Pamarti Venkataswamy vs Kodandarama Bus Transport Ltd. and others

Jaganmohan Reddy, J.—This is an appeal from the judgment of Vis(sic) natha Sastry J., in an application under the Con(sic) (sic)nies Act refusing to order the voluntary winding of Kodandarama Bus Transport Ltd., (hereinafter (sic)ferred to as the Company) subject to the supervi(sic) of the Court.

The petitioner is the appellant. The ap(sic) (sic)lant who is one of the 14 share-holders held fully paid up shares in the Company which was corporated on 6-6-1945 with an authorised caj(sic) of Rs. 2,00,000/- divided into 4,000 shares of Rs. (sic)each. He also claims to be the creditor of Company to the extent of about Rs. 10,000/-.

One of the share-holders viz., Toladi Dhj(sic) who held 143 shares died in or before 1950, so there were only 13 share-holders on the date of filing of the petition under Sections 213(1) and of the Indian Companies Act. The first respor(sic) is the'' Company in voluntary liquidation; the se(sic) respondent was the liquidator who is alleged to resigned and the third respondent is a contrib(sic) and the creditor of the Company.

The assets of the first respondent company sists of 11 motor transport vehicles of the val(sic) Rs. 1,50,000/- with ten route permits. The a (sic)lant alleged that as the Company was running loss and was neither profitable nor encouragin(sic) its business it was decided by a special resoluti(sic) the Company passed on 6-12-1952 to volun(sic) wind up the affairs of the Company and ap(sic) the second respondent who was the Managin(sic) rector of the Company as the liquidator.

The second respondent thereafter function the liquidator only upto 29-10-1953 when he r(sic) (sic)ed his post. The office of the liquidator was (sic) and it is alleged that the second and the thir(sic) pondents were disposing of the assets of the pany to the detrinjent of the share-holders.

It was further alleged by the appellant the respondents 2 dhd 3 have committed various a misfeasance and malfeasance infringing the rig the share-holders of the Company including t(sic) the appellant and for these reasons prayed the Company be wound up voluntarily subject supervision of the Court under the provisions Companies Act and appoint a fit and proper as liquidator id place of the second responder resigned and for passing such further orders Court may deem fit or proper in the circum:(sic) of the case.

The second respondent alleged in his (sic)ter that in or before March, 1952 the posit(sic) the Company was very unsatisfactory in that i(sic) had accumulated to more than Rs. 90,000/-, (sic) tax-demands for substantial sums were also (sic)pated and in fact the Company was sustaining(sic) in actual business. The main assets of the company consisted of 11 buses plying on 10 rout one bus in the spare.

It had also a small baby car M.D. 55 an small machine spare parts erected on the s(sic) longing to one of the share-holders. In that (sic)tion in which the Company was faced at th(sic) the share-holders considered it extremely in the interests of everybody concerned t(sic) some arrangements for the distribution of ass(sic) liabilities among the various share-holders.

(sic)i Pursuant to this desire on 16-3-1952 an agree(sic) (sic)nt was executed and signed by ten share-holders whom the appellant was one of them. Among signatories the appellant''s brother, Pamarti Go(sic) (sic)darajulu and his brother-in-law'' Saladi Venkata(sic) (sic)1am, two of the share-holders, who along with appellant and Saladi Ayyanna and Saladi Satya(sic) (sic)tyana, the minor share-holder, habitually acted in (sic)son, had signed the said agreement.

The agreement embodied a scheme for the allot(sic) lt of buses amongst the share-holders arranged (sic)line different groups and provided for the meet(sic) of a proportionate share of the liabilities of the (sic)ipany present and prospective. The valuation of (sic)c buses was made by an independent person and lots were cast by mutual agreement by one (sic)anarayana, a respectable third party.

The buses were allotted as per three lots and on the very day the respective share-holders possession of the vehicles and plied them, ma(sic) (sic)ng their own buses, meeting the expenditure taking income without any reference to the (sic)ipany. To ensure payment of their shares of the fides by'' different groups, C certificates and G (sic)lits of the Motor Vehicles were kept in the name the Company and the agreement provided that default of payment by snare-holders or a group are-holders of his or their share of Company s (sic)lities, the buses could be talsen possession of by Managing Director and sold for discharging the (sic)ity undertaken by the defaulter.

The appellant was allotted M.D.E. 856 (A.D.A-(sic)plying on the Kakmada - Mandapeta route, (sic)ook possession of the same and ran it for his exclusive benefit. Though he had not signed greement, yet the was aware of the facts and pursuant to that agreement by obtaining the (sic)lotted to him and running it on his own ac(sic) The brother of the appellant Pamarti Go(sic) (sic)rajulu, Saladi Satyanarayana and Saladi Ayyan(sic)-were allotted one bus M.D.E. 1350. Of the first two were signatories. They thus took the of the buses.

the second respondent also stated that other holders to whom the buses were allotted took (sic)sion of them and ran them, on their own ac(sic)

It is further alleged that from out of the (sic)ats realised from various shareholders in pur(sic) of the agreement, some of the debts were (sic)rged except two items regarding which there some disputes. In these circumstances they (sic)advised that it might facilitate the resolution of (sic)ampany if a Liquidator was appointed.

Accordingly on 6-12-1952 ten share-holders met (sic)assed a resolution for voluntary winding up the (sic)ny and appointed the second respondent as (sic)tuidator. The share-holders continued to act (sic)ordance with the agreement and considered (sic)tires bound by it. The respondents further on to state the difficulties confronted by them (sic)ome-tax demands being made from time to Although each of them had paid their share me of them Kunapureddy Satyam was financi(sic) (sic)nbarrassed as the buses falling to his share (sic)mrnt and was not in a position to pay them. all the rest of the eight groups discharged (sic)nands as and when they arose. It is unneces(sic) refer to these details except to say that a demand by the income tax Department in the (sic)ting year 1951-52 of about Rs. 16,000/- was (sic)ind proceedings under the Revenue Recovery ire instituted and all the buses seized on (sic)54. The appellant, his brother Govindara (sic)d his brother-in-law Saladi Venkataratnam de(sic) (sic)to pay their share of the income tax.

The other five groups of share-holders having paid their shares to the Revenue Inspector the buses were released. Three buses belonging to die appel(sic) lant''s group were put up for sale on 9-8-1954 and knocked down for Rs. 7,000/- but in order to avoid their sale the second respondent stated that he intervened and all the five groups of share-holders advanced monies and paid up the rest of the demand. Before the buses could be taken possession of another heavy demand for 1952-53 was presented for Rs. 15,537-9-0 and the buses distrained. Once again the amounts were advanced by the second respondent and his group which were payable by the appellant and had the buses released from attachment. The buses belonging to that group viz., M.D.E. 656 (ADE 641), MDE 1350 (ADE 643) and M.D.E. 1264 (ADE 642) were sold for Rs. 7,000/-. Rs. 6,000/- and Rs. 5,000/- respectively to third persons.

The amounts received were set off against the amounts by the appellant, his brother and brother-in-law after which a sum of Rs. 5600/- stands to their credit and will be adjusted towards the share of the remaining debts of the Company. It is further stated that all the assets of the Company have been distributed and particularly all debts have been discharged and nothing is left for the Liquidator to do, and that the appellant having run the bus to his own right for a period of 27 months and appropriated the profits and having now chosen to refuse to pay his share of the income tax cannot complain of the forfeiture clause of agreement invoked against him. In these circumstances the petition was resist(sic) (sic)ed. The third respondent''s counter has generally adopted the counter of the second respondent

The appellant in his rejoinder challenged the legality of the agreement of 16-3-1952 and the distri(sic) (sic)bution of the motor vehicles and liabilities of the Company among the share-holders. He stated that was not a party thereto and that this agreement was superseded by the resolution for voluntary winding up of the Company and that the income tax (sic)arrears were payable by the Company from its funds. He further stated that the motor vehicles belong to the Company and the permits stood in its name, that the second respondent was no longer a liquidator having resigned his office, and it was just and equitable that the Company should be wound up under the Court''s supervision.

Viswanatha Sastry, J., observed that the fecial resolution for voluntary winding up of the Company was valid, but the arrangements entered into between the share-holders before the special resolution viz., allowing them to adjust the value of their shares towards the price of the vehicles and pay over the balance to the Company for being append in discharge of the debts indirectly amounted to purchase by the company of its shares though it was not competent to do so. He however held that the arrangement entered into under Ex. B-20 was in substance a sale of the vehicles to the share-holders in consideration of their paying a part of the price in cash and their undertaking to pay the liabilities of the Company particularly the liability to pay income tax, and that this arrangement was accepted and acted upon by the appellant and other share-holders who support him and that having enjoyed the benefit of the ar(sic) (sic)rangement and plied the motor vehicles lor their own profit for two years they now profess ignor(sic) ance of the arrangement and pretend that the motor vehicles are still the property of the Company

He further observed that the Company was bound to tnansfer the certificates and G permits to the respective groups of share-holders as soon as all their liabilities undertaken under Ex. B-20 were discharged and that though this was a clumsy and (sic)unbusiness like arrangement, as all the living shareholders were either parties to it or to have accepted and acted upon the arrangement it was too late to upset it or to uphold the contention of the appellant that the nine motor vehicles allotted to the nine groups of the share-holders now form part of the assets of the Company and should be disposed of under the order of the Court.

In the circumstances it was held that as the shares of the share-holders were fully paid up and there is no possibility of their being asked to contribute anything, there were no sufficient reasons for interposition of the Court by a supervision order and that the voluntary liquidation should therefore continue.

Further having regard to the compromise memo filed before the Court by the appellant and the respondents viz., that the voluntary winding-up in pursuance of the special resolution dated 6-12-1952 should continue and that Sri Nakka Suryanarayana Murty of Kakinada should be appointed as voluntary liquidator, he was accordingly appointed with the direction that if he does not act, it will be open to the parties to move the Court u/s 203 of the Companies Act for the appointment of another liquidator.

The learned advocate for the appellant contends before us that (1) appellant was not a party to the arrangement, Ex. B-20 and is not bound by it, (2) this agreement is in contravention of the provisions of Section 211 of the Companies Act and also it contravenes section 54-A of the Companies Act which prohibits the Company from buying its own shares, and (3) the sale of the buses on 7-8-1954 by the 2nd respondent was after he had resigned as liquidator on 20-10-1953 and consequently he had no power to sell the same; as such the sales are not binding on the Company and the buses therefore continue to be assets of the Company. For these reasons the learned advocate contends that the voluntary winding up should be ordered subject to the supervision of the Court u/s 221.

On the other hand the respondents'' advocate submits that inasmuch as there was a valid special resolution for the voluntary winding up of the Company there is nothing illegal in the Liquidator act accordance with the arrangement entered into and adopted by all the share-holders and that there in no contravention of any of the provisions of the Companies Act.

The validity of the special resolution has not been seriously challenged, though it arose for determination before Viswanatha Sastry, J., because the Assistant Registrar of the Joint Stock Companies in his letter Ex. B-24 dated 22-7-1953 has stated that as the notice does not specify the intention to pass the resolution as a special resolution, it does not comply with the provisions of Section 81 of the Indian Companies Act, and was treated as not valid.

The learned Judge, however, held that the letter of the Assistant Registrar, Joint Stock Companies, was based on an incorrect copy of the notice, Ex. A-l, sent to him and that having regard to the resolution for voluntary winding up of the Company and the effect given to it subsequently as disclosed by the Minutes Ex. A-7 dated 27-12-1952 and the documents, Ex. A-10 dated 15-6-1953, A-12 dated 26-7-1953 and A-14 dated 5-3-1953, the 2nd respondent was functioning as the liquidator. We have no hesitation in agreeing with the finding that there is no infirmity or irregularity in the resolution by which the company was put into liquidation and that pursuant to this resolution there was an existing voluntary winding up of the Company. It may be observed that no supervision order under S. 221'' can be made where the voluntary winding up itself is invalid, and hence on this basis a ere tor cannot apply for such an order. The appell(sic) has in his compromise petition filed before the lea(sic)ed Judge proceeded on the assumption that voluntary winding up was valid and desired that same should continue.

The question now is whether the order un(sic) Section 221 of the Companies Act to voluntarily w(sic) up should continue subject to the supervision of Court. This section vests a discretion in the C(sic) which would be exercised having regard to the f(sic); and the circumstances of the case.

The creditor or a contributory cannot as a r(sic) (sic)ter of right obtain such an order, but if it can shown that the resolution for voluntary winding has been passed fraudulently or where the credi(sic) support an order for supervision in order to s(sic) guard their interests or where there is prepond(sic) (sic)ing influence of the share-holders whose com is impeached or where investigation is required the assets are large, the Court might pass an o(sic) under that Section.

The above are some of the considerations w(sic) weighed with Courts in England in considering application for voluntary winding up under the prevision of the Court. These principles would our view, equally apply in applications u/s 221 of the Indian Companies Act. The appellant must show that he is a cre and is likely to suffer by the action of the maj(sic) or that the action of the majority virtually amou(sic) to the action of a single person who has contr(sic) the majority of the votes or the majority has o(sic) wise acted in a manner prejudicial to the inte(sic) of the share-holders in general or that the sur(sic) sion order is necessary in order to have recour(sic) some of the provisions of the Company law v(sic) are not exercisable under the voluntary winding but the exercise of which would be beneficia(sic) the interests of the share-holders and the credi(sic) _ Unless some such ground is urged and esta(sic) (sic)ed ''the Court will not interfere with the windir(sic) of the company by the share-holders themselv(sic) is contemplated by the very term voluntary wi(sic) up. Once the share-holders have validly decid(sic) voluntarily wind up the Company, it cannot b(sic) (sic)puted that the liquidator appointed by then wind up the affairs of the company in accor(sic) with the provisions of Sections 210 and 220 c(sic) Companies Act.

He can under S. 211 utilise the assets for charging the liabilities of the company and after, unless otherwise provided for in the ar(sic) distribute the balance if any among the me according to their rights and interests. It is (sic) ded by the learned Advocate for the appellar(sic) the liquidator has without discharging the deb paid off the contributors which contrive, provisions of Section 211 as well as Section 5 the Companies Act. Section 211 is as under "Subject to the provisions of this Act as t(sic) (sic)ferential payments, the property of a company on its winding up, be applied in satisfaction liabilities pari passu and subject to such appli(sic) shall, unless the articles otherwise provide, be (sic)buted among the members according to their and interests in the Company."

Where, as in this case, it is admitted that the company was heavily indebted and that there w(sic) income tax demands pending, the only way in the liquidator can deal with the situation is the assists of the Company, discharge the del(sic) if there is any balance, to pay off the contrib(sic) according to their rights and interests in the company

In this case what appears to have been done or to the liquidation was to value the buses, allot(sic) (sic)m to the nine groups of share-holders who paid amounts after deducting their share amount and (sic) the amounts so received pay off the debts of Company. The agreement Ex. B-20 dated 3-1952 settled a scheme for the winding up of- company in the following manner. The paid up (sic)re capital of the 14 share-holders and the prc(sic) s value of each share on the basis of the Com(sic) (sic)y''s assets and liabilities was determined.

The motor vehicles were to be assessed and (sic)le by the General Manager of Ramdas and Co., (sic)W. 4 with their route permits and 9 motor vehi(sic)- were allotted to the nine groups of share-holders were to be proportionately liable for the debts the Company existing as well as for the future (sic)ility towards income tax for the years for which (sic)ssment had yet to be made. Towards the excess of the value of the motor (sic)cles over the value of the shares of each group (sic)e amount was paid by them in cash and for the (sic)nee promissory notes were executed some of (sic)h were subsequently discharged

"as a result of innovation by which the share (sic)ers of the groups made themselves personally (sic)e to the 3rd respondent who was the principal (sic)itor of the Company." company''s liability to the 3rd respondent was by discharged. It was also provided in the (sic)e agreement that if any group made a default (sic)ay its share of the liabilities and debts of the (sic)pany, the 2nd respondent will be entitled to possession of the assets of such defaulting group (sic)oups and sell the same and discharge the debts liabilities of such defaulting group.

With respect to one of the share-holders, Toladi(sic) (sic)araju, who died possessed of shares it was (sic)d that the value of these shares were to be (sic)ited in Court where a suit was pending relating a succession of his estate. The buses so allotted to be run under clause (11) of the agreement (sic)le individual responsibility of the group to a they were allotted and they were to enjoy the (sic)s and bear the losses incurred thereby.

After the debts and liabilities of the Company paid in full and such discharge is recorded in company''s dissolution minutes book, transfers (sic)i be effected of the company''s buses allotted to roups in their favour or in favour of their no and all such expenses of transfer shall be by the transferees. Till then the buses of the company shall remain in the name of the company.

(sic)t was also contemplated in paragraph 12 that (sic)e 13 share-holders should sign the agreement, ready stated only 10 signed it. The petitioner tarn Rajarao and Jakkula Madhava Rao have (sic)gned it. Pursuant to this agreement a notice (sic)1 was sent to all the share-holders fixing a (sic)ig on 18-3-1953 for the vehicles to be allotted 9 groups of share-holders.

This notice Ex. B-l, was signed by the petitioner -3-1952. R. W. 4 the General Manager of as Motor Transport Co. Ltd., valued the motor (sic)es th their route permits and cast lots and group thereafter took the motor vehicle which it and began to ply it from that date. It is (sic)dmitted that the debts of the Company shown schedule items 1 to 6 and 9 to 14 to the tune 68,143-8-5 were paid and the only amounts have to be paid are items 7, 8 and 15 viz., its due to the deceased T. Dhanaraju, Rs. 5-6 and to Mangalampalli Bapaiah Guru a sum 5,000/- Apart from this it is not seriously controverted that the income tax demands were paid by all the groups- except that of the appellant, his brother Govinda rajulu and his brother-in-law P. W. 1. As a consequence of the refusal to pay the buses allotted to them were sold and after debiting the amounts due on account of the said demand, the balance is credited to their accounts. It may be noted that these buses were sold after the special resolution winding up the company was passed when the appellant was still running the buses according to the scheme set out in the agreement of 16-3-1952. Of course the appellant has denied the fact of his having run the buses on his own account, but Viswanatha Sastry, J., has held against this contention.

There is no doubt that the share-holders have a right to draw up a scheme of liquidation whereby the debts and liabilities of the company are paid and provision is made for distributing the balance. The liquidator can be authorised to carry out a scheme of this nature and there is nothing illegal or contrary to the provisions of the Companies Act in arriving at such a scheme.

The appellant contends that the provision that the amount of the share capital was to be deducted from the value of the assets allotted to the shareholder, contravenes the provisions of Section 211 inasmuch as the contributor''s are paid first instead of the debts being discharged. In considering this contention the scheme as a whole has to be taken into consideration. The main purpose of the scheme, in our view, was the discharge of the debts and liabilities of the Company which was first and foremost in the minds of the share-holder who met on 16-3-1952.

The buses continued to belong to the company as long as the debts were not discharged and it is only after all the debts were not discharged by each person who had undertaken to discharge his share of the liability that the bus could become his property legally. Even though the scheme was formulated and agreed to earlier to the resolution winding up the company voluntarily, it must be deemed to have been confirmed and continued even after the resolution was passed by reason of the fact that all the share-holders including the appellant acted there under find ran the buses on their own account.

It is only on or about 26-6-1954 when the income tax demands were made and the appellant, his brother and brother-in-law refused to pay the tax their buses had to be sold. The appellant contends that he neither took part in the scheme nor ran the buses as allotted by the respondents.

Though he was not a signatory to the agreement of 16-3-1952, as already stated he received the notice Ex. B-l fixing the meeting for 18-3-1952 and signed it and, though R. W. 4, Nakka Suryanarayana, Manager of Ramdas Transport Co. Ltd., does not remember that the appellant was present at the time when Ex. B-20 was executed, nor at the meeting as he was asked about the matter which happened 4. or 5 years ago, from the evidence of the appellant himself as P. W. 2 it is clear that he paid Rs. 7,000/-in December 1952 in cash to the 2nd respondent and took a receipt from him with the recital that the amount under it represented the balance of the sale price of the bus after giving credit for his share capital and contribution to the company''s debts.

It was contended by the respondents that the appellant allowed the bus allotted to him M.D. 856 to be run by his nephew, a fact which he denied, but as the learned Judge pointed, the appellant in his deposition in O. S. No. 68 of 1954 on the file of the Sub Court, Rajahmundry, filed by the 3rd respondent, the principal creditor of the Company recorded on 22-10-1954 Ex. B-9, stated the following;

There was a loss in the business. So we wanted to liquidate it. On 16-3-1952 an agreement to that effect was written on Rs. 1-8-0 stamp paper. They put up 2 buses M.D.E. 856 and 1262 to sale. The former was valued at Rs. 18,000/- and the latter at Rs. 16,000/-. The share capital of myself and the 1st defendant (P. W. 1) was deducted and the value of the two buses was fixed at Rs. 14,000/-. Both of us paid Rs. 7,000/- to liquidator K. Ventanna some days prior to 6-12-1952. for the balance of Rs. 7,000/- Venkanna and plaintiff asked us to execute a promote in favour of the plaintiff saying that two buses would be transferred to us. We executed Ex. A-l for Rs. 7,525/-TWO other share-holders Saladi Ayyanna and Saladi Satyanarayana and the appellant''s brother Govinda rajulu were allotted a motor vehicle. Saladi Venkataratnam, another shareholder and the brother in-law of the appellant, was also allotted a motor vehicle on 18-3-4952 and when he was examined in the same suit on 23-10-1954 (Ex. B-3) He admitted that the and the appellant got motor vehicles M.D.E. 4262 and 856 which were valued at.Rs. 14,000/-and that they had paid the amount after deducting their share capital.

The evidence of R.Ws. 2, 5, 8 and 9 shows that the appellant was present at the time Ex. B-20 was drawn up and the reason for not signing it is given by R.W. 9 who says that he and the appellant left when Ex. B-20 was about to be signed as they could not sit in a congested place. R.W. 9 is one of the persons who did not sign the agreement. There is overwhelming evidence in this case, as pointed out by Viswanatha Sastry J., to show that all the shareholders including the appellant were plying their buses in terms of the agreement and that the denial of P.W. I that neither he nor Govindarajulu, nor the appellant plied their buses cannot be accepted.

We entirely agree with this finding. The appellant his brother and his brother-in-law plied these motor vehicles for two years under the scheme and took full advantage of them, earning income there from and they cannot now be permitted to say that they were not bound by the scheme agreed to and adopted by all the shareholders. The appellant and others who sail with him are themselves to blame for the recalcitrant and non-co-operative attitude which they took for the sale of the buses allotted to them which, it is said, were valuable. Had they kept their side of the agreement, they would not have landed themselves in this position.

It is further urged that some amounts were overpaid to the creditors shown in item 9 and 10 C schedule, but this is a matter which the liquidator can look into. The respondent''s Advocate states that practically all the debts have been paid. There is an amount standing to the credit of the appellant. Also there are amounts due by way of refund from income tax which will more than cover the few liabilities that have to be discharged.

It is again contended that the liquidator appointed under the special resolution of 1-12-1952 resigned and at the time when he exercised the power of sale under the agreement he was no longer the liquidator. This is not borne out by the evidence. R.W. 2, the respondent stated that he did send a letter of resignation of his office as a liquidator on health reasons, but he did not press for it acceptance as the share-holders desired him to continue.

He says that all the share-holders consented to Ex. B-10 the valuation of the motor vehicles by R.W. 4 as well as to the casting of the lots. There is no doubt whatever from this and the evidence R. Ws. 5 and 7 that the resignation was not accessed and that he continued to be the liquidator.

Lastly it is said that the scheme envisag(sic) the deduction of the share capital would, as obse(sic) (sic)ed by Viswanatha Sastry J., amount to the comp(sic) purchasing its own shares. What the learned lu(sic) states was that the Company indirectly purcha(sic)its own shares; but this observation was with re(sic) (sic)ence to a period anterior to this resolution for voluntary winding up of the Company.

But having regard to the fact that there is valid resolution for the winding up of the Comp(sic) these arrangements which are subsequently adop(sic) by all the share-holders cannot have that eff(sic) When once the Company is being wound up the is no question of the company purchasing its shares, the entire object being to pay off its d(sic) and liabilities and distributing the balance am the share-holders with respect to their rights interests.

In our view this is not a fit case in w(sic) a supervision order should be made under- S. of the Indian Companies Act which would am(sic) to an interference, with the rights of the shareholder; to liquidate the Company. In the r(sic) the appeal fails and is dismissed with costs.