K. Rama Rao and Others vs Pressteels and Fabrications P. Ltd. (No. 2)

B. Prakash Rao, J.—This appeal is filed u/s 483 of the Companies Act, 1956, read with Clause 15 of the Letters Patent, aggrieved against the orders of the learned single judge in Company Petition No. 2 of 2007 dated April 24, 2009 K. Rama Rao and Others Vs. Pressteels and Fabrications P. Ltd. (No. 1), dismissing the petition filed by the petitioners herein u/s 433(c), (f) and (g) and Section 439 of the Companies Act, 1956 read with Rule 9 of the Companies (Court) Rules, 1959, seeking winding up of the company under the provisions of the aforesaid Act.

Heard Sri S. Ravi, learned Counsel for the appellants and Sri V.S. Raju for the respondent-company and at their request the main appeal itself is taken up for disposal at the admission stage.

In the application filed by the appellants for winding up, the case of the petitioners was that having regard to the nature of the affairs which are not satisfactory, the company needs to be wound up. It was alleged that the respondent-company was incorporated on December 4, 1971, for the purpose of carrying on the business which was run by a partnership firm under the name and style of "Presstels and Fabrications". The first petitioner who was the partner in the earlier firm later became a director with effect from October 27, 1980 and ceased to be a director with effect from June 20, 1984. The first petitioner was holding 1,819 shares, while second and the third petitioners held 825 and 851 shares, respectively. The nominal share capital of the company is Rs. 1,00,00,000 consisting of 1,00,000 equity shares of Rs. 100 each. The issued, subscribed and paid-up capital was Rs. 33,00,000 comprising of 33,000 equity shares which are fully paid-up. Later, the authorised share capital of the company was raised for 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 business includes manufacturing and selling of precision tools, jigs, fixtures, dies, machinery spares and carrying on business in light engineering sheet metal components, etc. It was alleged that it is only after cession of the first petitioner as director, the company went into traverse and not properly carrying on business due to internal quarrels among the directors. The meetings are not held including that of annual general meeting nor any accounts are placed before the general body. Earlier, one Sri Ch. H. Bhagawandas filed C.P. No. 2 of 1986 before this Court for winding up of the company, however, the same was compromised and ultimately dismissed as withdrawn. Yet, there was no improvement and there is enormous delay in lodging the annual reports and plant and machinery of the company was sold for the ostensible purpose of liquidating its liabilities. In the year 1995, there has been no activity of any fresh contracts, yet the expenditure went on towards travelling expenditure and for personal use, rather than, the business of the company, ultimately, it has resulted the losses to a tune of Rs. 1.54 crores. There is a heavy debt due to the State Bank of India for a sum of Rs. 2,41,95,389.40 which was being suppressed and not made known to the shareholders. It had come to notice much later. Therefore, the entire affairs are not transparent and the directors sought to involve themselves in real estate business by disposing of the lands of the company situated at Sanathnagar under the guise of development agreements with third party developers. There are no changes made amongst the objects of the company nor any permission from the members was taken for such activity. An extent of 48 acres of land was sold for a nominal sum of Rs. 13.16 lakhs. Under these circumstances, the appellants/petitioners have approached the Company Law Board under Sections 397 and 398 of the Companies Act, 1956, making various allegations of suppression and mismanagement, however, the said petition was disposed of by an order dated January 28, 2003 K. Rama Rao v. Pressteels and Fabrications P. Ltd. [2004] 122 Comp Cas 492 (CLB), directing the company to allot proportionate shares to the appellants. The appeal filed against the said order in C.P. No. 13 of 2003 before this Court was dismissed and same was confirmed by the Supreme Court. Still there was no improvement, hence it needs to be wound up.

Contesting the application, the case of the respondent-company was that the petitioners have not come out with true facts and circumstances and suppressed many earlier proceedings inter se. Initially the company had acquired acre 4.30 guntas of land at Fathenagar in Ranga Reddy district for the purpose of the aforesaid business and the petitioners who were allotted due shares, i.e., the first petitioner initially was allotted 300 shares of Rs. 100 each and later 1,107 bonus shares were allotted, as per his entitlement. He acquired further 412 shares through transfer from Smt. Ragha-vamma during the year 1990. The second and the third petitioners were allotted 400 equity shares each and they again acquired 876 shares from Smt. Raghavamma, by way of transfer. Therefore the share pattern of the petitioners hardly comes to 4 per cent, only of the total shareholding of the company. The company acquired land ad measuring 3.5 acres at Paloncha for construction of quarters. The company had executed a power of attorney on November 11, 1974, in the name of the first petitioner for pursuing the said transaction, however, the first petitioner got the said land transferred in his own name, which was objected to, but however later on the company has taken a lenient view. Clandestinely the first petitioner has established a partnership firm under the name and style of "Indwell Constructions" and flouted another firm under the name and style of "Industrial Engineers" and trying to knock away the works of the company. Even though, those concerns were given due works but there was no prompt performance of the work. The first petitioner has filed a suit in O.S. No. 174 of 1986 on the file of the City Civil Court, Hyderabad on February 19, 1986, for recovery of Rs. 18,45,280 which ultimately went in arbitration and an award was passed for Rs. 16,78,763 and a compromise decree was passed thereunder. The said amount was received by the first petitioner and he filed fresh execution proceedings in E.P. No. 11 of 1994 on the file of the Additional Senior Civil Judge, Gudiwada claiming for a further sum of Rs. 1,66,512 and got property of the company at Gannavaram attached. Later on, after the accounts are taken into account that the first petitioner is due a further sum, thus a company filed a suit in O.S. No. 424 of 2006 on the file of Chief Judge, City Civil Court, Hyderabad. In view of the attempt on the part of the first petitioner to knock away the landed property of acre 6.4 guntas at Chinnautapalli village, near Gannavaram in Krishna district, which he got transferred in his name, proceedings were initiated before the Mandal Revenue Officer for cancellation of the alleged patta granted in favour of the first petitioner. Initially, the Mandal Revenue Officer, dismissed the said application, however on appeal, the Revenue Divisional Officer, as per orders in Appeal No. 1 of 2003 dated July 21, 2003, allowed the appeal and cancelled the patta. On further proceedings before the Joint Collector at the instance of the first petitioner, the orders of the Revenue Divisional Officer were set aside and the orders of the Mandal Revenue Officer were restored. A writ petition was filed in W.P. No. 8780 of 2004 challenging the orders of the, Joint Collector dated May 3, 2004. The company has filed another suit in O.S. No. 67 of 2001 and obtained an injunction restraining the first petitioner from interfering and the said suit was decreed on March 3, 2008. The appeal filed by the first petitioner is pending. Another suit in O.S. No. 241 of 2003 was filed before the Civil Court at Gudiwada for recovery of Rs. 85,609 against the first petitioner and the same was decreed, against which an appeal was filed by the first petitioner and the same is pending on the file of the District Court. Therefore, in view of these checkered events and the proceedings which have been suppressed by the petitioner, there are absolutely no bona fides, hence, there exists no warrant nor any justification for winding up and sought for dismissal. The learned single judge after taking into consideration the rival submissions and the scope of provision u/s 433(f) of the Companies Act, 1956, vis-a-vis the principles laid down in Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, found that the petitioners have absolutely not made out any prima facie case to warrant such extreme step of winding up of the company and entire events would only show some personal vendetta, ill feelings rather than any deficiency or affect the regular affairs of the company and dismissed the said application.

On considering the submissions and on perusal of the material filed from both sides, the point which arises for consideration is whether on the facts and circumstances the application as filed by the appellants/petitioners is liable to be proceeded with for winding up of the respondent-company.

At the outset, it is to be stated that all the aforesaid events as mentioned by the respondent-company in the counter affidavit, were not denied by the appellants herein, that apart, all these events pertain to court proceedings. Therefore there cannot be any dispute in this regard. Except making allegations of mismanagement, the petitioners have not come out with any specific case or averment, much less any details in support to show as to how and in what manner the affairs warrant for winding up of the company. One of the petitioners herein admittedly was a director and ceased later. All the petitioners stand in the foot of a shareholder and their total shareholding admittedly comes to 4 per cent, of the total shareholding of the company. There is no dispute to the fact that there has been earlier attempt before the Company Law Board in C.P. No. 2 of 1986 and it resulted in vain and finally affirmed by this Court in appeal. There was a compromise, and a decree in O.S. No. 174 of 1986 and later other proceedings in O.S. No. 67 of 2001 and other proceedings. Similarly, the proceedings before the Company Law Board are not only confirmed by this Court but also by the Supreme Court rejecting all apprehensions. The entire allegations in those applications virtually run on the same lines as now sought to be raised in the present application.

The brief events in the back-drop of the developments in the case as it unfolded are that the company was incorporated on December 4, 1971 and the first appellant/first petitioner purchased the land R.S. No. 600/3 at Guntur on January 10, 1978 and thereafter the first appellant became the director of the company on October 27, 1980 and later he ceased to be in the said post of director with effect from June 20, 1984. In the suit referred to above in O.S. No. 174 of 1986 which was filed by the first petitioner himself seeking for recovery of an amount of Rs. 18,45,280 towards the final payment after completion of the work to which he was entitled to, wherein a compromise decree was passed on July 8,1988, for an amount of Rs. 16,78,763. Complaining that the said amount has not been paid, the first petitioner laid execution petition and the same was dismissed after contest by the court orders dated October 11, 2006.

The petitioners have filed an application under Sections 397 and 398 of the Companies Act, 1956, in C.P. No. 27 of 2002 before the Company Law Board, against the company raising several contentions, which was ultimately disposed of as per the orders dated January 28, 2003, with liberty to the petitioners to opt for additional shares as they are entitled to as on June 30, 2001 and the company would give the liberty of inspection of the records and the balance-sheets to them in accordance with the provisions of the Act. Not satisfied, the petitioners have filed an appeal in Company Appeal No. 13 of 2003 in this Court and the same was dismissed as per the orders dated August 1, 2004. Against the said orders a SLP (Civil) No. 25834 of 2004 was filed before the Supreme Court and the same was dismissed as per the orders dated January 9, 2006.

Of the other litigation between the parties, includes one suit by the company in O.S. No. 424 of 2006 on the file of the Chief Judge, City Civil Court, Hyderabad seeking for rendition of accounts of the firm of the first petitioner and to account for such sums that would be found due. In another suit in O.S. No. 67 of 2001, filed by the first petitioner, where he sought for injunction against the company, not to interfere with the properties of the company situated at Gannavaram. Similarly, the company had filed another suit in O.S. No. 241 of 2003, on the file of the Additional Senior Civil Judge (FTC), Gudiwada for recovery of an amount of Rs. 1,49,247 against the first petitioner and the same was decreed as per the orders dated July 18, 2006. Against the said decree, the petitioner filed an appeal. Similarly in the proceedings before the revenue authorities in respect of the property purchased, an application was filed before the Mandal Revenue Officer by the company on May 24, 2002, to cancel the ryotwari patta issued in favour of the first petitioner, however, the same was dismissed by the primary authority/Mandal Revenue Officer as per the orders dated January 27, 2003. On further appeal, the Appellate Authority, viz., Revenue Divisional Officer, Nuzvid allowed the same at the instance of the company as per the orders dated January 27, 2003. Thereafter, the first petitioner filed a revision before the Joint Collector, Krishna and the said order was set aside as per the orders dated April 1, 2004. Challenging the said order, a writ petition in W.P. No. 8780 of 2004 was filed on May 3, 2004, which is pending.

Therefore from the above, it amply shows that since inception there have been several litigations, more at the instance of the petitioners themselves and none of those proceedings would reflect any lapse or irregularity in regard to the affairs of the company. Further, it shows, the attempt on the part of the petitioners themselves, somehow or other the company being subjected to such proceedings for no fault, there is no finding as against the company on the affairs or any irregularities either in its management or even in regard to the financial aspects.

The entire gamut of the petitioners'' case in the present application is the case of mismanagement. It has been alleged that the company has not been carrying on any business from the year 1994 and there has been delay in filing reports without any explanation with a view to create the false records. Further, from the year 1995-2005, the company did not execute a single contract and the reason alleged was paucity of funds and bad market conditions. Therefore, apart from the litigation with which the company is faced, there is absolutely no activity on its part and no business is carried on for the past decade. The annual reports would indicate the financial position and its irregularities. Therefore, on a reading of the application filed by the petitioners seeking for winding up of the company, the basis is the vague allegation of mismanagement. No specific averment or details are made out showing the incidents. Nothing has been shown as to any serious lapse or such irregularities having a direct impact on the very business or its activities much less on the finance of the company. Curiously, there is no proper reference or any explanation to those earlier litigations and the results therein. There is clear suppression.

The aforesaid checkered events amply show that in view of the consistent proceedings between the parties in some or other court, authority or otherwise, more concentration is drawn for the company in proceedings outside rather than raising pointer to the company''s affairs. Therefore, the company itself as such cannot be said to have been reached such a point where it possibly could not carry on business either due to finances or otherwise. The company has been successfully contesting all the proceedings initiated at the instance of the petitioners and others. All those would indicate sincerity on the part of the company and management in trying to protect the interest of the company in particular and larger interests of the shareholders in general. The relief sought for winding up of the company is quite a substantial and serious one and it cannot be allowed on flimsy and vague grounds without any sound and valid base. More so when it lacks bona fides. Individual rivalries or disputes, if any, have no place to put against the interests of the company and running concern. While considering the case, the learned single judge reiterates that:

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 interest 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.

Considering the principle as laid down for the requirement for aforesaid remedy, the apex court in Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, while considering such application, held as follows (headnote):

In an application for the winding up of a company under the just and equitable clause, 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.

Relief u/s 433(f) of the Companies Act, 1956, based on the just and equitable Clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company. It is not a proper principle to encourage hasty petitions for the winding up of a company without first attempting to sort out the dispute and controversy between the members in the domestic forum in conformity with the articles of association. There must be materials to show when the ''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.

When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership:

Held, on the facts, that the principles for the dissolution of a partnership did not apply to the appellant-company, and in the absence of allegations that the company could not run smoothly in the best interests of the shareholders, the winding up petition u/s 433(f) of the Companies Act, 1956, had to be dismissed.

From the above principles in decision, it has to be seen, if there exists any just and equitable ground. It squarely depends upon the totality of the circumstances. It should not rest on mere bald and sweeping allegations, without a specific case being made out on allegations and material in support. The aforementioned very events as evident from the proceedings all along would show that there is a vituperous attempt to disturb the company from its base without any valid justification. It is to be noted that the company does not exist at the instance of or for the interest of few individuals, be it shareholders or otherwise, necessarily the interest has to be looked on larger pane and protect the shareholders in general. The interest of the. shareholders which runs in tune with that of the company cannot be tinkled with in a light manner. Any such action on the part, would only show lack of sincerity, which is fatal to such application. It can in no terms be said to be any way nearer to the basic requirements of the principle of just and equitable clause. Therefore, we have no hesitation to hold that no prima facie case has been made out on just and equitable perspective. The learned single judge has, on a valid count non suited the appellant.

Lastly, it has to be seen that even the application as has been filed initially purportedly under Sub-clauses (c) and (f) of Section 433 read with Section 439 of the Act, however, it is not necessary to divulge into Sub-clause (g) of Section 433 of the Act, since the said provision has not so far come into force and the appellants/petitioners cannot invoke the said provision.

The learned single judge has taken into consideration all these various aspects and has rightly held following the dicta of the apex court in Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, that no case has been made out by the petitioners to warrant any exercise for winding up of the company. Further, it was held that it is not in the interest of the entire class of the members of the company to wind up, and it cannot be opted merely at the instance of the petitioners, who have been pursuing one or the other proceedings at different stages, without any success. It only shows that the attempt on the part of the petitioners is to see that the company is put to losses at the cost of major shareholders, which is neither permissible nor sustainable under the law. Therefore, we are in entire agreement with the reasoning given by the learned single judge and hold that there is absolutely no justifiable or equitable grounds for the purpose of arriving at a conclusion that the respondent-company deserves to be wound up.

For the aforesaid reasons, we do not find any merits in the appeal and the same is hereby dismissed. No costs.