Framroz D. Mehta vs Jahangir and Co., (Private) Ltd., and others

Ramaswami, J.—This is an application by Sri Framroz D. Mehta for the winding up of Jehangir and Co. (Private) Ltd. The grounds on

which this company is sought to be wound up are (a) that the substratum of the company is gone; (b) that the company has not been carrying on

any business from 1953, assuming that the alleged negotiations with the Industrial Chemicals Ltd., is true and that there is no intention on the part of

the directors to resume any business and (c) that it is impossible to carry on any business as contemplated in the memorandum in view of the

deadlock among the directors.

The facts leading to the institution of this petition are : The respondent company was floated by K.S. Narasimhachari and his son N. Rangachari

as a private company and the first directors of the company were the said K.S. Narasimhachari and one Vissa Rajagopal, who ceased to be a

director on 25th October 1948. It is not known if he had subscribed towards any share capital. The affairs of the company however were solely in

the hands of K. S. Narasimhachari who as the only local director at Madras used to transact all the business of the company and carry on all

correspondence from No. 55, Edward Elliots Road, Mylapore, Madras. The petitioner and Dr. S.N. Deboo became members on the 25th

October 1949 and became the directors of the company. Being permanent residents of Bombay they had little or no part in the management of the

company and they completely relied upon the information given to them by the said K.S. Narasimhachari.

The respondent company acted as managing agents of the Indian Commercial Steam Navigation Co., Ltd., until 1949. In the beginning of 1953

the said K.S. Narasimhachari is alleged to have negotiated with Messrs. Industrial Chemicals Ltd., Talayuthu, for the sole selling agency for

Calcium Carbide manufactured by them. It is stated that on the representation of Narasimhachari about this transaction going through, the

petitioner deposited Rs. 10,000 and subsequently, the petitioner says, he found it to be a hoax. There were criminal Court proceedings.

Narasimhachari was prosecuted in C. C. No. 10465 of 1955 and he was convicted by the Fourth Presidency Magistrate, Madras. On appeal

Somasundaram, J. acquitted him.

The company vacated the registered office at No. 107, Armenian St., Madras-1 and shifted its office to the residence of K. S. Narasimhachari

at No. 55, Edward Elliots Road, in 1954. This change was not reported to the Registrar of Companies. Narasimhachari also did not submit any

statutory returns to the Registrar. Therefore the Registrar issued notice to the petitioner and Dr. Deboo, the other director, as to why they should

not be prosecuted. Nothing has been done by Narasimhachari to avert the prosecution.

The company has done no business since 1949 and the accounts of the company have not been audited and no balance-sheet and profit and

loss account had been drawn up. No director''s meeting has been held since 1949 and there is no registered office for the company. There is not

the slightest possibility of the deadlock between Narasimhachari and the petitioner and Dr. Deboo being broken, and the company functioning. The

company itself which has become defunct is unable to make good the deposit of Rs. 10,000 of the petitioner. This state of affairs requires to be

thoroughly investigated by the company being wound up and a liquidator being appointed.

Sri Narasimhachari is unable to dispute any of these impeachments except that he states that there is a bona fide dispute between him and the

petitioner regarding the debt said to be due to the petitioner from the company and that therefore the petition should be dismissed.

It is quite true that where, however, a debt is bona fide disputed, the nonpayment thereof does not amount to neglect within the meaning of S.

433 of the Companies Act, and in such a case a winding up order is not a proper mode of enforcement. In re Gold Mill Mines 23 Ch. D. 240,

Tulasidas v. Bharat Khand 33 Bom. 47, and Satyaraju v. Guntur Mills, 48 Mad. 247. So, where there was a bona fide dispute as to the liability of

the company and the company had not been paid by the company by reason of such dispute, it was held that the company has not neglected to

pay their debts and a petition for winding, up was not maintainable. Dittoomal v. Own Prasad 1944 Commi. Cases 224. The reason for this rule is

obvious. If a company is solvent and there is a genuine dispute about an alleged debt, the resort by the creditor to the remedy of winding up is

ordinarily referable to a desire on the part of the creditor to bring pressure on the company in order to induce the company to pay the debt,

without having the dispute settled by a civil Court, by which Court the dispute ought to be ordinarily settled. To make an order for winding up in

such a case would deprive the company of its right to have the question between it and the petitioning creditor decided in the normal way by the

civil Court constituted for the purpose, and this would be opposed to public policy. An application for winding up in such a case, must, therefore

be regarded as a vehicle of oppression and an abuse of the process of Court. W.T. Henley''s Telegraph Works Co. Ltd. Vs. Gorakhpur Electric

Supply Co. Ltd., P.R. Doraiswami Ayyar Vs. Coimbatore Easwara Sahaya Nidhi Ltd., , and In re Imperial Hydropathi Hotel Co. 49 L.T. 147 at

149 (Tassell M. R.). But a mere assertion by the company that the debt is disputed is not sufficient. Where the debt is undisputed it is; futile for the

company to say ""we are able to pay our debts but we do not choose to pay this particular debt."" So where there was no trace of mala fide and the

object of the creditor was simply to recover the debts out of such assets as may be available and where the company is in a moribund condition

the applicant would be entitled ex debito justified by an order for winding up. Tulasidas In re, 39 Bom. 47 (per Beaman), J. AIR 1929 651

(Lahore) and Dayal Ramjidas, In re AIR 1939 Lah. 777. For a discussion of this topic see Khanna Company winding up, page 15, N.C.

Chatterjee and Krishnamoorthi Company Law, p. 733, Buckland, The Indian Companies Act, 3rd Edn., Vol. I, p. 192 : L. C. S. Gower, the

Principles of Modern Company Law, Ch. 27, p. 578, and following. S.R. Devar, Indian Companies Law and Practice, Vol. II, p. 13. But this is

not a case where the winding up is solely rested on the liability to recover the debt and seeking by this means to recover the debt. It is rested on

other grounds which I shall proceed to examine.

The petitioner has shown that the substratum of the company must be deemed to have gone. The substratum of the company is deemed to be

gone when (i) the subject-matter of the company is gone; (ii) the object for which it was incorporated has substantially failed; (iii) it is impossible to

carry on the business of the company except at a loss, i.e., there is no reasonable hope by allowing the petition to stand over and for a scheme to

be framed that the object of trading at a profit can be attained; and (iv) the existing and probable assets are insufficient to meet the existing

liabilities. In this case there is no dispute that tests W.T. Henley''s Telegraph Works Co. Ltd. Vs. Gorakhpur Electric Supply Co. Ltd., to (iv)

apply. German Dete Coffee Co. 20 Ch. D. 169, Haven Coal Co. 20 Ch. D. 151, London and County Coal Co. 3 E of 355, T. E. Brinsmead and

Sons 1897 1 Ch. 406, Peruvian Amajan Co. 29 T.L.R. 384, Yendjee Tobacco Co. 1916 2 Ch. 426, American Pioneer Leather Co. 1918 1 Ch.

556, Locka and Jhon Blackwood Ltd. 1924 A.C. 783, R.C. Devis and Collett Co,, Ltd. 1935 Ch. 693, Civic Judi sties In Re: The Cine

Industries and Recording Co. Ltd., Ernes Thug AIR 1941 P. C. 106, In Re: Janbazar Manna Estate Limited, , Murlidhar AIR 1920 Cal. 722, The

Universal Mutual Aid and Poor Houses Association, Ltd. Vs. A.D. Thoppa Naidu and Others, AIR 1937 146 (Privy Council) , See also

Khanna''s winding up, page 21, and Foll; Chatterjee and Krishnamurthi, page 736.

Having come to the conclusion that the substratum of the company is gone and there is no reasonable hope of renewal or reconstruction the

Court will wind up the company because that which the company was formed to do will no longer be done and the Court has jurisdiction and is

bound to exercise the jurisdiction to wind up the company. This is the case here.

That there is a complete deadlock in the affairs of the company and it is not possible to carry on needs no demonstration. The directors have

been fighting amongst themselves and Narasimhachari has been prosecuted by the petitioner in the Fourth Presidency Magistrate''s Court. In fact

Narasimhachari''s own complaint is that he is ruthlessly persecuted by the other two directors in collusion. Therefore, there is a deadlock in the

management of the company entitling the Court to direct the winding: Mumtas Bank Ltd. 13 Cal. 603, American Pioneer Leather Co. 1918 1 Ch.

556, Yendfee Tobacco 1916 2 Ch. 426, Murlidhar AIR 1920 Cal. 722, Seethiah AIR 1949 Mad. 675, Khanna Winding up page 27.

This is a case where full investigation is necessary and where Narasimhachari is being charged with the mismanagement of the affairs of the

company and being guilty of misconduct and no relief in the domestic forum is possible. It is a matter which will have to be fully investigated. The

Court in such a case would order winding up under the just and equitable clause. This just and equitable clause is not confined to cases in which

there are grounds analogous to those mentioned in other clauses of the Section. The rule of ejusdem generis is not applicable to this clause.

Standard Aluminium and Brass Works AIR 1929 Bom. 8. Palmer in his Company Law, 18th Edn. at page 402, has summarised the cases in

which winding up has been made under the just and equitable clause: (a) That the substratum of the company was gone. Where the substratum had

gone, but the company had the widest possible powers, and the Court allowed the petition to stand over for a scheme to be considered by the

shareholders. (b) That the company was a bubble. (c) That the company was conceived and brought forth in fraud. (d) That full investigation was

necessary. (e) That there was a complete deadlock, (f) That the articles provided for a winding up in the event which had happened. (g) That one

of the principal shareholders refused to produce accounts or balance sheets or to pay dividends, he having a majority of the voting power, (h) That

the petitioner was excluded from all participation in the business. It is unnecessary to multiply the other charges about the change of address

without informing the Registrar of Companies and non-submission of returns, Narasimhachari keeping all the accounts etc., and excluding the other

directors from the participation in the company''s business. Justifiable lack of confidence in the conduct and management of the company and gross

irregularities which all come within the ambit of the aforesaid catalogue reproduced above from Palmer. W.T. Henley''s Telegraph Works Co. Ltd.

Vs. Gorakhpur Electric Supply Co. Ltd., B. Gopal Chetty AIR 1925 Mad. 633=21 L.W. 367; R. Sabapathy Rao and Others Vs. Sabapathy

Press Co., Ltd., Mumtaz Bank Ltd. AIR 1929 Lah. 571; Muralidhar AIR 1920 Cal. 722; Seethiah AIR 1949 Mad. 675; AIR 1932 1 (Privy

Council) The net result of this analysis is that a case has been made out for ordering the winding up of the respondent company. Ordered

accordingly and the Official Liquidator is appointed liquidator. The petitioner will get his costs from the respondent-company.