R.J. Kochar, J.@mdashThe petitioner is one of the four directors of the respondent-company. He has prayed for a winding up order from this court u/s 433(f) read with Section 439 of the Companies Act, 1956 ("the Act"). According to the petitioner, in the given circumstances of the case, it would be just and equitable to order winding up of the respondent-company.
2. The respondent-company has filed its affidavit in reply to contest the petition on its maintainability as also on the merits of the case. The petitioner has filed his rejoinder to the said affidavit-in-reply of the respondent-company. It is the petition against the remaining three directors of the respondent-company. The three directors are resisting very seriously the attempt of the petitioner to bring about the economic death of the respondent-company.
3. I have heard both learned counsel for the parties at length. Both learned counsel have extensively referred to me the whole of the proceedings and both have cited a number of decisions in support of their contentions.
4. Shri Diwan, learned counsel for the petitioner has submitted that the respondent-company was formed by four friends, who became the directors of the respondent-company. It was incorporated on January 1, 2000, and it has a very small staff of only 8 persons. Shri Diwan has pointed out that the petitioner holds 50 per cent. of the equity and the remaining 50 per cent. equity is held by the other three directors of the respondent-company. All the four directors were the first directors of the company and they continued to be the only directors, who had subscribed to the memorandum and articles of association. According to learned counsel, from the very smallness of the company it was indeed a quasi-partnership between the petitioner and the other three directors. Shri Diwan has called this company a glorified partnership. According to learned counsel, the company being only a glorified partnership, the principles of dissolution of a partnership firm should be applied to the present case of winding up of the company of four directors, who have been more or less partners of the business. Shri Diwan has laid great emphasis on the ground that there is a total loss of mutual confidence and a state of irreconcilable differences between the petitioner on the one hand and the three directors on the other hand. The petitioner has alleged lack of probity and good faith in the conduct of the affairs of the company by the other three directors. According to learned counsel, mutual faith, trust and friendship were the foundation for the four directors who came together to build a house for commercial venture in the shape of the respondent-company. All the four were knit together by the personal bond of friendship. Shri Diwan has vehemently submitted that the very same point of personal relationship is destroyed and there is mutual loss of faith, trust and confidence on both the sides. There was an agreement and understanding amongst the four directors that the respondent-directors would be in charge of the management and the petitioner would not participate in the management of the company. Shri Diwan has enumerated the reasons for the petitioner to lose faith, trust and confidence in the other directors who were in charge of the management of the company. According to learned counsel, the respondents did not convene meetings of the board of directors, they did not send notices of these meetings to the petitioner nor did they communicate the minutes of the meetings held by the company. According to the petitioner, even the minutes books of the meetings of the general body and the board of directors were not maintained in accordance with the statutory provisions under Sections 193, 285 and 286 of the Act. Shri Diwan has criticised the respondent-directors for having violated the mandatory provisions of the Act in respect of holding of the meeting and also in respect of maintenance of proper minutes. Learned counsel has pointed out that the so called minutes shown to be the minutes of the meetings were only loose sheets and they were not as per the rules in a bound register maintained for recording of the minutes of the meeting. Shri Diwan has submitted that all the resolutions passed by the respondent-company without sending any notices to the petitioner were not legal and valid. Shri Diwan has made a very serious allegation against the respondents-directors that they were siphoning off the funds of the company and were indulging in wrongful business dealings. Learned counsel has pointed out that from the unaudited accounts of the company it was clear that there were share trading losses to the tune of Rs. 16,37,591 which ought not to have been incurred as the company was meant to derive its income from brokerage and it was not supposed to indulge in trading of shares. He has further pointed out that there were wrong deal losses sustained by the company to the tune of Rs. 11,62,471 which were attributable to the neglect on the part of the directors. Learned counsel further points out that huge amounts to the tune of Rs. 10,72,579 were paid as professional fees which according to him were disproportionate and unjustified. He has further pointed out that the directors have sold their own cars to the company and that they have increased their personal salary to Rs. 12 lakhs per annum each, behind the back of the petitioner. Shri Diwan has made one more serious allegation against the respondent-directors that they had misused the documents and had fabricated the documents and that his resignation was typed on the blank papers which were taken from him under the guise of using the same for business purposes.
5. It further appears that both the sides had a mutual understanding arrived at after discussion which was finally reduced to an agreement dated February 23, 2001. The gist of the agreement appears to be that the respondent-directors had agreed to purchase the shares of the petitioner for Rs. 2.25 crores. The grievance made by Shri Diwan is that the respondent-directors have refused to honour their commitment in the said written agreement which was signed by both the parties and had also appointed an escrow agent, Shri Rajen Gandhi, a chartered accountant. According to learned counsel, his client had agreed to sell his shares for Rs. 2.25 crores as per the mutual agreement which was finally required to be cancelled and annulled as the respondents-directors did not honour their commitment. Shri Diwan has further pointed out that his client was agreeable to any mode of valuation of the shares provided in the articles of association. Finally Shri Diwan has reiterated his offer to voluntarily go out of the company in accordance with the agreement dated February 23, 2001, if his client is paid the agreed sum of Rs. 2.25 crores. Shri Diwan has emphasized the fact that the petitioner had invested Rs. 3 crores and was entitled to get back more than that amount of investment. In the aforesaid circumstances, according to learned counsel, it would be just and equitable to order winding up of the respondent-company applying the principles of dissolution of partnership as there was lack of probity on the part of the respondent and consequently there is complete loss of mutual confidence and irreconcilable differences between the petitioner on the one hand and the respondent-directors on the other hand.
6. Shri Dwarkadas, the learned senior counsel for the respondents has in his usual vehement way very strongly resisted any order of winding up of the respondent-company which is a profit making running concern. According to learned counsel, the petitioner has an alternative remedy of approaching the Company Law Board with his grievance of oppression and mismanagement. It is the Company Law Board which is the forum under Sections 397 and 398 of the Act which would consider all the facts and circumstances of the matter and would decide the truth or otherwise in the allegations made by the petitioner. Shri Dwarkadas has pointed out Section 443(2) of the Act to stress his submission that the petition should be dismissed as contemplated by the said provision. According to learned counsel, all the allegations made against the respondent-directors are false and baseless. According to him, the company court cannot investigate into the allegations of oppression and mismanagement in the affairs of the company. Shri Dwarkadas has accused the petitioner of suppression of material facts and in particular the written agreement dated February 23, 2001, which was not specifically referred to in the petition. Shri Dwarkadas has pointed out that the petitioner was an investor and was never interested in the working of the company. He had traded through the company and was never looking after the day-to-day management of the company while the respondent-directors are the professionals and are managing the affairs of the company. The petitioner is not even an authorised signatory in any of the bank accounts or otherwise. Learned counsel has completely disagreed with the submissions of Shri Dwarkadas that the respondent-company was a glorified partnership firm of friends. According to learned counsel, it was pure and simple commercial venture between the petitioner and the other three directors. Learned counsel has submitted that there was absolutely no evidence to prove oppression and mismanagement. It was pointed out by learned counsel that the petitioner was issued all the notices of the meetings of the board of directors as also the annual general meeting. He has also pointed out that there was absolutely no manipulation or siphoning off of the funds and that the company was making good profits and it was functioning strictly in accordance with the provisions of the Act. He has replied verbatim to each and every allegation made on behalf of the petitioner. He has seriously criticized the petitioner for making very wild allegations against the directors that the petitioner had given blank signed letters which were misused by them, one of such letters being the alleged resignation by the petitioner as a director from the company. Shri Dwarkadas has pointed out from all the letters purportedly fabricated that they were duly typed and signed by the petitioner on his own letter head and there was absolutely no fabrication of the letters. Shri Dwarkadas has pointed out contradictory pleadings and also suppression of facts and false denial of facts by the petitioner. It was submitted by learned counsel that mismanagement and misconduct by themselves were not sufficient for an order of winding up u/s 433(f) on the just and equitable ground and that the same can be redressed by the Company Law Board u/s 402 of the Act. According to learned counsel, the petitioner was acting unreasonably in not seeking to pursue the remedy available under Sections 397 and 398. Learned counsel reiterated the position that the winding up petition is of the last resort and cannot be entertained when alternative remedies are available. Shri Dwarkadas submitted that the Company Law Board has wide powers to investigate into the allegations of oppression and mismanagement. Learned counsel has relied on the case-law as under :
"(I) Suppression of material facts :
(a) One who comes to court, must come with clean hands. Property grabbers, tax-evaders, bank-loan dodgers and other unscrupulous persons from all walks of life find the court process a convenient lever to retain the illegal gains indefinitely ... A person whose case is based on falsehood, has no right to approach the court. He can be summarily thrown out at any stage of the litigation.
(II) Principles of dissolution in cases of glorified partnership :
1. The principles of dissolution of partnership cannot be liberally invoked when it is agreed between the members that a particular member would be excluded from the management of the company.
2. Where the articles of association neither impliedly nor remotely spell out that group representation is the basis of composition of the board of directors it is a mitigating factor against the petitioner who contends the company as a glorified partnership.
Vijaykumar S. Thakur v. Thakur Savdekar and Co. Ltd. (unreported judgment H. C. O. O. C. J. Co. Petition No. 259 of 1992) (Bom).
3. When the promoters of a company, elect to avail of the advantages of forming a limited company, the submission that a limited company should be treated as a quasi-partnership should not be easily accepted.
(III) Alternative remedy and winding up :
1. When remedies are provided by the statute for matters concerning the management and running of a company, the extreme and irretrievable step of winding up must be resorted to only in very compelling circumstances.
2. On the ground of reduction of capital, mismanagement and oppression the petitioner can invoke the jurisdiction of the Company Law Board u/s 397 and can file a civil suit for seeking relief.
3. On the basis on a bald allegation, it is not permissible for the court to exercise the discretion vested in it u/s 433(f) of the Act. The just and equitable principle cannot be used as an instrument to wind up a company on mere allegations.
Gadadhar Dixit v. Utkal Flour Mills (P.) Ltd. [1989] 66 Comp Cas 188 (Ori) .
4. The remedy u/s 433(f) of the Companies Act, 1956, based on the just and equitable clause is not to be read as being ejusdem generis with the preceding 5 clauses.
5. 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 interest of the company.
6. Section 225(2) of the 1948 Companies Act contemplated the making of a winding up order u/s 226 only if the continuance of the company would cause the petitioner an injustice which could not be remedied by any other step reasonably open to him.
Re a Company (Vinelott J.) [1983] 2 All ER 854
Though a party had failed to make out a case of oppression, the court had power to do substantial justice between the parties u/s 397 of the Companies Act.
7. In those circumstances learned counsel prays for dismissal of the petition with exemplary costs.
8. The facts and events summarised hereinabove and stated by both the parties in their pleadings leave no manner of doubt in my mind that the relations between the petitioner on the one hand and the three directors on the other hand have lost the basis of mutual trust and confidence which is the foundation for every relation in life more so in business life. It may be a partnership or it may be small limited company like the present one. A very crucial fact which cannot be forgotten in the present case is that on February 23, 2001, both sides had signed an agreement to part company with each other. Both had agreed to purchase and sale of the petitioner''s shares in the company for a sum of Rs. 2.25 crores. Even this factor would speak for itself that the relationship has mutually severed. It is unfortunate that the agreement was cancelled and annulled finally. From the agreement which is brought on record by the respondents it is clear that the petitioner had agreed to sell and transfer his shares in the company for a sum of Rs. 2.25 crores to the respondents, who had agreed to purchase the said shares for the said agreed amount from the petitioner. Pursuant to the said agreement both the parties had appointed their mutual acceptable escrow agent Shri Rajen Gandhi with whom both of them had kept the shares with the transfer forms and the cheques for the value of the shares. Had the said agreement been implemented nothing would have survived. The allegations made by the petitioner in the petition appear to me as a case tried to be pleaded for just and equitable relief of winding up of the petition. Prior to the signing of the said agreement there was nothing on record to substantiate any of these allegations made by the petitioner in the petition. There was no complaint or grievance made by him in respect of the holding of meetings, the absence of notice, absence of minutes, siphoning off of funds by the directors and the allegations of monetary mismanagement. All these allegations appear to have been made for the first time in the petition. One thing is very clear that the petitioner was stationed at Hyderabad and could not participate in the day-to-day business affairs of the company which was looked after by the other three directors. The petitioner was only a sleeping director, his status therefore in reality appears to be that of an investor of Rs. 3 crores in the venture of the company which is looked after by the other three directors. Prima facie, I am not very much satisfied with the allegations made by the petitioner about the oppression and mismanagement of the affairs of the company. There is not even a single concrete instance of oppression of the petitioner by the three directors. Apart from making such a bald allegation in the petition for the first time there is absolutely no material to substantiate the charge of oppression by the other three directors. There might be some irregularities in the maintenance of the minutes and some such business transactions of the company. All such allegations even cumulatively do not make out a case for the winding up of the respondent-company. I do not find any just and equitable ground for winding up of the respondent-company on the basis of the aforesaid allegation made by the petitioner. Had he been really serious about these allegations there would have been cogent material to support such allegations. There is hardly any material before me to conclude that there is a prima facie case for admission of the petition u/s 433(f). All these allegations require deeper investigation under Sections 397, 398 read with Section 402. The Company Law Board can certainly consider the agreement dated February 23, 2001, in the context of its powers u/s 402(f), (g). Section 443(2) of the Act is very clear to restrict the jurisdiction of this court u/s 439. Though the petitioner has an alternative and efficacious remedy available under Sections 397 and 398 he has been acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. The Company Law Board can investigate into the allegations made by the petitioner. The Company Law Board can further exercise its powers u/s 402 in the context of the agreement dated February 23, 2001, entered into by the parties but cancelled and annulled by them subsequently.
9. The Supreme Court has analysed the Section 397(2) on the case of
"Section 397(2) of the Act provides that an order could be made on an application made under Sub-section (1) if the court is of the opinion--(1) that the company''s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members, (2) that the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up, and (3) that the winding up order would unfairly prejudice the applicants. No case appears to have been made out that the company''s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members. Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. In order to be successful on this ground, the petitioners have to make out a case for winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up on just and equitable grounds, no relief can be granted to the petitioners. On the other hand the party resisting the winding up can demonstrate that there are neither just nor equitable grounds for winding up and an order for winding up would be unjust and unfair to them. On these tests, the Division Bench examined the matter before it."
10. In my opinion there is nothing on record to conclude that the company''s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to the petitioner. Barring a minor grievance of non-receipt of notices and the manner of maintenance of the minutes book there is no allegation or material to point out oppressive conduct of the other directors towards the petitioner. I do not find any other facts to exercise the discretionary jurisdiction to order winding up of the running company on the just and equitable ground. The respondents have sufficiently demonstrated that there are no just and equitable grounds for the winding up of the company. While confirming the order of the Division Bench of the High Court in the above referred judgement the Supreme Court has observed as under in para. 11 (page 497) :
"The last and the most important point urged is in regard to continuation of directorship of the first petitioner. The first petitioner joined the company in or about 1971 and he is a director. It was noticed that the last board meeting which he appears to have attended was held on August 19, 1995, but apparently he did not thereafter attend the meeting of November 16, 1985. Thereafter there was no material to show that he went to the corporate office or attended any board meeting. Petitioner No. 1 pleaded that the respondents could not have treated him as having ceased to be a director in terms of Section 282(1)(g) of the Act. Form 32 had been filed by the company with the Registrar of Companies on January 15, 1988, showing that petitioner No. 1 had ceased to be a director with effect from December 21, 1987, and since then it is maintained throughout that petitioner No. 1 ceased to be in the office of the director of the company. The Division Bench noticed that the position that petitioner No. 1 ceased to be a director is seriously disputed and the Division Bench ultimately concluded that the termination of directorship would not entitle such person to ask for winding up on just and equitable grounds inasmuch as there is an appropriate remedy by way of company suit which can give him full relief if such action had been taken by the company on inadequate ground. The Division Bench found that if a director even if illegally terminated cannot bring his grievance as to termination to winding up the company for that single and isolated act, even if it was doing good business and even if the director could obtain each and every adequate relief in a suit in a court."
11. It would be open to the petitioner to approach the Company Law Board for appropriate reliefs under Sections 397, 398 read with Section 402.
12. Considering all the facts and circumstances I do not find any substance in the petition deserving admission. The petition, therefore, is dismissed with costs which is quantified at Rs. 5,000.
