ORDER
B.C. Mitra, J.
1. Sulekha Works Ltd. (hereinafter, referred to as the (Company) is a public Company which was incorporated in 1946. The objects of the Company inter alia are the manufacture of ink and allied products. The Company was promoted by the members of a family (hereinafter referred to as the Maitras) and four outsiders. A Private Company, viz., Maitra Brothers and Co. Ltd. was and still is the Managing Agent of the Company. Sankaracharyya Maitra was the Managing Director of the Managing Agency Company and as such he was and is ex officio Director of the Company. He became the ex Offico Director in 1946 and is still such a Director of the Company.
2. The Company was started with a paid up capital of Rs. 12,000/- only. With this small capital the Company carried on business in a small way until 1951, from which year the volume of its business showed a phenomenal rise. The balance sheets from 1951 to 1961 disclose remarkable progress in the prosperity of the Company, The, gross sales of the Company from year to year, set out below will give a true picture of the Company's progress:
YearGross Sale.
1950Rs. 1,16,818/-1951Rs. 3,06,708/-1952Rs. 4,80,968/-1953Rs. 7,75,095/-1954Rs. 10,37,457/-1955Rs. 15,35,533/-1956Rs. 19,80,637/-1957Rs. 22,59,822/-1958Rs. 27,18,412/-1959Rs. 33,98,512/-1960Rs. 37,41,909/-1961Rs. 42,00,000/-
The above figures are a clear indication of the progressive rise in the Company's prosperity. The balance sheets show that in 1952 the paid up capital of the Company was Rs. 1,09,370/- and in 1960 it was Rs. 3,23,000/-.
3. The present application arises out of a winding up petition presented on July 25, 1962 by one Amar Nath Sarma who is a contributory and a Director of the Company. The petition was admitted on the same day by S. P. Mitra, J. and various interim orders were made, to which I will refer later on. On March 5, 1963, an order was made directing inter alia usual advertisements in the Calcutta Gazette and two newspapers, but such advertisements were not to be issued till March 11, 1963. On the next day this application was moved on behalf of the Company for an order for dismissal of the winding up petition, an order recalling or setting aside the orders for advertisements made on March 5, 1963, stay of all further proceedings including publication of advertisement of the winding up petition and for other orders.
4. In order to understand the rival contentions of the parties in the winding up petition and in the present application, it is necessary to go into the activities of the parties during a few previous years.
5. The Maitras promoted a Private Company under the name of Bengal Sales Agency Private Ltd. (hereinafter referred to as the Agency Company), which became the Selling Agent of the Company's products. One Sachindra Narayan Guha, a Director of the Company, became a Director of the Agency Company and was looking after its affairs. Disputes arose among the Directors of the Agency Company and on or about June 7, 1961 the Agency Company filed a suit against Guha. This suit caused a chain reaction and sparked off serious disputes among the Directors of the Company, some of whom were also Directors in the Agency Company.
6. The immediate result of the suit filed against Guha was that on June 20, 1961 Guha presented a petition for winding up the Company. This petition was admitted and various ad interim orders were made by S. P. Mitra, J. on the winding up petition. In this petition numerous charges were made against the Directors of the Company, among whom Sarma is one. Various charges were also made against the Managing Agent.
7. The dispute with Guha was settled; the substance of the settlement was an exchange of shares between Guha and the Maitras. This exchange of shares was effected with a view to give Guha sole control over the Agency Company and terminate his interest in the Company, Guha transferred his holding of shares in the Company to the Maitras and their nominees, who on their turn transferred their holding of shares in the Agency Company to Guha. The result of the mutual exchange of shares was that Guha ceased to have anything further to do with the Company and the Maitras ceased to have anything further: to do with the Agency Company. The transfer of shares by the parties was approved at a Board meeting of the Company held on October 3, 1961. Sarma was the Chairman of this meeting. This meeting, besides approving other transfers, approved the transfer of one hundred shares from one Nawkari Chatterjee to Sarma. The importance of this transfer is that, it has been urged on behalf of the Company, that Sarma was-acquiring further shares in the Company having full knowledge of the serious charges made by Guha in his winding up petition.
8. It was contended by Mr. Gouri Mitter, learned Counsel for the Company, that the immediate cause for Sarma's presenting the winding up petition was some dispute with the Company regarding publicity business of the Company which was previously done exclusively by the Hindusthan Publicity Society, of which Sarma is the proprietor. It is alleged that the entire publicity business of the Company used to be done by Sarma; the volume of business having been reduced though not entirely stopped, Sarma presented the winding; up petition with a view to put pressure on the Company to realise the ulterior object of compelling the Company to entrust a larger share of its publicity business to Sarma. I must at once point out that there is no evidence as to the volume of publicity business done by Sarma previously and also of the measure of reduction in such business. But at the same time, I should point out, that there may be some substance in this allegation as it is difficult to find an explanation for Sarma's presenting the winding up petition in the circumstances hereinafter stated.
9. Before going any further I should note that the steady increase in the volume of the Company's business and its prosperity was unmistakably reflected in the dividend declared by the Company. In 1951 the Company paid a dividend of 5 per cent on ordinary shares, in 1952 the dividend was 6 per cent in 1953 and 1954 it was 7 per cent. in 1955 it was 8 per cent. in 1956, 1957 and 1958 it was 10 per cent; up to this year the dividend was paid free of income tax. In 1959 and 1960 it was 121/2 per cent but subject to tax. The shareholders of the Company, therefore, participated in and fully enjoyed and were enjoying the benefits of the Company's prosperity until the winding up petition was presented by Sarma.
10. For the purpose of further expansion and development of the Company's activities, an agreement was entered into between the Company and the West Bengal Financial Corporation, under which the latter agreed to advance a loan of Rs. 4,00,000/- to the company. The said Corporation has already advanced to the Company a sum of Rs. 2,00,000/- and was ready and willing to advance the balance of Rs. 2,00,000/-. But the advance was withheld owing to the pendency of the winding up petition against the company. It is alleged by the Company that the object of Sarma was to prevent this further sum of Rs. 2,00,000/- from coming into the hands of the company for expansion and development work.
11. Under the terms of the loan agreement with the West Bengal Financial Corporation, it has the right to nominate a Director on the Board on the Company and also the right to inspect the company's books. The Corporation has nominated a Director who has been attending all the meetings of the Board of Directors of the Company. It is urged on behalf of the company that this nominee Director of the Corporation, who has been regularly attending the Board meetings of the company has raised no objection to the manner or method of the Company's business administration or to the manner and method in which books are maintained.
12. The Managing Agency agreement commenced from 1946. Before the termination of the agreement the Board of Directors, at its meeting on January 6, 1960, which was attended by Sarma, recorded an appreciation of the meritorious service of the Managing Agents and recommended that the approval of the Central Government, and the shareholders be sought for re-appointment of the Managing Agent, as such re-appointment would be beneficial to the Company. By reason of the operation of Section 339 of the Companies Act, 1956 the Managing Agency agreement was due to come to an end on August 16, 1960. At a meeting of the Board held on February 18, 1960 which also was attended by Sarma, a resolution was passed unanimously for re-appointment of the Managing Agent on the existing remuneration. The Board recommended re-appointment for a term of ten years but the Central Government sanctioned the re-appointment for five years only. This matter is of importance, because the charges in the winding up petition are mostly against the Managing Agent; the nature of the charges being mismanagement, misappropriation, irregularities in management of the Company's affairs and violation of provisions of law. It was emphasised by learned counsel for the Company that far from condemning the Managing Agent, of censuring it for its alleged misdeeds, Sarma was a party to the resolution which recorded appreciation by the Board, of the meritorious service rendered by the Managing Agent; Sarma was also a party to the resolution by which the Managing Agent was re-appointed for a further term of ten years on nearly the same terms and conditions regarding remuneration.
13. There is one other matter to which reference should be made at this stage. After the settlement of the dispute between the Company and Guha, the latter did not proceed with his winding up petition but one Nritya Gopal Saha, another contributory was substituted in the place of Guha in the winding up petition. The substituted petitioner introduced certain new charges in his winding up petition. Saha died on September 6, 1961 and thereafter one Paresh Chandra Ray applied for being substituted in the place of Saha, But this application was not proceeded with.
14. It is in the background of the events mentioned above that Sarma presented the winding up petition out of which this application arises. As this application is for dismissal of the winding up petition and for stay of all further proceedings, it is necessary to indicate the nature of the charges made in the petition. The principal charges in the winding up petition are set out below:--
1. The Directors of the Company are under complete control of the Managing Agent and have no voice in the management of the Company's affairs.
2. The Maitras hold the majority of the shares of the Agency Company which was promoted, to draw the margin of profits on sales of the Company's products--There are manipulation of accounts which will be revealed if the ledgers of the company and the Agency company are compared with the bills drawn by the Agency company.
3. The Managing Agent and the Directors belonging to its group are guilty of wrongful, fraudulent and illegal acts --They are grossly mismanaging the affairs of the Company.
4. The Managing Agent is taking away huge sums of money from the Company's funds in violation of law and by improper, fraudulent means.
5. If affairs of the company were properly and honestly managed, larger profits would have been made.
6. Company had large possibilities--Business of the Company was developing from year to year--The Managing Agent and Directors have retarded the Company's progress by acts of mismanagement.
7. Managing Agent and its group have acquired large number of shares by adjustment, against commission on fictitious sale of shares.
8. Members of the Managing Agency Company own land adjoining the company's factory--A building has been erected on the land out of company's funds in 1954 and 1955--Relevant cash books and vouchers have been secreted--Company paying rent, of Rs. 500/- per month to the members of the Managing Agency Company.
9. In 1959 Company maintained a cash balance between Rs. 10,000/- and Rs. 45,000/-, while series of cheques issued by the Company to meet trade liabilities were dishonoured.
10. In spite of heavy cash balance, Company failed to pay income tax dues and paid penalty of Rs. 500/- in 1959.
11. The Company borrowed Rs. 10,000/- from a party--the money so borrowed was misappropriated by the Managing Agent--Debit and credit entries regarding the loan were made on 31-12-59 but interest on the loan amounting to Rs. 700/- was paid by the Company.
12. Company borrowed Rs. 5,000/- from another party--Amount paid back to the party on 14-11-60--Interest paid by Company and false journal entries made--The party's loan account was debited with Rs. 4,000/- and the same amount was credited to calls in arrear account of the auditor.
13. Managing Agent withheld payment of bonus declared to workers--One month's bonus for 1955 paid in 1960 after a threat of strike.
14. False liabilities of the Company created by the Managing Agent.
15. Default in holding Annual General Meeting and filing of Balance Sheets.
16. Proceedings taken against Directors by the Registrar for default in filing accounts--Directors convicted and fined Rs. 50/-
17. Managing Agent obtained loan on two hundis of Rs. 5000/- each--The money borrowed was used by the Managing Agent for its own purposes but the loans were entered into the books of the Company.
18. Default in holding Annual General Meeting for passing accounts for 1959--Directors were suspicious and A. G. Banerjee was appointed to scrutinise accounts.
19. A. G. Banerjee made a report which showed an alarming state of affairs.
20. Managing Agent kept large sums of money in its hands although the Company maintained several bank accounts.
21. Cash in hand checked on 10-3-61 by the petitioner and P. K. Majumdar and found to be short according to entries in the cash book by Rs. 18,000/- --I. O. U. slips produced to make cash in hand agree with entries in the cash book--Shortage of cash reported to Registrar, Joint Stock Companies and Deputy Commissioner of Police, Enforcement Branch.
22. Directors signed false balance sheet for 1959--Auditors certified the same subject to remarks which have not been explained by Managing Agent.
23. From the balance sheet for 1959 it appears that the Company did not make over provident fund moneys to the Trustees within time.
24. N. G. Maitra received advances from the Company in contravention of Sections 295 and 369 of the Act.
25. Vouchers for disbursement of Rs. 77,559/- not made available to Auditors.
26. The Managing Agent/Board of Directors made false statements by saying that provident fund money had been made over to Trustees.
27. Petitioner refused to sign balance sheet of the year ending 31-12-60 as there are false figures--Value of finished, goods shown at Rs. 3,25,692.08 nP. but in fact there were no stock of finished goods on 31-12-60.
28. Reports of internal auditors or managing agents not annexed to the balance sheet in which a number of items required further explanation which was not given.
29. A sum of Rs. 2,98,911.77 nP. shown as loan to Agency Company, but this was not supported by any documents to prove acceptance of the figure by the Agency Company.
30. As amount due from the Agency Company is disputed, the matter was referred to arbitration and this gives rise to suspicion that the debt due from the Agency Company has not been correctly shown.
31. The Board of Trustees of the Provident Fund did not hold meetings--At a Board meeting held in 1961 R. P. Lahiri was replaced by P. N. Nandi though Lahiri ceased to be a Director as long ago as 1956.
32. For the year ending 31-12-55 Company paid Rs. 87,000/- as income tax but in balance sheet provision made for only Rs. 51,546-10 annas--Petitioner not told how the additional sum of Rs. 35,000/- was paid by the Company--Heavy liabilities for income tax and sales tax but no provision made for the same.
33. Balance sheets for 1958, 1959 and 1960 do not represent the correct picture--Sale proceeds not credited--Provident fund not paid to trustees.
34. Managing Agent and its associates fraudulently misappropriating funds and making unlawful gains,
35. Expenditure incurred by Managing Agent and Directors is exorbitant and irregular--They failed to exercise control over such expenditure--Finances of Company misappropriated--Company reduced to insolvency.
36. Company received Rs. 2,00,000/,- as a loan from Financial Corporation--Managing Agent in contravention of the agreement utilised the money in payment of existing liabilities instead of utilising the same for expansion and development.
37. Managing Agent and Directors borrowed larger sums of money since 1956 which together with money already borrowed by the Company exceeded aggregate of paid up capital.
38. Since 1961 sales not credited in books of account but confidentially maintained by Managing Agent--Large sums misappropriated by Managing Agent.
39. The Company in breach of agreement with the Agency Company sold goods through Chinsurah Supply Agency--Petitioner made enquiries by letter but no reply sent to him.
40. No audit note regarding closing voucher file--Managing Agents and Directors misappropriated Rs. 68,000/- --False balance sheet produced showing balance at Rs. 45,000/-.
41. Workers of the Company are dissatisfied for mismanagement.
42. Proper contract register as required in law is not maintained--Particulars of contracts not entered in the register.
43. Petitioner came to learn that Guha entered into fresh agreement for selling agency of Company's products at an increased commission of 121/2%.
44. Policy of Managing Agents and Directors is fraudulent--Directors fraudulently making personal gains and gains for concerns in which, they are interested--Remuneration, allowance and commission paid to Managing Agent in violation of the Act.
45. To make illegal gains the Directors have appointed Demco as Selling Agent in U. P. at heavy commission of 121/2%.
46. Although sales increased considerably ratio of profits decreased in 1959--Accounts of the Agency Company not properly maintained.
47. Dufter Shilpa Protisthan Private Ltd., a Company under the same management was converted into a subsidiary concern by purchase of the majority of the shares--The Maitras who held the majority shares converted, their insolvent Company into a solvent one by selling their 50% shares to the Company and thereby increased the liabilities of the Company,
48. By letter dated 11-8-61 Managing Agent intimated its decision to resign--The Board considered the letter at a meeting on 11-8-61 and decided to place the matter before the general meeting in 1962 but the matter was not placed before the general meeting.
49. Managing Agent is still continuing to act as Managing Agent. . The notice calling the 15th Annual General Meeting to be held on 27-7-62 did not contain any agenda regarding resignation of Managing Agents.
50. Material information suppressed from shareholders by Managing Agent and Directors--Company's affairs carried on in fraud for benefit of Managing Agent and Directors--Copies of two letters dated 16-5-60 and 8-8-60 from H. D. Mukherjee are annexed.
15. It is to be noted that the charges mentioned above are directed against the Managing Agent and the Board of Directors of the Company. It is also to be noted that except for a few charges of fraud, all the other charges relate to acts of mismanagement or wrongful misappropriation of the Company's funds. I shall discuss the nature, character and effect of the charges made in the circumstances and in the events that have happened. But I should mention at this stage, that except for a few fresh charges made in the winding up petition, all the other charges had been made and the winding up petition made by Guha and the petition made by Nritya Gopal Saha. What is still more significant is that in some cases the charges in this winding up petition have been copied; verbatim from the petitions of either Guha or Nritya Gopal Saba.
16. The charges which are fresh, in this winding up petition and which were not made in the petition of Guha or Saha are as follows: --
1. General allegations of fraud, misappropriation and Mismanagement.
2. Dispute with Agency Company regarding moneys clue from it to the Company--Arbitrators appointed for adjudication of dispute.
3. Guha filed petition before Sub-divisional Officer, Alipore, in 1961 charging Managing Agents and Directors with breach of trust and falsification of accounts--Magistrate directed O. C., Tollygunge Police Station to take cognizance but no enquiry made.
4. Loans taken on behalf of the Company exceeded paid up capital.
5. The Agency Company has entered into a new agreement.
6. Fraudulent and oppressive policy of Managing Agent and Directors.
7. Remuneration paid to Managing Agent in excess of what can be paid under the terms of the Act.
17. The fresh charges which have been made in the winding up petition and which, were not made by either Guha or Saha in their petitions are of a minor character. All the major and important charges in this winding up petition had already been made by either Guha or Saha in their petitions.
18. The charges are directed against the Managing Agents and the Board of Directors. A very curious feature of the charges against the Directors is that the charges have been made against the Board of Directors as a whole, which included the petitioner himself, and not against individual Directors. As an active member of the Board, who never failed to attend any meeting of the Board, excepting once, the petitioner was not only closely associated with the Board, in its management of the affairs of the Company, but took leading part in the deliberations at Board meetings. He dominated the Board meetings and because of his influence he was appointed member of several sub-committees that the Board appointed from time to time, in taking policy decisions in important matters. He led the other Directors in the matter of the dispute with Guha and also in the matter of settlement of the disputes with him. He led them again in the matter of acquiring shares of Duftar Sipla Protisthan Private Ltd. He was again the leader of the Directors who decided upon a surprise spot checking of the cash balance in the Company's till and lodged complaints with the Registrar of Joint Stock Companies and the Deputy Commissioner of Police, Enforcement, for alleged shortage and misappropriation of the Company's funds. Such activities on the part of Sarma, if anything prove that he played a very important part in shaping the Company's business policy and in management of the affairs of the Company. Except for a single dissent on his part in refusing to sign the balance sheet for 1960, all the other Board resolutions were passed unanimously and there is not one single occasion when he raised his voice of protest in the deliberations of the Board. Indeed it must be said that credit in no small measure is due to him for the prosperity of the Company's business.
19. Before proceeding any further I should deal with one matter, which has considerable bearing on this application. I have already noted that the major charges in the winding up petition have been taken from the petition of Guha or Saha and in some cases the charges made in the present petition for winding up, are verbatim copies of the charges in Guha's petition. It is true that some fresh charges have been added by Sarma in his petition. But these fresh additions are made for the purpose of distinguishing this petition from the two previous petitions than for the purpose of obtaining a winding up order on them.
20. Shortly after the winding up petition was presented by Guha the Board held a meeting on July 24, 1961, Sarma was the Chairman of this meeting. The resolutions passed at the meeting are of importance for more than one reason. In the first place this meeting considered the winding up petition presented by Guha and passed a resolution relating to that matter. In the second place, this meeting also dealt with the letter of resignationfrom the Managing Agent and also passed a resolution in that matter. Regarding Guha's petitionof winding up the material portion of the resolution is as follows:
'Although the Board denies the allegationsmade in the aforesaid petition and is inclined toput a stop to such things by fighting the issue inthe Court, still from the business point of view, itis desirable to reconcile the dispute, if it is possibleto arrive at in an honourable way, so as to avoidunnecessary expenses and harassment, which arestanding in the way of smooth functioning of thebusiness and production.'
21. The above resolution was passed unanimously. No doubt Sarma as Chairman of the Board meeting took a leading part in the deliberations. The Board as a whole denied the charges made by Guha and wanted to put a stop to such winding up petitions by fighting the matter out in Court. Yet it is the same Sarma who now wants to wind up the Company on amongst others, the same charges which were made by Guha and which he so categorically and unequivocally denied, Furthermore, Sarma was so sure about the falsity and frivolousness of the charges made in Guha's petition that he subscribed to the resolution for fighting the matter in Court. The charges in Guha's petition were denied by Sarma, and such denial could only be on the ground that the charges were not maintainable either because they were false or frivolous. Yet the same charges are now sought to be relied upon in all solemnity and this Court is called upon to make an order for winding up of the Company on identical charges.
22. The other matter dealt with at the Board meeting was the letter of resignation from the Managing Agent. The Managing Agent is the main target of attack in the winding up petition. It has been submitted on behalf of the Company that the Maitras wanted to resign from the Managing Agency of the company, owing to the charges made against the Managing Agent by Guha in his winding up petition. No doubt that must have been the reason for the proposed resignation by the Managing Agent by its letter of July 24, 1961. It is in this background that the Board at the same meeting passed a resolution the material portion of which is as follows:
'The Board appreciates the efficient conducting of the business of the Managing Agents which has brought the Company to the foremost manufacturers of ink in India out of practically nothingness, and regrets to learn that Messrs. Maitra Brothers and Co. (P) Ltd. is now prepared to resign from the Managing Agency. The Board decides to defer consideration of the matter until its next meeting.'
23. That is what Sarma thought of the manner in which the Managing Agent performed its duty, Sarma did not stint words in congratulating the Managing Agent for its meritorious service to the Company. Yet he now wants this Court to believe and act upon his allegations that the same Managing Agent is guilty of fraud, misappropriation and misapplication of the Company's funds. I shall refer to this matter later on in this judgment.
24. This application being for stay of further proceedings or dismissal of the winding up petition in exercise of the Court's inherent powers, on the ground that the application is an abuse of process of Court, it is necessary for me to go into the merits of the charges, for the purpose of determining if the petition based on those charges is an abuse of the process of Court.
25. One of the charges in the petition is in regard to the balance sheets for the years 1958, 1959 and 1960. The allegation is that these balance, sheets do not represent the correct picture. The ground for the allegation is that the sale proceeds of the Company's products were not fully credited in the accounts, the provident fund moneys have not been paid to the trustees, large sums of moneys were diverted or dissipated from the Company's funds to the detriment of the Company's interest. It is to be noted that the charges are singularly devoid of any particulars. No particulars have been furnished of the amounts which have not been credited in the accounts, or of the sales in respect of which the charges are made, or the dates when the sales are alleged to have taken place. The same applies to non-payment of the provident) fund moneys to the trustees and also diversion and dissipation of the Company's funds,
26. Sarma was a Director from 1956 and he never raised the questions either at the Board meetings or at the General meetings of the Company, that the balance sheets are being improperly prepared and do not represent the correct picture of the Company's affairs. If the grievance was at all genuine and if there was any substance in the allegation, one would expect that Sarma would have raised this question at the meeting of the Board of Directors. As a member of the Board it was open to him and in fact it was his duty, to point out the irregularities of which he now complains. One would again expect him to raise this question' at the Annual General Meetings of the Company or at least to write to the Managing Agent in the matter. But nothing was done. The Balance Sheets of which he now complains were approved by him excepting the one of 1960, at the Board meetings. The General Meetings at which the accounts were passed, were called under the direction of the Board, of which he was a member, the Directors' report to the share-holders were again approved by him and the Directors' answers to the Auditors' comments were also approved, by him at Board meetings.
27. The balance sheet for the year 1958 was placed at a Board meeting held on January 6, 1960. Sarma attended this meeting and he and Guha wanted some time to examine the accounts. They were supplied with copies of accounts for the purpose. At two other Board meetings held on January 8, 1960 and January 12, 1960 the discussions regarding the balance sheet for 1958 were continued. At the Board meeting held on February 18, 1960 which was again attended by Sarma, the balance sheet and profit and loss account for the year 1958 were approved unanimously and it was resolved that the accounts be placed at the 13th Annual General Meeting of the share-holders for their approval and adoption. Not only that, Sarma also signed the Directors' report, the balance sheet and profit and loss account. The Annual General Meeting of the share-holders was held on March 30, 1960 and the balance sheet and the profit and loss account were unanimously adopted by the share-holders.
28. Turning now to the balance sheet for the year 1959, this balance sheet was placed for approval at a Board meeting on February 24, 1961. Sarma attended this meeting. The Board appointed A. G. Banerjee to examine the accounts of the Company and advise the Board on the balance sheet and profit and loss account. The discussion by the Board on the accounts continued for sometime. As many as nine Board Meetings were held to discuss the account for 1959. At the Board meeting held on March 15, 1961 the accounts for the year 1959 were unanimously approved and so also were the replies of the Directors to the Auditors' comments on the accounts. Curiously enough, although this Board meeting was requisitioned by three Directors, one of whom was Sarma, he did not attend the Board meeting. But at the Board meeting held on April 6, 1961, which was attended by Sarma, the draft report from the Auditors on the accounts for the year 1959 which were approved at the previous Board meeting on March 15, 1961, was read and a resolution was passed unanimously approving the Directors' replies to the Auditors' remarks on the accounts for the year 1959. This meeting is important for another reason. A. G. Banerjee was appointed to examine the accounts and advise the Board on the balance sheet for the year 1959. The appointment of A. G. Banerjee was proposed by P. K. Majumdar and was seconded by Sarma at the Board meeting held on February 24, 1961. But at the Board meeting held on April 6, 1961 a resolution was unanimously passed to the effect that the report from A. G. Banerjee is not necessary any longer and he was to be informed accordingly.
29. The proceedings of the several Board meetings which discussed the balance sheet for the year 1959, the appointment of an external auditor to examine the accounts and the subsequent resolution dispensing with the report from the external auditor, make it quite plain that Sarma, among other Directors, went into the accounts for the year 1959 very deeply and it was after nine meetings of the Board, that the balance sheet and profit and loss accounts for the year 1959 were approved by the Board. Having had all these opportunities to scrutinise the accounts and discuss the same, Sarma has now made a charge in the winding up petition that the accounts for the year 1959 are false. These accounts were passed unanimously at the Annual General Meeting of the Company held on November 8, 1961 and Sarma himself was the Chairman of this meeting. He did not raise a single question at this meeting, about the correctness of the Balance Sheet. Having done all this he now wants the Court to wind up the Company on a reckless charge that the accounts for the year 1959 are false and this Court is now invited to act upon this allegation.
30. The draft balance sheet and profit and loss account for the year 1960 were discussed at a Board meeting held on June 5, 1962. The Board by a majority approved the draft balance sheet and the profit and loss account, but Sarma dissented. At the next meeting of the Board held on June 16, 1962, which was attended by Sarma, the report from the Auditors on the accounts for the year 1960 was read and a resolution was passed unanimously that the replies of the Directors to the Auditors' comments on the accounts be approved. The draft Directors' report for the year 1960 was also unanimously approved. The accounts for the year 1960 were placed at the Annual General meeting held on July 27, 1962. The accounts were passed at the general meeting by a majority of 56 to 6. Sarma and his group, having six votes, voted against the resolution adopting the accounts. It is curious that Sarma who was a party to the Board resolution passed on June 16, 1962, approving the replies of the Directors to the Auditors' comments opposed the passing of the accounts at the Annual General Meeting. But the reason for the opposition is not far to seek. By the time the Annual General Meeting was held on July 27, 1962, Sarma had already come out in the open, and had presented the petition for winding up on July 25, 1962, and after presenting the petition he asked for an injunction restraining the holding of the Annual General Meeting on July 27, 1962. The meeting, however, was not restrained and therefore, he did what he could, namely, oppose the accounts.
31. The charge that the 1960 balance sheet is false is based on the allegation that the value of finished goods has been shown in the balance sheet to be Rs. 3,25,692.08 nP. But according to Sarma, there were no stock: of finished goods on December 31, 1960. It is to be noted that no particulars have been given as to how Sarma came to know that on December 31, 1960 the stock of finished goods was nil. The Auditors of the Company who certified the balance sheet, have checked the stock register, and it is after such checking that the values of finished goods have been mentioned in the balance sheet. Sarma wants the Court to reject the Auditors' certificate regarding the value of the stock of finished goods has been mentioned in the balance that there was no such stock. The Company maintains a stock register and if there was any substance in Sarma's allegations, he would have referred to the stock register from which it would be easy to ascertain if there was no stock of finished goods. But he has not relied on or referred to the Company's stock register. Then again he would certainly have raised this question at the Board meetings if there was any truth in his allegation or he would have written to the Managing Agent pointing out that the statement in the balance sheet does not agree with the stock register of the company. But he did nothing of the kind. On the other hand, at the Board meeting on June 16, 1962 he was party to a resolution which approved the replies of the Directors to the Auditors' comments.
32. There is another matter to which reference should be made in this connection. The Board meeting held on June 16, 1962 passed a resolution authorising the Managing Agent to issue notices for the 15th Annual General Meeting; the draft of the notice wag placed before the Board and was approved. Sarma who attended the Board meeting was fully aware that the Annual General Meeting was going to be held on July 27, 1962. Yet he waited for presenting his winding up petition and praying for an injunction to restrain the holding of the Annual General Meeting, until only two days before the meeting was due to be held, i.e., July 25, 1962, when he presented the winding up petition. The matter does not end here. In paragraph 51 of his petition an attempt has been made by him to mislead the Court into believing that he came to know of the Annual General Meeting proposed to be held on July 27, 1962 only on July 4, 1962 when he received the notice of the meeting. He also alleges that a printed report and the accounts were received by him only on July 4, 1962. Quite plainly this is an attempt to induce the Court to believe that he was kept in the, dark about the accounts and the Directors' report and about the Annual General Meeting and he came to know about them for the first time on July 4, 1962. It is quite clear that he knew about the Annual General Meeting to be held on July 27, 1962 as early as June 16, 1962, when he, as a member of the Board, authorised the Managing Agent to call the General meeting. Again he as a member of the Board, at the Board meeting held on June 16, 1962 approved of the replies of the Directors to the Auditors' comment on the accounts. He has chosen to mislead the Court by making false statements and thereby inducing the Court to make interim orders on his winding up petition. No doubt he failed in his main object of stopping the Annual General Meeting but the Court was induced to make an order on deliberate suppression of his knowledge about the date of the general meeting and also about, the report. The interim order passed by the Court was that no effect was to be given to the resolutions passed at the Annual General Meeting on July 27, 1962 till disposal of the winding up petition. In my view, Sarma's conduct in deliberately making false representations in the petition solely with the object of inducing the Court to make interim orders in his winding up petition, is a very serious matter. He chooses to wait from the 16th of June 1962 when he came to know about the date of the Annual General Meeting, until the 25th July 1962, for the purpose of launching his onslaught on the Company and succeeded in inducing this Court to lend its aid in his mischievous object, on false statements deliberately made. He has procured the aid of the machinery provided by law and the jurisdiction vested in this Court in a diabolical scheme to bring the company to its knees by obtaining orders from this Court with the sole object of ruining the credit and business of the Company.
33. It is necessary to refer to the balance sheet for 1959 once again. Sarma in any event cannot complain that he blindly accepted the accounts prepared by the Managing Agent or the employees of the company and also the draft balance sheet and profit and loss accounts. As many as nine Board meetings were held, eight of which he attended, for the purpose of scrutinising the balance sheet of 1959. The Directors including Sarma, went very deeply into it and it was only then that the Board passed the draft balance sheet and profit and loss account. It is quite clear that because Sarma with the other Directors was satisfied that there was nothing wrong with the accounts, that they passed a resolution dispensing with the report of the external Auditor who was appointed to scrutinise the accounts. It will not be out of place here to mention that the charge relating to the balance sheet for 1959 is identical with the charge which was made by S. N. Guha hi his petition for winding up. Sarma along with other Directors denied this charge and all the other charges made by Guha, at the Board meeting held on July 24, 1961.
34. In a petition for winding up, the Court should not reopen the balance sheet on the bare allegation that it js false. The balance sheets had been passed at the Annual General meetings of the company and it is not for the Court in a winding up petition to make an order for the winding up of the Company on a charge that the balance sheet does not represent a true picture. More particularly in the facts of this case? no reliance should be placed on the allegations of the petitioner, who was emphatic in his denial of similar charges made by Mr. Guha in his winding up petition.
35. The next important charge is that the Company is commercially insolvent. The grounds for this charge are firstly that the company has heavy income-tax and sales tax liabilities and no provision has been made for the same. Secondly it is alleged that cheques issued by the Company have been dishonoured by non-payment and therefore, it is alleged that the Company is insolvent.
36. It is not necessary for me to repeat here what I have said earlier, regarding the prosperity of the Company. The sales have gone on increasing from year to year and the net profit has also correspondingly risen. The share-holders have been getting dividend of 121/2% until the presentation of this winding up petition and the interim, order restraining the Company from giving effect to the resolution passed at the Annual General meeting held on July 27, 1962. Nevertheless the charges of insolvency having been made, it is necessary to see if there is any substance in the charges.
37. But before going into individual charges of insolvency, it is necessary to point out that in course of the several years, during which the Company has been carrying on business, no creditor has filed a suit against the company and no decree has been passed against the company for non-payment of money due from the company. No statutory notice for non-payment of a debt has been served by any creditor for winding up the company. Indeed for a manufacturing concern like the present company, it is no small credit to say that no creditor has taken recourse to legal proceedings for recovery of a debt due to him.
38. It is contended on behalf of the company that the charge relating to non-payment of income-tax is entirely false.
It is argued for the year 1955 nothing is due from the company on account of income-tax and the entire demand has been paid. For the accounting year 1959 not amount demanded after adjustment of payment under Section 18(a) of the income-tax Act, was Rs. 65, 310.25 np. On appeal to the Appellate Assistant Commissioner this amount was reduced to Rs. 16,360.29nP. and it was fully paid by the company. For the accounting year 1957 the Company paid advance tax of Rs. 19,392.62 nP. and the) company paid on various dates Rs. 46,148.09 nP. The balance due upon assessment was found to be Rs. 653.29 nP. and this amount also has been paid by the Company. For the accounting year 1958 the Company paid advance tax of Rs. 28,936/-; the final instalment of Rs. 5,771/- has also been duly paid. For the accounting year 1959, the Company had paid advance tax of Rs. 36,532.00. The net amount demanded alter adjustment of the advance was Rs. 19, 983.00 and this amount has also been duly paid. For the accounting years 1960 and 1961 the company has paid in full the demand under Section 18(a) of the Income-tax Act and paid in each of the two years Rs. 63,175.00. The assessments for the years 1960 and 1961 have not been completed and therefore, the Company has not been able to pay its dues for these years yet.
39. The Company's case regarding payment of income-tax has not been seriously controverted by Sarma. It willbe seen, from the figures mentioned above that the Companyhas been quite regular in payment of its income-tax liabilities and there can. be no question of drawing an inferenceof insolvency on the ground that the company has not paidor has not made provision for payment of its income-taxliabilities.
40. Another charge relating to income-tax is that for the year 1955 the Company paid income-tax of Rs. 87,000/-but in the balance sheet Rs. 51546/- only was set apart for income-tax. The complaint is that the petitioner was not told from where the additional sum of Rs. 35,000/- was paid. On behalf of the company it is denied that assessment was for Rs. 87,000/- and therefore, there is no question of payment of an additional sum of Rs. 35,000/-. According to Mr. Mitter, the original assessment was Rs. 61,108.34 nP. Out of this the Company paid Rs. 47,7157- and disputed liability for the balance of Rs. 13,393.34 np. The Company preferred an appeal and this appeal was allowed in full so that its liability for the balance of Rs. 13,393.34 nP. was wiped out. It is thus clear that the allegation regarding income-tax liability for Rs. 87,000/- is entirely false and there was no basis for the same. As regards the other charge, namely that he was not told how the additional sum of Rs. 35,000/-was paid, it is to be noted that this sum was not paid at all; but assuming it was paid, as a Director he was entitled to look into the company's Books and find out for himself the source of this sum. The other Directors are under no liability in law to furnish such information to him.
41. Regarding sales, tax the position is the same. There is a vague charge that provision has not been made for payment of sates tax. The chalans relating to payment of sales tax were produced in Court and it was shown that for the year 1958 the Company paid West Bengal Sales Tax of Rs. 20,505.55 nP. and Central Sales Tax of Rs. 38,642.79 nP. For the year 1959 the Company paid West Bengal Sales Tax of Rs. 26,698.96 nP. and Central Sales Tax of Rs. 32,148.62 nP. For the year 1960 the company paid West Bengal Sales Tax of Rs. 25,554.93 nP. and Central Sales Tax of Rs. 28,753.09 nP. It was contended that the company has made and satisfied the whole of its sales tax liabilities. For the years 1958 and 1959, ex parte assessments were made by the commercial Tax Officer for sales tax, as the company failed to produce before the; authorities books of account which were in the custody of the Official Receiver, who was appointed in Guha's petition for winding up. For these two years appeals are pending. It is not a case of the company's inability to pay, but the company is bona fide aggrieved by the assessments, which were made ex parte by the taxing authorities. It was, therefore, contended that the charge relating to non-payment, of income-tax and sales tax or for not making provision for the same is absolutely frivolous as the company has fully discharged its tax liabilities. 1 have no hesitation in accepting the company's contention that it had fully discharged its liabilities for income'-tax and sales tax.
42. But assuming that the company did not pay its income-tax or sales tax liabilities would that be a ground for winding up a company on a charge of insolvency The Income Tax Act and Sales Tax Act provided a machinery for realisation of taxes and if the Company made defaults certificate proceedings would have been commenced for non payment of taxes. There is no allegation that any such proceedings have been taken against the company. Nor is there any evidence that the company is unable to pay its taxation liabilities.
43. There is another matter to which reference should be made regarding the allegations relating to the tax liabilities. Sarma is making allegations regarding matters which happened in 1955, 1957, 1958 and 1959. The petition was presented by him in 1962. From the year 1956 he has been a Director of the company. He never raised the question of income-tax or sales-tax liabilities of the company either at any of the Board meetings or Annual General meetings. Besides he has came to Court in 1962 for winding up the company relating to matters that happened in 1955, 1956, 1957, 1958 and 1959. Even if his charge was true and even if such a charge could be held to be a ground for winding up the company, the delay in making this application and the laches in his conduct would have been fatal to an application for winding up on these grounds.
44. The next charge relating to insolvency is that several cheques issued by the company were dishonoured and therefore, it was contended that the company is insolvent and should be wound up. The allegation relating to dishonour of cheques is denied by the company. It is contended by learned counsel for the company that not a single cheque remains unpaid. Sarma in his petition has furnished no particulars of the cheques, which according to him have been dishonoured. It has been stated in the affidavit in opposition on behalf of the company that on a few occasions cheques have been drawn by the company, through inadvertence, before the company's account was credited by realisation of cheques drawn in favour of the Company. But in these few cases the amount due to the parties whose cheques were dishonoured have been fully paid by the Company and there is not one single instance where the amount remains unpaid. It is contended by learned counsel for the company that the Company's business extends over the whole of India, and in some cases there have been delay in realising cheques sent from outstations. In the affidavit-in-reply filed by Sarma, in the winding up petition he sets out for the first time in Annexure B to the affidavit a list of the cheques which according to him were dishonoured. It is strange that particulars of this nature should be furnished for the first time in the affidavit-in-reply knowing fully well that the company cannot, deal with the allegations. In my view, in a winding up petition grounds and particulars which are relied upon by the petitioner must be set out. In the petition itself and not in the affidavit-in-reply. In any event the company has denied that any amount due on any cheque issued by the company remains unpaid. Furthermore not a single creditor has served notice on the company under Section 434, of the Companies Act, 1956 for nonpayment of debt. No creditor has filed a suit against the company for realisation of its dues and no decree has been passed against the company. In my view, the allegation relating to dishonour of cheques is absolutely frivolous and without any substance whatsoever.
45. There is another matter relating to the charge of dishonour of cheques. It appears from Annexure B to the affidavit-in-reply of Sarma that ail the cheques excepting one were drawn by the company in the year 1959. At this time Sarma was one of the most active Directors on the Board. If the dishonour of ceques is a matter on which his feelings are so strong, why did he not raise this question at the Board meetings which he unfailingly attended Dishonour or cheques, assuming it is true, is eminently a matter to be raised and discussed by the Board or a matter which one would expect to be raised at the Annual General Meeting of the Company. But Sarma did nothing. He never asked for any explanation, from the Managing Agent in the matter. Nor did he agitate the question at Board meetings or General meeting of the company. After all these years, he now wants the court to act on particulars of dishonour of cheques, set out for the first time in his affidavit-in-reply and make an order for winding up of the company. This indeed is strange conduct on the part of a contributory who was a Director and as such actively associated with the management of the Company's affairs throughout the material time.
46. The next charge to be dealt with is the charge that the company paid for building of structures on land belonging to the Managing Agents. The charge is that the land adjacent to the company's factory is owned by the Managing Agent, the structure was raised on the land and the cost of construction was paid out of the company's funds. The company is occupying the premises and is paying rent at Rs. 500/- per month.
47. It appears that the company desired that additions and alterations should be made to the premises which stood on the land belonging to the Managing Agent. And for this purpose a loan was granted by the Company to the Managing Agent which was repaid long ago. The construction of the structures was done by the company's engineers according to its directions; At a meeting of the Board held on March 6, 1954 the company requested the Managing Agent to construct structures on the land for its occupation. The Board passed a resolution for a loan of Rs. 12,000/- and also agreed to pay rent of Rs. 75/- per month for each floor making a total of Rs. 150/- per month for the entire premises. A resolution was passed that an agreement be entered into between the Managing Agent and the Board of Directors for this purpose. The proposal was made by S. N. Guha and seconded by R. P. Lahiri.
48. The Board meeting held on October 16, 1955 recorded by a resolution the repayment in full of the advance made by the company to the Managing Agent and also resolved to pay the increased rent of Rs. 250/- per month from July 1955. Sarma's charge is that this loan to the Managing Agent was not shown in the balance sheet of 1954. But the loan was repaid in full within December 12, 1954 and therefore assuming that the loan ought to have been shown in the balance sheet, there was nothing that could be shown as such loan. Then again at a Board meeting held on November 18, 1959, of which Sarma himself was the Chairman, a resolution was passed to the effect that company should pay a rent of Rs. 500/- per month for occupation of the premises by the company, it was recorded in the resolution, that the land and the buildings belong to the Managing Agent. Curiously enough in the affidavit-in-reply to the winding up petition filed by Sarma a strange case has been made that the land also was purchased out of the Company's funds. There is no suggestion of this charge) in the petition. He was himself the Chairman of the meeting of the Board which passed the resolution recording that both the land and the buildings belong to the Managing Agent and he now wants the Court to rely upon his allegation that the land was purchased out of company's, funds and the structures also were constructed out of the funds of the Company. It is clear that the charges relating to the construction of structures out of the company's funds have been recklessly made, without any regard for truth. Besides it is to be noted that the matters now complained of took place as early as 1955. And in November 1959 he was a party to the resolution which recorded that the Managing Agent was the owner of the land and the buildings. After all these years he wants the Court to make an order for winding up on reckless and frivolous charges relating to the ownership of the land and the buildings.
49. The next manner in the petition is a loan of Rs. 10,000/- from Madhuri Chatterjee. It appears that in June 1959 the Company borrowed Rs. 10,000/- from Madhuri Chatterjee on a hundi. It is alleged that this sum was misappropriated by the Managing Agent and the entries in the books were made on December 31, 1959 and the interest for the loan, amounting Rs. 700/-, was paid by the company.
50. It appears that this money was kept in the company's safe and was not utilised, by the company. Those in charge of making the entries in the company's books had not made the necessary entries. This omission was detected in December 1959 and the entries were made on December 31, 1959. The money was paid back to Madhuri Chatterjee and the Managing Agent was compelled to pay the interest due on the loan as the company did not utilise the money. This matter was commented upon by the Auditors in their comments in the balance sheet for 1959. The Directors in their reply to the Auditor's comment had explained the matter. The Directors' report was approved by Sarma and he signed the report. The Directors' replies to the Auditor's comments were discussed at a Board meeting held on. April 6, 1961. Sarma attended the meeting and approved of the draft replies. The accounts were passed at the Annual General Meeting of the Company held on November 8, 1961. Sarma was the Chairman of this meeting, and as Chairman he gave the explanation as to what exactly and actually had happened. The shareholders unanimously adopted and ratified the transaction. Having done all that, Sarma now complains about the matter which took plate as early as 1959 and wants the matter to be relied upon on grounds for winding up the Company. He had approved of the transaction, he had recommended to the shareholders that the Directors' explanation should be accepted by them, as a member of the Board he made no protest whatsoever. It should be noted that the Company suffered no loss at an. For this minor act of irregularity Sarma wants the Company to be wound up, after having fully condoned the same and recommended to the shareholders that there was nothing wrong in the transaction at all.
51. Of a similar natural is the charge relating to two loans of Rs. 5000/- each obtained on behalf of the Company by the Managing Agent on January 9, 1960. The entries relating to these loans were not made at the time when the loans were taken but were made later, on February 22, 1960. This matter was commented upon by the Auditors and these comments were published along with the balance sheet for 1960. The Directors' replies to the Auditors' comments are also published along with the said balance sheet.
52. It appears from the Directors' replies that the Managing Agent was made to pay the interest for the period that the money was not utilised by the company. This reply of the Directors was approved unanimously at the Board meeting held on June 16, 1962, which was attended by Sarma He had accepted and approved of the explanation offered and was quite satisfied with it. It is evident that the company had suffered no loss and the delay in entering the loan in the books of the company, is in any event, a minor irregularity. The accounts for the year 1960 were passed at the Annual General Meeting held on July 27, 1962. Sarma and five of his supporters opposed the passing of the accounts. But this opposition was not for any purpose other than that he had already moved the petition for winding up the company. And obviously he desired to utilise his opposition to the accounts, in order to lend some colour of bona fides to the charges made by him. I have no hesitation in holding that this charge is by no means a charge on which any company can be wound up on the ground that it is just and equitable to wind up the company. The matter is simply one of internal management. The share-holders approved and ratified what was done in spite of the comments of the Auditors. There was no attempt by the Directors to suppress the matters from the shareholders. The Auditors' comments were placed before the shareholders who had passed the accounts and there is an end of it,
53. The next matter to be dealt with is the surprise checking of the cash by Sarma and another Director, P.K. Majumdar on March 15, 1961. It is not clear as to for what purpose this surprise cash checking was done by Sarma. But it is evident that he was taking a very deep interest in the affairs of the Company's day-to-day administration. It is alleged in the petition that according to the cash book a balance of Rs 18,000/- should have been in the till of the company. They checked up the cash in hand and found that there was a shortage. Promptly they wrote to the Registrar of Joint Stock Companies and forwarded a copy thereof to the Deputy Commissioner of Police, Enforcement Branch. This indeed is a very strange conduct on the part of a Director who had been closely associated with the Managing Agent and his fellow Directors on the Board. He had eulogized and commended the services of the Managing Agent in no uncertain terms. Yet because he thought that there was a shortage in the cash in hand, he promptly complains in writing to the Registrar and the Enforcement Branch to seek re- dress, instead of doing what a man should have done, if his intentions were at all bona fide, viz., to take the matter up with the Managing Agent and his fellow Directors. The explanation of his conduct is quite plain and that is that he was inspired by the sinister motive of making out a case that the Managing Agent and the other Directors were misappropriating the company's funds and thought that the matter was serious enough to attract the notice of the Enforcement Branch and the Register.
54. The company has offered its explanation and that is, that moneys are paid out to the company's servants for the purpose of the company's business. Suspense slips are maintained serially in a register called the Cash Suspense Register. The company's employees after spending such moneys as they required for the company's business, rendered accounts and the suspense slips and the register are thereupon squared up. The suspense slips therefore, represent the cash money lying in the hands of the company's servants who go out in the market for the company's bus