Full Judgment Text
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PETITIONER:
HIND OVERSEAS PRIVATE LIMITED
Vs.
RESPONDENT:
RAGHUNATH PRASAD JHUNJHUNWALLA AND ANR.
DATE OF JUDGMENT10/10/1975
BENCH:
GOSWAMI, P.K.
BENCH:
GOSWAMI, P.K.
ALAGIRISWAMI, A.
UNTWALIA, N.L.
CITATION:
1976 AIR 565 1976 SCR (2) 226
1976 SCC (3) 259
CITATOR INFO :
MV 1983 SC 75 (82)
ACT:
Practice-Company cases-Winding up petitions-Duty of the
company Court.
English decisions-Usefulness of-Applicability to cases
under the Companies Act.
Winding up of companies-The Companies Act (Act I),
1956-Sec.433(f)-Scope of vis-a-vis s. 44(g) of the
partnership Act.
"Just and equitable clause"- Applicability in case of
partnership firms in the guise of a private company.
HEADNOTE:
Under s. 433(f) of the Companies Act, 1956, a company
may be wound up by the Court, if the Court is of opinion
that it is just and equitable that the company should be
wound up. Section 44(g) of the Partnership Act also speaks
of the "just and equitable clause".
One RPJ agreed with VDJ and MPJ who are carrying on the
business under the name and style of "Chimanram Motilal" to
start a new business of iron and steel in co-partnership and
for that purpose, an account was opened in the name of
"Raghunath Prasad Jhunjhunwalla Ka Sir Khata" in the books
of "Chimanram Motilal". It was agreed that RPJ should have
3/8th share and VDJ with MPJ should have 5/8th share of the
proposed business. Before the said proposed business could
be started, at the suggestion of VDJ, actually a limited
company was formed in August,. 1956 under the Companies Act
with the understanding that (i) VDJ with MPJ should finance
the entire business. (ii) the share in the company should be
held by RPJ, VDJ and MPJ and the members of their respective
families in the proportion of 3/8th and 5/8th as agreed to
before and (iii) that RPJ and his group would generally look
after the day-to-day business of the company under the
general control and supervision of VDJ. The nominal capital
of the company was Rs. 5 lacs divided into 2500 equity
shares of Rs. 100/- each. RPJ and another ACD, an employee
and nominee of VDJ, became the subscribers to the Memorandum
of Association of the company and also became its first
directors. On 23-8-1956, VDJ and MPJ were appointed as
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directors of the company. On 23-11-1957, ACD resigned and
PCJ (son of RPJ) was opted in his place. RPJ was appointed a
director-in-charge of the company and both RPJ and PCJ were
paid monthly remunerations. Following a family partition
between VDJ and MPJ in the year 1958, the shares of MPJ were
transferred in the name of the wife of VDJ and MPJ resigned
from the Board of Directors on 21-1-1959. Since that date
till October, 1965 the Board of Directors were RPJ. PCJ and
VDJ, when VDJ got his son VKJ appointed as Technical
Director of the company. Though the business of the company
was managed by RPJ and PCJ, the business policy, the
appointment of staff, general supervision of the work of the
business etc., were in the hands of VDJ. From 1959 onwards
the factory commenced its regular production and substantial
profits were made between 1960 and 1965 except in the year
1961 when there was some loss. Finding that there has been a
mismanagement of affairs of RPJ and PCJ to the tune of Rs. 8
lacs the VDJ group who were holding the major shares
numbering, 3125, in order to safeguard their interest and
the business, called the Board’s meeting on 27-5-1966 and
the Board countermanded all the previous resolutions and
thus took away all the powers of RPJ. The extraordinary
general meeting called on 28-5-1966 resolved to remove RPJ
and PCJ as directors of the company and to appoint persons
belonging to VDJ’s group as directors. This led to the
filing of an application for winding up under s. 433(f) of
the Companies Act by RPJ before the company Judge of the
Calcutta High Court contending that the company was in the
nature of a
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partnership and is liable to be wound up in view of the loss
of confidence between the two groups/members and on the
alleged ouster of RPJ group. The Petition for winding up was
dismissed by the company Judge inasmuch as (i) the
substratum of the company was not gone; (ii) the deadlock
could be resolved by the articles; (iii) there were
alternative remedies open: and (iv) lack of probity did not
result in prejudice to the company’s business affecting
petitioner’s rights as share-holder, but only affected his
right as director. The appellate Bench, however, allowed the
appeal of the respondent RPJ and ordered the winding up of
the company in the facts and circumstances of the case,
viz., impossibility of carrying on business by RPJ as a
partner, the exclusion of RPJ from the partnership concern
and loss of mutual confidence between RPJ and VDJ group.
Dismissing the appeal by certificate, the Court,
^
HELD: (1) In an application under s. 433, 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 the two groups. The court should see that a prima
facie case has been made out before it is admitted on the
allegations in the petition. Even admission of a petition
which will lead to advertisement of the winding up
proceedings us likely to cause immense injury to the company
if ultimately the application has to be dismissed. The
interest of the applicant alone is not of predominant
consideration. It is not proper principle to encourage
hasty petitions under s. 433 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 "just and
equitable clause" is involved, that it is just and equitable
not only to the persons applying for winding up but also to
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the company and to all its shareholders.
[243 C-D, 240 H, 241 A]
(2) Section 433 of the Companies Act is modelled on the
English Companies Act. The Indian law is developing on its
own lines and making progress of its own circle. The courts
will have to adjust and adapt limit or extend the principles
derived from English decisions entitled as they are to great
respect, suiting the conditions of our society and the
country in general, always, however, with one primary
consideration in view that the general interests of the
shareholders may not be readily sacrificed at the altar of
squabbles of directors of powerful groups for powerful to
manage the company. [240A, C-D]
Ramanandi Kuer v. Kalawati Kuer, (1928) PC 2, applied.
(3) Section 433 of the Companies Act, 1956, provides
six recipes so that the company may be wound up by the
court. Under s. 433(f) which is identical in terms with s.
222(f) of the English Act of 1948, a company may be wound up
by the court if the court is of opinion that it is just and
equitable that the company should be wound up. It is now
well established that the sixth clause, viz., "just and
equitable" is not to be read as being "ejusdem generis" with
the preceding five clauses. The just and equitable clause
leaves the entire matter to the wide and wise judicial
discretion of the court. The only limitations are force and
the content of the words themselves "just and equitable".
Section 44(g) of the Indian Partnership Act also contains
the words "just and equitable". [241-B-E]
Section 433(f) is to be read with s. 443(2) of the Act,
which provides that where the petition is presented on the
ground that it is just and equitable that the company should
be wound up, the court may refuse to make an order of
winding up 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. Again under s. 307 and 398 of
the Act there are preventive provisions in the Act as a
safeguard against oppression in management. These provisions
also indicate that relief under s. 433(f) based on the "just
and equitable" clause is in the nature of a last resort when
other remedies are not efficacious enough to protect the
general interests of the company. [241 E-G]
228
Madan Lal and another v. Groin Chambers Ltd., Muzaffar
Nagar and others, [1968] 2 S.C.R. 252 and S. P. Jain v.
Kalinga Tubes Ltd. [1965] 2 S.C.R. 720, followed.
(4) In applying the principles of dissolution of
partnership to companies, the following factors must be
present:
Equal shareholding; complete deadlock in the
administration of the company; lack of probity and
mismanagement in the conduct of affairs of the company [In
re Yenidje Tobacco Co. Ltd. 1961 2 Ch. 426]. The just and
equitable clause cannot be invoked if a deadlock can be
resolved by the articles and if there are alternate
remedies. (In re Cuthbert Cooper and Sons Ltd., 1937 Ch.
392). If there is no justifiable lack of confidence grounded
on the conduct of the directors in the conduct of management
of the companies affairs (Rajahmundry Electric Supply
Corporation (1955) 2 S.C.R. 1068). These are sound
principles depending upon the nature, composition and
character of the company. The principles are good as they
are their application in a given case or in all cases,
generally creates problems and difficulties.
[233D-E; 236-D]
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(5) The principle of "just and equitable" clause
baffles a precise definition. It must rest with the judicial
discretion of the court depending upon the facts and
circumstances of each case. When more than one family or
several friends and relations together form a company and
there is no right as such agreed upon for active
participation of members who are sought to be excluded from
management the principles of dissolution of partnership
cannot be liberally invoked. Besides, it is only when
shareholding is more or less equal and there is a case of
complete deadlock in the company on account of lack of
probity in the management of the company and there is no
hope or possibility of smooth and efficient continuance of
the company as a commercial concern, there may arise a case
for winding up on the "just and equitable" ground. In a
given case the principles of dissolution of partnership may
apply squarely if the apparent structure of the company is
not the real structure and on piercing the veil it is found
that in reality it is a partnership. These are necessarily
equitable considerations and may in a given case be
superimposed on law. Whether it would be so done in a
particular case cannot be put in the strict jacket of an
inflexible formula. [247G, D-F]
In re Cathbert Cooper & Sons Limited, [1937] Ch. 392;
and In re Yenidje Tobacco Company Limited, [1916] 2 Ch. 426,
discussed.
In re Ebrahimi and Westbourane Galleries Ltd. [1973] AC
360, discussed and considered.
Lackh and another v. John Blackwood Limited [1924] AC
783, quoted with approval.
Baird v. Lees. [1924] AC 83 and D. Davis & Co. Ltd. v.
Brunswick (Australia) Ltd. and others A.I.R. 1938 PC 114,
referred to.
Rajahmundry Electric Supply Corporation Ltd. v. A.
Nageswara Rao and others[1955] 2 SCR [1066], Mohan Lal &
Anr. v. Grain Chamber Ltd., Muzaffarnagar and others. [1968]
2 S.C.R. 252 and S.P. Jain v. Kalinga Tubes Ltd., [1965] 2
S.C.R. 820, followed.
(6) In the present case, assuming partnership had been
contemplated the idea was deliberately abandoned; the
company was started with one ACD who had no relation with
MCJ group or the VDJ group but an employee of VDJ, which
would negative the idea of partnership which connotes equal
status among the partners; While it is true that a director
may work in the company on remuneration. RPJ however served
like an employee on monthly salary not on his own initiative
enjoying an equal partner’s freedom and prestige but
directly under the supervision and control of VDJ
acknowledging a status definitely of a subordinate
character; The voluntary financial involvement of a large
stake by VDJ carefully thought to be protected against
erosion of his interests by constant vigil on the day-to-day
working does not fit in with the
229
concept of a partnership; Even the account was being opened
for the purpose of the formation of the company and the
account was closed on such formation. The shareholding is
between the two family groups, it cannot be said that the
company thereby takes the image of partnership. On the other
hand, the fact that after discussion, the parties
deliberately abandoned the idea of farming a partnership
would go to show that there was no intention to carry on
business as partners. [242E-H]
There are no special features which would
unquestionably lead to the conclusion that the company is in
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substance a partnership and the principle of "just and
equitable clause" cannot be therefore, extended. [242-H,
245A]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1785 of
1970.
From the Judgment and Order dated 25-9-69 of the
Calcutta High Court in Appeal No.146 of 1967.
S. V. Gupte, S. B. Mukherjee, P. C. Bhartari, J. B.
Dadachanji and Dilip Sinha for the Appellant.
A. K. Sen, R. C. Nag, O. P. Khaitan, B. P. Maheshwari,
Suresh Sethi and R. S. Agarwal for Respondents.
The Judgment of the Court was delivered by
GOSWAMI, J. This appeal by certificate is against the
common judgment of the Calcutta High Court in respect of
respondents’ application for winding up and appellant’s stay
application relating to the Hind Overseas Private Limited, a
private limited company (briefly the company).
The question that is raised in this appeal relates to
the scope of section 433(f) of the Companies Act, 1956
(briefly the Act) and in particular whether the principles
applicable in the case of dissolution of partnership could
be involved in the case of the company.
The allegations in the winding up petition before the
High Court are as follows:
The company was incorporated under the Act in August
1956. The nominal capital of the company is Rs. 5,00,000/-
divided into 2,500 Equity shares of Rs. 100/- each and 2,500
unclassified shares of Rs. 100/- each, the entire nominal
capital has been issued and fully paid up.
The petitioners (respondents herein), Raghunath Prasad
Jhunjhunwalla and his son, Phoolchand Jhunjhunwalla
(hereinafter to be described as R.P.J. and P.C.J.
respectively), and the members of their family hold 1875
shares in the company and the remaining 3125 shares are held
by one V. D. Jhunjhunwalla and the members of his family.
In or about the month May, 1956, R.P.J. and V. D.
Jhunjhunwalla (briefly V.D.J.) who was then carrying on
business under the name and style of ’Chimanram Motilal’
with his cousin, one Mahabir Prasad Jhunjhunwalla (for
brevity M.P.J.) agreed to start a new business of iron and
steel in co-partnership and for that purpose an account was
230
opened in the name of ’Raghunath Prasad Jhunjhunwalla Ke Sir
Khata’ in the books of ’Chimanram Motilal’. It was further
agreed between the parties that R.P.J. would have six annas
share and V.D.J. along with M.P.J. ten annas share in the
said proposed partnership business.
Before the said proposed business could be started,
V.D.J., however, changed his mind and some time in the month
of June 1956, he suggested to R.P.J. that a limited company
be formed, inter alia, to carry on the business in iron and
steel and the shares in the company would be held by R.P.J.,
V.D.J. and M.P.J. and the members of their respective
families in the same proportion as mentioned above. V.D.J.
further agreed to provide for and arrange along with M.P.J.
the entire finance that may be necessary for the purpose of
the business of the company and R.P.J. and his group would
generally look after the day-to-day business of the company
under the general control and supervision of V.D.J. It is
stated in the petition that R.P.J. in view of the
relationship between the parties and having trust and
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confidence in V.D.J. agreed to the said suggestions and
accordingly the company was formed on or about August 9,
1956, under the provisions of the Act. One Anil Chandra
Dutta, an employee and nominee of V.D.J. along with R.P.J.
became the subscribers to the Memorandum of Association of
the company and also became its first directors. After its
incorporation, the company carried on for some time the
business of controlled stockists of iron and steel and since
the end o the year 1958 the company carried on the business
of the manufacture and supply of railway sleepers in
execution of Government contracts.
On or about August 23, 1956, V.D.J. and M.P.J. were co-
opted as directors of the company. On or about November 23,
1957, Anil Chandra Dutta resigned from the Board of
Directors and P.C.J. was co-opted as a Director in this
place. R.P.J. was appointed as Director in-charge of the
company on November 23, 1957 at a monthly remuneration of
Rs. 1000/-. This remuneration was subsequently increased to
Rs. 1250/- per month with effect from October 1, 1961 and he
was also granted further allowance of Rs. 250.00 per month
on account of maintenance of guest house. His monthly
remuneration was again increased to Rs. 2000.00 with effect
from September, 1964. The monthly remuneration of P.C.J. was
initially fixed at Rs. 750.00 per month with effect from
October 1, 1961 and was subsequently increased to Rs.
1500.00 from September 1, 1964.
Following a family partition between V.D.J. and M.P.J.
about the year 1958, the shares of the latter were
transferred in the name of the wife of V.D.J. M.P.J. also
resigned from the Board of Directors on or about January 31,
1959. Since that date and until October 1965, the Board of
Directors of the company consisted of R.P.J., P.C.J. and
V.D.J. In or about the month of October, 1965, V.D.J. got
his son, Vinode Kumar Jhunjhunwalla, appointed as the
Technical Director of the company.
Since the year 1958 and until February 26, 1965, the
entire business of the company has been the manufacture and
supply of
231
railway sleepers in execution of Government contracts. The
business of the company during this period had been always
managed by R.P.J., P.C.J. under the general supervision and
guidance of V.D.J. and the business policy was always
dictated by V.D.J. The Cashier, Manager-cum-Engineer, Munim,
and Cash Peon and other important Officers and employees
were always appointed by V.D.J. of his own choice and on his
terms. R.P.J. has been acting as the Director-in charge
throughout since his appointment at a Board meeting held on
November 23, 1957. V.D.J. asked for and received daily
reports of the working of the factory and of the business of
the company from R.P.J. and gave detailed instructions even
relating to the daily administration. From 1959 onwards the
factory commenced its regular production of railway sleepers
and made substantial profits between 1960 and 1965 except in
the year 1961 when there was some loss.
It is alleged that after trying to take wrongfully and
illegally full control and management of the affairs of the
company in order to oust R.P.J. group, V.D.J. ultimately
succeeded in getting hold of Directors’ Minute Books and the
Minute Books of the General Meetings of the company. V.D.J.
with the help of the members of his group, wrongfully and
illegally took away the keys and the other statutory books
and documents of the company from the registered office and
refused R.P.J. group any access to them, R.P.J. was also
assaulted by an employee of the company at the instance of
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V.D.J. and there were some criminal proceedings against
R.P.J. and P.C.J. V.D.J. as a Director called a meeting of
the Board on May 27, 1966, by Notice dated May 24, 1966.
R.P.J.’s solicitors on May 27, 1966, sent a notice to the
company and V.D.J. calling upon them to desist from holding
the meeting which was called with a view to oust the R.P.J.
group completely from the control and management of the
affairs of the company. V.D.J. group did not pay any heed to
the Solicitors’ letter and passed various resolutions in the
Board’s meeting held on May 27, 1966, whereby the previous
resolutions of the Board were countermanded and cancelled
and R.P.J. was deprived of his all lawful authority and
powers as a Director including the right to operate the
banking account of the company. R.P.J. was purported to be
removed from the office of the Director-in-charge of the
company. V.D.J. group caused an advertisement to be
published in the Vishwamitra on or about May 20, 1966,
intimating the cancellation of powers in favour of R.P.J.
V.D.J. taking advantage of the majority holding of shares by
himself and the members of group, caused to be issued
through certain shareholders belonging, to his group a
requisition dated May 28, 1966, for calling an Extra
ordinary general meeting with a view to remove R.P.J. and
P.C.J. as directors of the company and to appoint other
persons belonging to their group in their places instead.
The explanatory statement to that Notice alleged that there
was a loss of about Rs. 8 lakhs in the year 1965.
It is further alleged that V.D.J. with the help of
goondas and armed guard took possession of the company’s
factory and ousted R.P.J. and P.C.J. therefrom. It is also
alleged that the liabilities of the company would exceed its
assets and the same was not commercially
232
solvent. That serious disputes and differences had arisen
among the shareholders of the company and there was a
complete deadlock in the management of its affairs. There
was also complete loss of confidence of one group in the
other. Lastly it is averred that the company was in
substance a partnership and it could not carry on its
business any more and the circumstances would justify the
dissolution of the company had it been a partnership.
The above are the allegations in the winding up
petition which came up for admission before the learned
Company Judge. There was a counter-affidavit filed by V.D.J.
in opposing the prayers. We may only note paragraph 14 of
his counter-affidavit
"The respondent, Raghunath Prasad Jhunjhunwalla
was an employee of the firm of Messrs Kamlapati Motilal
of Kanpur of which I am the Managing Partner. Having
gained confidence as such employee the said Raghunath
Prasad Jhunjhunwalla was taken in as a Director of the
Company and entrusted with the powers of management of
the Company. The respondents had no money to subscribe
for the shares of the Company and moneys were procured
by me to enable them to subscribe for the share of the
Company. The applicants on their own admission were in
charge of the management of the affairs of the Company.
While in such management they have mismanaged the
affairs of the Company and misappropriated the funds
and assets of the company as would appear from the
statements made in my affidavit affirmed on June 16,
1966.. "
The only point which appears to have been canvassed
before the learned Company Judge and later before the
appellate court was that the company was formed as a result
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of mutual trust and confidence and the company was in
substance a partnership and, therefore, the principles of
partnership would be attracted. The same arguments are
pressed into service by the respondents before us. If it
were a partnership, says Mr. Sen on behalf of the
respondents, on the facts and circumstances disclosed in the
petition dissolution would have been ordered by the court
under section 44(g) of the Partnership Act. A case for
winding up has been, therefore, prima facie, made out by the
respondents on these allegations. It is submitted that the
learned Company Judge committed an error of law in
dismissing the winding up petition without admitting it and
in allowing the stay petition of the company (appellant
herein) and that the Division Bench in the Letters Patent
Appeal was right in setting aside the order of the Company
Judge.
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 real members or
the ratio of shareholding is equal. In the domestic or
family companies, says the learned Judge, courts have
233
applied the dissolution of partnership principle where
shareholdings are more or less equal and there is ousting
not only from management but from benefits as shareholders.
Lack of probity has to result in prejudice to company’s
business, affecting rights of complaining parties as
shareholders and not as directors. The learned Judge relied
on an English case [In re Cuthbert Cooper & Sons Limited(1)]
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:-
"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 shareholders or as regards directors.
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 In re Yenidje
Tobacco Company Limited (2) 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 share-holding.
(2) Complete deadlock in the administration of
the company.
(3) Lack of probity and mismanagement in the
conduct of affairs of the company.
The learned Company Judge held that the principle in
Yenidje’s case (supra) was not attracted in this case.
On the other hand, according to the appellate court the
principles in Yenidje’s case were to the effect that-
"if a private company could be fairly called a
partnership in the guise of a private company then the
things which might be a ground for dissolution of a
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partnership will apply also in the case of a private
company" and that "in this connection deadlock is not
material".
The appellate court then described the circumstances which
according to Lindley justify the dissolution of the
partnership:
(1) if the partnership agreement is wilfully or
persistently violated;
234
(2) if one partner so behaves in matters relating
to the partnership business that the other
partners find it impossible to carry on
business in partnership with him;
(3) if some partners are in effect excluded from
the concern;
(4) if the misconduct of one or more partners is
such that the mutual confidence which must
subsist in a partnership is destroyed;
(5) if there is a state of animosity which
precludes all reasonable hope of
reconciliation and friendly cooperation;
(6) if it is impossible for the partners to place
that confidence in each other which each has
a right to expect, provided that the
impossibility has not been caused by the
persons seeking to take advantage of if
Having noted the above, the appellate court held that
conditions (2), (3) and (4) were unquestionably fulfilled in
this case and, therefore, allowed the application and
rejected the stay application.
Before we proceed further we may refer to a recent
decision of the House of Lords in Ebrahimi and Westbourne
Galleries Ltd. and Others (1) (briefly Ebrahimi’s case)
wherein after reviewing all the earlier cases it was held as
follows:-
"The foundation of it all lies in the words ’just
and equitable’ and, if there is any respect in which
some of the cases may be open to criticism, it is that
the Courts may sometimes have been too timorous in
giving them full force. The words are a recognition of
the fact that a limited company is more than a mere
legal entity, with a personality in law of its own;
that there is room in company law for recognition of
the fact that behind it, or amongst it, there are
individuals, with rights, expectations and obligation
inter se which are not necessarily submerged in the
company structure. That structure is defined by the
Companies Act and by the articles of association by
which shareholders agree to be bound. In most companies
and in most contexts, this definition is sufficient and
exhaustive, equally so whether the company is large or
small. The ’just and equitable provision does not, as
the respondents suggest, entitle one party to disregard
the obligation he assumes by entering a company, nor
the court to dispense him from it. It does, as equity
always does, enable the court to subject the exercise
of legal rights to equitable considerations:
considerations, that is, of a personal character
arising between one individual and another, which may
make it unjust, or inequitable,
235
to insist on legal rights, or to exercise them in a
particular way....
"The superimposition of equitable considerations
requires something more, which typically may include
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one, or probably more, of the following elements:
(i) an association formed or continued on the
basis of a personal relationship, involving
mutual confidence-this element will often be
found where a pre-existing partnership has
been converted into a limited company;
(ii) an agreement, or understanding, that all, or
some (for there may be ’sleeping’ members),
of the shareholders shall participate in the
conduct of the business;
(iii)restriction upon the transfer of the members’
interest in the company-so that if confidence
is lost, or one member is removed from
management, he cannot take out his stake and
go elsewhere."
The respondents have laid great emphasis on the ratio
of the above decision. It is true that section 222(f) of the
English Companies Act, 1948 which the House of Lords was
considering corresponds to section 433(f) of the Act. In the
above decision the House of Lords had to deal with a private
limited company consisting of three members, the petitioner
therein, being one of the three. Lord Wilberforce delivering
his reasoned speech has himself noted that-
"It is a fact of cardinal importance that since
about 1945 the business had been carried on by the
appellant and Mr. Nazar as partners, equally sharing
the management and the profits".
It was also noticed that-
"the company made good profits, all of which were
distributed as directors’ remuneration. No dividends
have ever been paid, before or after the petition was
presented."
In Ebrahimi’s case (supra) the company which was first
formed by the two erstwhile partners, Ebrahimi and Nazar,
was joined by Nazar’s son, George Nazar, as the third
director and each of the two original shareholders
transferred to him 100 shares so that at all material times
Ebrahimi held 400 shares, Nazar 400 shares and George Nazar
200 shares. The Nazars, father and son, thus had a majority
of the votes in general meeting. Until the dispute all the
three remained directors. Later on an ordinary resolution
was passed by the company in general meeting by the votes of
Nazar and George Nazar removing Ebrahimi from the office of
director. That led to the petition for winding up before the
court.
The following features are found in Ebrahimi’s case:-
(1) There was a prior partnership between the
only two members who later on formed the
company.
236
(2) Both the shareholders were directors sharing
the profits equally as remuneration and no
dividends were declared.
(3) One of the shareholders’ son acquired shares
from his father and from the second
shareholder, Ebrahimi, and joined the company
as the third shareholder-director with two
hundred shares (one hundred from each).
(4) After that, there was a complete ouster of
Ebrahimi from the management by the votes of
the other two directors, father and son.
(5) Although Ebrahimi was a partner, Nazar had
made it perfectly clear that he did not
regard Ebrahimi as a partner but regarded him
as an employee in repudiation of Ebrahimi’s
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status as well as of the relationship.
(6) Ebrahimi through ceasing to be a director
lost his right to share in the profits
through directors’ remuneration retaining
only the chance of receiving dividends as a
minority shareholder.
Bearing in mind the above features in the case, the House of
Lords allowed the petition for winding up by reversing the
judgment of the court of appeal and restoring the order of
Plowman, J.
None of the parties questions the principles as such
adumbrated by the House of Lords in Ebrahimi’s case (supra)
or even those in the earlier Yenidje’s case (supra) and
indeed these are sound principles depending upon the nature,
composition and character of the company, The principles,
good as they are, their application in a given case or in
all cases, generally, creates problems and difficulties. The
respondents’ counsel is well cognizant of this difficult
aspect and, therefore, rests his argument on the footing
that the company is in substance a partnership and
necessarily, therefore, according to him, the principles of
partnership should be attracted.
Before we come to the facts of the present case, we
have to deal with the principles of the Yenidje’s case
(supra) which were the cornerstone of the arguments on
behalf of both the parties before the Company Judge as well
as the appellate court. Ebrahimi’s case (supra) was not
available to the parties at that stage.
Yenidje’s case (supra) has acquired celebrity and in
application of the ratio of that case varying shades and
colour have been sought to be given from time to time in
England and appropriate to occasions and to facts and
circumstances of cases coming before the courts.
It is not necessary for us to go over the labyrinth of
cases wherein the Yenidje’s principle was applied and it
will be sufficient to gather the ratio from the words of
Lord Cozens-Hardy M.R. expressed in the decision itself. The
learned Master of Rolls posed the question thus in that
case:
"I think it right to consider what is the precise
position of a private company such as this and in what
respects it can be fairly called a partnership in the
guise of a private company."
237
This was a company of the two shareholders and two
directors who had earlier traded separately but amalgamated
their businesses and formed a private limited company. The
constitution of the company was such that under its articles
of association for any case of difference or dispute between
the directors there was a provision for arbitration. In fact
in one of such disputes a reference was made to arbitration
which resulted in an award to which one of the two
shareholders declined to give effect. It was proved in that
case that the two directors were not on speaking terms, that
the so-called meetings of the board of directors had been
almost a farce or comedy, the directors would not speak to
each other on the board, and some third person had to convey
communications between them which ought to go directly from
one to the other. Under the above situation it was observed
by the learned Master of Rolls as follows:
"Is it possible to say that it is not just and
equitable that that state of things should not be
allowed to continue, and that the Court should not
intervene and say this is not what the parties
contemplated by the arrangement into which they entered
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?"
*
"Certainly, having regard to the fact that the
only two directors will not speak to each other, and no
business which deserves the name of business in the
affairs of the company can be carried on, I think the
company should not be allowed to continue. I have
treated it as a partnership, and under the Partnership
Act of course the application for a dissolution would
take the form of an action; but this is not a
partnership strictly, it is not a case in which it can
be dissolved by action. But ought not precisely the
same principles to apply to a case like this where in
substance it is a partnership in the form or the guise
of a private company ? It is a private company, and
there is no way to put an end to the state of things
which now exists except by means of a compulsory order.
It has been urged upon us that the just and equitable
clause has... been held.. not to apply except where the
substratum of the company has gone or where there is a
complete deadlock. Those are the two instances which
are given, but I should be very sorry, so far as my
individual opinion goes, to hold that they are strictly
the limits of the ’just and equitable’ clause as found
in the Companies Act".
*
"If ever there was a case of deadlock I think it
exists here; but, whether it exists or not, I think the
circumstances are such that we ought to apply, if
necessary, the analogy of the partnership law and to
say that this company is now in a state which could not
have been contemplated by the parties when the company
formed and which ought to be terminated as soon as
possible".
238
It is clear that although Yenidje’s case (supra) was a
case of a complete deadlock, that was not stated to be the
sole basis for a conclusion to wind up the company. The
House of Lords in Ebrahmi’s case (supra) approved the
decision in Yenidje’s case (supra). We may also point out
that the House of Lords did not approve of the undue
emphasis put on the contractual rights arising from the
articles over the equitable principles, derived from
partnership law in re Cuthbert Cooper & Sons Limited
(supra).
We may also refer to the Privy Council decision in Loch
and Another and John Blackwood Limited(1), wherein section
127 of the Companies Act, 1910, of Barbados, identical with
section 433(f) of the Act was considered. Lord Shaw of
Dunfermline quoted in the judgment a passage from the case
of Baird v. Lees(2), which is as follows :-
"I have no intention of attempting a definition of
the circumstances which amount to a ‘just and
equitable’ cause. But I think I may say this. A
shareholder puts his money into a company on certain
conditions. The first of them is that the business in
which he invests shall be limited to certain definite
objects. The second is that it shall be carried on by
certain persons elected in a specified way. And the
third is that the business shall be conducted in
accordance with certain principles of commercial
administration defined in the statute, which provide
some guarantee of commercial probity and efficiency. If
shareholders find that these conditions or some of them
are deliberately and consistently violated and set
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aside by the action of a member and official of the
company who wields an overwhelming voting power, and if
the result of that is that, for the extrication of
their rights as shareholders they are deprived of the
ordinary facilities which compliance with the Companies
Acts would provide them with, then there does arise, in
my opinion, a situation in which it may be just and
equitable for the Court to wind up the company".
We may also refer to another decision of the Privy
Council in D. Davis & Co. Ltd. v. Brunswick (Australia),
Ltd. and others(3) which was from the decision of the Full
Court of the Supreme Court of New South Wales. Section 84(e)
of the New South Wales Companies Act (1899) also provides
for winding up, inter alia, on just and equitable ground. In
dealing with that clause, the Privy Council observed as
follows :-
"The position of the Court in determining whether
it is just and equitable to wind up the company
requires a fair consideration of all the circumstances
connected with the formation and the carrying on of the
Company during the short period which had elapsed since
12th May, 1930; and the
239
common misfortune which had befallen the two shareholders in
the Company does not, in their Lordships view, involve the
consequence that the ultimate desires and hopes of the
ordinary, shareholders should be disregarded merely because
there is a strong interest in favour of liquidation
naturally felt by the holders of the preference shares".
*
"Nor on the other hand can any general rule be
laid down as to the nature of the circumstances which
have to be borne in mind in considering whether the
case comes within the phrase".
This Court had to deal with the ‘just and equitable’
clause under section 162(vi) of the Indian Companies Act,
1913, in Rajahmundry Electric supply Corporation Ltd. v. A
Nageswara Rao and others(1) and the Court quoted with
approved the following passage in Loch’s case (supra) :
"It is undoubtedly true that at the foundation of
applications for winding up, on the ‘just and
equitable’ rule, there must lie a justifiable lack of
confidence in the conduct and management of the
company’s affairs. But this lack of confidence must be
grounded on conduct of the directors, not in regard to
their private life or affairs, but in regard to the
company’s business. Furthermore the lack of confidence
must spring not from dissatisfaction at being outvoted
on the business affairs or on what is called the
domestic policy of the company. On the other hand,
wherever the lack of confidence is rested on a lack of
probity in the conduct of the company’s affairs, then
the former is justified by the latter, and it is under
the statute just and equitable that the company is
wound up".
Again in Mohan Lal & Anr. v. Grain Chamber Ltd.
Muzaffarnagar & Ors.,(2) this Court had held that-
"Primarily the circumstances existing at the date
of the petition must be taken into consideration for
determining whether a case is made out for holding that
it is just and equitable that the company should be
wound up"
(See also Rajahmundry Electric Supply Corporation’s case
(supra) and S. P. Jain v. Kalinga Tubes Ltd.(3).
Keeping the ratio of Ebrahimi’s case in the forefront
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of his argument Mr. Sen submits that in the present case
also there was a definite understanding and agreement
between the two family groups for equal status and equal
participation in management and, therefore, exclusion of the
respondents from the directorship is burial of mutual trust
and denial of that relationship on which alone the company
was formed and hence there is a prima facie case for
admitting the petition.
240
Although the Indian Companies Act is modelled on the
English Companies Act, the Indian law is developing on its
own lines. Our law is also making significant progress of
its own as and when necessary. Where the words used in both
the Acts are identical, the English decisions may throw good
light and reasons may be persuasive. But as the Privy
Council observed long ago in Ramanandi Kuer v. Kalawati
Kuer(1)-
"It has often been pointed out by this Board that
where there is a positive enactment of the Indian
legislature, the proper course is to examine the
language of that statute and to ascertain its proper
meaning-uninfluenced by any considerations derived from
the previous state of the law or of the English law
upon which it may have been founded."
If it was true in the twenties it is more apposite now that
the background, conditions and circumstances of the Indian
society, the needs and requirements of our country call for
a somewhat different treatment. We will have to adjust and
adapt, limit or extend, the principles derived from English
decisions, entitled as they are to great respect, suiting
the conditions of our society and the country in general
always, however, with one primary consideration in view that
the general interests of the shareholders may not be readily
sacrificed at the altar of squabbles of directors of
powerful groups for power to manage the company.
When more than one family or several friends and
relations together form a company and there is no right as
such agreed upon for active participation of members who are
sought to be excluded from management, the principles of
dissolution of partnership cannot be liberally invoked.
Besides, it is only when share-holding is more or less equal
and there is a case of complete deadlock in the company on
account of lack of probity in the management of the company
and there is no hope or possibility of smooth and efficient
continuance of the company as a commercial concern, there
may arise a case for winding up on the just and equitable
ground. In a given case the principles of dissolution of
partnership may apply squarely if the apparent structure of
the company is not the real structure and on piercing the
veil it is found that in reality it is a partnership. On the
allegations and submissions in the present case, we are not
prepared to extend these principles to the present company.
The principle of ‘just and equitable’ clause baffles a
precise definition. It must rest with the judicial
discretion of the court depending upon the facts and
circumstances of each case. These are necessarily equitable
considerations and may, in a given case be superimposed on
law. Whether it would be so done in a particular case cannot
be put in the strait-jacket of an inflexible formula.
In an application of this type allegations in the
petition are of primary importance. A prima facie case has
to be made out before the court can take any action in the
matter. Even admission of a petition which will lead to
advertisement of the winding up proceedings
241
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is likely to cause immense injury to the company if
ultimately the application has to be dismissed. The interest
of the applicant alone is not of predominant consideration.
The interests of the shareholders of the company as a whole
apart from those of other interests have to be kept in mind
at the time of consideration as to whether the application
should be admitted on the allegations mentioned in the
petition.
The question that is raised in this appeal is as to
what is the scope of section 433(f) of the Act. Section 483
provides for the circumstances in which a company may be
wound up by the court. There are six recipes in this section
and we are concerned with the sixth, namely, that a company
may be wound up by the court if the court is of the opinion
that it is just and equitable that the company should be
wound up. Section 222(f) of the English Companies Act, 1948
is in terms identical with the Indian counter-part, section
433 (f). It is now well established that the sixth clause
namely, ’just and equitable’ is not to be read as being
ejusdem generis with the preceding five clauses. While the
five earlier clauses prescribe definite conditions to be
fulfilled for the one or the other to be attracted in a
given case, the just and equitable clause leaves the entire
matter to the wide and wise judicial discretion of the
court. The only limitations are the force and content of the
words themselves, ’just and equitable’. Since, however, the
matter cannot be left so uncertain and indefinite, the
courts in England for long have developed a rule derived
from the history and extent of the equity jurisdiction
itself and also born out of recognition of equitable
considerations generally. This is particularly so as section
35(6) of the English Partnership Act, 1890 also contains,
inter alia, an analogous provision for the dissolution of
partnership by the court. Section 44(g) of the Indian
Partnership Act also contains the words ’just and
equitable’.
Section 433(f) under which this application has been
made has to be read with section 443(2) of the Act. Under
the latter provision where the petition is presented on the
ground that it is just and equitable that the company should
be wound up, the court may refuse to make an order of
winding up 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 would up instead
of pursuing that other remedy.
Again under sections 397 and 398 of the Act there are
preventive provisions in the Act as a safeguard against
oppression in management. These provisions also indicate
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 interests of the company.
Coming to the present case we find that the company was
formed first with R.P.J. and Anil Chandra Dutta. Anil
Chandra Dutta was admittedly an employee of V.D.J. and it is
also claimed that even R.P.J. was an employee of a company
in which V.D.J. was a managing partner. Although the entire
finance was to be arranged by V.D.J., it appears the company
was started by the above two persons
242
with V.D.J. remaining in the background. Anil Chandra Dutta
soon resigned and other people came in and in 1965-66 there
were 19 shareholders, nine headed by R.P.J. and ten headed
by V.D.J., clearly showing two family groups-R.P.J. group
had 1875 shares and V.D.J. group had 3125 shares. V.D.J.
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stood guarantee for bank overdraft to the tune of Rs. 47
lakhs and as the learned Company Judge has noted the stake
of the appellant in the company was about Rs. 63 lakhs as
opposed to the stake of the respondents amounting to Rs.
1.87 lakhs. It is, therefore, clear that R.P.J. group’s
interest in the company was not of the same magnitude as
that of the appellants. The learned Company Judge put the
picture as follows:-
"The entire affidavit evidence brings in the
forefront two broad features. First, that there are
disputes between the petitioners and the respondents
regarding appointment of Vinode Kumar Jhunjhunwalla and
Hariram Modi. It is said on behalf of the petitioners
that these appointments in breach of articles and in
breach of the provisions of the Companies Act are
adequate grounds for winding up. It is, on the other
hand said by the respondents that the allegations of
breach of articles and provisions of the Act are denied
and these are the subject-matter of remedy by suit and
are not the subject-matter of winding up. The other
feature is that the respondents charge the petitioners
with misappropriation. The petitioners also charge the
respondents with having utilised the funds of the
company."
Is this company, in substance a partnership or in the
image of a partnership as claimed ? We may now address to
this aspect strenuously emphasised by Mr. Sen. It as in
Ebrahimi’s case (supra) there had been an earlier
partnership and the partners later on formed into a company,
the matter would have stood on a different footing. In the
present case, however, we do not find any special features
which would unquestionably lead to the conclusion that the
company is in substance a partnership. On the other hand the
following aspects are noteworthy:
Assuming partnership had been contemplated, the idea
was deliberately abandoned. The company was started with one
Anil Chandra Dutta who was no relation of the two families
but was an employee of V.D.J. This would negative the idea
of partnership which connotes equal status amongst the
partners. While it is true that a director may work in the
company on remuneration, R.P.J., however, served like an
employee on monthly salary not on his own initiative
enjoying an equal partner’s freedom and prestige but
directly under the supervision and control of V.D.J.
acknowledging a status definitely of a subordinate
character. The voluntary financial involvement of a large
stake by V.D.J. carefully sought to be protected against
erosion of his interests by constant vigil on the day-to-day
working does not fit in with the concept of a partnership.
All the above features do not enable us to accept the
submission of the respondents that the company in this case
is in substance a partnership.
243
In the present case there is yet another important
feature against the respondents. Serious trouble apparently
arose on or about May 23, 1966, when a Board meeting was
notified. Prior to that even though something might,
perhaps, be brewing inside, but nothing came to the surface
although the respondents alleged that V.D.J’s son, Vinode
Kumar Jhunjhunwalla, had been sent to the States at
company’s expense and was later on, after completion of
education, appointed as Technical Director and that all
these were illegal actions. It is significant that R.P.J.
group was present in the meeting when these resolutions were
passed and they made no grievance at the time about the
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same. The petition for winding up was filled on June 7, 1966
and the foundation for it was laid in the solicitors’ letter
to the appellants on May 27, 1966. That may be said to be
nucleus of the dispute so far as the records show.
It is not a proper principle to encourage hasty
petitions of this nature 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 ’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.
The cases of small companies stand on a different
footing from a company like the present with nineteen
shareholders, although apparently arrayed in two groups. It
is not, prima facie, established on the allegations that the
company cannot run smoothly in the best interest of the
general shareholders, including the R.P.J. group, after exit
of the quondam directors.
The conclusion of the Division Bench that the company
is in substance a partnership venture was based on the
following principal reasons:-
(1) The original idea was to start a partnership
venture and that idea was given ultimately
the shape of a private company
(2) The Sir Khata account shows that the starting
on a partnership venture the parties set up a
private company.
(3) The shareholding shows division amongst two
family groups.
(4) There was no denial by the appellants of a
specific averment of the respondents that the
company was in substance a partnership.
(5) The respondents were all along functioning as
working partners and the respondent, V.D.J.
was the financial partner.
We will examine each of these reasons.
244
With regard to the first reason, the solicitors’ letter
of May 27, 1966, which is the nucleus of the subsequent
winding up petition filed in court is of great significance
and the improvement in the version later in the petition
will lose its importance. It was stated in the solicitors’
letter that "some time in May 1956 it was agreed between our
client Shri R. P. Jhunjhunwalla and Shri V. D. Jhunjhunwalla
and Shri Mahabir Prasad Jhunjhunwalla to do some type of
business in partnership, Shri V. D. Jhunjhunwalla suggested
that a limited company should be formed in which our client
could hold shares to the extent of -/6/- annas and Shri V.
D. Jhunjhunwalla and Shri Mahabir Prasad Jhunjhunwalla to
the extent of annas -/10/- and that our client would manage
the business of such company as and when it was formed and
that the requisite finance for the working of the company
would be made by Shri V. D. Jhunjhunwalla and Shri Mahabir
Prasad Jhunjhunwalla."
There is nothing in the above paragraph which is the
corner-stone of the plea of partnership in substance that
there was any active contemplation about forming of a
partnership. Reference to ’some type of business of
partnership’ is very casual in the above extract. On the
other hand, it is more reasonable to conclude that although
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there might have been discussion about the advantages and
disadvantages of partnership vis-a-vis a private limited
company, no time was lost in deciding to form a company. If
this is the only basis of agreement between the parties to
sustain the claim, we are unable to accept the same.
Regarding the second reason, the Sir Khata account
which has been heavily relied upon to found an agreement or
understanding is wholly misconceived. It merely shows that a
joint account was, for the time being opened for the purpose
of the formation of the company and the account was closed
on such formation. It does not indicate any understanding as
to the right of management of the company by any group of
shareholders. Thirdly, because the shareholding is between
two family groups, it cannot be said that the company
thereby takes the image of partnership. On the other hand,
the fact that after discussion, the parties deliberately
abandoned the idea of forming a partnership would go to show
that there was no intention to carry on business as
partners. Fourthly, after going through the correspondence
it is not possible to say that there was no denial of the
averment by the respondents that the company was in
substance a partnership. Apart from anything else it is
enough to point out that in the letter of V.D.J. dated June
3, 1963, the allegations have been clearly denied. It is,
therefore, a very weak reason to reckon. With regard to the
last reason, it appears that the respondents themselves took
the position in their petition that R.P.J. was managing the
affairs of the company under daily supervision and control
of V.D.J. Whether this position is accepted by the
appellants or not, their statement in that respect gives no
indication of their right to manage the business as a
working partner as claimed. Besides, working on remuneration
by a director is not an unknown feature even in company
business and we have already adverted to the status in
245
which he worked. Nothing, therefore, turns on this feature.
All the above reasons, therefore, fail to convince us that
the conclusion of the Division Bench that the company is in
substance a partnership, is correct.
We should observe, that nothing observed by us in this
appeal may be taken as expression of any opinion on the
merits of the allegations and counter-allegations of the
parties.
In the result the appeal is allowed with costs. The
judgment of the Division Bench is set aside. The winding up
petition stands dismissed and the stay petition of the
appellant is allowed.
S.R. Appeal allowed.
246