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549 paragraphs · 12,623 wordsVenkataraman, J.—Company Petition No. 87 of 1964 is a petition by two persons, Godavaribai and Hariprasad, to wind up the company
known as the Amalgamated Commercial Traders (Private) Limited under the provisions of the Companies Act 1 of 1956. The Petitioners are
shareholders. Company Application No. 8 of 1965 is an application by the Company for an injunction restraining the petitioners from proceeding
further with the petition and for directing them to file a suit, if so advised. This application has been filed under Rule 9 of the rules under the Act.
That runs thus:
Inherent powers of Court.�Nothing in these Rules shall be deemed to limit or otherwise affect the inherent powers of the Court to give such
directions or pass such orders as may be necessary for the ends of justice or to prevent abuse of the process of the Court.
The contention in the application is that the main petition is an abuse of the process of the Court.
A preliminary objection was raised by Sri G. Ramaswami, Counsel for Hariprasad (Petitioner No. 2) that this application could not be maintained.
The objection is based on the fact that the company has not yet filed a counter affidavit in the main petition. The main petition was filed on 26th
December, 1964. It was admitted by me on 29th December, 1964 and advertisement was directed and the hearing was fixed for the 29th January,
1965. Company Application No. 8 of 1965 was put in 15th January, 1965, where in the company has not deal with the averments in the main
petition but has only set out what according to it are sufficient to sustain Company Application No. 8 of 1965. The point of Sri G. Ramaswami is
that on a true construction of Section 443 the Court is bound to enquire into the main petition on its merits, that there can be only one such enquiry
and that consequently the company, if at all it wants to resist the petition, must answer the averments in the main petition and cannot side-step
them. Section 443, so far as it is material, runs:
443 (1) on hearing a winding up petition the Court may�
(a) dismiss it, with or without costs; or
(b) adjourn the hearing conditionally or unconditionally; or
(c) make any interim order that it thinks fit; or
(d) make an order for winding up the company with or without costs or any other order that it thinks fit;...........
(2) Where the petition is presented on the ground that it is just and equitable that the Company should be wound up, the Court may refuse to make
an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to
have the company wound up instead of pursuing that other remedy....
Rule 36 reads:
Procedure at hearing of petition:- At the hearing of the petition, the Judge may either dispose of the petition finally, or give such directions as may
be deemed necessary for the filing of counter-affidavits and reply affidavits, if any, and for service of notice on any person, who, in his opinion, has
been omitted to be served or has not been properly served with the notice of the petition and may adjourn the petition to enable the parties to
comply with his directions. Except as otherwise ordered by the Judge, it shall not be necessary to give notice of the adjourned hearing to any
person.
There are a number of decisions both in England and in India which have held that an application may always be filed under Rule 9 or what
corresponds to it, invoking the inherent power grounds are made out to show that the petition for wof the Court to stay the further proceedings in
the petition for winding up or to dismiss it where sufficient winding up is an abuse of the process of the Court. It will be enough to refer to the
following:
In re. London and Paris Banking Corporation (1874) 19 E C 444, Cercle Restaurant Castiglione Company v. Lavery (1880) 1, 18, C D 555. In
re. Gold Hill Mines (1883) 23 C D 210. In re. A Company (1894) 2 Chancery Division 349. Tulasidas Lallubai v. The Bharat Khand Cotton Mill
Co. Ltd. (1915) 39 Bom. 47. The Company v. Sir Rameswar Singh (1918) 23 Cal. W. N. 844. Bharat Vegetable Products Ltd., In re. (1951)
56 Cal. W. N. 29. Charles Forte Investments Ltd. v. Ananda (1963) 3 W L R 662 = 34 C C 233, preferred to in In re. Surrey Garden Village
Trust, Limited (1964) 3 All E.R. 962 at 969 referred to In Re: Sulekha Works Ltd., where almost about all the cases are reviewed.
Reference may also be made on the question of procedure in such a case to Western India Theatre Limited v. Associated Bombay Cinemas
Limited (1959) 29 C C 127.
Buckley''s Company Acts, 13 Edition (1957) at page 451.
If the petition has been presented, if the Court finds it to be an abuse of process, the Court may on motion stay all the proceedings under it or
dismiss it.
See also Palmer''s Companies Precedents, 17th Edn. Part II, at page 45.
But none of these decisions has dealt with the question raised by Sri G. Ramaswamy in a precise form. Briefly put, the point of Sri G.
Ramaswamy is that when once the petition has been admitted, it must be disposed of in one or other of the way mentioned in S. 443 and that
consequently whatever the company wants to say by way of answer to the petition must be an answer once and for all. It seems to me, however,
that it is possible to reconcile S. 543 and R. 36 on the one hand and R. 9 on the other, as indeed they must be. The practical way of such a
resolution will be to hold that when an application under R. 9 is disposed of, it must be considered as also amounting to a hearing of the main
petition itself either finally or preliminarily. The matter is one of substance, and just as the company will be entitled to show that the winding up
petition is an abuse of the process of the Court, the petitioners also must be allowed to prove their case and be permitted to adduce such evidence
as they for their part want. The Court must not stifle the petitioners. At the same time where it appears to the Court that the petition is only an
abuse of the process of the Court, that even if the allegations are true, there are other modes of redress apart from winding up, and that no useful
purpose will be served by proceeding further with the petition, the Court has always got inherent powers of terminating the main petition, either an
adjournment sine die or by a dismissal. The question is really one depending upon the facts and circumstances of each case and the flexibility of the
procedure is indicated by the terms of S. 443 itself, and of R. 36. So long as the Court does justice, there is no bar to disposing of the main
petition itself even before the company is asked to file a counter. It may happen, however, that after hearing the abuse of process application, the
Court finds that it is not possible to dispose of the main petition finally by holding it as an abuse of process of the Court, and that there is case for
further enquiry by requiring the Company to file a counter affidavit; in such a case, the Court will not pronounce a detailed order on the abuse of
process application, because it will have to dispose of the petition ultimately, and it may happen that though the winding up petition could not be
disposed of at the preliminary stage on the ground of the abuse of process of the Court, it may have to be dismissed finally after enquiry on on
grounds including the grounds urged in support of the abuse of process application. The flexibility of the procedure need not cause dismay,
because the Court cannot act arbitrarily, and its decision is subject to an appeal in the High Court itself and in the Supreme Court. I do not think it
necessary to refer to the several decisions, because they do not contain anything which would invalidate the view expressed above and in fact they
seem to support the above view.
At this stage I must indicate the procedure which was actually adopted in this case. In support of Company Application No. 8 of 1965 Banka,
who is one of the directors of the Company (and happens to be the 4th respondent in the main petition Company Petition No. 87 of 1964) filed an
affidavit dated 15th January 1965. A counter thereto was filed by Hari Prasad on 22nd January 1965, and that was adopted by Godavari Bai, his
mother. Banka filed a reply affidavit on behalf of the company on 5th February 1965. At that stage company Application No. 8 of 1965 as well as
Company Petition No. 87 of 1964 appeared in the hearing list. I indicated that I would take up Company Application No. 8 of 1965 first and
decide whether the main petition could be disposed of finally without requiring the company to file a regular counter affidavit in the main petition in
detail or whether the matter should be adjourned for further enquiry requiring the company to file a counter affidavit. Beyond stating this, I did not
impose any restriction either on the petitioners or on the company to adduce such evidence as they desired even at the preliminary stage of the
consideration of Company Application No. 8 of 1965. Thereafter what happened was that Sri G. Vasantha Pai, Learned Counsel for the company
marked several documents as exhibits on his side explaining their purpose and addressed arguments in support of the application : Company
Application No. 8 of 1965. Then Sri G. Ramaswami, Learned Counsel for Hariprasad, and Sri A.N. Rangaswanii, Learned Counsel for Godavari
Bai, marked documents on behalf of the petitioners and addressed arguments. In the course of such arguments Hariprasad filed a further affidavit
on 11th March, 1965. Sri Vasantha Pai objected to this further affidavits but I said that that might be received. Banka filed an affidavit dated 16th
March, 1965 in reply to the affidavit of Hariprasad dated 11th March, 1965. Even thereafter some documents were marked on both sides. Sri G.
Ramaswami did not indicate before Sri G. Vasantha Pai commenced his arguments and marked the documents on behalf of the Company, that he
wanted to examine any witness on his side, but at a rather late stage after Sri G. Vasantha Pai had practically finished his arguments, Sri G.
Ramaswami indicated that he would address arguments to show that prima facie the petitioners had a good case for winding up, and if the Court
was satisfied in that behalf it might allow the petitioners to examine Hariprasad.
It seems to me, however, that if Hariprasad wanted to examine himself, he should have done so, even before Sri Vasantha Pai commenced his
arguments. It is not right that after listening to the arguments of Sri Vasantha Pai, Hariprasad should try to give evidence in a way to meet the
arguments. Even in a suit or petition tried under the provisions of the Civil Procedure Code, evidence is adduced before arguments are begun and
the arguments only follow the evidence, the idea being that it should not be open to a party to adduce evidence to fill up the loop holes pointed out
in the course of the arguments by the other side. It is necessary to adhere to this procedure all the more in the case of winding up petition, where
the rule of evidence is even stricter than in the case of an ordinary suit, because whereas in an ordinary suit it will be sufficient to indicate the broad
facts without disclosing the evidence, in the case of winding up petition everything necessary for winding up must be stated in the petition itself and
cannot be allowed to be enlarged at least in substance at the stage of evidence. At any rate before the hearing of the application. Company
Application No. 8 of 1965 commenced and before Sri Vasantha Pai addressed his arguments, it was incumbent on Sri Hariprasad to inform the
Court that he wanted to examine himself, and in so far as he has left it to the Court to give him permission to examine himself, I am satisfied that this
is not a case where such permission should be given. I may add that what I have said here is only in accordance with what has been laid by a
Bench of this Court in Seethayya v. Venkatasubbayya ILR (1950) Madras 59 = 63 L.W 1079. In that case the hearing day of the winding up
petition was fixed as 27th October, 1947. It was taken up the next day and on that day respondents 1 to 9 in the appeal (representing the
company and the persons opposing the winding up petition) requested time for filing counter affidavits. Ten days'' time was given and the petition
was posted for hearing on 10th November, 1947. Counter affidavits were filed and reply affidavit was filed by the petitioner. The petitioner�s
counsel asked for adjournments successively on different grounds, like the document''s not having been typed or having been translated. The
adjournment was refused and the Learned Counsel for the petitioner read the petition, the affidavit, the counter affidavits and the reply affidavit and
made his submissions and argued questions of law. After all that he made a request to call oral evidence in support of the application by putting the
first petitioner in the box and also wanted permission to cross-examine the respondents on the averments contained in their counter affidavits. That
was refused by Clark, J. and the winding up petition was dismissed on merits. On appeal, the first question that was dealt by the Bench was the
correctness of the procedure of Clark, J. The Bench differing from Clark, J. pointed out that oral evidence could be permitted to be adduced in
some cases, but they agreed with Clark, J. that in the particular circumstances of the Case the request for adducing oral evidence was belated and
that the petitioners should have indicated on 28th October, 1947 itself or at least on 5th November, 1947 when the counter affidavits were filed
and when the petitioners must have known of the case of the respondents, they wanted to adduce oral evidence on their side and desired to cross-
examine the other side. The Bench emphasised the need for disposing of winding up petitions expeditiously and pointed out that that was the
reason why the law required the facts to be stated in the winding up petition and Blade the statutory affidavit prima facie evidence. They agree with
Clark, J., that in that particular case the request for oral evidence and for cross-examination of the other side was only intended to protract the
proceedings. The observations of the Bench will apply to the present case as well. I therefore propose to dispose of the matter On the materials
available, which are voluminous enough.
The grounds of the winding up petition are (1) that the company is unable to pay its debts, (2) that it is just and equitable to wind up because (a)
the substratum of the company has gone, (b) there is oppression of the minority shareholders, and (c) there is fraud in the conduct of the affairs of
the company. The company denies these allegations and says that the petitioners themselves could not honestly believe in their truth and that most
of these matters had already been raised by them and given up in prior proceedings. In Order to understand the contentions properly, it is
necessary to describe in some detail the events which form the background. The company was incorporated on 29th January 1948 under the
provisions of The Indian Companies Act, 1913. The nominal capital of the company is Rs. 3,00,000/-, divided into ten thousand 7�% tax free
cumulative preference shares of Rs. 10/- each, and two thousand equity shares of Rs. 100/- each. Actually only 1000 equity shares of Rs. 100/-
have been issued and they have been subscribed and fully paid up. Hence, the paid up capital is Rs. 1,00,000/-. The 1st petitioner Godavari Bai
holds 104 shares and the 2nd petitioner Hariprasad holds 25 shares.
After setting out the facts, His Lordships proceeded.
On 27th May, 1960 Hariprasad sent a notice under S. 434 of the Companies Act (page 65 of Ex. R-2) stating that unless he was paid the net
dividend of Rs. 1750 for 1958-1959 and the sum of Rs. 7605.62 due to him on current account, he would take steps for winding up the company
under S. 439 of the Act. He also asked who the other claimant was. To this a reply was sent on 10th June, 1960 (page 66 of Ex. R-2) stating that
the company had not yet received some documents from the previous Directors. There was no reply as to who the other claimant was. On 22nd
July, 1960, a circular letter was sent to all the shareholders, including Hariprasad, stating that the company was advised that the resolution of 30th
December, 1959 was not a proper and valid declaration of dividend, because of the provisions of section 207, already referred to. Thereupon on
26th July, 1960, Hariprasad filed a petition, Company Petition No. 42 of 1960, for winding up the Company (Ex R-3 at pages 1 and 2 of Ex. R-
1). He based that petition on the ground that his demand of 27th May, 1960 had not been complied with, that the company had failed and
neglected to pay the same and that, therefore, the company was unable to pay its debts. Paragraph 8 of the petition stated that the company was
unable to pay its debts. Form 46 at pages 141 and 142 of the Company (Court) Rules provided the following general form :
The Company is (insolvent and) unable to pay its debts
Because of the omission of the words, ''insolvent and'', it may be taken, as the petitioners want us to, that the petition, Company Petition No. 42
of 1960, was at its inception, not based on any allegation of commercial insolvency of the Company, but was based on the deemed insolvency
enacted in S. 434(1)(a) of the Act.
A.C.K. Krishnaswami and Factors Private Limited supported the petition (pages 4 and 5 of Ex. R-1) claiming to be creditors of the company.
Godavari Bai also supported the petition and filed her affidavit through her son Hariprasad (Ex. R-9 at page 7 of Ex. R-1). She claimed, besides, a
net dividend of Rs. 7280 for 1958-1959 on her 104 shares, a sum of Rs. 34,863-73 as having been due to her. This represents the dividend
accrued to her for the previous years and credited to her account.
[His Lordship set out contents of the counter affidavits and proceeded].
On 27th December, 1960 and 3rd January, 1961 the Additional Collector of Bombay issued orders under S. 46 (2) of the Indian Income Tax
Act, 1922, attaching the 25 shares standing in the name of Hariprasad, the 104 shares standing in the name of Godavari Bai, and the sum of Rs.
34,863-73 standing to the credit of Godavari Bai in the books of the company. The averment in these orders of attachment was that these shares
and the amount belonged to Ramkumar S. Morarka (father of Godavari Bai), that Hariprasad and Godavari Bai were only benamidars of R.S.
Morarka, and that these attachments were made in order to recover the arrears of income tax due from that R.S. Morarka. These orders find
place at pages 88 to 90 of Ex. R-2.
On 27th December, 1960, the company sent a notice of meeting of members to be held on 27th January, 1961, for declaring the dividend for
1958-1959, which, in the opinion of the company, had been wrongly declared on 30th December, 1959. On behalf of Hariprasad, his lawyer sent
a notice, Ex. R-5, dated 5th January, 1961, that the proposed re-declaration would inter alia amount to contempt of Court, because the validity of
the declaration of 30th December, 1959, had been put in issue in Company Petition No. 42 of 1960, which was pending in the High Court,
Actually, Hariprasad filed a petition on 19th January, 1961, C.A. No. 19 of 1961, alleging contempt on the part of the company and its Directors.
The two petitions, Company Petition No. 42 of 1960 and C.A. No. 19 of 1961 came up for hearing before Veeraswami, J., in December,
1961.
X X X X X
[After referring to the facts, His Lordship proceeded].
On 20th December, 1961, Veeraswami, J. dismissed C.P. No. 42 of 1960 and C.A. No. 19 of 1961 by a common judgment, Ex. R-6
(pages 49 to 53 of Ex. R-1). So far as the sum of Rs. 7605-62 claimed by Hariprasad was concerned, he referred him to a suit. So far as the sum
of Rs. 1750, the net dividend for 1958-59 declared on 30th December, 1959 was concerned, the learned judge held that it was not invalid on the
ground of contravention of S. 207, hut he took the view that the non-payment of the amount within three weeks would not amount to neglect on
the part of the company to pay that amount, within the meaning of S. 434 (1) (a), because it was factually solvent, at any rate, to pay off the small
sum of Rs. 1750, and it evidently did not comply with the demand of Hariprasad because of the legal advice it had received that the declaration of
dividend of 30th December, 1959, was not valid. The learned Judge briefly referred to the evidence of the auditor and the other materials on the
question of the financial solvency of the company. The non-payment of Rs. 1750 being the only ground alleged in the petition, the petition was
dismissed. So far as Godavari Bai and A.C.K. Krishnaswami, who supported Hariprasad, were concerned, it was pointed out that they were only
supporting creditors and they could not enlarge the ground availed of by Hariprasad.
Against this decision, appeals were preferred by Hariprasad, Godavari Bai and A.C.K. Krishnaswami, being respectively O.S.A. Nos. 18, 37
and 70 of 1962. The appeals were disposed of on 19th November, 1963, by Ramachandra Iyer, C.J. and Ramakrishnan, J. The appellate
judgment is at pages 63 to 74 of Ex. R-1. The Bench, agreeing with Veeraswami, J., held that the declaration of dividend of 30th December,
1959, was valid, but differed from Veeraswami, J., by holding that once that step was reached, the failure to pay the demand of Rs. 1750 by
Hariprasad constituted neglect under the statutory provisions of S. 434 (1) (a) and that for the purposes of the fiction enacted in S. 434 (1) (a) it
was immaterial that the company was factually solvent. They wound up by saying:
We consider that the appropriate order to be made in the case will be to direct the winding up of the company on the ground of its inability to pay
its debts, but at the game time direct the order to be kept in abeyance for a period of three weeks in order to enable the company to pay up the
dividends to the two creditors, namely, Mr. A.C.K. Krishnaswami and Mr. Hariprasad for the year 1959. There will be no order for payment in
regard to the other claims made by the creditors as they being disputed will have to be established in a suit. The amount of dividend due to Mr.
Hariprasad will be deposited in Court and the same will be paid over to him only after due notice to the Collector of Bombay who had issued the
prohibitory order and after hearing any representation that he may make. In case the amounts are paid or deposited in Court as the case may be
within three weeks the winding up petition will stand dismissed. In default, there will be a winding up of the company and further proceedings will
ensue. The appellants will be entitled to their costs. We make no order as to payment to Smt. Godavari Bai as she has not made the statutory
demand.
On 6th December, 1963, the company filed petitions, S.C.P. Nos. 252 and 256 of 1963 for leave to appeal against the above decision dated
19th November, 1963, in so far as it related to Hariprasad and A.C.K. Krishnaswami. No appeal was preferred in respect of Godavari Bai, since
the Bench had not directed deposit of any amount in respect of her claim. A.C.K. Krishnaswami and Hariprasad filed counters on 9th December,
1963 (Ex. R. 17 being that of Hariprasad) suggesting that by the application for stay, the company was only seeking to get time for payment of the
amounts of Rs. 11,620 and Rs. 1750 due respectively to A.C.K. Krishnaswami and Hariprasad, because it did not have the necessary funds. Just
to disprove that statement, but not as a condition of averting the winding up, the company deposited the amounts in Court on 10th December,
1963. On that date leave to appeal was granted. (Vide pages 98 and 99 of Ex. R-1). Stay of the operation of the judgment for a period of two
months was also granted (vide page 103 of Ex. R.1) and the company was referred to the Supreme Court for further directions. In fact on 21st
January, 1964, in the Supreme Court the company obtained stay of the winding up order of the Bench. (Vide Ex. R. 18 at pages 117 and 118 of
Ex. R-1). The Supreme Court appeals were numbered as C.A. Nos. 515 and 516 of 1964. Exs. R-1 and R-2 are the printed records for the use
of the Supreme Court. It was agreed by both sides that though only some of the pages thereof have been marked specifically as exhibits now, all
the other pages also may be referred to.
It will have been noted that Ramachandra Iyer, C.J., and Ramakrishnan, J., did not make any order as to payment to Godavari Bai as she had
not made the statutory demand, quoting S. 434. To overcome that impediment, Godavari Bai made a statutory demand Ex. P-24, dated 23rd
November, 1963 (pages. 19 and 20 of enclosures to the petition). She claimed a sum of Rs. 56,420 as dividend from 1952-1953 upto and
inclusive of 1962-1963. She referred to the orders of the Additional Collector of Bombay dated 27th December, 1960 and 3rd January, 1961
and contended that the orders were invalid, since inter alia the said Collector had no jurisdiction in Madras. However, if the company wanted to
respect the orders, she gave option to the company to pay over the amounts to the said official mentioning the claim of Godavari Bai, within three
weeks, and she stated that she would treat it as sufficient compliance with the demand. But the company did not comply with the demand, and sent
a reply, Ex. P-25 on 17th December, 1963, stating that the Collector of Bombay had jurisdiction, that the company had been put on notice of the
claim of her father, R.S. Morarka (who had by then died) in respect of the shares and the dividends claimed by her, that in view of the prohibitory
order of the Additional Collector of Bombay the payment could not be made to her, that, being only a share-holder, she was not a creditor who
could avail herself of S. 434 and that she must go to a Court, establish her claim.
Thereupon three Writ Petitions, W.P. Nos. 1454, 1455 and 1457 of 1963, were filed in this Court, the first by Hariprasad and the latter two
by Godavari Bai, for quashing the orders dated 27th December, 1960 and 3rd January, 1961, of the Additional Collector of Bombay. Those Writ
Petitions are still pending, but it is relevant to point out that the Additional Collector of Bombay withdrew the prohibitory orders by order dated
18th April, 1964, Ex. P-27 ; but it appears to have been communicated only on 24th July, 1964. It may perhaps also be mentioned that, earlier
than that, Hariprasad and Godavari Bai made unsuccessful attempts in C.M.P. Nos. 881 to 883 of 1964 in the Writ Petitions to direct the
company to deposit the amounts claimed by them. Those petitions were disposed of by Veeraswami, J., on 6th April, 1964 (Ex. R-19). It is
unnecessary at this stage to refer to the reasons for the dismissal of those petitions.
The company did not get renewal of the commission agency of Salar Jung Mills Limited, which expired on 31st December, 1962, or the
commission agency of India Sugars and Refineries Limited, which expired on 31st December, 1963.
On 1st May, 1964, the company filed a suit, C.S. No. 65 of 1964 in this Court (Ex. R-24 is the plaint) impleading as defendants (1) A.C.K.
Krishnaswami (2) Hariprasad (3) Godavari Bai and (4) Factors Private Limited. The company alleged that a lease for mining magnesite had been
taken by the company from the Magnesite Corporation of India, Limited.
X X X X
[His Lordship referred to the facts and held.]
However, the company filed a petition C.M.P. No. 2875 of 1964 (Ex. R-31) in the Supreme Court seeking directions whether it could pay
out the dividends declared on 31st October, 1964, because normally under S. 207 of the Act it would have to be paid within 42 days. Hariprasad
filed an affidavit in the Supreme Court resisting the payment of the dividends. The Supreme Court passed an order that the dividends should not be
paid out till the disposal of C.A. Nos. 515 and 516 of 1964.
Appeals C.A. Nos. 515 and 516 of 1964 were heard in the Supreme Court and judgment was reserved on 16th December, 1964. It was
actually pronounced on 8th January, 1965 (Ex. R. 22). The appeals were allowed and the winding up order dated 19th November, 1963, was set
aside on the following grounds:
We are satisfied that the debt in respect of which notice was given under S. 434 was bona fide disputed by the appellant company. The appellant
company had received legal advice and it had acted on it. On the facts it seems to us clear that the appellant company did not dispute the debt in
order to hide its inability to pay debts. Further, we are satisfied that the question whether the declaration of dividend dated 30th December, 1959,
is valid or not raises a substantial question as to the interpretation of S. 207 of the Companies Act. Further, whether the declaration dated 30th
December, 1959, is severable or not is also a substantial question. We do not propose to decide whether the declaration of dividend was valid or
not or whether it was severable or not, because in these proceedings we are only concerned with the question whether the debt was bona fide
disputed by the company on substantial ground. If the debt was bona fide disputed, as we hold it was, there cannot be ''neglect to pay'' within S.
434(1)(a) of the Companies Act. If there is no neglect, the deeming provision does not come into play and the ground of winding up, namely, that
the company is unable to pay its debts is not substantiated.
Company Petition No. 87 of 1964 was filed on 26th December, 1964. The petition itself refers to the fact that when their Lordships of the
Supreme Court reserved judgment on 16th December, 1964, they indicated that they were going to allow the appeals on the ground that the debt
in question was a disputed debt, on which the winding up petition could not be founded. The petitioners were therefore anxious to make out that
the grounds on which the present petition is based were different from those which were relied on in Company Petition No. 42 of 1960 and that
the proceedings arising out of Company Petition No. 42 of 1960, which on 26th December, 1964, had not yet come to an end, would not be an
impediment to the filing of Company Petition No. 87 of 1964. They averred that on 26th December, 1964, there was no winding up order in
force, because, according to them, the winding up order passed on 19th November, 1963, by Ramachandra Iyer, C.J., and Ramakrishnan, J.,
was averted by the company by depositing the disputed amounts claimed by Hariprasad and A.C.K. Krishnaswami on 10th December, 1963.
They proceed on the footing that what was concerned in Company Petition No. 42 of 1960 and the appeals therefrom were only the amounts
claimed specifically therein by Hariprasad and A.C.K. Krishnaswami, that they would file suits, if need be, for the recovery of those amounts after
the decision of the Supreme Court Appeals, C.A. Nos. 515 and 516 of 1964, and that the present petition proceeds on entirely other grounds.
The two grounds, on which Company Petition No. 87 of 1964 is based, are that the company is unable to pay its debts [S. 433 (e)], and that
it is just and equitable that the company should be wound up [S. 433(f)]. The case that the company is unable to pay its debts is based again on
two subsidiary grounds, firstly, that the company neglected to comply with the demand made by Godavari Bai in Ex. P-28 dated 31st July, 1964,
for Rs. 63,983-83, the meaning of S. 434 (1) (a). The second subsidiary ground is that factually also the company is that the defences raised in
their reply, Ex. P-29 dated 22nd August, 1964, were not bona fide, and that the company must be deemed to be insolvent within commercially
insolvent, even adopting the criterion in S. 434 (1)(c). The case that it is just and equitable to wind up the company is based on the following
subsidiary grounds : (i) that the substratum of the company has been lost because of the loss of the commission agency of Salar Jung Mills and the
India Sugars and Refineries Limited ; (ii) that the affairs are being conducted fraudulently and in oppression of the minority shareholders consisting
of the two petitioners and solely to enrich the Morarkas. It is alleged that S.P. Parasrampuria, the present Managing Director (Respondent 3 in the
petition) and M.R. Banka the other Director (Respondent 4 in the petition) are mere nominees of the Morarkas and are acting at the behest of
Morarkas, who, however, are not registered shareholders.
X X X X
Several reasons have been put forward by Sri Vasantha Pai to show that the petition is an abuse of the process of the Court. I shall deal with
the more substantial of them. I shall show that most of the grounds for winding up are not tenable, and that even if some of them are true, winding
up is not called for. The first important ground put forth by Sri Vasantha Pai for showing that the petition is an abuse of the process of the Court is
that it was filed curing the pendency of the appeals in the Supreme Court. It seems to me that this contention is sound. If the appeals were to be
dismissed by the Supreme Court, the winding up order of the High Court dated 19th November, 1963, would, by virtue of S. 441 (2) be deemed
to commence on 26th July, 1960, the date of the presentation of C.P. No. 42 of 1960 by Hariprasad. Similarly, the actual winding up order could
not be deemed to have been vacated merely because of the stay order dated 21st January, 1964. Now, if the present petition were to succeed,
the winding up therein should be deemed to commence on 26th December, 1964. Obviously there cannot be a second winding up order, when
there is already a winding up order. Reference may also be made to S. 446 of the Act which says that when a winding up order has been made, no
suit or other legal proceedings shall be commenced against a company except by leave of the Court and subject to such terms as the Court may
impose. It seems to me, therefore, that in such a situation the present petition could not have been presented without the leave of the Supreme
Court. This would hold good even about strangers, because the winding up order of the High Court was published. But, in any case, the petitioners
cannot plead ignorance of the winding up order of the High Court. The office of the High Court returned the petition, C.P. No. 87 of 1964, with
several objections, and Objection No. 6 raised the question how this petition could be filed when the appeals were pending in the Supreme Court.
The reply of Sri G. Ramaswamy, Counsel for the second petitioner, was this : ""The pendency of the Supreme Court appeal has nothing to do with
this. The circumstances are alleged to have arisen after C.P. No. 42 of 1960. Moreover, there cannot be any winding up in the Supreme Court
appeal as the money has been deposited."" This reply does not at all meet the objection as explained by me. Even if the petition, C.P. No. 87 of
1964 is based on circumstances, which arose after C.P. No. 42 of 1960, the objection pointed out by me would remain. Further, Learned
Counsel is wrong in having stated that because the money claimed by Hariprasad and A.C.K. Krishnaswami was deposited on 10th December,
1963, there was no winding up. I have already pointed out that the deposit was made only to overcome the effect of the averment in the counter
affidavit of A.C.K. Krishnaswami and Hariprasad (Ex. R-17) that the company was seeking stay of the operation of the winding up order,
because it did not have the necessary funds to make the payments. The deposit was by no means intended to stave off the winding up order itself.
Side by side with the deposit, the company persisted in their petition for leave to appeal to the Supreme Court, and the Bench also granted leave
only because there was a winding up order, and the value of the subject-matter involved was more than Rs. 20,000 because the winding up order
would enure in favour of all the creditors and contributories of the company under S. 447 of the Companies Act. (Vide pages 98, 99 of Ex. R-1).
Stay of the operation of the judgment was ordered for a period of two months to enable the company to obtain further direction from the Supreme
Court as to the continuance of the stay of the winding up proceedings. In other words, the Bench was of the opinion, and rightly, if I may say so
with respect, that there was a winding up order, which was not averted by the deposit. The further order of stay passed by the Supreme Court on
21st January, 1964, Ex. R-18 was also on the same basis. In fact, the Supreme Court need not have heard the appeals at all, if there was no
winding up order on account of the deposit, and the appeals would have been dismissed on that short ground. On the other hand, the appeals were
allowed, and the order of the Bench of this Court winding up the company was set aside. In the face of all this, it is rather surprising that it should
still be contended that there was no winding up because of the deposit. Sri Vasantha Pai stated that Sri R. Ganapathi Iyer raised the same point
before the Supreme Court during the hearing of the appeals on behalf of Hariprasad and A.C.K. Krishnaswami, and that their Lordships pointed
out that there was no substance in that objection.
I shall now deal with the other contentions put forward by Sri Vasantha Pai. In so far as the winding up petition was based on S. 434 (1) (a),
on account of the non-compliance with the demands of Godavari Bai, Ex. P-28 dated 31st July, 1964, Sri Vasantha Pai took a preliminary
objection that a shareholder like Godavari Bai could not avail herself of the provisions of S. 434 (1) (a) in respect of the dividend due to her. S.
434 (1) (a) reads:
A company shall be deemed to be unable to pay its debits, if a creditor, by assignment or otherwise, to whom the company is indebted in a sum
exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or
otherwise, a demand under his hand requiring the company to pay the gum so due and the company has for three weeks thereafter neglected to
pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor.
The point of Sri Vasantha Pai is that a shareholder claiming dividend is not a creditor under S. 434(1)(a). This argument is based primarily on
S. 426(1)(g) which says:
S. 426(1): In the event of a company being wound up, every present and past member shall be liable to contribute to the assets of the company to
an amount sufficient for payment of its debts and liabilities and the costs, charges and expenses of the winding up, and for the adjustment of the
rights of the contributories among themselves, subject also to the following qualifications, namely............
(g) a sum due to any past or present member of the company in his character as such, by way of dividends, profits or otherwise, shall not be
deemed to be a debt of the company payable to that member, in a case of competition between himself and any other creditor, who is not a past
or present member of the company ; but any such sum shall be taken into account for the purpose of the final adjustment of the rights of the
contributories among themselves.
The argument is that though the above provision may show that even dividends payable to a share-holder constitute a debt of the company, a
share-holder will not be a creditor, because a distinction is made between a past or present member and a creditor, and even in respect of a
creditor a further distinction is made between his claim in the character of the past or present member and a claim otherwise than in that character.
The same distinction is kept up in S. 439(1)(b) and (c). S. 439(1)(b) permits an application for winding up by any creditor or creditors and S.
439(1)(c), permits a petition for winding up by any contributory or contributories and a share-holder will be a contributory. It is further urged that
the fact that a creditor simpliciter, as distinguished from a share-holder, can get his dues paid straightaway, whereas a share-holder cannot get his
dividends paid straightaway, and will have to wait, on account of the provisions of Ss. 426(1)(g) and 530, would show that the Legislature could
not have intended the winding up petition as a summary method of enforcing payment of the dividend, because that would not be to the advantage
of the share-holder, whereas a decree in an ordinary suit for dividends could be executed straightaway by the share-holder. But it is unnecessary to
deal with this contention, because this contention has been negatived by Ramachandra Iyer, C.J. and Ramakrishnan, J., (pages 70 and 71 of Ex.
R-1). By their judgment dated 19th November, 1963, they held that the provision of S. 434(1)(a) could be availed of by the share-holders in
respect of unpaid dividends. The point was raised in the Supreme Court by Sri Vasantha Pai but was not dealt with. Hence, the decision of the
Bench of this Court holds good so far as this Court is concerned.
There is, however, substance in the next contention of Sri Vasantha Pai that because of the winding up order dated 19th November, 1963,
and the pendency of the appeals in the Supreme Court, the demand of Godavari Bai in Ex. P-28 dated 31st July, 1964, could not be complied
with ; that at any rate, the company bona fide believed that it could not be complied with, and that consequently the non-compliance with that
demand would not amount to neglect to pay, within the meaning of S. 434(1)(a). S. 536(2) enacts that in the case of a winding up by or subject to
the supervision of the Court any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company
or alteration in the status of its members, made after the commencement of the winding up, shall unless the Court otherwise orders, be void. On
account of this provision and the retrospective operation of S. 441(2) by which the winding up must be deemed to have commenced on 26th July,
1960, it would not have been open to the company to comply with the demand, Ex. P-28, dated 31st July, 1964, at any rate, without the orders of
the Supreme Court. Even assuming, for the sake of argument, that this is not the correct position in law, I am of opinion that there was at least a
contention which the company bona fide believed as being valid, when it sent the reply, Ex. P-29 dated 22nd August, 1964, putting fourth the
pendency of the appeals in the Supreme Court as a reason for not paying. It was a substantial question, and the judgment of the Supreme Court
dated 8th January, 1965, in C.A. Nos. 515 and 516 of 1964 is itself authority for the proposition that where, on account of a substantial question,
the demand is not complied with, the non-payment could not amount to neglect to pay, within the meaning of S. 434(1)(a). Further, Godavari Bai
must have been aware of this position, and in so far as she still resorted to the winding up petition to enforce the payment, it must be considered to
be an abuse of the process of the Court. The authorities are clear that where a shareholder, or, for that matter, a creditor files a winding up petition
to enforce payment of a debt, about which he or she knows there is a bona fide dispute, it is an abuse of the process of the Court. In this
discussion I have so far quoted S. 536. In addition, reliance is placed by Sri Vasantha Pai on the provisions of S. 426(1)(g), the contention being
that because of that provision, the amounts claimed by Godavari Bai on 31st July, 1964, were only arrears of dividend, and that Godavari Bai
could not have insisted on immediate payment thereof in view of the winding up order, and must wait. The contention of Godavari Bai is that a sum
of Rs. 34,863-73 could not partake of the character of dividends. But the amount represented undrawn arrears of dividends and, it seems to me,
that for purposes of S. 426(1)(g) it could not lose its character of dividends. That is also what is stated in Palmer''s Company Law, 20th Edition,
page 625, ""if there are arrears of declared dividend in the winding up, the sums due are, by virtue of S. 201(g) (Companies Act, 1948 of England)
not deemed to be a debt of the company ; this means that the member who competes with a creditor is deferred to the latter until the latter is
satisfied."" Even assuming that it lost its character of dividends, it will be an amount due to a present member ''otherwise'', within the meaning of S.
426(1)(g) which speaks of ""a sum due to any past or present member of the company in his character as such by way of dividend''s, profits or
otherwise"". Further, apart from the sum of Rs. 34,863-73, the remaining sums claimed there are admittedly arrears of dividends.
Thus, because of S. 536(2) and S. 426(1)(g) there was no neglect to pay, and the petition for winding up based on non-compliance with the
demand of 31st July, 1964, must be held to be an abuse of the process of the Court.
X X X X
It will be seen that in Ex. P-29 dated 22nd August, 1964, in reply to the demand of Godavari Bai, the company wanted her to produce for
their inspection the relevant share certificate. The underlying object of the company appears to have been to make out that Godavari Bai was not in
possession of the share certificate, because they really belonged to her father, R.S. Morarka. The Company, in C.A. No. 8 of 1965, relied on the
prohibitory orders of 27th December, 1960 and 3rd January, 1961, of the Additional Collector of Bombay as putting the company on notice of
the claim of R.S. Morarka and as affording justification for the noncompliance with the demand of Godavari Bai. It seems to me, however, that
that would not be a bona fide defence to the company, because, for one thing, the Additional Collector of Bombay had withdrawn the prohibitory
orders by that time, Ex. P-27, and further, because of the provisions of S. 206, which enacts that no dividend shall be paid by a company in
respect of any share except to the registered holder of such share or to his order or to his bankers. That is a bar to the company paying dividends
to any person other than Godavari Bai in respect of the 104 shares standing in her name. The company further relies on proviso (c) to S. 207. S.
207 imposes a penalty on the Director and other Officers in case of non-payment of the declared dividend within forty-two days from the date of
the declaration. The proviso enacts the different circumstances where no offences shall be deemed to have been committed within the meaning of
the above provision, and proviso (c) is ''where there is a dispute regarding the right to receive any dividend'' It is urged by the company that here
was a dispute by the income tax Officer, and the Additional Collector of Bombay, of the right of Godavari Bai to receive the dividend. But Sri G.
Ramaswamy for Hariprasad contended that that would not be a proper construction of the proviso and that the proper construction would be that
which harmonises the proviso with S. 206, and not one which would wipe out the effect of the provisions of S. 206. From that point of view, Sri
G. Ramaswamy urged that both S. 206, and the proviso to S. 207, could remain and that the proviso might operate in the following cases:-
(1) where the shares have been transferred but before the transfer is registered in the books of the company, there is a dispute about the right to
receive the dividend;
(2) the right to receive the dividend may be in dispute where a share-holder dies;
(3) the right to receive the dividend may be in dispute in the case of joint holders of a share.
He contended that the proviso does not contemplate the case of a share-holder being benami for another. In this connection he refers, besides
S. 206, to clause (9) of the Articles of Association of the company, which runs thus:-
The Company shall not, except as ordered by a Court of competent jurisdiction or as by statute required, be bound or be compelled in any way to
recognise, even when having notice thereof, any trust or any other right in respect of a share other than an absolute right thereto in the registered
holder thereof for the time being, or such other rights in case of transmission thereof as are conferred by Regulations 21 to 23 of Table A.
Sri Vasantha Pai pointed, with some justification, that the above Article would only protect the company from being compelled to recognise a
claim on behalf of R.S. Morarka that Godavari Bai was only a benamidar, but the said Article, by itself, would not prohibit the company from
recognising the claim of R.S. Morarka, That may be correct so far as Art. 9 is concerned. But it seems to me that so far as proviso (c) to S. 207 is
concerned, the interpretation placed by Sri G. Ramaswami is more in consonance with the principle of harmonious construction than the
interpretation of Sri Vasantha Pai, which would reduce S. 206 of its vitality. The position was different when the prohibitory orders of 27th
December, 1960, and 3rd January, 1961, were in force and had not been withdrawn. The company could well have contended bona fide that so
long as these prohibitory orders were there, they could not afford to pay the claim of Godavari Bai. But, when once these orders are withdrawn,
that justification for non-payment disappears. But, as I have pointed out, there can be no doubt at least with regard to the first reason, namely, that
because of the winding up order, the company could have bona fide believed that it could not comply with the demand, and to that extent the
winding up petition was an abuse of process of High Court.
The allied ground of the winding up petition is that the company is factually insolvent and was unable to pay its debts, within the meaning of S.
434(1)(c). This is explained in paragraph 17 of the petition. The petitioners take the published balance sheet as on 30th April, 1964 (Vide pages
27 to 35 of the Directors Report). The assets are valued at Rs. 11,46,501.
X X X X
On the materials available, therefore, the company was financially sound on 26th December, 1964, and also later.
It will be noted that though initially C.P. No. 42 of 1960 was based only on the deemed insolvency under S. 434(1)(a) at the later stages, an
attempt was definitely made to show that the company was factually insolvent. But Veeraswami, J., found that the company was factually solvent,
and that was also the basis on which the Bench of this Court and the Supreme Court proceeded. To show that commercial insolvency was also
relied on at the later stages reference may be made to the following, namely, paras 15 to 18 of Hariprasad''s reply affidavit of 15th October, 1961
(Ex. R-11 at pages 15 and 16 of Ex. R-1), the cross-examination of the auditor before Veeraswami, J., (Ex. R-7) the affidavit of 20th December,
1961 (Ex. R-8), the grounds of appeal in O.S.A. Nos. 18 and 37 of 1962, for example, grounds 11 and 12 in O.S.A. No. 18 of 1962, and
grounds 8 to 12 and 14 to 19 in O.S.A. No. 37 of 1962 (Ex. R-15) and the statement of the case of the two parties before the Supreme Court
(Exs. R-45 and R-46). If Hariprasad and A.C.K. Krishnaswami and Godavari Bai, who supported him in C.P. No. 42 of 1960, believed that the
company was factually insolvent, it was open to them to get the company wound up on that basis and to sustain the order of winding up of the
Bench before the Supreme Court on that basis. To that extent, not having done so, they would be precluded by the principle of constructive res
judicata from agitating the same ground here. But it might be urged that this bar of constructive res judicata might, at the most, extend only to the
state of things as on the date of the cross-examination of the auditor, namely, 18th December, 1961, and that that bar would not prevent the
petitioners from showing that after that date circumstances occurred which made the company factually insolvent. But actually no such
circumstances have been alleged, much less proved. Substantial dividends were declared for 1959-1960, 1960-61, 1961-62, and 1962-63, as
seen from Ex. P-28, and the papers given by the company, namely, Rs. 100, Rs. 80, Rs. 60, Rs. 60 per share, and for 1963-64 a dividend of Rs.
60 per share was declared on 31st October, 1964.
A closely allied contention is that, though the Company may have been financially sound as on 31st October, 1964, the substratum has gone,
because the commission agency of Salar Jung Mills expired on 31st December, 1962, and that of India Sugars and Refineries Limited on 31st
December, 1963, and these were practically the only two sources of income of the company. In fact, it is contended by the petitioners that Cl. (a)
of Art. 3 of the Memorandum of Association dealing with the commission agency of India Sugars and Refineries Limited deals with the main object
with which the company was formed and that with its loss the substratum has disappeared. I am, however, of opinion that Cls. (b) to (f) also will
form the objects of the company, the rest of the clauses being only powers. On the question of substratum, the following Cases cited at the Bar are
instructive:
Re Kitson & Co., Ltd., (1946) 1 All. E.R. 435 and Re Eastern Telegraph Co., Ltd. (1947) 2 All. E.R. 104. See also the instructive article of Mr.
McPherson ""Winding up on the just and equitable ground"" Modern Law Review, May, 1964, in particular, page 290,
X X X X
I now turn to the allegation that the affairs of the company were conducted in a manner oppressive to the minority share-holders in fraud and
for enrichment of the Morarkas. In assessing the truth and effect of these averments, we cannot afford to forget the conduct of the petitioners,
which unmistakably shows a desire to wreck the company and paralyse its working in a normal way.
X X X X
It is surprising that the 2nd petitioner should file a winding up petition, which would invite such misfeasance proceedings against him. The truth
is that this averment is considered good enough to get a winding up order from the Court and later the 2nd petitioner and A.C.K. Krishnaswami
can escape by saying that as a matter of compromise the interest was given up. At any rate, the petitioners will be more satisfied by the harassment
caused to the company and possibly the Morarkas by the winding up than by the harassment, which may eventually be caused to some extent to
Hariprasad and A.C.K. Krishnaswami. The winding up petition cannot be restored to for such purposes.
From the above analysis it will be seen that it is not possible to accept the charge in paragraph 10 of the further affidavit of 11th March, 1965,
that the writing off of interest constitutes a breach of trust by the present directors and is an oppression of the minority share-holders.
It will be clear from the above analysis that we cannot accept the allegation that the writing off of the interest in this transaction was done by the
present directorate, Parasrampuria and Banka, and that they are liable in misfeasance therefore. Even assuming that the writing off of the interest
was unauthorised, it appears that the amount of the interest cannot be recovered from Radheshyam Morarca even if winding up is ordered. That is
because of the bar of limitation. The latest point of limitation can only be 15th March, 1961, when the account of Radheshyam Morarka was
settled as per Ex. R-43. The period of limitation will be three years from that date on the footing that Morarka is an ordinary debtor of the
company. If winding up is ordered, it will date back to 26th December, 1964, under S. 441(2). If on 26th December, 1964, a suit against
Radheshyam Morarka was not time barred, it might be urged that the amount could well be recovered from Radheshyam Morarka, but, since the
claim against Radheshyam Morarka was time barred even on 26th December, 1964, the bar of limitation cannot be got over. On this point
reference may be made to the decision of the Privy Counsel in Hansraj Gupta v. Official Liquidator and Dahradun Co. 54 Allahabad, 1067. The
result is that even if winding up is ordered, the company can, if at all, recover the amount only from A.C.K. Krishnaswami and Hariprasad in
misfeasance proceedings as past Directors under S. 543 of the Act. Under such circumstances, it will not be open to them to bring forward a
winding up petition on their own act of misfeasance. A person cannot take advantage of his own wrong. Reference may be made in this connection
to Burt v. British Nation Life Assurance Association 45 English Reports, 62, quoted in N.V.R. Nagappa Chettiar and Another Vs. The Madras
Race Club and Others, . The headnote there may be taken to summarise the position correctly:-
Although it may be too strict to hold that a Director of a company is bound to look back through the minute book, into entries made in it before he
became a Director, yet, subsequently to his becoming a Director, he is a party to dealings founded on those noticed in such prior entries and allows
his brother Directors to act and proceed upon the notion that he affirms and adopts the transactions to which such entries relate and this course of
action goes on during two years, he is precluded from impeaching such transactions, unless he can establish a case of deception or want of due
information.
X X X X X
In this confused evidence, it is not possible to say definitely that the transfer was made unauthorisedly by the present directorate, though that is
very probable. I am, however, proceeding on the assumption that the transfer to Stressed Concrete Constructions Private Limited was
unauthorised, and that the present directorate was responsible therefor. But, I do not think that it will be just and equitable to wind up the company
on that account. Mere misconduct on the part of the Directors is not a ground for winding up, where it has not affected the finances of the
Company. In Rajamundry Electric Supply Corporation v. Nageswara Rao 1951 Supreme Court Journal, 218 at 221, their Lordships of the
Supreme Court observed:
Where nothing more is established than that the Directors have misappropriated the funds of the company an order for winding up would not be
just and equitable because if it is a sound concern, such an order must operate harshly on the rights of the shareholders. But if, in addition to such
misconduct, circumstances exist which render it desirable in the interests of the shareholders that the company should be wound up, there is nothing
in S. 162(6) of the Companies Act, 1913, which bars the jurisdiction of the Court to make such an order.
In Palmer''s Company Precedent, 17th Edition, Volume 2, at page 36, it is stated that mere misconduct or mismanagement however on the
part of Directors is not, of itself sufficient to justify an order, the proper action for the petitioner being to commence a suit against the Directors
concerned, though the Court will exercise its discretion in such a case, if the company is deprived of its usual remedies, if the Court comes to the
conclusion that any other course will lead to continuous and expensive litigation or if the conduct of the directors can only be properly investigated
in a winding up. In Halsbury''s Laws of England, Simonds Edition, Volume 6, at page 535, it is stated:-
Misconduct of Directors or of liquidators or the fact that its business has been carried on at a heavy loss (if the company is not insolvent) or the
issue of shares at a discount, it not per se a ground for winding up, nor is the fact that the company has acted dishonestly to outsiders, or that a
majority of shareholders insufficient to pass a special resolution, wish it.
Reference may be made also to McPherson''s article already referred to.
Of the cases quoted in the text books, I wish to refer to two. In re Anglo-Greek Steam Company 1866 Vol. 2 Equity Cases, - 14 Times Law
Reporters, 120, and Hull v. Turf Mines Ltd. Transvaal Law Reports, Supreme Court, cited as 1906 T.S. 68. In the Anglo-Greek Steam
Company 1866 Vol. 2 Equity Cases, - 14 Times Law Reporters, 120, Commissions were taken by the Directors in promoting the company and
subsequently in the running of it. Lord Romilly at page 8, condemned this conduct of the Directors but was of the opinion that it was not a ground
for winding up. At page 10, he observed:
I am of opinion that the misconduct of the directors and manager towards the share-holders may be the subject of a suit, but it is not a reason for
winding up the company, until that mismanagement has produced insolvency, ""which is very far from being the case now.........I see much that may
be proper to reform, but I see nothing which would render it, to use the words of the Act, ''just and equitable'', in the present state of affairs, that
this company should be wound up.
In Hull v. Turf Mines Ltd. Transvaal Law Reports, Supreme Court, cited as 1906 T.S. 68, the main grievance against the Directors was that
they failed to call up the balance of 18 shillings in the pound on the shares for which they had subscribed. There were also some other allegations,
Innes C.J. and Smith J., followed the Anglo-Greek Steam Company 1866 Vol. 2 Equity Cases, - 14 Times Law Reporters, 120, and held that
winding was not called for. Innes, C.J., observed at page 75:
It appears to me that the principle is well established that misconduct on the part of the directors, misapplication of funds, and even fraud in the
promotion of the company, though they may give ground for action against the directors will not in themselves justify the winding up of a solvent
company capable of carrying on its business ; especially against the wishes of the majority of its share-holders.
At page 76, this is how he summarises Re. Anglo-Greek Steam Navigation Co. 1866 Vol. 2 Equity Cases, - 14 Times Law Reporters, 120 :
It was proved that commissions had been taken, and that money had been received by the directors ; yet in the face of these facts the Court
refused to grant a winding up order, because it held that the proper remedy of the share-holders was by action against the directors, and not by
winding up a company which was perfectly solvent and able and willing to carry on its business.
Smith J. observes:
As to the alleged acts of misfeasance, it is sufficient to say that, so far as I am able to discover it has never been held to be a ground for a winding
up order unless these acts have brought the company to an insolvent stage, which clearly is not the case here.
Lower down (Page 85)
This reason why misfeasance on that of Directors is per se no ground for the winding up of a company is that the injured share-holders have a right
of action against them.
No evidence has been let in to show how much was collected from Stressed Concrete Constructions Private Limited. But I am prepared to
assume that nothing substantial was collected. But, in spite of it, the finances of the company have not been affected. Large dividends have been
declared at the rate of Rs. 80 per share for 1960-1961, Rs. 60 per share for 1961-1962, Rs. 60 per share for 1962-1963, Rs. 60 per share for
1963-1964. (Vide page 5 of the statement of the company). After all, a company exists for the benefit of the share-holders, and where such profits
have been earned, notwithstanding mismanagement by the Directors, it will not be fair to the share-holders to kill the company by winding it up. It
should still be open to the petitioners to institute a suit separately against the present directorate for the alleged unauthorised transfer to Stressed
Concrete Constructions Private Limited. Winding up is not a proper remedy for redressing that alleged grievance. It will amount to throwing out
the child in washing the bath-tub. An alternative remedy is open to the petitioners u/s 235 of the Act by a petition to the Central Government. On
the right of action by minority share-holders on behalf of the company, reference may be usefully made to the discussion in Gore Browne on Joint
Stock Companies, 41st Edition (1952) at pages 381 to 386, Buckley on Companies Act, 13th Edition, pages 169 to 172, N.V.R. Nagappa
Chettiar and Another Vs. The Madras Race Club and Others, at pages 667 to 669, and Dr. Satya Charan v. Rameshwar Prasad AIR (1950)
Federal Court, 133.
X X X
I have said enough to show that on the merits there are no grounds for winding up, and the petition is an abuse of the process of the Court, and
that the main object of the petitions must only be to wreck the company and its reputation. This is further strengthened by the fact that they did not
comply with the rules about the service of the petition on the company, so that the company could not come forward to the Court in time to
restrain the advertisement. Rule 28(1) reads:
Where a petition is presented against a company, it shall be accompanied by a notice of the petition in the prescribed form, together with a copy of
the petition for service on the company and an envelope addressed to the company at its registered office or its principal place of business and
sufficiently stamped for being sent by registered post for acknowledgment. The Registrar shall immediately on the admission of the petition send the
notice together with the copy of the petition to the company by registered post.
The office raised objection 13 that the previsions of this rule should be complied with and returned the petition on 28th December, 1964. When
the petition was re-presented on the same day, Sri G. Ramaswamy replied to some of the other objections, and so far as objection No. 13 and
some other objections were concerned, he stated, ""Other returns complied with."" He explained that he thought it was sufficient on his part to
answer the points which required an explanation from him as Counsel and he had assumed that his clerk or Hariprasad would have complied with
the other objections. But there is no affidavit of the clerk or of Hariprasad that objection No. 13 was complied with, and actually the records do
not show that the petitioners brought an envelope addressed to the company at its registered office and sufficiently stamped for being sent by
registered post for acknowledgment, as required by Rule 28. It is now seen that two sets of the petition and the enclosures were filed on 26th
December, 1964, because they bear the seal of that date though the copies do not seem to have been available for the company when Sri
Vasantha Pai wanted them on 4th January, 1965. Sri Vasantha Pai has filed Ex. R-35 giving in detail the steps taken by him in the company to get
information about the petition. At page 6 thereof there is a letter which he wrote to the two Advocates appearing for the two petitioners stating,
On enquiry at the office of the Registrar, Original Side, Madras, we find that you have not furnished copies of the petition to the High Court for
service on the first respondent."" That averment is repeated in the petition which the company filed in the Supreme Court for stay of the proceedings
in this Court (Vide pages 13 and 14 of Ex. R-38). It is stated there that because copies of the petition were not available, only inspection of the
main petition was given to the Counsel by the Registrar. There can be little doubt that the stamped envelope was not furnished to the office as
required by R. 28, for if it had been furnished, the Registrar of the office would have sent the notice together with a copy of the petition to the
company by registered post at once. Actually, that could not be done till now and it was only on information otherwise received by the company,
and with great difficulty as pointed out in Ex. R-38, that the company was able to enter appearance on 4th January, 1965. Sri Ramaswamy relies
on the fact that there is a tick mark against objection No. 13 and argues that the clerk in the office of the High Court must have been satisfied that
the return was complied with : then the petition was re-presented on 28th December, 1964. I am not prepared to make that assumption,
particularly when there is no affidavit of the clerk of Sri G. Ramaswamy or of Hariprasad. R. 31 says that in default of compliance with the
requirements of the rules and the directions of the Judge or Registrar as regards the advertisement and service of the petition, the petition shall, on
the date fixed for hearing, be posted for orders of the Judge, and the Judge may either dismiss the petition or give such further directions as he
thinks fit. Sri Vasantha Pai prayed that I should dismiss the petition under R. 31 itself for non-compliance with the requirements of R. 28 about the
service of the petition on the company. What the Court should do is a matter depending on the circumstances of each case, and so far as the case
is concerned having regard to the facts that on the merits themselves there are no reasonable grounds for winding up and that the petition is an
abuse of the process of the Court, it would be a proper exercise of the discretion of the Court under R. 31 to dismiss the petition for non-
compliance with R. 28, when there is reason to think that the non-compliance may have been deliberate. Sri Vasantha Pai referred to the non-
compliance with some of the other rules, but I do not think it necessary to refer to those points. The prayer in C.A. No. 8 of 1965 is for restraining
the petitioners from further proceeding with the application. But the law permits the dismissal of the petition itself. I have said enough to show that
there are no grounds for winding up, and the petition is an abuse of the process of the Court. There is no point in merely restraining the petitioners
from proceeding further with the petition, and the petition can well be dismissed. As quoted already, Buckley states at page 451, ""if a petition has
been presented, if the Court finds it an abuse of process, the Court may on motion stay all proceedings under it or dismiss it."" In Re London and
Paris Banking Corporation (1874) 19 Equity Cases 444 and In re. Gold Hill Mines (1883) 23 Chan. Dn. 210 were cases of such dismissal.
Accordingly I hereby dismiss the petition O.P. No. 87 of 1964 with costs of the first respondent which I fix at Rs. 1000. C.A. No. 8 of 1965 is
allowed. C.A. Nos. 315 and 316 of 1965 are dismissed.