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Judgment
Lakshmanan, J.—Company Petition No. 44 of 1989 has been filed u/s 433(f) of the Companies Act, 1956 (hereinafter referred to as ""the
Act"") for winding up of the respondet-company on the just and equitable ground. The respondet-company was incorporated on October 25,
1985, for manufactured of fibre glass reinforced plastic (FRP) light fittings. The authorised share capital of the respondent is Rs. 3 lakhs and the
amount paid up is R.s 2.4 lakhs. Of this amount, the petitioner, his father, brother and wife and invested Rs. 1.05 lakhs. The managing director of
the respondet,Mr. P. Venkatasubramanian and his family hae invested Rs. 1.25 lakhs and the balance Rs. 1,00,000 by a friend of P.
Venkatasubramanian,namely namely, Mr. Sivajothi. The respondent is a small private limited company in the nature of a partnership as the bulk of
the shares are owned by members of two families who are closely related to each other
After the incorporation of the company on October 25, 1985, Mr. P. Venkatarmaniam who was the initial subscriber and managing director
ofthe company wrote to the petitioner at Bombay, vide letter dated November 30, 1985, and sought his participation in the business ventury. By
the said letter, the said P. Venkatasubramaniam proposed to have only relatives as shareholders and the share capital will be Rs. 1.10 lakhs.
Pursuant to the said rquest. The petitioner met the said Mr. P. Venkarasubramaniam on February 3, 1986, for a discussion and, in the meeting
held on the said date, the said Mr. P. Venkatasubramanian, hereinaftrer called PV, agrred with the petitioners family that the petitionrs family will
invest and hold 50 per cent. shares of the company and what the petitiioner will be made a working director of the company. This was also
confirmed by the letter dated february 18, 1986 sent by PV stating that, for all practical purposes, the petitioner is deemed a director of the
company with immediate effect, the petitioner is deemed a director of the company with immediate effect. The petitioner is deemed a director of
the company with immdiate effect. Upon this understanding. the petitioner and his family members contributed rupees one lakh towards share
capital between March and May 1986 and another Rs. 50,000 in December, 1986. But the said PV disappointed the petitioner by violating this
understanding for maintaining the 50 per cent. ratio of shareholdings or making the petitioner a working direcotr of the company. The contribution
of PV and his family members was Rs. 1.35 lakhs being the value of shares taken on various dates between March, 1985 and April, 1987.Despite
the understanding for equal shareholding between PV and the petitiioner''s family, PV allotted more shares to himself, though PV states in his letter
dated February 10, 1986, that our of Rs. 1.10 lakhs meant for the petitioner, he had alredy allotted of Rs. 1.10 lakhs to his friend D. Sivajothi. By
May, 1986, PV and his family had subscribed Rs. 66,000 towards shares which includes Rs. 10,000 from Sivajothi, From March, 1986, to May
1986 the petitioner and his family contributed share capital of Rs. 1 lakh and another Rs. 5,000 in December, 1986. From May, 1986, to April,
1987, PV had allotted to himself and his family members Rs. 60,000 on various dates without reference to the petitioner and with a view to hold
majority shares contrary to the understanding and against the interest of the petitioner.
As the petitioner was not appointed as a wholetime director of the company as agreed upon, to took up the matter with the said PV and,
onMay 19, 1986,at the residence of the petitioner at Bombay, PV declared that the petitioner was being nominated as a director note book calling
it an ""attendance registerz"". PV said that the offical oppointment letter would follow after he reached Madurai. The petitioner states that the
appointment was finally confirmed only on May 23, 1988. In between PV made several excuses for not confirming the petitioner as a director The
petitioner states that it became clear to him that PV had inducted him and his family members only for their money and that the he had no real
intention of involving the petitioner in the active participation and management of the affairs of the company. It is also stated that the petitioner was
appointed as a wholetime director by a board resolution dated May 23, 1988, on a salary of Rs. 1,500 per mensem and that the appointment was
for a period of three years from May 23,1988 but till date the petitioner has not been paid his salary at all. The petitioner states that the consistently
acted only for the benefit of the company. When the said PV and the company urgently required funds, the petitioner pledged his personal National
Savings Certificates and obtained a short term loan of Rs. 18,650 on October 5, 1987, which was to be repaid within three months but PV has
not paid the same till date. Besides the above amount, the petitioner''s relatives have aslo advanced Rs. 36,000 to the company, which has not
been repaid. The residence of the said PV and the registered office of the company are one and the same. Taking advantage of this, the wife of the
said PV Mrs. V. Subbalakshi, who is also a director in the company, used to personally collect the mail and refused the petitioner any access to
the same. This curtailed the right of the petitioner as a wholetime director to know about the day- today activities of the company. The petitioner''s
protest against this met with only further disregrd shown to him. The petitioner was not apprised of the propgress or problems of the company
which, as a wholetime director, he was entitled to know. The said PV could not even answer the specific queries entitled to know. The said PV
could not even answer the specific queries raised PV was in charge of the company matters. The petitioner states that the said PV was in charge of
the day-to-day affairs of the company and that the entire mismanagement by PV has seriously affected the operation of the company , some
examples of which have been mentioned in the main company petition itself which will be dealt with by me while considering the arguments of Mr.
Arvind P. Datar. Another glaring example of bad management on the part of the said PV is that, as managing director, he fixed for himself and
drew a salary of Rs. 2,000 per mensem, but fixed a salary of Rs. 1,500 per mensem, for the petitioner and even this amount was not paid.
whereas he appointed a manager on a salary of Rs. 2,500 per mensem and paid his salary for about a year. The contributiion of this manager to
the company was ""zero"" and when this was pointed out bythe petitioner, he was literally abused and was asked to shut up on the issue. However,
after continuous strong protests from the petitioner, the services of the so-called manager were terminated. Against the sum, of Rs. 10.90 lakhs of
trm loan and Rs. 1.25 lakhs of soft loan, the company availed of only Rs. 7.40 lakhs and Rs. 1.04 lakhs respectivelu. But in view of bad
production loss. PV could neither repay the instalment of loans due nor interest therefor. As on the date of the company petition. the accumulated
arrears on account of loan amount and interest shuld be to the order of Rs. 3 lakhs. The petitioner states and asserts that this critical situation is
only due to the mismanagement and irregularitys on the part of PV The petitioner asserts that due to wrong and false information furnished by the
said PV the State Bank of India, Kappalur, Madurai, rejected the application of the company made inthe first week of August 1988, for cash
credit facilities. The different of opinion and the positive animosity of PV towards the petitioner is manifest in a letter dated October 11, 1988, by
PV asking the petitioner to quit the company. On November 27, 1988, the petitioner was again asked by PV orally to leave the company
unconditionally. The petitioner was told that this share amount of Rs. 1.05 lakhs, and the loans advanced by the petitoner and his relatives together
with interest would be paid in due course. PV refused tocommit this repayment in writing PV refused to permit the petitioner to attend the factory
and instructed the workers not to allow the petitionar into the factory premises. Indeed, by a letter dated February 28, 1989, the petitioner was
instructed not to visit the factory without his consent. At the same time, the said PV made false and insinatory allegations that the petitioner had
instigated the workers against the company. At the tiome, the said PV made false and and insinuatory allegations that the petitiner had instigated the
workers against the company. These allegtions were clearly contradicted by the statement of one R. Alagariswamy, who was also present at the
time when the petitioner sought to visit the factory. The petitiner further states, that, from the beginning. It has been the intention of the said pV to
get money from the petitiner to the petitioner in the affairs of the company. The gross mismanagement onthe part of the said PV has resulted in the
company being financially crippled. The company ha been unable to repay the loan/interest to the Tamil Nadu Industrial Investment or sales.The
existing and possible liquid assets are insufficient to discharge its liabilities. In the circumstances, the petitioner submits that there is no alternative
but to wind up the company.The company consists of two groups, consisting of thesaid PV and his family on the hand and the members of the
petitiner''s family on the other. The company is really in the nature of a partnership business. The conduct of the affairs of the company by the said
PV has resulted in a state of complete deadlock in which it is impossible to carry on the business of the company. The attempts on the part of PV
to unjustly remove the petitioner from the board of directors has resulted in a state of irrecondilable animosity and loss of mututal confidence. By
his letter dated December 15, 1988, the said PV wrote to the petitioner''s father stating, inter alia, that differences existed between him and the
petitioner and that he could not run the unit beyond December, 1986. The petitioner submits that these circumstances would justify the dissolution
of a partnership and would also constitute just and equitable grounds to wind up the company. According to the petitiner. he is a contributory of
the company and the shares held by him were originally allotted to him in his name and inthe names of other memebrs of his family and these shares
have been held for a period of six months during the eithteen months immediately before the winding up. Consequently, the petitioner is entilted to
file the present petition u/s 433(f) of the act. Thus, the petitioner has come forward with the above company petition to wind up the respondent
company under the provisions of the Act.
The above company petition was resisted by the respondent company. They have filed a counter-statement, dated June 12, 1989 According to
the respondent company, there was no agreement or undertaking that the petitioner would be appointed a director and that he would continue to
hold the officer of director as long as the shares were held by the petitioner and his family. When there is no undertaking or agreement. according
tothe respondent-company , no question of violation would arise. According to the respondent-company, they were not aware of the various
contentions of the petitioner made in paragraph 6 of the affidacit regarding his qualification and experience. The respondent- company further
states that, at the time when the company was floated, the petitiner was without a job and that, therefore, the company chose to utilise his services.
The other allegations made in the company petition have also been denied. The allegations that the petioner and his family members were inducted
only for their money and that there was no real intention of involving the petitioner in the active participation and management of the affairs of the
company are all imaginary and unsustainable. The respondent-company have, therefore, prayed that this company petition may be dismissed and
justice rendered to the,.
On behalf of the petitioner, exhibits p-1 tp p-19 were marked and onbehalf of the respondent-company, exhibits R-1 and R-2 have been
marked. No oral evidence was let in by both parties in this case. Hence the matter was posted for arguments on October 3,1991, and the
arguments were heard on various dates.
Mr. Arvind P. Datar, learned counsel appearing for the petitioner, submits that the respondent-company is liable to be wound up on the
following five grounds:
1.There is a complete failure of substratum and there is nohole of revival of the respondent company
2.If the shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of prohibit in the
management of the company and there is no hope or possibility of smooth and efficient continueance of the company as a commercial concern,
there may arise a case of winding up on the just and equitable ground.
The respondent-company is really in the nature of a partnership.The facts are such that they would justify dissolution of the firm and would,
consequntly, justify winding up of the company.
There is no alternative remedy except to wind up the company, and
Majority of creditors/shareholders have supported thewinding up.
Let me now deal with the above points in the same order.
Ground No. 1 : There is a complete failure of substratum and there is no hope of revival of the respondent company :
i. The substratum of the company has disappeared because the object for which it ws incorporated. viz., manufacturing of FRP light fittings, has
compeltely failed and the respondent-company has not been able to manfuacture and sell such producs on a commercial basis.
As per exhibit P-1 (pages 1 and 2 of the typed set of documents) the company was to break even at 47.5 per cent, and the sales at 80 per cent.
capacity were to be rs. 55 lakhs. Therefore, for the company to break even must have sales of Rs. 32.65 lakhs. However, from the balance sheet
for the last three years which have been filed as exhibits P-18 and P-19 (pages 35-45 of the typed set of documents), its financial position can be
summrised as follows :
31-3-1989 31-3-1990 31-3-1991
(In rupees)
Sales
per annum 1,57,680 81,246 90,508
Loss 3.02,807 2,53,058 2,76,913
Total carry
forward loss 3,50,309 6,03,367 8,80,280
Liability
(Loan) 12,10,634 13,78,162 15,53,478
B/E point 47.% - Rs. 32 lakhs.
Thus, the respondent-company has to repay loans of Rs. 13.5 lakhs and has carry forward loss of Rs. 8.8 lakhs whereas the gross sales per
annum is only Rs. 90,000. Therefore, the petitioner submits that there is no hope of reviving the respondent-company. In addition, at paragraph 12
of the reply affidavit (page 33 of the typed set of pleadings) the petitioners has specifically stated that there is no hope of revival of the respondent-
company. This is not been controverted by the respondent company in the pleadings by waya of evidence. Thus, in the present financial state of
affairs, there is no hope whatsoever of the respondent company becoming a viable unit. In addition , the respondent has not paid any interest to the
financial insitution s particularly the Tamilndu Industrial Investment Corporation.
(iii) The activities of the respondent have virtually come to a standstill. The respondent-company has a press mould with installed capacity of
30,000 kgs. per annum and hand mout of 4,800 kgs per annum. The actuall capacity utilisation is as follows :
Press mould Hand mould
89 90 91 89 90 91
Production 168 10 Nil 1420 643 784
Kg. Kg. Kg. Kg. Kg. Kg.
Capacity
utilisation 0.56% 0.03% 0.00% 29.58% 13.39% 16.33%
This shows that the press mould machinery is lying unutilised whereas the same has been purchased for Rs. 12.32 lakhs by taking a term loan
from the Tamilnadu Industrial Investment Corporation. The figures mentioned above have been taken from exhibits P-18 and P-19, namely the
balance-sheet filed by the respondent company itself.
Mr. Arvind P. Datar, in support of his contentions, has invited may attention to the following two decisins rported in :
1.Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543.
The Supreme Court, at page 557 of the said judgment, has observed as follows :
Substratum of the company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is
impossable to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing
liabilities.
The next decision cited by Mr. Arvind P Datar is reported inVerendra Singh Bhandari v. Nandalal Bhandari and Sons Ltd. [1982] 52 Comp
Cas 36. The Madhya Pradesh high Court, in the said decision at page 51, held as follows :
The substratum of a company disappears when -
(a) the subject-matter of the company is gone, or
(b) the object for which it was incorporated has substantially failed or,
(c) it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that the object of trading
at a profit could be attained, or
(d) the existing and probable assets are insifficient to meet the existing liabilities.
According to Mr. Arvind P. Datar, the principles enuciated in the above to case would squarely apply tothe present case. As the substratum,
of the respondent-company has failed and there is no hope of the reviving the same. it is submitted that the respondent company is liable to be
wound up on the first ground alone.
Per contra, Mrs. Hema Sampath submits that the petitioner must prove that -
(a) the subject matter of the company is gone
(b) the object for which it was incorporated has substantially failed and
(c) it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that thje object of trading
at a profit could be attained.
The object of the company set out in paragraph 5 of the petitioner are wide. Thus, even according to the petitioner, the company has enough
assets and the profit is very good. The business grounded to a halt immediately after the inception due to paucity of funds. The bank refused to
extend facilities as the winding up petition was pending. If a business can go on and grow. winding up should not be resorted to. Referring to the
decision in Kumarapuram Gopalkrishnan ananthakrishnana v. Burdan Cutwa Railway Company Ltd. [1978] 48 Comp Cas. 211 Mrs. Hema
Sampath submits that the petition merely states that the substratum has disappeared without any basis and with mala fide intentions. The balance-
sheets filed are subsequent to the filing of the above petition and the company can be restarted at any time if the Damocles sword of the petitin is
removed. The deicison in Kumarapuram gopalakrishnan ananthakrishana''s case [1978] 48 Comp Cas 211 deals exhaustively with the meaning of
substratum"" of business.The petitioner must prove the three things mentioned above. The petitioner has failed to prove the same as allged.
According to the respondent, the company has enough assets and the project is very good and the business can go up and grow and winding up
could not be resorted to and the company can be restarted at any time if the Damocles sword of the petition is removed.
I am unable to appreciate the contention of learned counsel for the respondent. In my view, the petitioner has made out a prima facie case int
he petition. If the averments in the petition are read with the documents, it will be seen that -
(a) it is impossible to restart the company or carry on the business except at a loss, as could be seen from exhibits P-1, P-18 and P-19.
(b) There has been complete lack of probity in carrying on the business of the company (as could be seen from exhibits P-6 and P-7);
(c) The principles of partnership apply to the present case and the facts justify dissolution and consequently winding up of the company.
(d) The petitioner has been removed from the board of directors and excluded from the management despite an understanding that he would be
ade a director and particular in the managment ;
(e) The majority of the creditors/shareholders have supported the winding up.
While referring to the argument of Mrs. Hema Sampath to exhibit P-14, Mr.Arvind P Datar submits that it is misleading. The petitioner''s stay a
Bombay was with reference to obtaining the loan fromthe Tamilnadu Insutrial Investment Corporation. The petitioner went to Madurai only to be a
director and participate in the management of the respondent company. The petitioner also strongly denies the allegations that he had made any
complaint to the bank. On the contrary, when the Punjab Naitonal Bank refused to extend any facility he pleaded his National Savings Certificate
and obtained a loan for the company as evidenced by exhibit p-7 The offer of quitting the company in exhibits p-8 and p-9 was never
implemented. On the contrary, steps were taken to remove the petitiner within two months thereafter.Exhibits p-7, p-9, p-10 and p-11 and p-12
do not reveal any subverisve activity on the part of the petitioner. According to Mr.Arvind P. Dattar, these documents show the serious
misunderstanding/lack of confidence between the petitioner and the managing director of the respondent-company which culminated in the
expulsion of the petitioner and the filling of the present winding up petition. It is pertinent to note tht, even after the removal of the petitioner, there
has been no effort to revive or properly manage the affairs of the respondent mr.Arvind P Datar once again strongy denies that the petitioner was
making any complaint to the bank or to the dealers or instigating the workers. The respondent has not let in any oral or documentary evidence to
substantiate the serious allegations. The petitoner further submits the he and his family have invested almost Rs. 2 lakhs by way of shares.loans and
that they would not indulge inany activity which wuld harm the interest of the company and that it is only the unreasonable conduct of PV the
managing director of the company his financial ireegularities with the banks, and expulsion of the petitoner that has led to the filling of the present
winding up petition. Copiers of the orders of the courts below referred to by the respondents have also been market as documents, exhibits R-1
and R-2 before his court. Further, Mr. Arvind P. Datar says that a civil revision petition was filed before this court against on order in C.M.A. No
58 of 1989, but the same could not be pursued as the matter had become infructous and that the petitioner decided to return to Bombay. Hence it
is false on the part of the respondent tostate that the petitioner filed the winding up petitiner only after these orders were passed. On the contrary,
exhibit P-13 deted March 8, 1989, is a notice of the meeting to remove the petitioner and the petitioner has issued notice for winding up the
company on March 9, 1989,itself and filed the present company petition soon thereafter. The petitioner,, therefore submits that the respondent is
not correct the status that no prima facie case has been made out.
In my opinion, the petitoner has established that the sunstratum has gone on the basis of exhibits P-1, P-18 and P-19.The grounds for winding
up by the respondent-company on this aspect has been elaborated argued by mr. Arvind P. Datar at the time of hearing. It is seen tht the
substratum of the company had diappeared because the object for which it was incorporated, namely, manufacturing of FRP light fittings, has
completely failed and the respondent company has not been able to manufactured and sell such products on a commercial basis. As per exhibit P-
1 the company was to break even at 47.5% and the sales at 8-% capacity were tobe Rs. 55 lakhs.Therefore, the company to break even must
have sales of Rs. 32.65 lakhs. However, from the balance-sheets for the last three years which have been filed as exhibits P-18 and P-19, it is
seen that he financial position of the respondent-company is not goods and satisfactory. The respondent- company, as per the statements furnished
above in the paragraph supra, has to repay loans of Rs. 15.5.lakhs and has to carry forward loss of Rs. 8.8 lakhs,whereas the gross sales per
annum are only Rs. 90,000. Therefore, in my view,the submissions made by Mr. Arvind P. datar ont this ground are quite acceptable to this court
and, in my view, there is no hope of or scope for revival of the respondent company. In additiona, the petitioner has also stated in his reply-
affidavit that there is no hope of revival of the respondent-company which has not been controverted by the respondent in the pleading or byw ay
of evidence. Thus, in the presnet financial state of affairs, there is no hope whatsoever of the respondent-compny becoming a viable unit. In
addition, the respondent has not paid any interest to the financial instituion, particularly the Tamilnadu Industrial Investment Corporation. The
activities of the respondent have virtually come to a standstill. The perticulars given above inregard to the press mould and the hand mould in the
paragraphs supra show that the press mould and the hand mould in the pragraphs supra show that the press mould machinery is lying unutilised
whereas the same has been purchased for Rs. 12.32 lakhs by taking term loan from the Tamilnadu Industrial Investment Corporation. The figures
mentioned above have been taken from exhibits P-18 and P-19 namely, the balancesheet filed by the respondent-company itself. For the foregoing
reasons, I am of the view that the substratum of the respondent company had failed and that there is absolutely no scope or hope of revival of the
respondent- company and hence the respondent-company is liable to be would up on the first ground alone.
Ground No. 2: if the 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 of winding up on the just and equitable ground :
The Supreme Court in the decision in Hind Overseas P. Ltd. v. Raghunth Prasad Jhunihunwalla [1976] 46 Comp Cas 91 has laid down the
above principles which have been made as ground No. 2. As mentioned above, ground no. 2 would, in my mind, apply to the present case as
there has been lack of probity, and there is no hope or possibility of continuance of business. The petitioner and his family invested inthe share
capital of the respondent-company on the basis that the would be made a director. Although the funds were invested in March/December, 1986,
the petitioner was made a director only in May, 1988, vide exhibit P-5 Right from the beginning, the managing director of the respondent
company, PV, treated the petitiner withdiscourtesy and a humiliateing manner. Furhter, the petitioner''s salary has never been paid till date and the
managing director of the company, PV has, summond and extraordinary general body meeting and removed the petitioner from the board of
directors as could be seen from exhibits P-13 and P-14. Besides the above, PV was also responsible for serious financial irregularities with the
Punjab National Bank which led the bank to threten to instituting criminal proceedings as could be seen from exhibit P-6. The said exhibit also sets
out serious irregularities, Thereafter, certain amounts were advanced by the New Bank of India. Madurai Branch, on the basis of the National
Savings Certificate of the petitiner. These have also not been repaid till date. No attempt has been made to run the respondent-company in a
proper manner even after the removal to run the respondent-company in a proper manner even after the removal of the petitioner and there has
been no revival of the company''s business. The respondent has taken the stand that, due to the winding up proceedings, no financial institution is
willing toadvance money, in my view, this in an incorrect and unsubstantited plea. No bank is willing to lend money because of serious financial
irregularities with the Punjab Naitonal Bank and also because untrue doduments were filed with the State Bank of India, Kapullur branch. The
details are set out in the affidavit filed by the petitioner in Company Application No, 264 of 1989 in the above company petitin and these
allegations have not been denied in the counter-affidavit. Therefore, the manner in which the petitioner has been humiliated, his salary not being
paid nad the irregularar dealings with the bank will all, in my opinion, clearly show lack of probity. There is no hope or possibility if continuance of
business. The financial position has been set out in detail in ground No. 1 and the same will clearly establish that there is no hope of revivival of the
company.
Mrs. Hema Sampath submits that in a petition filed u/s 433(f), the allegations therein are all of primary importance and that a prima facie case
has got to be made out. According to learned cousel, the allegations mentioned in the reveal purely personal animosities and that too only because
the petitioner was constantly complaining to the banks about the running of the company of the company and, due to his fedding false information
to the banks, the company has to face financial constraints. When personal anumosities cropped up, the managing director ofthe company showed
his bona fides by offering to quite the company, vide exhibits, P-8 and P-9 but the petitioner did ot take up the offer for obvious reasons,
Referrering to exhibits P-7, P-9 and P-10 to P-12 Mrs. Hema Samapath submits that these exhibits clearly reveal the subversive activities of the
petitioner. He was constantly in touch with the banks and the dealers andwas spreading takes about the running of the company and he also tried
to turn the workers against the company and due to these, the company could not function smoothy. An extraordinary meeting was to be called to
remove the petitioner from the board under exhibit P-13. The petitioner filed O.S. No. 222 of 1989 in the sub-court, Madurai, for an injunction
restraining the company from passing any resolution removing the petitioner from the board. Injunction was refused. The appeal C.M.A. No. 58 of
1989 before the first Additional District Judge Madurai, was also dismissed. Copies of the orders have also been marked as exhibits R-1 and R-2
in these proceedings. As the petitioner could not achieves his end, he rushed to this court to file the above petition with a make fide intention to
extract an eye for an eye and a tooth for a tooth. So, Mrs. Hema Sapath submits that a prima facie case not having been made out, the petition
may be dismised. In my opinion, the argument of Mrs. Hema Sapathy is not tanable. No attempt has been made to run the respondent-company in
a proper manner evenafter the removal of the petitioner and there has been no revivial of the company''s business. No bank was willing to lend
money because of the serious financial irregularities with the punjab National Bank and also because false documents were filed with the State
Bank of India That apart, the amounts which were advanced by the New Bank of India, Madurai branch, on the basis of the National Savings
Certificate of the petitioner have also been not rapid till date. Hence there is a case of complete deadlock in the company on account of lack of
probity in the managementof the company and there is not hope or possibility of smooth and efficient continuance of the company as a commercial
concern. The company in question, in my opinion, has got to be wound up the just and equiitable ground.
Ground No. 3: The respondent company is really in the nature of a partnership. The facts are such that they would justify dissolution of the firm
and would consequently justify winding up of the company.
Elaborating the said contention, Mr. Arvind P. Datar submits that, according to PV, and relatives will be its shareholders. The petitioner and
members of his family purchased shares and advanced loans only onthe basis that the petitioner would be made a director and, for this purpose,
the petitioner left his residence in Bombay and settled down in madurai. The company was run on the understanding that both PV and the
petitioner would be directors and participate in the management of the company. If the private limited company, which is in the nature of a
partnership, is based on an understanding that a certain person would be a director, his expulsion from officer would be a ground from winding up.
The House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 has laid down the following guidelines and guiding principles
for winding up of priave companies which are in the nature of a partnership under the just and equitable clause :
(i) the company should be formed on the basis of personal relationship and mutual confidence.
(ii) There should ba an agreement or understanding that some of the shareholders would participate in the conduct of the business as in the case of
a partnership.
(iii) The exclusion of a director/members from management would justify the winding up even if removal of the director is in exercise of the powers
of the majority shareholders.
A similar view has been taken in Lundie Bors. Ltd. In re. [1956] 35 Comp Case 827. The House of Lord''s Judgment has been followed by
the court of Appeal in ABC Chewing Gum Ltd. In re., [1975] 1 All ER 1017. In this case, the relevant passage from the decision of the House of
Lords is quoted and a xeros copy thereof has been enclosed.
Under the Partnership Act, section 44 stipulates the clauses which would justify dissolution of the firm, it was submitted that the provisions of
clause (c), (d), and (g) of sectin 44 would squarely apply. The relevant clauses are set out below :
44(c). that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carryng on of the business, regard
being had to the nature of the business.
The petitioner submits that the serious irregularities committed by the said PV with the Punjab National Bank as per exhibit P-6 the New Bank
of India as per exhibit P-7 and the incorrect statement submitted to the state Bank of India, Kappalure branch, Madurai, have prejudically affected
the business, In view of the above, no bank is willing to offer credit facilities to PV as could be seen from pleading and other documents.
44 (d) that a partner other than the partner suing, wilfully or persistently commits breach of agreements relating to the management of the affarirs
of the firm or the conduct of its business, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for
the other partners to carry on the business in partnership with him.
There was an understanding that the petitioner would participate in the management and function as a director. This understanding has been
violated and the petitioner was removed in a humiliating manner on the ground that he was indulging in activities against the insterest of the company
as could be seen from exhibits P-13 and P-14 in the typed set of documents.
44 (f) that the business of the firm cannot be carried on save at a loss.
The facts have already been mentioned in ground No. 1 above which indicate that the company''s business cannot be carried on without loss.
44 (g) on an any other ground which renders it just and equitable that the firm should be dissolved.
There is a serious misunderstanding between the petitioner and PBV who were like to main partners of a firm. PV has made serious and
baseless allegations agaist the petitioner with the intention of removing him and keeping back the investments and loans given by the petitioner and
his family. Exhibits P-8, P-9, P-11 and P-12 and P-15 clearly show the bitter animosity between the two persons which has resulted ina complete
deadock inthe affairs of the company. Gower, his principles of Modern Company Law (IV Edition page 662), states that the just and equitable
clause can be invoked on the following four grounds.
(a) expulsion from office,
(b) justifiable loss of confidence,
(c) deadlock
(d) failure of substratum.
It is stated by Mr. Arvind . Datara that all the above four conditions are satisfied in the present case and that the facts would, therefore, justify
the winding up of the respondet-company. I see much force inthe contention of learned counsel for the petitioner.
Mrs. Hema Sampath, in reply to the above contentions, submiots that the princples of dissolution of partnership cannot be liberally invoked in
winding up petition. Learned counsel invited my attention to the judgment in Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla
and Another, . In the said decision, at page 574 in paragraph 13, the Supreme Court held as under :
When more than one family or several friends and relatives together form a company and there is no right as such agrred upon for active
participation of memebrs whoare sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked.
Besidesm, 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 contunuace of the company as a commercial
concern, there may arise a case for winding up on the jut and equitable gound. In a given case the principles of dissolution of partnership may apply
squarely if the apparent structurte of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. on the
allegations and submissions in the present case, we are not prepared to extend these principles to the present company.
But, in my view, the said decision is distiguishable on the facts and circumstances of the present case, Various other decisions of this court and
other courts, according to Mrs. Hema Sampath, have clearly laid down that a company cannot be wound up merely because the following
conditions exist:
(i) company working at a loss;
(ii) misconduct of directors;
(iii) oppression of some shareholders ;
(iv) expulsion of a director even if the company is in poor shape financially;
(v) factions and quarrels among directors.
Mrs.Hema Sampath submits that a prima facie case has not been made out by the petitiner, that as he could not stall his expulsion from
thecompany through a civil proceeidngs, he rushed to the company court that winding up u/s 493(f) is a purely discretionary relef, that the
substratum of the company has not disappeared, that the principle of partnership cannot be applied to the present case, that personal animosities
between two directors cannot be permitted to bring about the closure of a company, and that, therefore, this court may not be used by the
petitioner to claim compensation for his real or imaginary losses and that the petitioner may be dismissed with exemplary costs She invited my
attention to the following two decisions in :
In Re: Sulekha Works Ltd., , wherein it was held as under (headnote;)
Companies Act [1956] s. 433(f) - Scope - ''Just and equitable'' is not ejusdem generies with the other clauses for winding up inthe statute.
Companies Act [1956] S. 433(f) - Winding up petition by contributory - Petitioner not to be allowed to take advantage of his own wrong.
Companies Act [1956] ss. 433, 439 - Winding up petition presented not for bona fide object of obtaining winding up order but for an ulterior
purpsoes - petition held to be ill-advised.''
G. Kasturi v. Marali [1990] 2 LW 177; [1992] 74 Comp Case 661
These two decisions have cited for this court to refer to them for adetailed analysis of the principles of winding up a company u/s 433(f) of the
act. I am unable to agree with the contention raised by Mrs. Hema Sampath on this point. The principles of dissolutin of a partnership can be
involed if the company is in the nature of a partership. The petitiner has specifically alleged that the present company is in the nature of a
partnership and liable to be dissolved as could be seen from paragraph 21 of the petition. This avermet has not been denied in the counter-affidvit.
I have carefully analysed the reasons mentioned in the arguments of Mr. Arvind Datar on ground No. 3 mentioned above. I am of the view that the
principles of dissolution of a partnership would apply and justify the winding up of the respondent-company. The facts of the present case would
also justify this court in exercising its discreion and ordering winding up of the respondent-company . The petitiner had been thrown out of the
management of the company unjustifiable; and the wonding up petition has been filed by the petitioner onthe ground that it is just and equitable to
wind up petition to stall his explusion from the company. the notice for this petition was given ever before the notice for the extraordinary general
meeting was received under exhibits P-13 and P- 16.
Referring to the decision in In Re: Sulekha Works Ltd., , referred to by learned counsel for the respondent, Mr. Arvind Datar submits that it is
not correct to say that the decision related to the power of the winding up court in reopeneing the balance-sheet and the court also decided the
effect of the dispute between the main company and the managing agency company. Similarly, the reference to the decision of our High court in G.
Kasturi v.N. Murali [1992] 74 Comp Case 661, is also not justified. This was a case of oppression and mismanagement between, the editors and
a director of the ""Hindu"". However the court specifically observed that, if the company is a small private limited company, the principles of
partnership would apply and, since the ""Hindu,the principles of partership, these principles were not invoked On facts, it was held therein that there
was no oppression/mismanagement. In this case, Mishra J. and Bakthavatsala, J. held that ""the principle of quasi-partnership is applicable to a
small private limited company founded on personal relationship involving mutual confidence among members"".
The next ground urged by Mr.Arvind Datar is as follows:
Ground No. 4: These is no alternative remedy except to wind up the company.
u/s 433(2), it is stipulated that, if a petition is persented for winding up under the just and equitable clause, the court may refused an order of
winding up if it is of opinion that some other remedy is available and the petitioner is acting unreasonably inseeking tohave the company wound up
instead of pursuing theother remedy. Elaborating this contention, Mr. Arvind Datar submits that (i) Alternative remedy : The petitioner submits that
he has no remedy except to wind up the company. He has invested monies inthe remedy except to wind up the company. he has invested monies
in the share capital and he and therelatives have advanced monies by way of loans. In view of the petitioner from the office of the respondent-
company, expulsion of the petitioner from the office of the director and for other reasons mentioned above the petitioner would have not other
effective remedy either under sections 397 and 398 or other provisions of th Act, or by filing a suit for recovery of the amount advanced. The
company was started on the basis of mutual confidence for a particualr business objectives, viz. manufacturing of light fittings and that the same has
completely failed. There no scope or scope of reviving the company. Hence, there is no alternative remedy except of wind up of the company. In
such a situation, it has been held that the affiars of the company should be terminated as soon as possible, Reliance was placed on the decision in
Yenidje Tobacco Co. ltd., In re [1916] 2 Ch. 426, wherein it was observed by Lord Cozens-hardy M.R. as under ( at page 432):
If ever there was a case of deadlock I thing it exist here; but whether it exists or not I think the cirumstances are such that we ought to apply, if
necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties
whent the company was formed and which ought to be terminted as soon as possible.
This decision was quoted with the approval by apex court of our country in the decision inHind Overseas Pvt. ltd. v. Raghunath Prasad
Jhunjhunwalla [1976] 46 Comp Cas. 91:
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 interest 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 was, therefore, submitted that the above passage will clearly apply to the facts of the present case. (ii) Acting unreasonably: The petitioner
further submits that he has not acted unreasonably and had even accepted to settle the matter in accordance with the directons of this court for Rs.
3 lakhs payable in two or three instalments. The matter was adjourned on two occasions to enable learned cousel for the respondent-company to
consider this proposal. But, however, this order was not accepted on behalf of the respondent-company. This is by the way.
In reply to the above submissions. Mrs, Hema Sampath submits that if the petitiner has another remedy to have the matter rectified, as for
instance an application u/s 397 or 398 or an injunction to restrain ultra vires or illegal acts, the court will not make an order u/s 433(f). She refers
to the decisions in Lakenath Gupta v. Credits Pvt.ltd. [1968] 38 Comp Cas 599 I am unable to accept this contention. In my view, there is no
altrnative remedy and in view of the submission made by mr. Arvind Datar in ground No. 4 viz., there is no other option except to file the present
petition. In my event, there is no pleading on behalf of the respondent that any alternative remedy is available. This issue is answered accordingly.
Ground No. 5 : Majority of creditors/shareholders have supported the winding up.
Learned counsel for the petitioner has submitted that the supporting affidavit of three shareholders, three creditors and two shareholders cum-
creditors have been filed and that these are the majority of the shareholders/creditors and that they have filed affidavits to support the winding up of
the company and that there is no affidavit opposing the windin up.
I have given my deep and anxious consideration to the grounds raised by the both parties and thearguments advanced by both parties. The
financial position of the company is beyond redemption as the sales are only Rs. 90,000 per annum as against the outstanding loans of Rs. 15.3
lakhs and accumulated carry forward loss of Rs. 8.8 lakhs. The expensive machinery of R.s 12 lakhs was not utilised during the yer 1991 and the
affairs of the respondent-company have virtually come to a standstill . There is evidence to establish that banks have refused credit fcilities because
of the present position. The reference to the decision of the Calcutta High Court in Kumarapuram Gopalakrishnan Ananthakrishanan v.Burdwan-
Cutwa /railway Co. Ltd. [1978] 48 Comp Cas 211, is not correct. In the case, the proposeal to run a Railway could not be implementioned as the
railway business was taken over by the Government. However the company had no creditor or liabilities and had sufficient share capital to carry
on other business specified in the memorandum of association In the presentcase, the respondent is unable to repay even the interest and the share
capital has been completely wiped out.
Replying to the arguments of mrs. Hema Sampath,Mr. Arvind Datta submitted that the balance-sheet relates toa period after the winding up
petition was filed and that, therefore, the smae cannot be relied on by the petitioner, He further submits that although the balance- sheet relates to a
period after the winding up petition was filed, this court is entitled to rely onthe subsequent events whichw ill support the grounds the winding up.
For this proposition, he relied on the decision of our High court in Ramakrishnan Industries (p) Ltd. Ramakrishnana [1988] 64 Comp Cas 425. In
the said decision, the Division Bench of the our High Court has also relied on the judgment of the Supreme Court in the Needle Industries (India
Ltd v. Needle Industries Newey (India) Hodings Ltd. [1981] 51 Comp Cas 743, whereunder the Supreme Court observed that there is no
prohibition to either rely on the subsequent events as a piece of evidence to sustain the grounds already alleged or where. having regard to the
question to be decided, if the court considers it necessary to base a decision on the altered circumstances in order to shorten the litigation or to do
complete justice between parties.
On a consideration of the entire facts and circumstances of the present case, I am of the view that there is complete failure of the substratum
and that there is absolutely no hope or scope of revival of the respondent-company. In my view, this ground alone is sufficient to order winding up
of the respondent-company. According, this company petitions is allowed and the respondent-company is ordered to be wound up under the
provisions of the act. However, there will be no order as to costs. The petitioner will deposit a sum of Rs. 2,500 with the official liquidator within
four weeks from today.