Laiju vs Brick Bond Builders (P) Ltd.

Thottathil B. Radhakrishnan, J.—This is a petition seeking winding up of a private limited company. The petitioner and his wife hold 47.5% of the shares and the second respondent and the members of his family hold another 47.5%.

According to the petitioner, the father of the second respondent was also interested in an item of property over which the petitioner envisaged interest, to build a multi-storied residential complex and that the father of the second respondent and the petitioner reached an understanding to float a company and it was accordingly that the aforesaid company came into force and one James Paul, a retired Chief Engineer was brought into the Company to seek his advice. The Company was formed with the main object of purchasing, developing, selling etc. of buildings and to construct houses, hospitals, flats, apartments etc. and to carry on the business of building contractors and undertake and carry out building construction works and to engage in trading of building materials of any kind. According to the petitioner, though the project began in 1994 and several flats were allotted, the cash inflow was insufficient to obtain the desired pace for the construction of such a project and ultimately a loan was raised through the Federal Bank by depositing the title deeds of the property of the company and further collateral security, including at the risk of the petitioner executing documents.

The petitioner contends that the Federal Bank insisted on additional collateral security after it moved the Debt Recovery Tribunal pursuant to failed negotiations and M.P.D. Xavier, the father of the second respondent provided additional security and the Bank agreed to realise the undivided share in the properties, so that the Company could execute the sale deed in favour of the allottees. According to the petitioner, he arranged for sale of certain flats and thereafter played a pivotal role in making the project viable and he has also given his personal property as security and the third respondent acted in such a manner that the developments of the further events as regards the Company, were detrimental to the interest of the petitioner. According to him, the Company is essentially a partnership of two families and cannot carry on business, for having lost mutual faith and confidence and that the trust exposed by the petitioner on the second respondent has apparently turned out to be misplaced. In the said premise, it is contended that, to protect the interest of the petitioner, who is the original promotor of the Company, there is no alternative other than to have the Company wound up so that the petitioner will be able to get his share of profits. Accordingly, an order for winding up is sought for.

In opposition, the respondents challenge the sustainability of the winding up petition and contend that, the petitioner, if at all, has efficacious and alternative remedy before the Company Law Board u/s 397 of the Companies Act. Contentions are also raised on the merits, by alleging that the transaction with the Federal Bank is not as contended by the petitioner and that the petitioner had abandoned his responsibilities attached to the post of Managing Director and left for the Persian Gulf in early 2001. It is pleaded by the respondents that no situation has arisen for winding up of the Company and that the petition is filed in a manner to force the Company to part with certain portions, of the structure constructed, in a manner as the petitioner would desire to have it,

Various precedents as to the questions to be considered in a winding up petition, as also on the question as to whether nature of relationship between the parties is that of a partnership or not, have been referred by counsel on either side.

Learned counsel for the petitioner referred to the judgment in Ragunath Prasad Jhunjhunwala and Anr. v. Hind Overseas Private Limited (1971) 41 CC 308 to urge that if a private company could be fairly called a partnership under the guise of a private company, then the grounds for dissolution of a partnership will apply also in the case of a private company. The applicability of the principle of dissolution of partnership to the case of a private limited company was also canvassed on behalf of the petitioner by relying on the decision of the Delhi High Court in Eastern Linkers Pvt. Ltd. v. Dina Math Sodhi (1984) 55 CC 462. The doctrine of piercing the corporate veil was canvassed on behalf of the petitioner. Reference was also made to the decision of the Apex Court in Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, to point out that a complete deadlock is not always the sole basis of winding up and that in cases where a private company is more in the nature of a partnership, undue emphasis cannot be placed on the contractual rights arising from the Articles of Association over the equitable principles derived from partnership law.

Reference was made by the learned Counsel for the petitioner to the decision of the Apex Court in M/s. World Wide Agencies Pvt. Ltd. and another Vs. Mrs. Margarat T. Desor and others, to urge that when the materials on record disclose that the continuance of the company is prejudicial to the interest of the shareholders, the Court can consider granting alternate reliefs and that the materials on record show that the respondents are not acting in good faith. The learned Counsel for the petitioners also referred to the decision of the Apex Court in Bajaj Auto Ltd. Vs. N.K. Firodia and Another etc., to urge that the Directors are required to act bonafide and not arbitrarily or with a collateral motive. Urging that operation and mismanagement could be considered and alternate reliefs could be granted, the learned Counsel for the petitioner referred to the judgment of the Delhi High Court Moti Films Pvt. Ltd. and Anr. v. Harish Bansal and Ors. (1983) 54 CC 856. To that effect was also cited the decision of the Bombay High Court in Jer Rutton Kavasmaneck and Ors. v. Gharda Chemcials Ltd. and Ors. (2001) 106 CC 25.

The decision in Hind Overseas Private Limited (supra), was referred to on behalf of the respondents, to point out that the Apex Court has noticed that though Indian Companies Act is modelled on the English Companies Act, the Indian law is developing on its own lines and has made significant progress on its own.

Learned counsel for the respondents referred to the precedents in support of his arguments that within the conformity of Sections 396 and 399, the petitioner has an effective alternate remedy and the whole idea of the company will be frustrated if the analogy of partnership is imported. It was also further urged in view of the objections of incorporation that the contention that the substractum of the company disappears, is not sustainable. It was urged that the precedents are to the effect that an application for winding up is not to be used to pressurize the respondents to secure the interest of the petitioner''s motive of getting a pent house. Learned counsel for the respondents relied on the decisions of the Madras High Court in S.S. Rajakumar v. Perfect Castings Private Ltd. (1968) 38 CC 187 to urge that the existence of factions among the shareholders and bickerings between two groups of members coupled with vague allegations against the quality of management by persons in charge of the company and mere exclusion from management are not by themselves grounds for winding up of a company. Relying on the decision of the Delhi High Court in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd. and Ors. (1974) 44 CC 390 it was urged on behalf of the respondents that a petition for winding up ought not to be filed for putting pressure on the respondents to make them agree to the requirements of the petitioner and that the analogy of a partnership cannot be extended too far to a company since the basic idea would be frustrated if it could be dissolved in a like manner as a partnership would be. Referring to the decision of the Apex Court in Hind Overseas (P.) Ltd. (supra) on behalf of the respondents, it was urged that when more than one family together forms the company and there is no right as such agreed upon for active participation of members, who were sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked, and that relief u/s 433(f) of the Act based on 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 was urged on the basis of the said decision that there must be materials to show that it is just and equitable not only to the persons applying for winding up but also to the company and its shareholders. The said decision was also relied on to urge that the question whether a company is in the nature of a partnership or not could be decided only with reference to the facts and not by applying any precedents as such. In support of the contention against the allegation of loss of substractum, learned Counsel for the respondents relied on the decisions of this Court in George Vs. The Athimattam Rubber Co. Ltd., Thodupuzha, and A.P. Pothen v. Hindustan Trading Corporation Private Ltd. and Ors. 1966 KLT 928 : AIR 1968 Ker 149 to urge that the plea of loss of substractum does not necessarily depend upon the assignment or non-availability of some of the assets of the company and that so long as certain other business activities conceived by the objections of the company continue to remain in tact, there is no loss of substractum. Learned counsel for the petitioner also referred to the decision in K.T. Mathew v. Malabar Industrial Co. Ltd. (1986) 59 CC 569 Kerala to urge that the discretionary power u/s 433(f) has always to be applied as a last resort and not to be applied merely on an allegation of oppression of minority, misconduct and mismanagement and that the availability of effective alternate remedy is a ground on which such an application needs to be refused. The decision of the Apex Court in Kilpest Pvt. Ltd. and Others Vs. Shekhar Mehra, was referred to by the learned Counsel for the respondents to urge that having regard to the wide powers of the Company Law Board or the Court under the provisions which can take care of complaints regarding oppression and mismangement, it would be rarely necessary to wind up a company in proceedings u/s 397 and that a Limited Company cannot be treated as a quasi partnership since they voluntarily and knowingly bind themselves to the provisions of the Companies Act and therefore, the submission that a Limited company should be treated as a quasi partnership, could not be easily accepted.

An assimilation of the aforesaid decisions referred to by the counsel on either side would show that an application for winding up of a company u/s 433(f) of the Companies Act on the ground that it is just and equitable to do so is not to be granted except in cases where, on a thorough examination of the materials on record, it is found that there is no other way for the petitioner to have remedy for his grievance and that the mere completion of some of the projects envisaged by the company at the time of its incorporation does not by itself lead to the loss of substractum of the company and further that the initial intention of the promoters of the company to have the company held by two families is by itself not a ground to hold that the private limited company is in the nature of a partnership and is liable to be dissolved or wound up on grounds referable to the law relating to partnerships and, still further, that an application for winding up of a company shall not be used to pressurize those in management to yield to the needs or dictates of the petitioner.

It is by now settled as a salutary principle that the Company Court, in adjudicating an application for winding up u/s 433, is not to venture on an accounting between the parties or to issue an order for winding up, unless the situation warrants. It is not a jurisdiction to be utilised for sustaining a complaint as to oppression or mismangement. It is also not to be treated as a litigation where the rival groups are to be heard to make a choice regarding the manner in which they would settle among themselves, if the Company is voluntarily wound up. I say so because the bargain between the parties in this case, essentially, is as to the manner in which the funds have to be accounted for and the modality of apportionment, among themselves, of the right over the construction made by them.

Having regard to the aforesaid discussions, no grounds are made out to order the winding up of the company. Petition is accordingly dismissed. No costs.