TaxTMI 
TaxTMI 
1975 (10) TMI 71
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....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 1,875 shares in the company and the remaining 3,125 shares are held by one V. D. Jhunjhunwalla and the members of his family. 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, Vinodh Kumar Jhunjhunwalla, appointed as the technical director of the company. Since the year 1958, and until February 26, ....
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....g 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 29, 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 his group, caused to be issued through certain shareholders belonging to his group a requisition dated May 28, 1966, for calling an extraordinary 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 guards 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 solvent. That serious disputes and differences had arisen among the shareholders of the company and there was a complete deadlock....
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....hat 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 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 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 In re Cuthbert Cooper & Sons Ltd. [1937] Ch 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 su....
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.... 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 it. 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 v. Westbourne Galleries Ltd. [1973] AC 360, 379 (HL) (briefly Ebrahimi's case (supra), 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 obligations inter se which are not necessarily submerged in the....
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....r 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 (supra), : (1) There was a prior partnership between the only two members who later on formed the company. (2) Both the shareholders were directors sharing the profits equally as remuneration and no dividends were declared. (3) One of the shareholder's son acquired shares from his father and from the second shareholder, Ebrahimi, and joined the company as the third shareholder-director w....
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....recise 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". This was a company of 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 the 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 t....
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....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 [1924] SC 83 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 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 ....
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....any's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up". Again, in Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 , 557 (SC) this court had held that: "Primarily, the circumstances existing as 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 Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351 (SC)) Keeping the ratio of Ebrahimi's case (supra) in the forefront 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. Although the Indian Companies Act is modelled on the English Companies Act, the Indi....
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..... 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 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 433 provides for the circumstances in which a company may be wound up by the cou....
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....the 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 with V.D.J. remaining in the background. Anil Chandra Datta 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 1,875 shares and V.D.J. group had 3,125 shares. V.D.J. 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 Raghunath Prasad Jhunjhunwala's case (supra) : "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 Jhunjh....
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.... brewing inside, but nothing came to the surface although the respondents alleged that V.D.J.'s son, Vinode Kumar Jhun-jhunwalla, had been sent to the States at the 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 same. The petition for winding up was filed on June 7, 1966, and the foundation for it was laid in the solicitor's letter to the appellants on May 27, 1966. That may be said to be the 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....
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....eference 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 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 pa....