Court allows winding up petition due to share transfer via amalgamation, acknowledges management deadlock, mala fides to be examined

Severn Trent Water Purification Inc., In re

Severn Trent Water Purification Inc., In re - [2006] 68 SCL 176 (BOM.) Issues Involved:
1. Maintainability of the Petition
2. Deadlock in Company Management
3. Advertisement of the Petition

Detailed Analysis:

1. Maintainability of the Petition:

The petitioner filed for the winding up of the respondent company under Section 434(e) of the Companies Act, 1956, on the grounds of just and equitable reasons. The respondent's counsel contended that the petition is not maintainable under Section 439(1) of the Companies Act, which specifies that only certain classes of persons, such as contributories, can file for winding up. They argued that the petitioner, Severn Trent Water Purification Inc., which emerged from an amalgamation, is not a registered shareholder in the respondent company's records. The respondent cited the Supreme Court judgment in General Radio & Appliances Co. Ltd. v. M.A. Khader and the Division Bench judgment in Vassant Holiday Homes (P.) Ltd. v. Madan V. Prabhu, emphasizing that the petitioner must be a registered shareholder for at least six months in the last eighteen months to maintain the petition.

The petitioner countered that by virtue of the amalgamation, all rights, liabilities, and assets, including shares, vested in them, making them contributories. They argued that Section 439(4)(b) allows for petitions by persons whose shares devolved through the "death" of a former holder, which in this case is the legal death of the original company due to amalgamation.

The court found that the shares of the erstwhile company automatically transferred to the petitioner by operation of law upon amalgamation. The court distinguished the cited judgments on the grounds that they did not apply to the present case, as there was no legal prohibition against the transfer of shares through amalgamation. Thus, the court concluded that the petition is maintainable.

2. Deadlock in Company Management:

The court observed a complete deadlock in the management of the company, as both shareholders hold 50% equity each and cannot agree on business decisions. This deadlock has paralyzed the company's operations, making it impossible to function smoothly. The court referred to the Supreme Court judgment in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwala, which held that in closely held or private limited companies, the principles of partnership apply, and deadlock can be grounds for winding up on just and equitable grounds.

The respondent argued that the petition is mala fide, claiming the petitioner created the deadlock to force the winding up of the company. The court decided that this issue would be examined during the final hearing but acknowledged the prima facie existence of a deadlock.

3. Advertisement of the Petition:

The respondent requested that even if the petition is admitted, it should not be advertised immediately. They cited the Supreme Court judgment in National Conduits (P.) Ltd., which outlines three options for the court before advertising a winding-up petition. However, the court noted that the petition cannot be finally heard unless advertised, as per Rule 24(2) of the Company Court Rules. Given that both parties were already heard at the admission stage, the court saw no reason to delay the advertisement.

Conclusion:

The court admitted the petition and ordered it to be advertised in specified newspapers and the Maharashtra Government Gazette. The court granted a stay on the advertisement for three weeks to allow the respondent time to seek further relief. The petition was made returnable on 19-8-2005.