The Great Indian Motor Works Ltd. vs Chandi Das Nundy

Harries, C.J.—This is an appeal from an order of Banerjee, J., dated July 23, 1951, directing the winding up of the Great Indian Motor Works, Ltd. An application was made for the winding up of this company by one of the share-holders. The authorised capital of the company is Rs. 6,00,000 divided into six hundred shares, the main object of the company being to carry on the business of dealers in motor-cars. The company is also conducting a bus-service and owns omnibuses for that purpose. The present share-holders according to the register are the petitioner Chandi Das Nundy, his brother Kristo Das Nundy, the latter''s three sons and one Kurtick Churn Mullick who is Paid to be a first cousin of the wife of Kristo Das Nundy.

The company took over the business of a firm on partnership which was carried on by the two brothers, Chandi Das Nundy and Kristo Das Nundy. In 1926 they decided to form a private limited liability company and the company was formed and registered. The shares were held by these two brothers in proportion to their interest in the partnership, kristo Das Nundy owning considerably more shares than the present petitioner. A third shareholder was introduced, namely, Kartick Chum Mullick who owns twelve one thousand-rupee shares. It will be seen later that this gentleman now plays a most important part in the affairs of the company.

Unfortunately disputes have arisen between the petitioner Chandi Das Nundy and the directors of the company who are the petitioner, Kristo Das and Kartick. Chandi Das Nundy eventually presented this petition alleging in the first place that the company was insolvent and unable to pay its debts and secondly, that it was just and equitable to wind up the company.

As I have stated earlier, the company was formed to carry on the business of a partnership and indeed the members of the company were really nothing more than the partnership being carried on in a different guise. The directors were the two partners and they held all the shares. It seems that each of the partners transferred six shares to Kartick and thus he was introduced a considerable time ago.

All went well for a considerable time, but eventually it seems that there has been a struggle for power. The minutes of the Board of Directors show that Kartick was Kristo''s man. He was made the Chairman at the meetings of the directors and invariably supported Kristo against Chandi Das.

As I have stated earlier, the three sons of Kristo are shown as shareholders in this company and this incident shows that attempts were being made by Kristo to obtain a greater voting power and a firmer hold on the company. The articles of association are in the usual form of articles of association of a private company and they make the transfer of shares a somewhat difficult transaction. It seems that Kristo wanted to transfer one hundred and five of his shares to his three sons who were said to have been employed in the business and objection was taken to this transaction by the petitioner who pointed out that these shares could not be transferred in the manner suggested because such transfer was expressly forbidden by the articles. This transfer seems to have been suggested first in the year 1948, and a minute of the directors shows that Messrs. Orr Dignam had been consulted. On March 19, 1951, another meeting of the Board of Directors was held and again objection had been made to this proposed transfer and it seems that Messrs. Orr Dignam had expressed an opinion upon the matter. Kartick was voted to the chair and he got over the difficulty about the articles relating to transfer by ruling that this was not a transfer at all as the persons to whom the shares were to be passed were the heirs of Kristo. The minutes say that the Chairman considered all the points and in his view the transfer was not in the nature of a sale by way of transmission to his sons who were his heirs and were taking an active interest in the company''s organisation. The transfer was therefore very fair and could be sanctioned.

That this was a transfer of shares in the teeth of the articles of association is clear and it is somewhat difficult to understand the explanation given by Kartick in his ruling. What difference did it make whether the sons would be his heirs on the death of Kristo ? Nevertheless the Chairman who quite clearly was a man of Kristo ruled that this transfer was legal and sanctioned it in the teeth of opposition from the petitioner. The names of these sons have now been entered in the register of shareholders and the only way that they can be removed is by way of an application to the Court.

It is suggested that this was a deliberate attempt to increase the strength of Kristo''s party as it were in this company. Quite clearly these shares could not be transferred in the manner suggested, but though that had been clearly pointed out Kartick nevertheless ruled that it could be done and the transfer was sanctioned. It seems to me that this was a deliberate act and was intended to deprive the petitioner of any possible influence he might still have left in the company. Mr. Atul Gupta on behalf of the company has contended that this might have been an honest act of Kartick, but I cannot see how it can possibly be. They had consulted solicitors and it is quite clear that the solicitors never gave them the advice that this transaction was not in fact a transfer of shares. What else was it but a transfer ? Nevertheless Kartick had no difficulty in ruling that it was not a transfer because the transferees happened to be the heirs of Kristo, or to be more accurate, the transferees were persons who would be the heirs of Kristo when the latter died. It seems to me that at this meeting the directors were acting dishonestly with a view to defeat, if possible, the petitioner.

There is another transaction which suggests that the directors were not acting honestly. The company owed Kristo a sum of Rs. 2.35.000 in respect of money advanced by Kristo. Kristo wrote and demanded the payment of the money or in the alternative he suggested that the company''s property should be hypothecated to secure the amount and indeed the form of the hypothecation deed was drawn up by Kristo. It was quite clear that the company could not pay the sum of Rs. 2,35,000 and they eventually paid a sum of Rs. 50.000 against the opposition of the petitioner. The question then arose as to how the balance was to be dealt with. The solicitors, Messrs. Orr Dignam, appear to have suggested that a debenture should be issued by the company, but Kristo would have none of that. He insisted that the property of the company should be hypothecated and that he should have the right, if the money was not paid, to enter into possession of the company''s assets, manage the company''s affairs on his own behalf, and if necessary, sell the company''s undertaking. In other words, he was insisting upon a form of transaction which would leave him in sole command of the company''s undertaking. The petitioner naturally objected and it appears that in other proceedings Kristo and Kartick gave an undertaking to Sinha, J., that no further steps would be taken to carry out this transaction of hypothecation. It seems however that at a subsequent directors'' meeting a resolution was passed to proceed with this hypothecation and these two gentlemen found themselves charged with contempt of court. They were however discharged by Banerjee, J. In an affidavit Kristo still admits that the question of hypothecation has not been dropped, but has only been temporarily shelved. It seems to me that the method insisted upon by Kristo to secure the balance of his money would put him in sole command of the Company''s assets and its undertaking and it is not surprising that the petitioner has strongly objected to this form of hypothecation. It is a form very much to the advantage of Kristo and very much to the disadvantage of the company. Kristo would be perfectly secure if this is a solvent company if a debenture was issued. But Kristo has strongly objected to that because he says that the assets of the company have not the value which they are stated to have. If a debenture was issued Kristo could enforce his rights through the court, but if a hypothecation deed in the terms drafted by Kristo was executed, Kristo could enter into possession and manage the affairs of this company without any reference or interference by the Court. The insistence on this form of hypothecation deed clearly shows that these two directors Kristo and Kartick are more concerned with the interest of Kristo than they are with the interest of the company and it appears to me that the petitioner who is a very substantial shareholder and a director has a very legitimate grievance. No attempt is made to protect the interest of the company and this affair relating to hypothecation is being conducted entirely for the benefit of Kristo.

Both these brothers, the petitioner and Kristo, were managing directors and were each paid a handsome salary and commission. Each received the same salary, but the commission was in proportion to their holdings. The petitioner is no longer a managing director and his removal was obtained in a somewhat odd way. At a meeting of directors held on March 21, 1951, the question of renewing the services of the managing directors was considered. Mr. Kristo Das Nundy stated that he was prepared to renew his services and proposed accordingly. His proposal was seconded by the petitioner and Mr. Kristo Das Nundy was therefore reappointed a managing director. Mr. Chandi Das Nundy, the petitioner, then informed the meeting that he was prepared to renew his services and proposed that he be appointed, but he failed to find a seconder and it was therefore resolved that as the proposal was not seconded continuation of his services could not be recommended for renewal, but that it would be placed at the general meeting of the shareholders for final consideration. It must be remembered that the shareholders legally consisted of the petitioner. Kristo Das Nundy, and Kartick Churn Mullick with the three sons of Kristo Das Nundy illegally introduced. It seems very strange that Kristo Das Nundy could have allowed the petitioner to second his proposal appointing himself managing director knowing that he was not going to second the petitioner''s proposal when he proposed himself as managing director. There is a lack of candour and frankness here which is amazing and I have little doubt that the petitioner was tricked into seconding Mr. Kristo Das Nundy''s proposal believing that his own proposal would be in turn seconded by his brother Kristo Das Nundy. The result was that the petitioner found that he was no longer a managing director and therefore deprived of the fairly handsome remuneration which these managing directors obtained. Mr. Kristo Das Nundy in an affidavit has explained that the company paid no profits because it was really owned by the two partners of the old partnership and as they received handsome payments from the company it was unnecessary to pay any dividend. That may have been so. But the result of this resolution has been that there are no profits divided and now no salary for the petitioner, although a salary for Kristo Das Nundy has been secured. Again it appears to me that the whole business of this Company is being engineered for the benefit of Mr. Kristo Das Nundy.

It is said that the petitioner has commenced a rival business and the only basis for that suggestion is that the petitioner''s son, who is a man of thirty, does carry on a small motor-repairing business. There is no evidence at all that the petitioner is concerned in that business. Further it is quite clear that this allegation as to the petitioner carrying on a rival business was only made as a counterblast to the petitioner''s attitude in the transactions concerning the hypothecation deed. When it became clear that the petitioner would not consent to this transaction the other allegation was made. This is clear from the minutes of the directors'' meeting of July 23, 1948. There the petitioner had refused to sign a cheque for Rs. 50,000 in favour of Mr. Kristo Das Nundy because it was concerned in this hypothecation transaction. It was resolved at that meeting that as Mr. Chandi Das Nundy had refused to sign the cheque the same should be signed by Kartick Churn Mullick as Chairman. Mr. Mullick then signed the cheque and immediately there follows a minute referring to a letter of Mr. Kristo Das Nundy to Chandi Das Nundy about a rival business. There is no evidence at all that he is carrying on a rival business and it seems to me that this allegation has been made by Mr. Kristo Das Nundy as a ground for attack on the petitioner and to remove him from any participation in the affairs of the company.

These instances show that this company is not being run fairly and properly. Mr. Kristo Das Nundy has so arranged it that he has a majority and that majority is quite clearly being used not for the benefit of the company but for Mr. Kristo Das Nundy.

Banerjee, J., has pointed out that where a company is a private company and particularly where it is nothing more than a partnership converted into a company, the Court in winding up will apply to a very great extent the rules applicable to winding up a partnership. Where two partners cannot agree and cannot carry on business the Court will always wind up the partnership. The Court will wind up a partnership also if one partner was acting dishonestly towards the other or acting unfairly. In the present case I am quite satisfied that Mr. Kristo Das Nundy and Mr. Mullick are. to say the least of it, acting unfairly towards the petitioner and 1 think they are prepared to deprive the petitioner of all power and influence even if the means adopted are far from fair. Their conduct shows that they arc more concerned with the position of Mr. Kristo Das Nundy and the benefits that would accrue to him than with the position of the company. If such a state of affairs was disclosed in a partnership, the court would clearly wind up the partnership and it appears to me that this private company should, on the same grounds, be wound up. Further it appears to me that it would be quite impossible for this company to carry on business in future without a series of disputes and probably a long course of litigation, for example, these sons of Kristo Das Nundy have now been registered as shareholders. Mr. Gupta of course admitted before us that the whole transaction was illegal, but Kristo has never admitted it and they acted upon the resolution and the names of these persons have been registered. To remove them will involve litigation and 1 fear that if this company was allowed to continue it would be a fruitful source of profit to lawyers, but no source of profit to one of its shareholders at least, namely, the petitioner. I think it is just and equitable that this company should be wound up as I am satisfied that it will be impossible for this company to carry on its business fairly and honestly in the future.

It seems fairly clear also that this company is not in a position to pay its debts. Admittedly there was this debt of Rs. 2,35,000 due to Kristo and all that is paid is Rs. 59,000. The balance-sheet shows that the yearly profits of this Company are negligible and it would take many many years to pay off this debt out of the profits even if the future of this company was crowned with success. Kristo Das realises this and when he asked for payment of money he put forward an alternative, namely, the hypothecation of the company''s property on the terms which I have already set out. It is quite clear that the company has very little money in hand and the balance-sheets disclose very little ready cash in hand. It is to be observed that on April 27, 1950 the bankers of this company were pointing out that after paying a cheque for Rs. 2,285-3-0 in favour of the Standard Vacuum Oil Company the company''s account was overdrawn to the extent of Rs. 314-2-0. In other words, the company had overdrawn to that extent and owed a very large sum to Mr. Kristo Das Nundy. How could it pay its debts if it was pressed to do so ? Further, it appears to me, looking at the balance-sheets, that one asset at least of this company is grossly over-valued and that is the goodwill. It is shown in the balance-sheet of March 31, 1950, as Rs. 1.04,636 which appears to me to be a very inflated figure for a business of this kind. It has been pointed out by the directors that the depreciation allowance on buses and spare-parts and such like should be increased. But even so, the goodwill of this company is shown at a higher figure than the value of the buses which operate the bus services and of the spare-parts. In fact it is the main item in the balance-sheet. If the goodwill of this company is not worth anything like the amount stated then quite obviously this company is in a bad way, Banerjee, J., was of opinion that it could not pay its debts and I think he is right. In my judgment therefore the petitioner established the grounds upon which the court rightly made a winding-up order and that being so, this appeal fails and is dismissed with costs. Certified for two Counsel. The costs of the company will be paid out of the assets.

Das, J.

I agree.