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Judgment
Ramesh Ranganathan, J.—This petition is filed u/s 434(1)(a), 433(f) and 439(1)(b) of the Companies Act, 1956, read with Rule 95 of the Company (Court) Rules, 1959, seeking winding up of the first respondent company on "just and equitable grounds".
Section 433 of the Companies Act deals with several circumstances under which a company may be wound up by the Court. The opening words of the provision "a company may be wound up by the Court" shows that the provision itself is discretionary. K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, . A further discretion is conferred on the Court u/s 433(f) and it is only when the Court is satisfied that the facts justify the making of a winding up order, on the ground that it is just and equitable, that the company may be wound up M/s. World Wide Agencies Pvt. Ltd. and another Vs. Mrs. Margarat T. Desor and others, .
The "Just and equitable" Clause is not to be read ejusdem generis with the preceding five clauses in Section 433. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable Clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words themselves, "just and equitable". Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, ; J.A. Raghurama Arya v. East Coast Transport and Shipping Co. (P) Ltd. AIR 1958 AP 259 ; R.E.S. Co. Ltd. v. Nageswara Rao 1956 ALT 279 (SC); K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, .
The Court is required to form an opinion about the equitable nature of the case. Equity jurisdiction, thus, has been vested in the Court by the statute itself. It is not imperative for the court to make a winding-up order even if it forms the opinion that it was just and equitable to do so. The use of the word "may" creates a further discretion in the Court to order, or not to order, a winding-up. The discretion cannot be exercised arbitrarily or according to one''s own will or whim. It has to be regulated by law and the well-known rules of equity in order to assist the law, allay its rigour, advance the remedy and to relieve against abuse. Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. (Delhi) (1974) 44 CC 390 (Delhi HC (DB); K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, .
The "just and equitable" principle defies precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and, while it may, in a given case, be superimposed on law, it cannot be put in a straitjacket. Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, . No general rule can be laid down as to the nature of the circumstances which have to be borne in mind in considering whether the case comes within the phrase ''just and equitable'' for purposes of winding-up. Davis Co. v. Brunswick (Australia) LD. AIR 1936 PC 114; K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, .
The words, ''just and equitable'', are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. The ''just and equitable'' provision enables the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. The fact that a company is a small one, or a private company, is not enough. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed, or continued, on the basis of a personal relationship involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some, of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members'' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. It is through the just and equitable Clause that obligations, common to partnership relations, may come in. Ebrahimi v. Westbourne Galleries Ltd. (1972)2 All ER 492.
Gower, in his "Principles of Modern Company Law" (IV Edition page 662), states that the just and equitable Clause can be invoked on the following grounds:
(a) Expulsion from office
(b) Justifiable loss of confidence
(c) Deadlock
(d) Failure of substratum
Proved malversation and conversion of funds, deliberate and wanton oppression, by the management in power, of the minority shareholders with a view to make personal illegal gains, indulging in subversive activities so as to jeopardise the substratum of the company, a justifiable lack of confidence in the conduct and management of the company''s affairs due to lack of probity on the part of those in management, where there is open mismanagement and there is no panacea to remedy the evil, such are instances, though not exhaustive, when the courts exercise their jurisdiction under the "just and equitable" rule to wind up companies. In Rajakumar v. Perfect Castings P. Ltd. (1968) 38 Comp. Cas. 187 SC; In re Atul Drug House Ltd. [1971] 41 Comp. Cas. 352 SC.
A partnership firm, by name "C.R.S Estates", which was hitherto carrying on the business of real estate, was taken over as a going concern by the 1st respondent-company which was incorporated on 12.9.2000 with its registered office at Tirupati. The authorized capital of the 1st respondent is Rs. 10 lakhs divided into one lakh equity shares of Rs. 10/- each. Its main objects are to carry on business in real estate including purchase and sale of land, house plots, forming lay outs, construction of houses/flats, shops, complexes etc. The petitioner and the 2nd respondent were the only subscribers to the Memorandum of Association each of them for 100 equity shares, the first Directors of the 1st respondent and, under the Articles of Association, were entitled to hold such office for life or until their resignation. Serious differences and disputes arose between the petitioner and the 2nd respondent resulting in a complete dead lock in the ownership and management of the 1st respondent company, in criminal cases being instituted against each other and, eventually, in the present Company Petition being filed for winding up.
While ordering notice before admission this Court, by order in C.A. No. 278 of 2002 dated 15.04.2002, directed the 2nd respondent not to execute any registered deed alienating any of the assets of the 1st respondent company and, as a result, the 1st respondent ceased to carry on its business thereafter. The petitioner filed several documents in support of the averments in the Company Petition. The respondents, however, chose not to file any document along with their counter affidavit. The petitioner has also filed her affidavit in reply to the said counter affidavit. The Company Petition, despite six long years having elapsed after it was instituted in the year 2002, has not yet been admitted, and the submissions now made by Counsel on either side are limited only to the enquiry whether or not the Company Petition should be admitted. In an application for winding up, 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 were to be dismissed. Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, . While a detailed inquiry at the preliminary stage of admission should be avoided, Courts should, nonetheless, consider the dispute raised by the company. This can be achieved on assessment and appreciation of the evidence placed before the court at the stage of admission. The Court looks out for a prima facie case. If a petitioner makes out a prima facie case, then the Court would exercise its discretion. The remedy afforded is an equitable one. P.G. Bhatia & Co. v. Softsule Private Limited (1977) 47 CC 438. A prima facie case does not mean a case proved to the hilt but a case which can be said to be established if the evidence which is led in support of the same were believed. While determining whether a prima facie case had been made out the relevant consideration is whether, on the evidence led, it is possible to arrive at the conclusion in question and not whether that was the only conclusion which could be arrived at on that evidence. Martin Burn Ltd. Vs. R.N. Banerjee, .
Sri T. Surya Satish, Learned Counsel for the petitioner, would submit that the 1st respondent company was more in the nature of a quasi-partnership, that the complete lack of understanding, between the petitioner and the 2nd respondent and the deadlock in ownership and management had resulted in the 1st respondent not being able to carry on its business from the year 2002 onwards. Learned Counsel would contend that the 2nd respondent had no authority in law to remove the petitioner as a Director, that, in the absence of the petitioner, there was no quorum for a valid resolution to be passed, that neither was any notice issued to the petitioner calling upon her to attend, nor had the petitioner attended, any meeting in this regard, that in the absence of a valid meeting of either the Board, or the shareholders of the company, appointment of two additional directors and issuance of shares to them, or removal of the petitioner as Director, was ultravires both the Articles of Association of the 1st respondent and the provisions of the Companies Act and as such was abinitio void. Learned Counsel would point out several irregularities indulged in by the 2nd respondent more particularly of his having registered plot No. 52 twice. Learned Counsel would contend that, since there was no possibility of reconciliation between the petitioner and the 2nd respondent, the two directors and the only shareholders, there was no alternative but to wind up the company on just and equitable grounds. According to the Learned Counsel, no useful purpose would be served in relegating the petitioner to approach the Company law board as neither the petitioner nor the 2nd respondent were prepared to leave the management of the Company to the other. Learned Counsel would place reliance on S. Sundaresan v. Plast-O-Fibre Industries Pvt. Ltd. Vol. 76 Comp. Cas. Page 38, M/s. World Wide Agencies Pvt. Ltd. and another Vs. Mrs. Margarat T. Desor and others, and Hanuman Prasad Bagri and Others Vs. Bagress Cereals Pvt. Ltd. and Others, . Sri R. Raghunandan, Learned Counsel for the respondents, would fairly state that the respondents had not filed any documents in support of the averments in the counter-affidavit. He would contend that two additional directors had been inducted into the Board, that 100 shares each had been issued to them and that the petitioner had been removed from the office of director. Learned Counsel would further submit that Rs. 9.41 lakhs was received as share application money from associates of the 2nd respondent for which shares were required to be allotted, that the petitioner, having committed several irregularities, could not taken advantage of her own violation in seeking to have the company wound up, that, while it was true that the first respondent company was not carrying on business from June, 2002, winding up of the company would benefit neither the petitioner nor the 2nd respondent and, as the company had around 18.00 Acres of land, of which nearly Ac.10.00 was free-hold without encumbrances, the 1st respondent was a viable company which could be revived. Learned Counsel would submit that winding up of a company is a remedy of the last resort and, except for the plea of dead lock, all other contentions urged by the petitioner in the company petition related to oppression and mismanagement and that the appropriate remedy for the petitioner was to approach the Company Law Board which could examine the feasibility of putting either the 2nd respondent or the petitioner in management and direct one to compensate the other to leave the company. Learned Counsel would place reliance on Section 443(2) to contend that, since the petitioner was acting unreasonably in seeking to have the company wound up instead of pursuing the alternative remedy available to her, the jurisdiction of this Court u/s (f) of the Companies Act was barred and the company petition should, therefore, be dismissed at the stage of admission. Learned Counsel would place reliance on Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, and K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, .
Does Section 443(2) bar, or is it an additional fetter for, exercise of discretion by the Court u/s (f) of the Companies Act, is the question which necessitates examination in the first instance, for, if it were to be so held, it would be wholly unnecessary for this Court to examine the case on its merits.
The twin ingredients to be satisfied, u/s 443(2), for the Court to refuse to make an order of winding up on just and equitable grounds, is the formation of the opinion that (i) some other remedy is available to the petitioner and (ii) that she is acting unreasonably in seeking to have the company wound up instead of pursuing the other remedy. As reliance is placed by Sri R. Raghunandan, Learned Counsel for the respondents, on K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, , to contend that Section 443(2) is a bar for exercise of jurisdiction u/s (f), it is necessary to note the observations made by the Division Bench in this regard:
...The legal principles enunciated by the Supreme Court in Hind overseas Limited case (supra) to the effect that company cannot be wound up merely because there are differences between the shareholders and particularly when the company is running on sound lines, that if any misunderstandings or problems arise between the shareholders, the same have to be sorted out by alternative methods, that winding-up petition cannot be entertained unless alternative remedies are exhausted and that winding-up of a company is a harshest remedy and should be entertained as a last resort, are fully applicable to the facts of this case. The effect of Section 443(2) of the Act has also been considered by the Supreme Court in the above case. A contrast between the provisions under Clause (a) to (e) of Section 433 of the Act on one hand and Clause (f) thereof on the other makes it abundantly clear that statute itself created a bar u/s 443(2) of the Act from entertaining a winding-up petition on ''just and equitable'' grounds when alternative remedy is available....
In arriving at the conclusion extracted hereinabove, the Division Bench was merely following the judgment in Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, , wherein the Surpeme Court observed:
...Section 433(f) under which this application has been made has to be read with Section 443(2) of the Act. Under the latter provisions where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
Again u/s 397 and 398 of the Act there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief u/s 433(f) based on the just and equitable Clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company....
It is well settled that observations in judgments should not be read out of context. A word here or a word there, should not be made a basis for inferring inconsistency or conflict of opinions. Law does not develop in a casual manner. It develops by conscious, considered steps. Sri Konaseema Co-operative Central Bank Ltd. v. N. Seetharama Raju AIR 1990 AP 171 (FB). Observations of Courts are neither to be read as Euclid''s theorems nor as provisions of a Statute, and that too taken out of their context. The observations must be read in the context in which they appear to have been stated. Judges interpret statutes, they do not interpret judgments. They interpret words of statutes, their words are not to be interpreted as statutes. Bharat Petroleum Corporation Ltd. and Another Vs. N.R. Vairamani and Another, , Ashwani Kumar Singh Vs. U.P. Public Service Commission and Others, and Union of India (UOI) Vs. Amrit Lal Manchanda and Another, . As the Supreme Court, in Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, , did not hold Section 443(2) to bar the exercise of discretion u/s 433(f), a stray word, in the judgment of the Division Bench in K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, , cannot be read out of context to infer a deviation by the Division Bench and a conflict in its opinion with that of the Supreme Court. It is, thus, evident that Section 443(2) does not bar exercise of jurisdiction but further limits exercise of discretion u/s 433(f) of the Act. It is only if the other available remedy is not efficacious can the discretionary jurisdiction of the Court u/s 433(f) be invoked. The Division Bench, in K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, , also observed:
...Further, there is no explanation forthcoming from the appellant as to why he did not or cannot pursue the alternative remedies and he did not make out a case of lack of probity. He did not make out any case of prejudice to company''s business or affecting his rights as a shareholder....
The aforesaid observations of the Division Bench make it clear that this Court chose not to exercise its discretion u/s 433(f) of the Companies Act on other grounds and not because Section 443(2) was a bar.
To relegate the petitioner to the forum of the Company Law Board, this Court is not only required to form an opinion that the remedy is efficacious, it must also record its satisfaction that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that remedy. It is no doubt true that Sections 397 and 398 give ample powers to the Court to pass necessary orders u/s 402 compelling even purchase of shares, or the interest of any member of the company, by other members and for passing any just and equitable order so that a solvent concern could continue working in cases where the affairs of the company are conducted in a manner prejudicial to the public interest or in a manner oppressive to the members concerned. In Re Atul Drug House Ltd. [1971] 41 Comp. Cas. 352 SC. In examining this question, and with a view to give a quietus to this long pending dispute, as the Company Petition filed in the year 2002 had not even been admitted, this Court explored the feasibility of the parties arriving at a compromise. In its order dated 30.8.2007, this Court noted that both the Counsel had stated that the matter was at an advanced stage of compromise and that a memorandum of compromise would be filed along with individual affidavits of both the petitioner and the 2nd respondent. Thereafter, the matter underwent several adjournments and eventually, on 18.3.2008, this Court made it clear that, in case, the parties failed to report compromise within two weeks, the matter would be taken up for hearing on admission. Thereafter, the matter was heard and this Court, in its order dated 11.07.2008, considered it appropriate to permit both the petitioner and the 2nd respondent to inform it in writing whether they were willing to continue in the management of the company on payment of certain amount to the other party and, if so, the amount which they were willing to pay.
On 18.8.2008, Sri T. Surya Satish, Learned Counsel for the Petitioner, on instructions, submitted that the petitioner was willing to pay Rs. 3.5 Crores to the 2nd respondent within two weeks to take over the company on an as-is-where- is basis. He also stated that, in case the 2nd respondent was willing to pay Rs. 3.5 Crores to the petitioner, she was willing to leave the company on her being paid the said amount. Sri R. Raghunandhan, Learned Counsel for the 2nd respondent, submitted that he had been instructed to inform that the 2nd respondent was willing to pay Rs. 2.00 Crores to take over the company on an as-is-where-is basis and that he would put the higher offer made by the petitioner to the 2nd respondent and obtain instructions in the matter. This Court observed that the controversy could be resolved only if the petitioner and the 2nd respondent were present in Court and, accordingly, directed them to be present on 25.7.2008.
On 25.7.2008, both the petitioner and 2nd respondent were present in Court. While the 2nd respondent offered an increased bid of Rs. 4.00 Crores, the petitioner increased her bid from Rs. 3.5 Crores quoted earlier to Rs. 5.00 Crores. The 2nd respondent agreed to give up all his rights on payment of Rs. 5.00 Crores. A joint memo was filed by both the parties, and attested by their Counsel, wherein they stated that, after mutual discussions, the present memo was being filed for resolution of the disputes between them. This joint memo was made a part of the record and, since it required the petitioner to pay a sum of Rs. 2.00 Crores to the 2nd respondent within 15 days, the company petition was adjourned by two weeks. At the request of the parties it was again adjourned by a further period of two weeks.
On 22.8.2008, Sri T. Surya Satish, Learned Counsel for the petitioner, submitted that, while the petitioner was not inclined to pay the 2nd respondent Rs. 5.00 Crores, she was ready and willing to receive Rs. 4.00 Crores, as offered by the 2nd respondent earlier, and give up all her rights in the 1st respondent company. Sri R. Raghunandan, Learned Counsel for the Respondent, sought time to obtain instructions. On 25.8.2008 he informed the Court that the 2nd respondent was not willing to pay Rs. 4.00 Crores to the petitioner in view of the lack of trust between the parties.
The efforts made by this Court, to have the dispute amicably resolved, failed. The only contention urged, on behalf of the 2nd respondent, in seeking relegation of the petitioner to the forum of Company Law Board, is that the Company Law Board could direct one of the parties to buy the other party out. As this contention, in view of the above referred events, does not merit acceptance, and as the ground of constitutional dead lock cannot, admittedly, be resolved by the Company Law Board, it must be held, prima facie, that the petitioner cannot be said to have acted unreasonably in not pursuing the remedies under Sections 397 and 398 instead of invoking the jurisdiction of this Court u/s 433(f) of the Act.
The next question to be examined is whether a prima facie has been made out for admission of the Company Petition under the "just and equitable clause". Petitioner would allege that the 2nd respondent, with the criminal intention to cheat her and the company, had forged her signature and had withdrawn certain amounts from the joint account in State Bank of India, that she had filed a criminal complaint on the file of the III-Additional Magistrate of Judicial First Class, Tirupati in Crl.M.P. No. 372 of 2002 for offences u/s 406, 418, 465 and 468 IPC, on 28.01.2002, that F.I.R. No. 98 of 2002 dated 09.02.2002 was registered against the 2nd respondent by the Tirupati West Police Station, that the complaint is being investigated, that as a counter-blast the 2nd respondent had fabricated certain documents, notices, resolutions etc. to the effect that Smt. Dr. V. Geeta, D/o. V. Ramana Reddy and Smt. C.N. Krishna Veni, W/o. C.N. Bheema Reddy were appointed as Directors of the Company, that 100 shares each were issued in their favour and that the petitioner had been removed from the Board of Directors.
It is not even the case of the 2nd respondent that the petitioner submitted her resignation as a Director. His case, on the other hand, is that, soon after incorporation, Smt. V. Geetha and Smt. C.N. Krishnaveni were inducted as directors of the 1st respondent on 15.09.2000, that the said fact was intimated to the Registrar of Companies by filing Form-32, that State Bank of India, Tilak Road branch, Tirupati was intimated of such induction on 23.09.2000 while opening an account on behalf of the 1st respondent and that State Bank of India had acknowledged the intimation in its letter dated 5.3.2002. While admitting that the petitioner was also a subscriber to the Memorandum of Association, and that she was also a Director for life under the Articles of Association, the 2nd respondent would contend that the petitioner was removed as a Director on 29.1.2002 and intimation in Form No. 32 was filed with the Registrar of Companies on 31.1.2002. It is, therefore, not in dispute that the petitioner continued to be a Director of the 1st respondent when the other two directors were allegedly appointed on 15.9.2000. Such appointment is referable only to Section 260 and could only have been made on a valid resolution being passed in a meeting of the Board of directors. Since there were two directors in the 1st respondent company, (the petitioner and the 2nd respondent), and the quorum for a meeting of the Board, u/s 287(2), is two, it is only if both the directors were present in a Board meeting, and had consented to such an appointment, could a resolution passed in this regard be held to be valid. The counter affidavit is silent as to whether any notice, as stipulated u/s 286(1), was issued to the petitioner, whether she attended the said meeting and whether the resolution appointing these two persons as Directors was with her consent for either in her absence, or without her consent, no such resolution could have been passed. The respondents, for reasons best known, have not chosen to place before this Court either a copy of the intimation given by them to the bank on 23.09.2000, or the bank''s letter dated 05.03.2002, regarding appointment of two additional directors.
Even assuming that these two persons were appointed, u/s 260, as additional directors in a Board meeting, they were entitled to continue only till the next Annual General Meeting and not thereafter. The counter affidavit is silent as to when the annual general meetings of the 1st respondent, were held. It is necessary to note that, u/s 166(1), every company shall, in each year, hold an annual general meeting and not more than fifteen months shall elapse between the date of one annual general meeting of the company and the next meeting. Since Section 174(1) prescribes that quorum for a general meeting of a private limited company shall also be two, no resolution could have been passed at the general meeting without the consent of the petitioner.
While the 2nd respondent would submit that the issued, subscribed and paid up capital of the 1st respondent was Rs. 4,000/- divided into 400 equity shares of Rs. 10/- each, the petitioner would deny the allegation and submit that neither was a meeting ever held for issuance of additional shares apart from the 200 equity shares subscribed by the petitioner and the 2nd respondent in the 1st respondent-company nor was a return of allotment filed with the Registrar of Companies in respect of the alleged issue.
If, indeed, 100 shares each were allotted to Smt. V. Geetha and Smt. C.N. Krishnaveni, then this fact ought to have been intimated to the Registrar of Companies either by way of a Return of allotment in Form 2 as required u/s 75(1), or in the return u/s 159(1). It is only on shares being allotted to the applicants would the share application money, said to be for Rs. 9.41 lakhs, become share capital. Issue/allotment of shares can only be by way of a resolution passed either in the Board or in the general body meeting of shareholders which, obviously, could not have been done without the petitioner''s concurrence. Even if a resolution, inducting two additional directors or allotting 100 shares each to them, had been passed it would be void u/s 9 of the Act as it is without a valid quorum and is contrary to the aforementioned statutory provisions.
Petitioner would contend that the 2nd respondent, having come to know about the criminal complaint lodged against him on 28.1.2002 for the offence of forgery, had created a story of an alleged meeting of the Board having been held on 29.01.2002 for removal of the petitioner as Director, that neither was a notice issued nor was the petitioner informed of any such meeting and that Form-32 was fabricated only to fulfill the illegal intentions of the 2nd respondent to take over the company and run the same individually contrary to the understanding between them.
The 2nd respondent would deny the allegation that no notice was issued for any board or general meeting for the purpose of removing the petitioner as a Director and submit that the procedure under the Act for removing a Director had been followed. He would submit that the petitioner, who had received notices from the Company, had deliberately avoided attending the meeting wherein the resolutions were passed removing her from directorship and that, in accordance with the resolution passed by the general body, Form-32 was filed by the 1st respondent with the Registrar of Companies.
u/s 284 of the Companies Act, the power to remove directors has been conferred only on the general body of the shareholders, and not on the Board, that too after a special notice is given of the resolution to remove the director at the meeting, a copy thereof is sent to the director concerned who is entitled to make a representation and to be heard, on the resolution, at the meeting. Section 283 relates to vacation of office by a director and, under Sub-section (1) thereof, the office of a director shall become vacant if the ingredients of Clauses (a) to (l) thereunder are attracted. The counter affidavit filed by the respondents does not reflect satisfaction of any of the ingredients of either Section 283 or Section 284 of the Act. If, indeed, a general meeting had been called for to remove the petitioner as a director, there was no quorum for a valid resolution to be passed in the absence of the petitioner as she and the 2nd respondent were the only two shareholders. Any such resolution would, u/s 9, be void. It is, therefore, difficult to accept the submission that the petitioner was either removed from, or that he had vacated, the office of director. Prima facie, the petitioner and the 2nd respondent continue to be the only two directors, appointed for life under the Articles of Association, and the only two shareholders of the 1st respondent- company each holding 50% of its subscribed capital.
Two well accepted principles for invoking the ''just and equitable'' rule are (1) analogy of partnership principle to dissolve a small, domestic, quasi-partnership concern and (2) when there is justifiable lack of confidence on the ground of lack of probity. The first principle of dissolution on partnership lines would apply in the case of irreconcilable dead-lock by reason of the very constitution of that concern. Loch v. John Blackwood Ltd. 1924 AC 783; K. Mohan Babu Vs. Heritage Foods India Ltd., Hyd. and others, . Such a situation would arise in the case of equally divided holdings of partners in a quasi-partnership, when by reason of only acting as per the constitution a deadlock would be created without any oppression or mismanagement which could be remedied under Sections 397 and 398 of the Act. Atul Drug House Ltd. [1971] 41 Comp. cas. 352 SC. Where the constitution is such that it results in a complete and irresoluble deadlock the partnership principle must be invoked; while, in other cases, the ground of lack of probity in the conduct of the company''s affairs must be established In Re Atul Drug House Ltd. [1971] 41 Comp. Cas. 352 SC and, if there is no hope or possibility of its smooth and efficient continuance as a commercial concern, the company may be wound up on just and equitable grounds. S. Sundaresan Vol. 76 Comp. Cas. Page 38.
Petitioner would contend that, though both she and the 2nd respondent were equal shareholders and had equal rights over the assets and liabilities of the company, she was deprived of the profits which the company had earned during the course of its business, that the 2nd respondent had breached the trust and had misconducted himself, that it was impossible for both the directors to continue the business any further and that there was no other recourse but to have the company wound up under the just and equitable Clause as it was in the best interests of her investments and of third parties/customers who had invested monies, on the trust reposed by them on her, for nearly Rs. 1 crore. On the other hand, the 2nd respondent would contend that the petitioner''s sole interest was to freeze the company and, when she was prevented from doing so, she was attempting to have the company destroyed.
The 1st respondent-company, which took over a partnership firm on as is where is basis, is itself in the nature of a quasi partnership. The petitioner and the 1st respondent, the only two directors for life under Article 8 of the Articles of Association, are also the only two shareholders each holding 50% of the subscribed capital of the 1st respondent company. There is an underlying obligation, in the very constitution of the 1st respondent, that the petitioner and the 2nd respondent should repose faith and confidence in each other and that, as long as the business continued, both of them would be entitled to participation in the management. It is well settled that even in cases involving removal of directors from office, the just and equitable provision would come into play where the obligations, underlying the constitution of a company, are broken necessitating the company being dissolved and the principles, which courts have applied in partnership cases where there has been exclusion from management, being applied in such cases also. Ebrahimi (1972)2 All ER 492. While the 1st respondent has valuable assets in the form of unencumbered landed property exceeding 10 acres, the complete lack of trust among these two has resulted in cessation of all business activity of the 1st respondent ever since 2002. As noted hereinabove, the quorum for a valid meeting of either the Board of Directors or a General Meeting is ''two'' and, where the petitioner and the 2nd respondent do not see eye to eye with each other on any matter, it is evident that such dead lock is difficult to resolve. All that is necessary to induce the court to interfere is to satisfy the court that it is impossible for the partners to place that confidence in each other which each has a right to expect. In re Lundie Brothers Ltd. (1965) 35 Comp. Cas. 827. There is irreconcilable deadlock in the ownership and management of the 1st respondent by reason of its very constitution.
Allegations and counter-allegations have flown, thick and fast, between the petitioner and the 2nd respondent in their respective affidavits filed before this Court. While the former would allege that the books of accounts were in the custody of the latter as he was in control of the registered office of the 1st respondent-company, the 2nd respondent would contend that the petitioner and her husband had stolen certain receipt books of the 1st respondent company. While the petitioner would allege that the accounts had not been certified and that no auditors had been appointed by the shareholders of the company to scrutinize the accounts, the 2nd respondent would state that the petitioner, having claimed to be a director, could not absolve herself of her responsibility of ensuring statutory compliance.
The petitioner would allege that no resolution was passed either by the company or the Directors to register lands in favour of 3rd parties, that the 2nd respondent had started collecting amounts from third parties in respect of the lands to be sold by the company in the course of its business, totally by - passing the petitioner and representing himself to be the Managing Director, though he was not properly appointed in accordance with the Articles of Association of the Company or the provisions of the Companies Act. She would allege that the 2nd respondent, totally ignoring the investments made by third parties, had started collecting monies from others and was registering plots that were earmarked to those who had already made part payment of Rs. 97,69,900/-. Petitioner would state that, since the 2nd respondent had indulged in mismanagement, forgery, fabrication and manipulation to enrich himself at her cost and at the cost of other investors, the very purpose of converting the partnership firm into a company was lost, that it was the 2nd respondent who had damaged the reputation of the company fabricating documents and denying investments made by gullible investors/purchasers of various plots and that he had further damaged the reputation of the 1st respondent company making double registration of single plots.
The 2nd respondent would state that the petitioner, except for subscribing for 100 shares, had not made any investment either directly or through other persons. He would deny having collected any money from others much less the alleged sum of Rs. 97,69,900/- or to have registered plots specifically earmarked for others. He would deny that he had forged the signature of the petitioner or that he had withdrawn amounts from the company''s account. He would contend that it was the petitioner and her husband who had hatched a conspiracy to cheat the 1st respondent company and misappropriate its funds and, by misrepresenting herself as a Managing Director, she had collected lakhs of rupees from persons who had booked plots and had issued receipts forging the signature of the 2nd respondent, that when an explanation was sought for, the petitioner and her husband had, as a counter-blast, foisted a false case alleging that he had forged the petitioner''s signature and had withdrawn monies belonging to the 1st respondent. He would contend that whatever monies were received by the company from its customers was purely on the basis of his efforts and reputation and not because of the petitioner.
While the allegations and the counter allegations, with regards misappropriation and misutilization of funds and assets of the 1st respondent company, can only be established on evidence being let in after admission of the Company Petition, they would, prima facie, reflect lack of probity in the ownership and management of the 1st respondent company. In Yenidje Tobacco Co. Ltd. In re (1916) 2 Ch. 426, Lord Cozens-Hardy M.R. opined:
...If ever there was a case of deadlock I think it exists here; but whether it exists or not, I think the circumstances 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 when the company was formed and which ought to be terminated as soon as possible....
As a result of the deadlock in the ownership and management of the 1st respondent, there has been continuous statutory non-compliance of the provisions of the Companies Act. Not only has the company failed to keep proper books of account u/s 209(1) with respect to the monies received and spent, it has also failed to hold annual general meetings or to lay either before the Board or the General Body, as required u/s 219(1), the balance sheets and profit and loss account of the company for the past several years. Neither the Balance sheet and profit and loss account nor the report of the Board have been prepared annually nor have copies thereof been filed with Registrar of Companies as stipulated u/s 220(1). The 1st respondent has not even appointed auditors u/s 224(1) let alone the auditors report being placed before the general body and kept open for inspection of its members. But for owning valuable landed property, the 1st respondent has not been carrying on any business for the past several years. The deadlock in ownership and management of the 1st respondent is complete and appears incapable of resolution, leaving no other recourse except for winding up proceeding to be initiated.
Admit.
Let advertisement of admission of the Company Petition, as contemplated under Rule 99 read with Rule 24 of the Company Court''s Rules, 1959, be made in Deccan Chronicle (English daily) and Andhra Jyothi (Telugu daily) on or before 31.10.2008.
For filing proof of publication, list before regular Company Court on 05.11.2008.