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Judgment
Nooty Ramamohana Rao, J.—This petition has been moved by three shareholders of the respondent-company seeking winding up of the respondent-company, namely, M/s. Pressteels and Fabrications P. Ltd.
The case of the petitioners is that the respondent-company was incorporated on December 4, 1971, duly taking over the business carried on by a partnership firm under the name and style of "Pressteels and Fabrications". The partners of the said partnership firm have become directors of the company, at one time or the other. In that process the first petitioner, who was earlier a partner in the firm, also became a director of the respondent-company with effect from October 27, 1980 and he ceased to be a director with effect from June 20, 1984. The nominal capital of the company is standing at Rs. 1,00,00,000 consisting of 1,00,000 equity shares of Rs. 100 each. The issued, subscribed and paid-up capital was initially standing at Rs. 33,00,000 comprising of 33,000 equity shares, which are fully paid-up. The first petitioner was holding 1,819 shares, while the second and third petitioners hold 851 and 825 shares, respectively. Thus, the three petitioners together hold a little more than 10 per cent, of the paid-up share capital.
It is asserted by the petitioners that in or about the year 1996, the authorised share capital of the respondent-company has been increased by a further sum of Rs, 17,00,000 by issuing 17,000 shares and again during the year 2001, the share capital has been raised from Rs. 50,00,000 to Rs. 1,00,00,000.
The main objects for which the respondent-company came to be established are to acquire the business carried on by M/s. V. Sreehari Rao and fourteen others, in the name and style of "Pressteels and Fabrications"; and for carrying on the said business by undertaking to manufacture and to sell precision tools, jigs, fixtures, dies, machinery spares, and also carrying on business in light engineering, sheet metal components, etcetera. The petitioners assert that soon after the first petitioner ceased to be the director of the company, the respondent-company started landing in trouble. It was not carrying on any business and the directors of the company are quarrelling amongst themselves. The meetings of the company were not held and no information is made available for the members of the company to come to know about the affairs of the company. It has reached such a stage that even the annual general body meetings could not be convened and consequently, the accounts were not placed before the general body for its approval. It is also pointed out that one Sri Ch. H. Bhagawandas and his associates filed C.P. No. 2 of 1986 before this Court seeking winding up of the respondent-company. However, an unholy alliance has been struck amongst the feuding members of the board and a memorandum of compromise has been entered into by them, which resulted in C.P. No. 2 of 1986 being dismissed as withdrawn. There was no improvement even thereafter, in the affairs that were carried on by the company and, consequently, the same bad state of affairs continued to persist. There was enormous delay in lodging the annual reports with the Registrar of Companies and the records and registers, which are liable to be compulsorily maintained by the company, have all been either not maintained or deliberately suppressed from the knowledge of the members of the company, It was also alleged that during the year 1995 itself, the plant and machinery of the company has been sold for the ostensible purpose of liquidating its liabilities. Consistently, for the past several years, the respondent-company is not able to execute any contracts and the standard reply that is furnished by it, is that, there is heavy competition in the market and consequently, it is not able to execute any contracts. But, nonetheless the precious funds of the company are being abused and misused by the directors for defraying their travelling expenses running into lakhs of rupees. It is further pointed out that while reflecting on one hand that no business is being carried on, in its books of account, the respondent-company is consistently booking huge sums as expenditure towards payment of professional charges, on the other hand. Thus, clearly indicating the design of misappropriation of the funds of the company. It was also pointed out that the costs on the staff have been regularly booked in the books of account. There is no consistency from year to year maintained on this account. Thus, indicating the hollowness of the claim that the said money is used for meeting the expenditure of the staff. It is nothing but a devise worked out for misappropriation. Be that as it may, the company has been consistently making loss, as a result of which, the accumulated losses have reached more than Rs. 1.54 crores, thus, completely knocking out the substratum of the company. It is also further pointed out that without furnishing any details, it was tersely indicated that the State Bank of India had initiated recovery proceedings before the Debts Recovery Tribunal for recovering a sum of Rs. 2,41,95,389.40 from the respondent-company. Till the year 2000, the respondent-company has not shown any such loan transaction between it and the State Bank of India and strangely it has been reported in the financial statement for the year 2000 that a loan in a sum of Rs. 84,02,900 has been taken from the State Bank of India. Thus, the affairs of the company are being carried on in such a manner that it is anything, but transparent and proper. It is further alleged that the affairs of the respondent-company are not managed or carried on on the approved lines and consequently, it is no longer in the interests of the company and its members, for, the company to be permitted to exist any further.
The petitioners herein have also noticed that the directors of the company are indulging in illegal business of carrying real estate business by parting with the lands owned by the respondent-company at Sanathnagar in Hyderabad by entering into development agreements with several developers. The respondent-company has not asked for or secured a change in the objects Clause in the memorandum of its association. Thus, without securing permission from the members for indulging in a different line of business activity than what is approved, the company is carrying on the business.
It was further alleged that precious assets of the company in the form of an extent of more than 48 acres of land has been sold away for a nominal sum of Rs. 13.16 lakhs. Thus, signifying that the total sale consideration has not been brought to the books of account of the company.
In those set of circumstances, the petitioners herein approached the Company Law Board (CLB) under Sections 397 and 398 of the Companies Act, 1956, complaining of various acts of oppression and mismanagement by the directors of the respondent-company. The Company Law Board in spite of noticing the various irregularities and illegalities committed by the directors of the respondent-company, passed orders on January 28, 2003, directing the respondent-company to allot proportionate shares to the petitioners herein, if they exercise an option for acquiring them. Company Appeal No. 13 of 2003, filed, before this Court against the orders of the Company Law Board has also been dismissed and the Supreme Court, when approached, had declined to intervene in the matter. The petitioners, therefore, point out that the respondent-company has not made any alteration, whatsoever, in its methods of conduct of business and it was carrying on the same old illegal activities, which have all resulted in the substratum of the company being completely lost out. It has, therefore, become just and equitable to wind up the company.
The respondent-company has contested the petition. It has pointed out that M/s. Pressteels and Fabrications, was a registered partnership firm and that in the year 1963, it acquired acre 4.30 guntas of land at Fathenagar in Ranga Reddy District, for starting a fabrication unit for the purpose of manufacturing special tools, dies, jigs and special machine tools, etcetera. It was also carrying on-civil, mechanical and electrical contracts and it was registered as a small-scale industrial unit. The said firm executed major works to the State Electricity Board at Kothagudem Thermal Power Station, Paloncha, Khammam District. In view of its growing business activity, it was felt desirable to convert the partnership firm into a private limited company. The first petitioner being an erstwhile partner of the firm was initially allotted 300 shares of Rs. 100 each. Subsequently, the first petitioner was allotted 1,107 bonus shares as per his entitlement. The first petitioner has also acquired 412 shares through transfer from Smt. Raghavamma, during the year 1990. The second and third petitioners were allotted 400 equity shares each. They both, in turn, acquired further 876 shares from Smt. Raghavama, by way of transfer. It is asserted that as of now, the entire share capital of Rs. 1,00,00,000 has been issued, subscribed and paid-up. Therefore, as of now, the shareholding pattern of the petitioners is a mere 3.495 per cent, of the total shareholding of the company. It is further asserted that the original partnership firm acquired land of 3.5 acres at Paloncha for its own use and for construction of quarters for its staff and workers thereat. Upon formation of the company, the company executed a power of attorney on November 11, 1974, in the name of the first petitioner to get the said property registered in the name of the company. In disregard of the said trust reposed in him by the company, the first petitioner got the land together with the building thereon at Paloncha, registered in his own name, instead of in the company''s name. When the said development has come to light, the company has warned the first petitioner sternly but took a compassionate view of his otherwise objectionable conduct. It is further alleged that while continuing as a director of the respondent-company, the first petitioner established a partnership firm in the name and style of "Indwell Constructions" at Vijayawada and started indulging in competition with the respondent-company. When the respondent-company was awarded a pipeline contract worth about Rs. 1.9 crores by M/s. Hindustan Petroleum Corporation Ltd., Vizag (HPCL), the first petitioner approached the company seeking permission to execute the said work on a sub-contractual basis and in that respect he floated another firm and named it as "Industrial Engineers". In the guise of executing the contract for HPCL, the first petitioner has taken away the highly skilled engineers, technicians and workmen of the respondent-company, but however, failed to execute the project promptly and to the satisfaction of the HPCL, resulting in enormous loss of reputation of the respondent-company. The disputes that arose in executing this contract with HPCL have resulted in not so productive a litigation. The first petitioner instituted a civil suit in O.S. No. 174 of 1986, on the file of the City Civil Court, Hyderabad on February 19, 1986, seeking a decree in a sum of Rs. 18,45,280. The arbitration proceedings initiated by the respondent-company with the HPCL resulted in an award being passed for Rs. 16,78,763. Therefore, a compromise decree has been passed for the said sum in the aforesaid civil suit. The respondent-company liaisoned with the HPCL to ensure that this money of Rs. 16,78,763 is directly paid to the first petitioner herein. Having, thus, received the decreetal amount in the year 1992 itself, the first petitioner moved an execution petition bearing No. 11 of 1994, on the file of the Additional Senior Civil Judge, Gudiwada, claiming that a further amount of Rs. 1,66,512 is due and payable by the respondent-company on the ground that the full decreetal amount was not paid and got the landed property of the company of acre 6.40 cents, situate at Chinaautapalli Village, near Gannavaram in Krishna District, attached. The company as well as its banker, to whom the said land was offered as a security, contested the said case, resulting in the execution petition being dismissed, as it was brought out that the first petitioner has realised more money than he is actually entitled to collect from the HPCL. The final accounts have revealed that the firm floated by the first petitioner, in fact, owes money to the respondent-company and for that purpose the respondent-company has to file a civil suit in O.S. No. 424 of 2006, before the Chief Judge, City Civil Court, Hyderabad. The first petitioner was so keen to knock away the landed property of acre 6.4, situate at Chinaautapalli Village, near Gannavaram in Krishna District, for, he indulged in manipulative acts and clandestinely obtained a Pattedar passbook in his name for the said land. When it came to the notice of the company, the respondent-company had immediately moved the Mandal Revenue Officer on May 24, 2002, to cancel the Pattedar Passbook No. 0472714, issued in favour of the first petitioner, as the land is held and owned by the company. Even after realising the fraudulent attempt of the first petitioner, the Mandal Revenue Officer did not cancel the Pattedar passbook on the ground that the Village Officer has certified that the said land is under the possession of the first petitioner. The company, therefore, carried the matter by way of Appeal No. 1 of 2003, on the file of the Revenue Divisional Officer, Nuziveedu. After conducting a thorough enquiry into the matter, the Revenue Divisional Officer, passed orders on July 21, 2003, cancelling the Pattedar passbook issued by the Mandal Revenue Officer, in favour of the first petitioner and remitted the matter back to the Mandal Revenue Officer, for conducting a proper enquiry in terms of the ROR Act and to pass appropriate orders. The first petitioner carried the matter by way of a revision before the Joint Collector, Krishna District, who erroneously arrived at the conclusion that the Pattedar passbook has got to be issued only to the person, who is in actual possession of the property and, therefore, the initial orders passed by the Mandal Revenue Officer, are restored. Since the property is owned by the company and not by the first petitioner herein, the company had to file W.P. No. 8780 of 2004 in this Court for quashing the order passed on May 3, 2004, by the Joint Collector, Krishna District to protect its possession, the company had to file a criminal revision petition before the District Court, Machiliparnam. By its order dated January 27, 2004, the said court has set aside the order passed by the Mandal Revenue Officer to the extent, he recognised the possession of the first petitioner. The company had also filed a civil suit in O.S. No. 67 of 2001 and obtained an order of permanent injunction restraining the first petitioner from interfering, in any manner, with the land owned by the company at Chinaautapalli Village, near Gannavaram in Krishna District. The said civil suit is decreed on March 3, 2008. The first petitioner filed an appeal before the District Court, Machiliparnam. In the mean time, the first petitioner has approached the National Highways Authority and drawn an amount of Rs. 85,609 towards compensation for a part of the land acquired at Gannavaram for road widening purpose. As is already noticed supra, the land does not belong to the first petitioner, but it belongs to the company and hence, another civil suit in O.S. No. 241 of 2003 has been filed before the civil court at Gudiwada for recovering Rs. 85.609 from the first petitioner. The said suit was decreed with subsequent interest at 12 per cent, per annum. The first petitioner preferred an appeal to the District Court at Machilipatnam against the said judgment and it was still pending.
Therefore, the respondent-company submits that there is no warrant for winding up of the respondent-company as there are no justifiable or equitable grounds for doing so. It is pleaded that the first petitioner has been harassing the respondent-company on one pretext or the other and he has been using the forum of one court or the other to arm twist the company into submission to his dictates. Therefore, the above petition deserves to be dismissed with costs, as it lacks bona fides.
I have heard Sri S. Ravi, learned Counsel for the petitioners and Sri V.S. Raju, learned Counsel for the respondent-company.
Section 433(f) of the Companies Act, 1956, provides for winding up of a company on "just and equitable grounds". What factors and material would constitute these "just and equitable grounds", is a matter which has been left for the consideration of the court. There could not have been an exhaustive list of factors, which can constitute the "just and equitable grounds".
It is appropriate to notice that until the complete substratum of the company has gone or the deadlock in the company is incapable of being resolved in any other manner and there is no way to put an end to the state of things/affairs, which are existing in the company except by means of a compulsory order for its winding up, the "just and equitable grounds" Clause shall not be put to use. It should also be remembered that larger interests of the whole body of the shareholders of a company may not be readily sacrificed, due to the squabbles amongst the directors or one set of members against the other. In Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, , the Supreme Court held as under (page 105 and 107):
The principle of ''just and equitable'' Clause baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would be so done in a particular case cannot be put in the strait-jacket of an inflexible formula.
In an application of this type allegations in the petition are of primary importance. A prima facie case has to be made out before the court can take any action in the matter. Even admission of a petition which will lead to advertisement of the winding up proceedings is likely to cause immense injury to the company if ultimately the application has to be dismissed. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those of other interests have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition....
It is now well-established that the sixth clause, namely, ''just and equitable'', is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier Clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable Clause leaves the entire matter to the wide and wise judicial discretion of the court....
There must be materials to show when ''just and equitable'' Clause is invoked, that it is just and equitable not only to the persons applying for winding up but also to the company and to all its shareholders. The company court will have to keep in mind the position of the company as a whole and the interests of the shareholders and see that they do not suffer in a fight for power that ensues between two groups.
Bearing these principles in mind, the material on record, when properly analysed, discloses that the petitioners herein have approached the Company Law Board under Sections 397 and 398 of the Companies Act, 1956, alleging acts of oppression and mismanagement against the respondent-company. The Company Law Board was not totally convinced that the case warranted its intervention against the respondent-company. It had provided a remedy, that was considered by it as fair and reasonable. However, the petitioners have not chosen to avail of the same, as according to them any further investment to the capital of the respondent-company would only result in further misappropriation of funds by the present set of directors of the respondent-company. The appeal preferred by the petitioners against the said order of the Company Law Board, to this Court has also failed. Subsequent to this episode, there was nothing extraordinary about the company that was brought by the petitioners in the above petition, which can convince any neutral and impartial agency to feel that the affairs of the company have taken a nosedive. There were serious allegations traded by the petitioners on one hand and the company. The company itself has laid bare the mal-intentions of the petitioners. There were suits filed by the company against the petitioners, which were decreed, upon contest. Therefore, all that one can say is this: "all is not well between the company and the petitioners herein". It could be a case of loss of confidence of the petitioners in the affairs of the respondent-company being managed by the present, set of directors. To dispel the misgivings entertained by the petitioners, learned Counsel for the respondent-company has filed a memorandum in this matter pointing out that the respondent-company has received a sum of Rs. 8,45,631 for the works executed by it from M/s. K.C.P. Projects Ltd., during the financial year 2007-08. It is, therefore, difficult to assume that the total substratum of the company has been lost out or eroded. Further, the respondent-company was shown paying Income Tax for the past few years, thus, indicating that the expenditure booked by it in its books of account towards staff salaries and the fee paid to the professional services secured by it, is not an act of auditing gimmick or artificial booking of an expenditure, but, a real and genuine one. The respondent-company has offered its explanation as to why its plant and machinery was sold for purposes of liquidating its liabilities and as to how the increase in the capital has come in handy for clearing its debts and liabilities to the bank. Further, if an unproductive asset of the company is sought to be developed, in which process the company can gain substantially, does not amount to any unauthorised activity. No other shareholder of the company raised any demand for winding up of the company and hence, it can be assumed that it is not in the interests of the entire class of the members of the company to wind up the company. As was rightly pointed out by learned Counsel, the percentage of the petitioners'' shareholdings, as of now, in the company''s paid-up share capital, is less than 4 per cent. As compared to 96 per cent, of the other''s interests, the interests of the petitioners cannot demand any greater attention.
I, therefore, do not find any justifiable ground or equitable ground for the purpose of arriving at a conclusion that the respondent-company deserves to be wound up.
For these reasons, I do not find that the present petition has made out a case for admission. Hence, the petition is dismissed, but however, without costs.