M. Senthil Kumar and anr. Vs. Sudha Mills (India) Private Ltd. and ors. - Court Judgment

Excerpt:
company - alternative remedy - sections 397, 398, 433 and 443 (2) of companies act, 1956 - whether proceedings before company law board under sections 397 and 398 and winding up petition under section 433 (f) on just and equitable ground can be continued parallel - winding up is remedy of last resort - in case alternate remedy available to petitioner winding up should be avoided - in present case petitioner had remedy to file petition under sections 397 and 398 - winding up proceedings cannot be continued parallel to petition under sections 397 and 398. - jayasimha babu, j.1. equal partners who founded a private limited company, sudha mills (india) private limited on february 2, 1990, with equal shareholding and equal number of seats on the board of directors, after achieving impressive growth in the new company's turnover and profits, have fallen out and have invoked the jurisdiction of two different forums seeking different reliefs, thereby raising the question as to whether the proceedings before the two forums--the company law board before which c. p. no. 36 of 1993, filed by mr. and mrs. chotani on may 27, 1993, under sections 397 and 398 of the companies act seeking relief against oppression and mismanagement is pending, and this court wherein mr. and mrs. senthil kumar have filed company petition no. 50 of 1994 on march 19, 1994,.....

Judgment:

Jayasimha Babu, J.

1. Equal partners who founded a private limited company, Sudha Mills (India) Private Limited on February 2, 1990, with equal shareholding and equal number of seats on the board of directors, after achieving impressive growth in the new company's turnover and profits, have fallen out and have invoked the jurisdiction of two different forums seeking different reliefs, thereby raising the question as to whether the proceedings before the two forums--the Company Law Board before which C. P. No. 36 of 1993, filed by Mr. and Mrs. Chotani on May 27, 1993, under Sections 397 and 398 of the Companies Act seeking relief against oppression and mismanagement is pending, and this court wherein Mr. and Mrs. Senthil Kumar have filed Company Petition No. 50 of 1994 on March 19, 1994, under Section 433(f) of the Act seeking winding up of the company on just and equitable grounds--should continue parallel or one or the other proceedings deferred and if so, which one of the two proceedings is to be deferred.

2. These questions have arisen for consideration on account of the dichotomy in jurisdiction created by the Companies (Amendment) Act, 1988, regarding the reliefs that can be granted, even when the basic jurisdic-tional facts to be established are the same. The existence of a fact situation warranting the winding up of the company on the ground that it would be just and equitable to do so, is a precondition for invoking the jurisdiction of the Company Law Board under Section 397 as also for invoking the jurisdiction of this court under Section 433(f).

3. While the reliefs that may be granted in a petition under Section 397 as set out illustratively in Section 402 of the Act are wide ranging and are aimed at ensuring the continued corporate existence of the juristic entity, this court in a petition under Section 433(f) of the Act, unless the petition is dismissed can by way of final order only direct the winding up of the company which would ultimately result in its dissolution.

4. It would have been more convenient to the affected parties and it would also have been in the interests of justice, if the two proceedings could be taken up for consideration together. Proceedings pending before the other forums however, cannot be transferred to this court until a winding up order is made or a provisional liquidator is appointed. Transfer of the proceedings pending before the Company Law Board to this court for being tried along with the petition for winding up is, therefore, not possible.

5. In this order the parties are referred to with reference to their rank in Company Petition No. 50 of 1994.

6. The first petitioner and the second respondent had formed a partnership on December 3, 1987, for the purpose of carrying on business ofexporting textiles under the name and style of Sudha Mills. By the year 1990, it had recorded a turnover of Rs. 3.89 crores resulting' in a net profit of about 13.29 lakhs. Sudha Mills (India) Private Limited was incorporated on February 2, 1990, with an authorised capital of Rs. 50 lakhs and it took over the business that had been carried on by the firm. The board of directors comprised of the first petitioner, his wife the second petitioner, respondent No. 2 and his wife the third respondent. The new company earned a net profit of Rs. 59.73 lakhs in 1990-91 and Rs. 63.97 lakhs in 1991-92.

7. The prosperity of the company appears to have brought in its wake discord within the company between the two erstwhile partners who founded the company. The petitioners co-opted three more individuals as directors at a board meeting held on January 18, 1993, at Tirupur. Respondents Nos. 2 and 3 were not present at that meeting. Shares of the value of Rs. 5,000 were also allotted to each of these three newly co-opted directors on February 12, 1993. The issued, subscribed and paid-up capital of Rs. 20 lakhs which was held equally by the petitioners and respondents Nos. 2 and 3 was thus enhanced by the petitioners to Rs. 20,15,000. Respondents Nos. 2 and 3 were also excluded from the board of directors on the ground that they failed to attend three consecutive meetings of the board of directors, by reason of their absence at the board meetings held on January 11, 1993 ; adjourned to January 18, 1993, February 1, 1993, February 12, 1993, February 26, 1993, and March 19, 1993, all of which were held at Tirupur. The petitioners thereafter filed a suit in the sub-court at Tirupur for a declaration that respondents Nos. 2 and 3 have ceased to be directors of the company. It is the case of the second and third respondents that all these actions are illegal and invalid as they were not given notice of the meetings and the meetings were also held at short intervals only with the object of creating a ground on which respondent No. 2 could be removed from his position as managing director and respondent No. 3 could be removed from her position as director.

11. While it is alleged by the second respondent that the first petitioner had misused the funds of the company by not repaying to the bank about one crore rupees borrowed by the company from the bankers, it is the case of the first petitioner that the respondent who resides at and functions from Bombay has retained several lakhs of rupees of the company's funds which he has failed to return and account for, and was more anxious to retain his possession of the flat purchased by the company at Bombay, which flat he is alleged to have had repaired and furnished at the company's cost.

12. Respondents Nos. 2 and 3 moved the Company Law Board in May, 1993, under Sections 397 and 398 of the Act complaining of oppression and mismanagement and seeking various reliefs. In response to the notices issuedto them, petitioners Nos. 1 and 2 participated in those proceedings and an interim order was made by the Company Law Board restraining the petitioners herein from disposing of the movable and immovable properties of the company without its approval and directing that the voting rights in respect of shares allotted over and above the original allotment of Rs. 20 lakhs can only be exercised with the previous approval of the Company Law Board.

13. The Company Law Board made a further interim order on June 23, 1993, directing the continuance of its earlier order and also directing the company and the petitioners to send the minutes of the board meetings to respondents Nos. 2 and 3. It may be noted here that the co-opted directors having resigned, it is only petitioners Nos. 1 and 2 who are now functioning as directors. The parties were also directed by the Company Law Board not to sell or dispose of the unutilised export quotas which the company had acquired by reason of its past export performance.

14. The parties filed a joint memo before the Company Law Board on November 6, 1993, that they were endeavouring to settle the disputes and the case was thereafter adjourned to April 11, 1994, for final hearing.

15. Before the matter could be taken up by the Company Law Board for further hearing, the petitioners approached this court on March 19, 1994 and filed Company Petition No. 50 of 1994 and obtained ex parte stay of the proceedings pending before the Company Law Board in C. P. No. 36 of 1993.

16. It is the case of the petitioners that their efforts to settle the disputes with the respondents did not succeed on account of the unreasonable attitude of the first respondent in insisting upon retaining for himself the flat at Bombay without discharging any part of the liabilities of the company.

17. It is the case of the respondents that the petitioners have acted mala fide in invoking the winding up jurisdiction of this court and they have not made out a case for staying the proceedings before the Company Law Board in C. P. No. 36 of 1993 ; that it is just and proper to permit the continuance of the proceedings before the Company Law Board and to set a reasonable time limit for their conclusion.

18. The power of this court to stay the proceedings before the Company Law Board cannot be doubted. Section 442 of the Act expressly confers power on the court to stay or restrain proceedings pending against the company in any other court, at any time after the presentation of a winding up petition and before a winding up order is made. 'Court' referred to in this section, considering the context, has necessarily to be construed as any adjudicating authority which is required to act judicially and is empowered to pass orders binding on the company. Section 10E of the Act which provides for the constitution of a Board of Company Law Administration, by Sub-section (4C) has conferred on every Bench of that Board,the powers vested in a court under the Civil Procedure Code while trying' a suit in respect of, inter alia, discovery and inspection of documents or other material subjects producible as evidence, enforcing attendance of witnesses, compelling production of documents, examination of witnesses on oath, granting adjournments and reception of evidence on oath. Every Bench of the Board of Company Law Administration is deemed to be a civil court for purpose of Section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973, and every proceeding before the Bench is deemed to be a judicial proceeding within the meaning of Sections 193 and 228 of the Indian Penal Code, 1860, and for the purpose of Section 196 of the Code. Section 10E(5) of the Act requires the Company Law Board to be guided by principles of natural justice in the exercise of its powers and the discharge of its functions. Decisions or orders rendered or made by the Company Law Board are appealable. The person aggrieved may, under Section 10F of the Act, file an appeal to the High Court on any question of law arising from the order. The Company Law Board is clearly a 'court' for the purpose of Section 442 of the Companies Act.

19. This court can, in cases where it is considered by it to be appropriate, in exercise of its powers under Section 442 of the Act, stay proceedings pending before the Company Law Board against a company, at any time after the presentation to this court of a winding up petition for the winding of that company. If a winding up order is made in respect of the company, Section 446(1) would apply to proceedings against the company before the Company Law Board and such proceedings shall not be proceeded with, nor shall any fresh proceedings be commenced except with the leave of this court and subject to such terms as the court may impose. Petitions under Section 397 or 398 of the Act would, however, become infructuous on a winding up order being made.

20. The jurisdiction of this court to entertain petitions for winding up of companies is in no way impaired by reason of the jurisdiction of the Company Law Board having been invoked under any of the provisions of the Act. This court can proceed to make an order of winding up notwithstanding the pendency of any proceeding before the Company Law Board, there being no statutory bar to such a winding up order being made. It is, however, a matter of discretion of this court, as to whether the adjudication of the winding up petition should be adjourned to enable the Company Law Board to make a final order on any proceeding pending before it.

21. Winding up of a company on just and equitable grounds should not be ordered except as a last resort, as the presumption is in favour of the desirability of the continued existence and effective functioning of the company. Section 397 provides for relief in case of oppression even where a winding up order on just and equitable grounds is justified, if it is found that the order of winding up would unfairly prejudice the shareholderscomplaining of such oppression. The reliefs that can be so provided extend to regulation of the conduct of the company's affairs in future, purchase of shares or interest of any of the members by the other members or by the company, altering the articles of association, and relief in respect of any other matter for which the Company Law Board considers just and equitable, to provide. Under Section 443(2) of the Act the court may decline to wind up the company on just equitable grounds if the court is of the opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.

22. The policy of the State is thus to require the parties, unless there are exceptional circumstances, to pursue other remedies that may be available for the redressal of their grievances, before resorting' to a petition for winding up on the ground that it is just and equitable to do so.

23. In this context it is useful to set out the observations of the Supreme Court in the case of Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwala 1976 46 Comp Cas 91 (headnote): 'Relief under Section 433(f) of the Companies Act, 1956, based on just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company. It is not a proper principle to encourage hasty petitions for winding up of a company without first attempting to sort out the dispute and controversy between the members in the domestic forum in conformity with the articles of association. There must be materials to show when the 'just and equitable' clause is invoked, that it is just and equitable not only to the persons applying for winding up but also to the company and to all its shareholders. The company court will have to keep in mind the position of the company as a whole and the interests of the shareholders and see that they do not suffer in a fight for power that ensues between two groups.'

23. Mr. T. Raghavan, learned counsel for the petitioners in the winding up petition submitted that this is a case of partnership which has been transformed into a company and if the corporate veil is pierced, the reality will be a partnership and in this partnership, a situation of deadlock having arisen there is no alternative but to have the company wound up under the just and equitable clause. He further submitted that the erstwhile partners have developed such deep distrust in each other that there is no hope whatever of the deadlock being resolved as the shareholding of the two groups are equal and without mutual cooperation with each other, there is no prospect of running the company. He also submitted that the petition filed before the Company Law Board is ex facie not maintainable under Section 397 as the acts complained of are not qua members of the company but alleged violation of the respondents' rights as directors.

24. Mr. Arvind P. Datar, learned counsel for the respondents submitted that the respondents having invoked the jurisdiction of the Company Law Board earlier in point of time, by filing petition under Sections 397 and 398 of the Companies Act and in view of the wide ranging powers of the Board to bring to an end the acts of oppression and mismanagement complained of by the respondents, the consideration of this petition for winding up should be deferred and the Company Law Board directed to make a final order on the petitions pending before it within such time as may be fixed by this court. It was also submitted that in the background of these facts, the petitioner had abused the powers of the court in obtaining an ex parte order of stay.

25. Counsel for the parties referred to a number of authorities in support of their submissions.

26. Learned counsel for the petitioner relied on the decision of this court in the case of Ramakrishna Industries (P.) Ltd. v. P.R. Ramakrishnan 1988 64 Comp Cas 425 in support of his submission that this court has ample powers to make an ex parte order of injunction or stay, even at the admission stage of the winding up petition. Learned counsel relied on the following observation in the judgment (headnote): The words 'on hearing a winding up petition' occurring in Section 443(1) of the Companies Act, 1956, cover the entire period from the date of entertainment of the petition and issuing of notice till an actual order of winding up is made or the winding up petition is dismissed. 'Hearing' does not mean hearing the respondent to the petition. Hearing the petitioner for the purpose of admitting the petition and issuing notice is also part of the hearing of the winding up petition. The court's jurisdiction to make interim orders is not postponed till the date set for hearing of the company petition after notice to the respondents'.

27. Learned counsel for the petitioner referred to the decision of the Calcutta High Court in the case of Mohta Brothers (P.) Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Cas 119 wherein a Division Bench of that court held (headnote) : 'When dealing with a petition for relief from oppression or mismanagement made under Sections 397 and 398 of the Companies Act, 1956, the court must confine itself to the case as made out in the petition and to the allegations made therein and the supporting affidavits and not look at other evidence with regard to events that might have happened subsequent to the petition. . . .Vague and uncertain allegations of oppression or mismanagement, although they may constitute grounds for suspicion, do not entitle a petitioner to ask the court to embark upon an investigation into the affairs of a company in the hope, that in consequence of such investigation something will turn up which will enable the court to grant relief to the petitioner.'

28. Relying on these decisions, it was submitted that the allegations made by the respondent in the petition before the Company Law Board, were all vague and uncertain and no relief could be possibly granted and nothing constructive is likely to come out of the proceedings before the Company Law Board. He submitted that there was no hope of the company being run smoothly and efficiently in view of the deadlock that had arisen and the series of allegations made by the petitioner regarding the lack of probity on the part of the respondent and similar allegations by the respondent against the petitioner.

29. Learned counsel also relied on the said decision in support of his submission that the reliefs that could be granted under Section 397 and under Section 433 are different as the proceedings are distinct and separate and do not depend upon each other and the court can grant relief under the just and equitable clause, notwithstanding the institution of a petition under Sections 397 and 398 of the Companies Act. On the facts of that case, the court directed winding up of the company.

30. Learned counsel next relied on the decision of this court in the case of Rao (V.M.) v. Rajeswari Ramakrishnan [1987] 61 Comp Cas 20 more particularly the passage therein in support of his submission that the allegations made by the petitioner in a petition filed under Sections 397 and 398 of the Act must relate to the acts of oppression in the capacity of a member not as a director. It was held by the court that (headnote) : 'For maintaining a petition under Sections 397 and 398 of the Companies Act, 1956, (a) it must be established that the oppression complained of affected a person in his capacity or character as a member of the company, as harsh and unfair treatment in any other capacity such as a director or a creditor is outside the purview of the section ; (b) there must be continuous acts constituting oppression up to the date of the petition ; (c) the events have to be considered not in isolation but as part of a continuous story ; (d) it must be shown as a preliminary to the application of Section 397 that there are just and equitable grounds for winding up the company ; (e) the conduct complained of can be said to be oppression only if it can be said that it is burdensome, harsh and wrongful and the oppression involves at least an element of lack of probity and fair dealing to a member in matters of proprietary right as a shareholder'.

31. Learned counsel for the petitioner contended that the acts of oppression alleged against the respondents in the petition before the Company Law Board, being acts which affect their character as directors, was not maintainable and no relief could be possibly be granted on that petition.

32. Learned counsel for the petitioner also relied on an unreported judgment of this court in O. S. No. 177 of 1982 decided on February 23, 1983. The court therein dealt with the petitions filed by the same petitioners under Section 398 as also under Section 433(c) of the Act. The courtallowed the petition for winding up. Learned counsel, therefore, contended that the petition for winding up should be decided first. It is not possible to accept that submission. As observed earlier, it would be desirable to consider the petition under Sections 397 and 398 of the Act for winding up together. But such a course is not possible in view of the dichotomy of jurisdiction, brought about by the Companies (Amendment) Act, 1988. Learned counsel for the respondent relied upon the decision of this court in the case of Rajakumur (S.S.) v. Perfect Castings Private Ltd 1968 38 Comp Cas 187 wherein it was held by a single judge of this court that (headnote): 'though the just and equitable rule is wide, it has its own circumspection. Section 433(f) which is not to be read ejusdem generis with the other clauses (a) to (e) operates independently and has a precise import and content of its own'.

33. Learned counsel strongly relied on a decision of the Gujarat High Court in the case of Atul Drug House Ltd., In re [1971] 41 Comp Cas 352 wherein it was held that (headnote) : 'the principles of dissolution of partnership would be applicable to a company only if the company is a domestic company. Further, there should be irresolvable deadlock in the administration of the company. By introducing Sections 397 and 398 the Legislature must be taken to have clearly indicated that the irresolvable deadlock should be because of something in the constitution itself. The court found therein that the petitioners had alternative remedies under Sections 397 and 398 ; that they had availed of their remedy of investigation under Section 408 and failed to disclose this fact in their petition and that the petition for winding up, therefore, could not be admitted.'

34. Learned counsel relied on the following observations made in that judgment (headnote): 'At the time of admission of a petition for winding up under Section 433(f) the petitioner must convince the court not only of a just and equitable ground for so doing but also that there is no alternative remedy open to the petitioner. This is because if such a petition is admitted and there is a public advertisement, it would cause irreparable harm to a solvent company even if the company succeeds ultimately'.

35. The court observed at pages 367 and 368 of the report that 'a situation of irresolvable complete deadlock would arise by reason of the very constitution itself in case of equally divided holdings of partners in quasi partnership when by reason of only acting as per the constitution a deadlock would be created without any oppression or mismanagement, which could be remedied under Sections 397 and 398 of the Act'.

36. In the case of Gadadhar Dixit v. Utkal Flour Mills (Pvt) Ltd. 1989 66 Comp Cas 188 a learned single judge of the Orissa High Court held that a company being an independent and legal personality, distinct from the individuals who are its members, the mere fact that a pre-existing partnership firm has been converted into a private limited company does notby itself mean that the company retains the characteristics of a partnership. The court therein also emphasised the fact that relief under Section 433 is discretionary and the court may refuse to make an order for winding up if it is of the opinion that some other remedy is available to the petitioner and that he is acting unreasonably in seeking to have the company wound up instead of pursuing those other remedies. The relief under Section 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.

37. Learned counsel also relied on the decision of the Kerala High Court in the case of Jose J. Kadavil v. Malabar Industrial Co. Ltd.: Mathew (K.T.) v. Malabar Industrial Co, Ltd. 1986 59 Comp Cas 969 wherein the court pointed out that an order admitting a petition for winding up does not preclude the company court from dismissing the petition on the ground that the petitioner has an alternative remedy. Learned counsel relied on the following passage (headnote): 'It is now well settled that (i) the court can refuse to make an order of winding up a company on an application filed under the just and equitable clause, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy ; (ii) that safeguard against oppression and mismanagement has been provided under Sections 397 and 398 of the Act ; (iii) that relief under Section 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 and that Sections 397 and 398 provide an effective remedy to a contributory who has filed an application under just and equitable clauses alleging oppression of the minority, misconduct and mismanagement'.

38. Learned counsel also relied on the decision of a Division Bench of the Bombay High Court in the case of Daulat Makanmal Luthria v. Solitaire Hotels Pvt. Ltd. 1993 76 Comp Cas 215 particularly the observations at page 239 :

'The scheme of the Companies Act particularly after its amendment in 1956, would make one thing clear : a winding up has to be resorted to only when other means of healing an ailing company are of absolutely no avail. Remedies are provided by the statute in very many matters concerning the management and running of a company. A special forum itself has been created, and with an expertise and daily experience in relation to the problems in the working of the companies--the Company Law Board. It now adjudicates many such disputes which come before it as provided under the law. The Registrar of Companies has got an overseeing' authority in relation to enumerated matters. These safeguards are visualised for the protection of the individual shareholder, who in the scheme of thingsmay not be in a position to have a close view of the working' of the company and many of its deals. The important right of the majority of the shareholders to replace a group mismanaging' its affairs or lacking in probity is always there. Experience has, however, shown that the majority could be manipulated by those with ideas in mind and money to back. Sections 397 and 398 confer valuable rights even on the minority to seek the aid of a vigilant court in redressing their grievances. If pursued properly and effectively, many of the misdeeds of an erring or dishonest management could be checkmated and/or remedied by resort to such proceedings. This scheme of the Companies Act lies at the bottom of evaluation of the principles which insist on keeping at bay a winding up process except in very compelling circumstances.'

39. The consensus of judicial opinion clearly is that winding up is a remedy of last resort and if it can reasonably be avoided consistent with justice to the company and its members, winding up should not be ordered.

40. Section 443(2) expressly provides that the court may not make an order for winding up under the just and equitable clause if it is of the opinion that some other remedy is available, and if the petitioners are acting unreasonable in not pursuing such other remedies. A petition under Sections 397 and 398 is clearly one such remedy available to a petitioner.

41. When the forum competent to grant relief under Sections 397-398 has been moved and the proceeding is pending before it, more so when such proceedings are in the final stage, the court shall normally allow such proceeding to be completed and defer consideration of the petition for winding up, unless there are extraordinary circumstances in the case which cannot brook any delay in the winding up order being made. Parallel adjudication of the two proceedings has to be avoided to conserve judicial time and to avoid conflicting orders being passed by the two forums.

42. In a situation like the one that has arisen in this case, by deferring consideration of the winding up petition till the final order is made by the Company Law Board within the time to be stipulated by the court, the court would have the advantage of having before it the result of the proceedings under Sections 397 and 398 prior to the consideration of the winding up petition on the merits. If on such consideration it is found that a case for winding up on the just and equitable ground is made out the question of invoking of Section 443(2) to reject the petition would not arise.

43. Though it is the stand of the petitioners that the petition under Section 397 is not maintainable, as according to them, the acts complained of by the respondents, are not qua members, but as directors, that question should properly be decided by the Company Law Board, and not by this court in these applications. When the power to adjudicate such petitions is vested in the Board and not in the company court, the company courtcannot assume the jurisdiction of the Board to hold that the petitions are not maintainable and thus pre-empt the board from adjudicating the matter.

44. The ex parte stay of the proceedings in C. P. No. 36 of 1993 before the Company Law Board is vacated. The Board is directed to complete its adjudication of the said petition and pass final orders thereon within a period of twelve weeks from the date of receipt of a copy of this order.

45. Company Petition No. 50 of 1994 shall stand adjourned to June 15, 1995.