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2011 DIGILAW 1031 (KAR)

Kirti D Shah v. Deluxe Roadlines (P. ) Ltd.

2011-10-21

ARAVIND KUMAR

body2011
JUDGMENT Aravind Kumar, J.—The petitioners have filed this petition under sections 433(f) and 439 of the Companies Act, 1956 ('the Act'), seeking the following reliefs : (a) To wind up the respondent-company under section 433(f) of the Act. (b) To appoint the official liquidator, High Court of Karnataka, as liquidator of the respondent-company, for all its assets, properties bank accounts and book debts with necessary powers under the provisions of the Act. (c) To grant other relief as this hon'ble court may deem fit in the interest of justice and equity. It is contended that the first petitioner is the managing director, petitioner No. 2 is the joint managing director, and petitioner No. 4 is the executive director of the respondent-company and petitioner No. 6 is the director of the respondent-company. It is contended that petitioner Nos. 1 to 5 are also the shareholders of the respondent-company holding 65.52 per cent of the paid-up share capital of the respondent-company. 2. It is stated in the petition that the respondent-company is a private limited company incorporated under the provisions of the Act, having its registered office at the address mentioned in the cause title of the petition. The respondent-company is a family company formed by three brothers, i.e., petitioner Nos. 1 and 2 and one Sri Kushalchand D. Shah. It is stated that these three brothers and their family members are the directors and shareholders of the company. There are three families controlling the company comprising of blood brothers and their families and all the three groups are having representation on the Board of directors. The shareholding pattern as also the pattern in which the directors are in the Board, are as under: 3. It is stated that during December 2009, there was a family settlement and all the members of the family unanimously decided that Sri Kushalchand D. Shah, being the eldest of all three brothers should manage the affairs of the company in question subject to rest of the properties being partitioned as agreed upon and the said Sri Kushalchand D. Shah was given the authority to sign the cheques of all accounts of the company with various banks and he took control of the respondent-company and has been managing the affairs of the company. It is contended, that during June 2010, the petitioners came to know that Kushalchand D. Shah and his family members were delaying the process of partition of various properties which were in individual names and they were also siphoning off monies from the respondent-company including sale of various assets of the company and, thus, indulging in various acts of mismanagement. It is also contended that the statutory dues, employees dues, unsecured creditors dues, etc., were not paid due to which notices have been received from the statutory authorities including the income-tax department and secured creditors. One of the creditors has also issued a notice for winding up of the respondent-company and taking into consideration all the above-mentioned alleged illegal activities carried out by Sri Kushalchand D. Shah family a petition under sections 397 and 398 of the Act has been filed before the Company Law Board ('CLB') for the oppression and mismanagement being done by them. A copy of the said petition is also annexed to the present petition along with various orders passed by the CLB and collectively marked as Annexure C. The averments made in the petition filed before the CLB by the petitioners therein (who are also petitioners herein) is akin to the grounds urged in the present petition. On the petition being registered, the registry has raised the following objections : (i) Copy of Petition No. 54 of 2010 pending before the CLB to be filed. (ii) How the petition is maintainable when the case is pending before the CLB ? 4. In reply, learned counsel appearing for the petitioners has filed a memo on 20th September, 2011, to the following effect: II. The proceedings under sections 397, 398 and 433(f) of the Companies Act, 1956, are separate and distinct. One is not a substitute for the other but is complementary. This petition is maintainable on the following grounds : 1. We have not asked for winding up of the company as required under sub-section (2)(b) of section 397 of the Companies Act. 2. We (holding 66 per cent of equity shares) have gone to Company Law Board only to sort out internal disputes between the shareholder and director committed by one group holding 34 per cent. 3. The opposite group is playing dilatory tactics as it is with these disputes. 4. This petition has been filed since the substratum of the company has been lost. 3. The opposite group is playing dilatory tactics as it is with these disputes. 4. This petition has been filed since the substratum of the company has been lost. That the power of the company court to protect the interest of the shareholders company, secured creditors, unsecured creditors, employees are far better than that of the Company Law Board. 5. If this was so both the provisions would not have been present in the Act. 5. In view of the same, the matter was posted before the court on 14th October, 2011 and there was no appearance on behalf of the petitioners, as such, matter is listed today. 6. The matter is taken up for consideration and Sri Udayashankar, learned counsel appearing for the petitioner has been heard extensively. 7. Learned counsel appearing for the petitioners submits this petition for winding up under section 433(f) of the Act, has been filed by the shareholders of the respondent-company is maintainable and such a petition can be presented by any contributory or contributories as defined under section 439(1)(c) of the Act and there being no dispute that the petitioners being contributories/shareholders of the company, the present petition is maintainable. He further submits that, exercise of jurisdiction by the CLB to grant relief as envisaged under sections 397 and 398 of the Act does not overlap with the power of this court to order winding up of a company under section 433(f), if the petitioners are able to demonstrate before the company court that it is just and equitable. In support of his submission he has relied on the following judgments : (i) Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, AIR 1976 SC 565 . (ii) A.K. Puri and Others Vs. Devi Dass Gopal Kishen Ltd. and Others, AIR 1995 J&K 24 . 8. Having heard the learned advocate appearing for the petitioners, the following points arise for my consideration : (i) Whether the petition filed by the petitioners herein who are shareholders of the respondent-company is maintainable ? (ii) Whether objection raised by the registry is to be sustained or overruled ? 9. In order to answer or adjudicate the point formulated herein above, the following statutory provisions are required to be extracted, namely, sections 397, 433(f), 428, 433 and 439(c) of the Act, as it would throw light on the issue : Provisions of law: 397. (ii) Whether objection raised by the registry is to be sustained or overruled ? 9. In order to answer or adjudicate the point formulated herein above, the following statutory provisions are required to be extracted, namely, sections 397, 433(f), 428, 433 and 439(c) of the Act, as it would throw light on the issue : Provisions of law: 397. Application to tribunal for relief in cases of oppression. - (1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to tribunal for an order under this section, provided such members have a right so to apply in virtue of section 399. (2) If, on any application under sub-section (1), the court is of opinion - (A) that the company's affairs (are being conducted in a manner prejudicial to public interest or) in a manner oppressive to any member or members; and (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. 433. Circumstances in which company may be wound up by tribunal. - A company may be wound up by the tribunal, - (f) If the tribunal is of the opinion that it is just and equitable that the company should be wound up; 428. Definition of "contributory". - The term "contributory" means every person liable to contribute to the assets of a company in the event of its being wound up, and includes the holder of any shares which are fully paid-up and for the purposes of all proceedings for determining, and all proceedings prior to the final determination of, the persons who are to be deemed contributories, includes any person alleged to be a contributory. 439. Provisions as to applications for winding up. - (1) An application to the tribunal for the winding up of a company shall be by petition presented, subject to the provisions of this section, -.... (c) by any contributory or contributories; or.... 439. Provisions as to applications for winding up. - (1) An application to the tribunal for the winding up of a company shall be by petition presented, subject to the provisions of this section, -.... (c) by any contributory or contributories; or.... Case analysis 10. (a) Hind Overseas (P.) Ltd. (supra): According to the learned Company Judge the principle of dissolution of partnership applies to companies either on the ground of complete deadlock or on the ground of domestic or family companies. A complete deadlock, according to the learned Judge, is where the Board has two rival members or the ratio of shareholding is equal. In the domestic or family companies, says the learned Judge, courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from the management but from the benefits as shareholders. Lack of probity has to result in prejudice to the company's business, affecting the rights of complaining parties as shareholders and not as directors. The learned Judge relied on an English case Cuthbert Cooper & Sons Ltd., In re. [1937] 1 Ch. D 392/[1938] 8 Comp Cas 131 (Ch. D), which illustrates that if a deadlock can be resolved by the articles there is no deadlock, to bring in winding up and if there are alternative remedies the company should not be wound up. The learned Judge was also unable to hold that the substratum of the company was- gone. The learned Judge concluded as follows (page 97 of 46 Comp Cas) : As I have indicated these charges and counter-charges raise disputed questions of fact between two contesting parties for power. The petitioners desire that they should be in power and the respondents would go on financing. This was said to be the heart of the matter by counsel for the respondents. This comment is not without foundation. I am unable to hold that there is any mismanagement or misapplication either as regards the shareholders or as regards the directors. The directors disputes are not grounds for winding up on the facts and circumstances of the present case. According to the learned Judge the case of Yenidje Tobacco Co. Ltd., In re. [19161] 2 Ch. I am unable to hold that there is any mismanagement or misapplication either as regards the shareholders or as regards the directors. The directors disputes are not grounds for winding up on the facts and circumstances of the present case. According to the learned Judge the case of Yenidje Tobacco Co. Ltd., In re. [19161] 2 Ch. D. 426 (CA) and the cases following it have established that in applying the principles of dissolution of partnership, to companies the following factors were important : (1) equal shareholding. (2) complete deadlock in the administration of the company. The learned Company judge held that the principle in Yenidje Tobacco Co. Ltd. (supra) was not attracted in this case. 10.1 (b) A.K. Puri (supra): 11. A combined reading of sections 397 and 433(f) shows that "the just and equitable ground" constitutes a common thread passing through the two provisions. It furnishes a ground for winding up of the company and is also a pre-requisite to sustain a petition under section 397. The similarity, however, ends there though it creates a confusion and a misleading impression that the jurisdiction and the scope of inquiry under the two provisions is identical and that one is the substitute of the other. No wonder the present controversy emanates from a similar confusion. 12. In my view, the proceedings under section 397/ 398 and the winding up proceedings under section 433(f) are two different and distinct jurisdictions, poles apart from each other, notwithstanding the commonality of "the just and equitable ground". While the scope of the former is the resolution of the internal disputes relating to oppression and mismanagement in a company the latter is directed to achieve the winding up of the company which is the last resort. Their scope of inquiry and procedural modes are different and so are the reliefs capable of being granted. It is true that section 397/ 398 provides an alternate remedy to winding up of a company but it does not provide a substitute any way. Therefore, it is fallacious to contend that the CLB and the company court enjoy concurrent jurisdiction under the respective provisions. It was not so even when the company court possessed joint jurisdiction under sections 397 and 433, not to speak of today when two different forums stand created to exercise separate jurisdiction. Therefore, it is fallacious to contend that the CLB and the company court enjoy concurrent jurisdiction under the respective provisions. It was not so even when the company court possessed joint jurisdiction under sections 397 and 433, not to speak of today when two different forums stand created to exercise separate jurisdiction. It would be advantageous to refer to the observations of the Supreme Court in M/s. World Wide Agencies Pvt. Ltd. and another Vs. Mrs. Margarat T. Desor and others, AIR 1990 SC 737 , in this regard though these are referable to a situation when the company court enjoyed joint jurisdiction under sections 397/ 398 and 433 : Averments which a petitioner would have to make to invoke jurisdiction under section 397/ 398 are not destructive of the averments which are required to be made in a case for winding up under section 433(f) on the just and equitable ground, though they may appear to be rather conflicting if not contradictor. 11. It is the contention of Sri Udayashankar, learned counsel for the petitioner that, a combined reading of sections 397 and 433(f) would depict that these two provisions are independent, separate and distinct and they do not overlap with each other and the petitioners who are seeking for winding up of the respondent-company being the shareholders of the respondent-company would be entitled to maintain the petition if they are able to demonstrate that it is just and equitable to wind up which condition would suffice for this court for passing an order for winding up. 12. In the judgment of A. K. Puri (supra), referred to supra by learned counsel for the petitioners the short issue which came up for consideration was as to whether two parallel proceedings can be proceeded or not, namely, as to whether the proceedings under sections 397 and 398 and winding up proceedings under section 433(f) can be proceeded or not issue regarding a contributory or contributories filing the petition under section 433(f) was not in issue or considered in the said judgment. Hence, I am of the considered view that the said judgment would not come to the rescue of the petitioners to contend that the present petition would be maintainable. 13. Hence, I am of the considered view that the said judgment would not come to the rescue of the petitioners to contend that the present petition would be maintainable. 13. The petitioners herein who are shareholders of the respondent-company have filed this petition under sections 433(f) and 439 of the Act contending that on account of mismanagement of the respondent-company purportedly by Sri Kushalchand D Shah and his family members who are controlling the management of the respondent-company, on the ground that over-whelming evidence placed by the petitioners would go to show that there is mismanagement and the financial position of the respondent-company has deteriorated and there is complete dead lock in the management of the respondent-company and it is contended that this court in exercise of its power under section 433(f), namely, "just and equitable", in the interest of the shareholders of the company can direct winding up of the company. 14. Reading of this provision, namely, section 439 would clearly go to show that the application for winding up of a company can be presented subject to sub-sections (2) to (8) and as to who can present the petition under section 439 for winding up can be found at clauses (a) to (g) of sub-section (1) of section 439. In the instant case, the petitioners claim to be contributories or shareholders. Section 428 of the Act defines the term 'contributory' which means every person liable to contribute to the assets of a company in the event of it being wound up and includes the holder of any shares which are fully paid-up; "deemed contributories" includes any person alleged to be a contributory. A perusal of the petition averments and material on record it is clear that the petitioners are contributories/ shareholders of the respondent-company and they would be entitled to present a petition/application for winding up as they would come within the provision of section 439(1)(c) of the Act. However, it is to be noticed, that under sub-section (4) of section 439, a contributory has to cross two barriers to enable them to present a petition. The two barriers can be found in clauses (a) and (b) of sub-section (4) of section 439 and same has already been extracted herein supra. However, it is to be noticed, that under sub-section (4) of section 439, a contributory has to cross two barriers to enable them to present a petition. The two barriers can be found in clauses (a) and (b) of sub-section (4) of section 439 and same has already been extracted herein supra. Under clause (a) a contributory will not be entitled to present a petition for winding up of a company unless the number of members is reduced in the case of a public company below seven and in the case of a private company, below two; and under clause (b) a contributory would not be entitled to present a petition for winding up unless the shareholders in respect of which he is a contributory or some of them either were originally allotted to him or have been held by him and registered in his name for at least six months during IS months immediately before the commencement of the winding up or as devolved on them through the death of a former holder. It is the case of the petitioners herein that they fail under both the clauses, namely, (a) and (b). It is to be noticed at this juncture, the petitioners herein have filed a petition before the CLB under sections 397 and 398 and have obtained interim orders and have been pursuing their remedies with regard to oppression and mismanagement. A contributory would be entitled to seek winding up of the company under section 433(f) of the Act, de hors the petition having been filed under sections 397 and 398 of the Act before the CLB. There cannot be any dispute that these two proceedings are separate and distinct. A remedy is provided to the contributory to approach the CLB under section 397 or 398 of the Act before the CLB. Hence, there cannot be any dispute that these two proceedings are separate and distinct. A remedy is provided to the contributory to approach the CLB under sections 397 and 398 of the Act and while considering the claim of a contributory a member of a company, the CLB with a view to bring an end to the matters complained of is empowered to make such order as it thinks fit including winding up of the company. A perusal of the material on record would disclose that the allegations or averments made in support of winding up by invoking section 433(f) of the Act or on the same set of facts or allegations made in the petition filed under sections 397 and 398 of the Act before the CLB. Thus, the Legislature have in their wisdom thought fit to put an end to the disputes to be resolved once and for all has giver v power to the CLB to pass such orders while adjudicating under section 397 a power to pass order for winding up. A combined reading of sections 397 and 398 on the one hand along with section 439, goes to show that these two provisions are separate, independent and distinct from each other. However, it does not mean or include that a member of a company or a contributory can invoke these two provisions simultaneously "on same set of facts" though seeking different reliefs. In effect the end-result would be the same inasmuch as the CLB while adjudicating the claim of oppression and mismanagement has wide powers of passing suitable orders with a view to bring an end to the list between the parties and in this direction it has the power to order for winding up also. 15. Though the petitioner herein has contended that under section 439(4)(a) and (b), they are entitled to maintain the petition, such a contention cannot be accepted since under clause (a) the number is not reduced and no averment is made in the petition in this regard and as such, the contributory would not be entitled to maintain a petition in view of the fetter or embargo placed under clause (a) of sub-section (4) of section 439, though the petitioner would be entitled to maintain a petition under clause (b) of sub-section (4) of section 439 of the Act. 16. However, in view of the finding given by me in the foregoing paragraphs, that grounds urged in the instant petition and the grounds urged in Petition No. 54 of 2010 pending before the CLB being one and the same, the present petition is not maintainable and the same is hereby dismissed by upholding the objections raised by the registry. Accordingly, the company petition stands dismissed.