IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No 16 of 1997 with COMPANY APPLICATION No 7 of 1997 with COMPANY APPLICATION NO.58 OF 1997 For Approval and Signature: Hon'ble MR.JUSTICE H.L.GOKHALE ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? YES 3. Whether their Lordships wish to see the fair copy of judgment? NO 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder? NO 5. Whether it is to be circulated to the Civil Judge? NO ========================================================= -------------------------------------------------------------- KAPIL N. MEHTA,SURAT. Versus SHREE LAXMI MOTORS LTD. -------------------------------------------------------------- Appearance: 1. COMPANY PETITION No. 16 of 1997 MR HM BHAGAT for Petitioners MR GN SHAH for Respondent No. 1 2. COMPANY APPLICATIONNo 7 of 1997 MR HM BHAGAT for Petitioners MR GN SHAH for Respondent No. 1 3. COMPANY APPLICATION NO.58 OF 1997 MR BB OZA WITH MR VANRAJ PARGHI FOR PETITIONER -------------------------------------------------------------- CORAM : MR.JUSTICE H.L.GOKHALE Date of decision:31/07/98 CAV JUDGEMENT This petition filed under section 439 of the Companies Act, 1956, (hereinafter referred to as 'the Act') principally invokes the ground under section 433(f) of the Act, namely, that it is "just and equitable" that the respondent-company be wound up. The petition also mentions the ground as provided under section 434(1)(C) of the Act, namely, inability of the company to pay "its debts" but nothing is pleaded in support thereof in the petition nor argued across the bar. 2 Respondent-company is a private limited company. It is a "deemed limited company" by virtue of the statutory fiction introduced by section 43-A of the Act. The registered office of the company is situated at Umarwada, near Surat. Its principal business is that of agency or dealership in selling Tata Diesel Vehicles. It also has a petrol/diesel pump and a service station. It employs around 30 employees. The authorised subscribed capital of the company is Rs.15 lakhs divided into 15,000/- equity shares of Rs.100 each. 3 The main objects of the company for which the company was formed, as stated in the object clause of the Memorandum of Association are as follows:- "(1) To acquire and take over the business formerly carried on in partnership between Virendrasingh of Chhota Udaipur, Jamshedji P. Panthaki and Mukund Amratlal Shah in the firm name of Messrs Laxmi Motors, now taken over by Mukund Amratlal Shah together with its assets properties and subject to all liabilities and with a view thereto to enter into the agreement referred to in Article 4 of the Articles of Association and to implement and carry out the same with or without modification. (2) To acquire the agency or dealership of Tata Diesel Vehicles for Gujarat and/or any other territory and to act as agents and dealers of Tata Diesel Vehicles and to carry out all such functions and things as are usually carried out by an agent or dealer of vehicles." 4 Prior to the incorporation of the respondent-company His Highness Maharaja of Chhota Udepur, Virendrasinhji and one Shri Jamshedji Panthki and one Shri Mukund Amrutlal Shah ran a business in partnership in the name and style of M/s Laxmi Motors and this firm was the authorised dealer in South Gujarat for sale of vehicles and spare parts manufactured by TELCO. The said firm established a service station at Surat. The partners of the firm appointed the first petitioner as the Manager of the said firm and put him in-charge therof. Sometimes in January 1972 the Maharaja of Chhota Udepur retired from the firm and in February 1972 Jamshedji Panthki died and the business became vested in Shri M.A.Shah subject to the liabilities payable to the heirs of Jamshedji Panthki. In July 1972 said Shri M.A. Shah, Shri Homi, son of Shri Jamshedji Panthki, and the first petitioner formed the respondent Private Limited company. The company took over the business formerly carried on by the above firm together with its assets, properties and liabilities. 5 In pursuance of Article 11 of the Articles of Association of this company the shares of this company were allotted amongst the three groups equally. Thus, Shri M.A.Shah and persons constituting Shah group have 33-1/3 % shares; Homi J Panthki and persons constituting Panthki group have 33-1/3% shares and the first petitioner and his relatives constituting the Mehta group have 33-1/3% share. The second and third petitioner are sons of the first petitioner. Shortly after the registration of this company, the agreement of agency or dealership between TELCO and this company was executed in August 1972 and the agreement was renewed from time to time. 6 It appears that in the year 1990-91, on coming to know that the company was in financial difficulty, Homi Panthki and Dinesh Shah, son of M.A. Shah went to Surat from Mumbai (where they normally reside) and started looking into the financial position of the company. It is the case of the respondents that they were prevented from examining the books of accounts and records of the company by the first petitioner. Thereafter having found that the brother of the first petitioner one Natwarlal Mehta (who was working as spare parts manager) was responsible for some of the mismanagement, he was removed from his services in 1994. The sales of petrol and diesel during 1986-87 to 1991-92 were looked into by one Agarwal Kailash and Associates, a firm of Chartered Accountant which found that sale of large quantity of petrol and diesel during those six years was not accounted for. Another firm of Chartered Accountant namely, Natwarlal Vepari & Co. was appointed to look into the financial affairs and they submitted three separate reports dated 18.3.1996 certifying that due to the difference in credit sale, the company had suffered substantial losses in the three years. 7 The respondent-company received a letter dated 31.1.1996 addressed to the Chairman by the Manager (Sales) of TELCO asking them to inform as to who was in the management of the respondent-company. Two circular resolutions came to be passed by the majority directors on 5.2.1996 and 8.2.1996 appointing Homi Panthki and Dinesh Shah as the Managing Director and Joint Director respectively in spite of the opposition by the petitioners. On 8.5.1996 TELCO was informed that the Mehta group was without any management or administrative power in the company. The petitioners by their letter of 9.8.1996 protested against their removal from management by contending that the same was violative of Article 65 of the Articles of Association. 8 M/s Natwarlal Vepari & Co. further submitted a report dated 7.8.1996. One significant aspect of the report was that the payee receipts for rebate allowance received from the company to the tune of Rs.1,98,000 during 1988-1992 were not available. The Chartered Accountants also pointed out that in respect of rebate pertaining to Daman office amounting to Rs.6,44,150 for the year 1990-91 the payments amounting to Rs.6,10,650 were made in cash after three years in February-March 1994 and the receipts of the payees were not available. The Chartered Accountant expressed opinion that the veracity of these payments appeared to be doubtful since it does not stand to reason that the customers would wait for three years for receiving the rebate. 9 The said report was sent to the petitioners and their explanation was sought. That led to further correspondence between the parties. It appears that the petitioners started another company in the name of Auro Motors Private Limited in the meanwhile with the object of acquiring dealership of Tata Diesel vehicles. The respondents alleged that petitioners made frantic efforts to obtain dealership from TELCO though they did not get it. Thereafter, further correspondence between the lawyers of the parties has ensued. Criminal proceedings were filed against the petitioners. The petitioners challenged the same by filing Special Criminal Application No.491 of 1997 in this Court. This Court directed that the investigation be properly done by another officer and it appears that thereafter charge sheet has been filed against the petitioners. 10 The submission of the petitioners is that the respondents have made efforts to exclude them from the management. In para 19 of the petition it is averred as follows:- "The formation of the company was based on personal relationship and mutual confidences amongst partners. There are breaches of the basic understandings that the petitioners will participate in the conduct of the business. The respondent-directors are guilty of oppression and mismanagement. They have mismanaged, misconducted and misappropriate to the detriment of the petitioners who are oppressed by the said directors in management. The structure of the company only comprise of 3 group of directors who are equal partners in business of Telco dealership. The petitioners are one of the equal partners who have been vested with the management by the Articles of Association and by contracts at the outset. However, the other group of directors have misconducted to oust the petitioners from their vested right to control and manage the affairs of the company. Petitioners state that this has brought about total loss of confidence and lack of mutual faith and understanding. It is submitted that the petitioners are sought to be excluded from the management, and therefore or otherwise, principles of dissolution of partnership are required to be invoked. This is a case of irretrievable and irreversible 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. In the circumstances, it is just and equitable that the Company is wound up, particularly on the principle of dissolution of partnership" 11 On behalf of the respondents, an exhaustive reply has been filed by Homi J Panthki, affirmed on 10th March 1997. It is submitted therein that the petitioners have not come to the Court with clean hands and that they are themselves responsible for the deterioration in the financial affairs of the respondent-company which was prevented by timely intervention by himself as well as by Mr Shah. It is submitted that when one is invoking just and equitable clause, firstly, one must come to the Court with clean hands. 12 It is submitted that the petitioners are facing criminal proceedings for misappropriation and they have themselves set up a rival company to do the very business which the respondents are doing. It is further submitted that none of the petitioners were partners of the erstwhile partnership firm which was the predecessor of the respondent company and hence they cannot invoke the principles of partnership for dissolving a private limited company. It is denied that there is any contravention of Article 65 of the Articles of Association or that there is any deadlock in the management. It is submitted that appointment of Managing Directors is outside the scope of the restrictive clause of Article 65. It is denied that the company has no business now and it is submitted that the sale of vehicles by the respondent-company has again picked up after the period when the difficulties were created by the petitioners. Thereafter the petitioners have filed a rejoinder and then a supplement affidavit. The respondents have filed a sur-rejoinder and additional affidavit showing the amounts of commission received in recent times from TELCO as also enclosing therewith a copy of the chargesheet filed by Crime Branch against first and third petitioners, the earlier mentioned Natwarlal Mehta and some other charging them under sections 409, 465, 467, 468, 471, 477A, 411 and 120-B of the IPC. The charge sheet makes allegation of misappropriation with respect to :- (1) Not accounting for the amount of Rs.2,47,139 in the books of account of the company earned by sale of petrol and diesel during 1986-87 to 1991-92. (2) Not accounting for sale of diesel and petrol to the tune of Rs.57,164.01 during 1992-93 to 1994-95. (3) Not explaining the payment of rebate to 1097 customers to the tune of Rs.21,51,300. Petitioner no.3 has thereafter filed one more affidavit on 7.4.1998. 13 The petitioners have also filed a separate company application bearing no.7/97 praying for appointment of provisional liquidator and to restrain the respondents from dealing with assets of the company and from operating the bank account etc. Mr Homi Panthki has filed a reply opposing the prayers therein. One Shri Shaukat Saiyed and one Gopal Patel who claim to represent the employees have filed another Company Application No.58 of 1998 to join in the company petition. The affidavit in support thereof states that there are 30 employees in the respondent no.1-company who are affected by this petition. The matter was heard at length since serious consequences follow from the admission of a company petition. However, before the matter was heard, in the beginning itself efforts were made to see to it that if possible a compromise is arrived at between the parties or it is resolved by Arbitration. That effort however did not succeed. Shri S.N. Soparkar with Shri H.M. Bhagat have appeared for the petitioners. Shri B.J. Shelat with Shri G.N. Shah appeared for the respondents and Shri B.B.Oza with Vanraj Parghi have appeared for the workmen. 14 The learned advocates have ably assisted me in going through the record of the case as also the relevant statutory provisions and case law. Shri Soparkar, learned counsel appearing for the petitioners, as well as Shri Shelat, learned counsel appearing for the respondents, laid great emphasis on the judgement of the Honourable Supreme Court in the case of Hind Overseas Private Limited v. R.P. Jhunjhunwalla reported in AIR 1976 SC 565. Mr Soparkar submitted that under the Articles of Association as they existed in the respondent company a kind of veto power was given to each of the three groups when it came to taking decisions on certain matters. Article 65 of the Articles of Association of the respondent-company is very much relevant for our purpose and hence it is reproduced herein-below:- "65. All decisions of the Board whether taken at a meeting of the Board or by resolutions passed by circulation shall be passed by a majority vote of the Directors and in the event of a tie the Chairman shall have a casting vote provided that in respect of the matters enumerated hereinbelow such majority vote shall include the affirmative vote of at least one Director of each Group of shareholders namely :- (i) materially deviating from or materially changing the objects or activities of the Company or substantially expanding any such activities; (ii) otherwise than in the ordinary course of business, selling, leasing or dealing with the whole or any part of the Company's undertaking, property or assets; (iii) pledging any capital, shares, bonds or debentures of the Company or mortgaging the same as security for such loans; (iv) authorising projects for the acquisition, addition, replacement, sale, lease or disposal of any items of tangible or intangible property of the Company in excess of Rs.15,000/- (v) investing any of the funds of the Company otherwise than in trust, securities or in fixed deposit with the Company's Bankers; (vi) fixing or increasing salaries or other remuneration of any employee or officer including any Director of the Company whose total monthly salary is Rs.1,500 or more; (vii) becoming a guarantor or surety for obligations of third parties except for the purpose of the Company's business exceeding Rs.5,000; (viii) becoming a party to any merger or amalgamation; (ix) making any loan not being in the nature of an advance or deposit of the funds of the Company or credit facility to customers where the sum to be loaned or facility granted would, together with any other sum already loaned, exceed Rs.5,000/-; (x) the appointment of any Director in excess of six Directors and Committee of Directors, and the powers and authorities to be vested in such Committee; (xi) entering into contracts with parties other than Telco and Esso for the purchase of goods by the Company which contracts extend over a period of more than one year or exceed in value the sum of Rs.10,000/-; (xii) mortgaging or otherwise encumbering any of the assets or properties of the Company; (xiii) taking legal proceedings which go beyond the ambit of the usual business; (xiv) increase in share capital and/or issue or shares in pursuance of such increase." 15 Mr Soparkar submitted that with respect to the items provided under these Articles, for every decision to be taken by the management an affirmative decision of at least one director of each of the three groups was necessary. He submitted that circular resolutions outsting the petitioners from management and entrusting the same to Shri Panthki and Shah were therefore illegal inasmch as the petitioners never consented to that. Mr Soparkar submitted that essentially respondent no.1 was a quasi-partnership. The real nature of the relationship between the parties was necessary to be seen by piercing the corporate veil and if the management of the company was not possible in accordance with the Articles of Association, it was just and equitable that the company be wound up. He further submitted that as held in Needle Industries (India) Limited v/s Needle Industries Newey (India) Holdings Ltd. reported in AIR 1981 SC 1298 (with particular reference to the observations made in para 46, 47 and 48 thereof) that in a situation like this, one had to remember that behind each Corporation there are individuals. He laid emphasis on the following observations made by House of Lords in the case of Ebrahimi v. Westbourne Galleries Ltd. (1973) AC 360 (HL) (briefly, Ebrahimi's case): "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 company structure." 16 Mr Soparkar further submitted that in the facts of the present case the relations having been spoiled between the parties, under the structure as it exists in the Articles of Association if the Directors were not on talking terms the so called meetings of the Board of Directors would almost be "a farce or a comedy" in terms of phrase used in Yenidje's case (1916) 2 Ch 426. Mr Soparkar submitted that the principles laid down in Ebrahimi's case have been accepted as "sound principles" by the Honourable Supreme Court "depending upon the nature, composition and character of the company" as held in the case of Hind Overseas' (supra) in para 20 thereof. Mr Soparkar submitted that proposition of law emerging from Hind Overseas will squarely apply in the facts of the present case. In his view, in the facts of the present case, the right to active management is given to all the groups. All groups are having their shareholders. There is a dead lock in the management in their disputes. It is relevant to note that the apparent structure of the company is not the real one and in his view the company is nothing but a quasi partnership which can be seen by piercing through the corporate veil and therefore principles of partnership should apply. In a situation like this, as observed by the Honourable Supreme Court, in paragraphs 25 and 33 of Hind Overseas case, the equitable considerations must prevail over the legal rights. 17 Mr Soparkar submitted that as in the Hind Overseas case, in the present case also the business was earlier carried on as a firm and later on it was converted into a company. He accepts that otherwise the facts of that case were different. He submitted that in Hind Overseas case it was a case of starting a new business venture altogether and mainly there were no restrictive clauses in the Articles of Association or previleges given to any shareholders or special rights in favour of any party. It was also not a case of equal contribution by all the groups. Mr Soparkar therefore submitted that what is relevant are the propositions accepted by the Honourable Supreme Court in Hind Overseas case. In his view, facts of that case are clearly distinguishable from the facts of the present case and hence the ratio of that judgement needs to be applied to the present matter without being impressed as to how that case was decided on facts thereof. 18 As against the above submissions of Mr Soparkar, Mr Shelat, the learned counsel appearing for the respondents, submitted that what is material is to find out as to whether it is `just and equitable' in the facts of the present case that the company be wound up. Mr Shelat submitted that since it is a jurisdiction based in equity, it is necessary that the petitioner must firstly come to the court with clean hands. He submitted that there are serious charges of misappropriation against the petitioners and they are facing a charge sheet in the court of law. He submitted that the active participation and practically the full control of the management by the petitioners was never disputed by the Panthki and Mehta group, right from the inception of the company in the year 1972 until 1991. It is only when it was found by Panthki and Shah groups that the petitioners are mismanaging the affairs and misappropriating the funds that they had to move into the matter. Mr Shelat asked, "Should the answer to such a situation be only winding up of the company?" Mr Shelat put it in the words of the learned company judge who decided in Hind Overseas case in Calcutta High Court as incorporated in para 14 of the Supreme Court judgement that the heart of the matter was that "the petitioners desire that they should be in power and the respondents would go on financing." Mr Shelat submitted that it is relevant to note that the petitioners have set up a rival company to do the very business which the respondent-company was doing. There are about 30 workmen employed in this company and the company has made a good name in South Gujarat and there is no reason why it should be wound up only because one group which is in management mismanages the company and misspropriates its earning to the exclusion of others. In a case like this, the other shareholders and Directors are bound to react and takeover the management which is what has happened. 19 Mr Shelat then submitted that as can be seen from para 17 of the petition, the petitioners are claiming mismanagement by Panthki and Shah groups since February 1991 in view of the complaints received by TELCO. The petition alleges oppression and mismanagement and exclusion of the petitioners from the management in para 19 thereof. Mr Shelat submits that for all these allegations appropriate remedy was available to the petitioners under section 397 of the Act. In fact, on 19th December 1996 in the letter addressed by petitioner's advocate on page 15 thereof he has in terms stated as follows:- "..... However, my clients desire me to inform you that this step of appointment of Managing Director, each one from two groups, to the total exclusion of the third group is an act of oppression within the meaning of the expression in Section 397 of the Companies Act, 1956. My clients reserve their right to seek appropriate relief in this behalf as provided in Sec.397, and in such an action, relief will also be sought for declaring the circular illegal and for removal of the two Managing Directors