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VENKATARAMA AYYAR, J. – This appeal arises out of an application filed by the first
respondent under S. 162, cls. (v) and (vi), Companies Act, for an order that the Rajahmundry
Electric Supply Corporation Ltd. be wound up. The grounds on which the relief was claimed
were that the affairs of the Company were being grossly mismanaged, that large amounts
were owing to the Government for charges for electric energy supplied by them, that the
directors had misappropriated the funds of the Company, and that the directorate which had
the majority in voting strength was “riding roughshod” over the rights of the shareholders.
In the alternative, it was prayed that action might be taken under S. 153-C and appropriate
orders passed to protect the rights of the shareholders. The only effective opposition to the
application came from the Chairman of the Company, Appanna Ranga Rao, who contested it
on the ground that it was the Vice-Chairman, Devata Ramamohanrao, who was responsible
for the maladministration of the Company, that he had been removed from the directorate, and
steps were being taken to call him to account, and that there was accordingly no ground either
for passing an order under S. 162, or for taking action under S. 153-C.
- On behalf of the appellant, it was firstly contended that the application is so far as it
was laid under S. 153-C was not maintainable, as there was no proof that the applicant had
obtained the consent of the requisite number of shareholders as provided in sub-cl. (3)(a)(i) to
S. 153-C. That clause provides that a member is entitled to apply for relief only if he has
obtained the consent in writing of not less than one hundred in number of the members of the
company or not less than one-tenth in number of the members, whichever is less.
The first respondent stated in his application that he had obtained the consent of 80
shareholders, which was more than one-tenth of the total number of members, and had thus
satisfied the condition laid down in S. 153-C, sub-cl. (3)(a)(i). To this, an objection was taken
in one of the written statements filed on behalf of the respondents that out of the 80 persons
who had consented to the institution of the application, 13 were not shareholders at all, and
that two members had signed twice.
It was further alleged that 13 of the persons who had given their consent to the filing of
the application had subsequently withdrawn their consent. In the result, excluding these 28
members, it was pleaded, the number of persons who had consented would be reduced to 52,
and, therefore, the condition laid down in S. 153-C, sub-cl. (3)(a)(i) was not satisfied.
We are of opinion that this contention must, on the allegations in the statement, assuming
them to be true, fail on the merits. Excluding the names of the 13 persons who are stated to
be not members and the two who are stated to have signed twice, the number of members who
had given consent to the institution of the application was 65.
The number of members of the Company is stated to be 603. If, therefore, 65 members
consented to the application in writing, that would be sufficient to satisfy the condition laid
down in S. 153-C, sub-cl. (3)(a)(i). But it is argued that as 13 of the members who had
consented to the filing of the application had, subsequent to its presentation, withdrawn their
consent, it thereafter ceased to satisfy the requirements of the statute, and was no longer
maintainable.
We have no hesitation in rejecting this contention. The validity of a petition must be
judged on the facts as they were at the time of its presentation, and a petition which was valid
when presented cannot, in the absence of a provision to that effect in the statute, cease to be
maintainable by reason of events subsequent to its presentation. In our opinion, the
withdrawal of consent by 13 of the members, even if true, cannot affect either the right of the
applicant to proceed with the application or the jurisdiction of the court to dispose of it on its
own merits.
- It was next contended that the allegations in the application were not sufficient to
support a winding up order under S. 162, and that, therefore, no action could be taken under
S. 153-C. We agree with the appellant that before taking action under S. 153-C, the Court
must be satisfied that circumstances exist on which an order for winding up could be made
under S. 162.
The true scope of S. 153-C is that whereas prior to its enactment the Court had no option
but to pass an order for winding up when the conditions mentioned in S. 162 were satisfied, it
could now in exercise of the powers conferred by that section make an order for its
management by the Court with a view to its being ultimately salvaged. Where, therefore, the
facts proved do not make out a case for winding up under S. 162, no order could be passed
under S. 153-C.
The question, therefore, to be determined is whether the facts found make out a case for
passing a winding up order under S. 162. In his application the first respondent relied on S.
162, cls. (v) and (vi) for an order for winding up. Under S. 162(v), such an order could be
made if the company is unable to pay its debts. It was alleged in the application that the
arrears due to the Government on 25.6.1955 by way of charges for energy supplied by them
amounted to Rs. 3,10,175-3-6.
But there was no evidence that the Company was unable to pay the amount and was
commercially insolvent, and the learned trial Judge rightly held that S. 162(v) was
inapplicable. But he was of the opinion that on the facts established it was just and equitable
to make an order for winding up under S. 162(vi), and that view has been affirmed by the
learned Judges on appeal. - It was argued for the appellant that the evidence only established that the ViceChairman, Devata Ramamohan Rao, who had been in effective management was guilty of
misconduct, and that by itself was not a sufficient ground for making an order for winding up.
It was further argued that the words “just and equitable” in cl. (vi) must be construed
‘ejusdem generis’ with the matters mentioned in cls. (i) to (v), that mere misconduct of the
directors was not a ground on which a winding up order could be made, and that it was a
matter of internal management for which resort must be had to the other remedies provided in
the Act.
The contention of the appellant is that as all the charges made in the application amounted
only to misconduct on the part of the directors, and as there was no proof that the Company
was unable to pay its debts, an order for winding up under S. 162 could not be made.
- The authorities relied on by the appellant reflect the view which was at one time held in
England as to the true meaning and scope of the words “just and equitable” in the provisions
corresponding to S. 162(vi) of the Indian Act.
The law is thus stated in Halsbury’s Law of England, Third Edition, Volume 6,
page 534, para 1035:
“The words ‘just and equitable’ in the enactment specifying the grounds for winding
up by the Court are not to be read as being ‘ejusdem generis’ with the preceding
words of the enactment.”
When once it is held that the words “just and equitable” are not to be construed ‘ejusdem
generis,’ then whether mismanagement of directors is a ground for winding-up order under S.
162(vi) becomes a question to be decided on the facts of each case. Where nothing more is
established than that the directors have misappropriated the funds of the Company, an order
for winding up would not be just or equitable, because if it is a sound concern, such an order
must operate harshly on the rights of the shareholders.
But if, in addition to such misconduct, circumstances exist which render it desirable in the
interests of the shareholders that the Company should be wound up, there is nothing in S.
162(vi) which bars the jurisdiction of the Court to make such an order. - Now, the facts as found by the courts below are that the Vice-Chairman grossly
mismanaged the affairs of the Company, and had drawn considerable amounts for his
personal purposes, that arrear due to the Government for supply of electric energy as on
25.6.1955 was Rs. 3,10,175-3-6, that large collections had to be made, that the machinery was
in a state of disrepair, that by reason of death and other causes the directorate had become
greatly attenuated and “a powerful local junta was ruling the roost,” and that the shareholders
outside the group of the Chairman were apathetic and powerless to set matters right. On these
findings, the courts below had the power to direct the winding up of the Company under S.
162(vi), and no grounds have been shown for our interfering with their order. - It was urged on behalf of the appellant that as the Vice-Chairman who was
responsible for the mismanagement had been proved, and the present management was taking
steps to set things right and to put an end to the matters complained of, there was no need to
take action under S. 153-C.
But the findings of the Courts below are that the Chairman himself either actively
cooperated with the Vice-Chairman in various acts of misconduct and maladministration or
that he had at any rate, on his own showing abdicated the entire management to him, and that
as the affairs of the Company were in a state of confusion and embarrassment, it was
necessary to take action under S. 153-C. We are of opinion that the learned Judges were
justified on the above findings in passing the order which they did. - It was also contended that the appointment of administrators in supersession of the
directorate and vesting power in them to manage the Company was an interference with its
internal management. It is no doubt the law that courts will not, in general, intervene at the
instance of shareholders on matters of internal administration, and will not interfere with the
management of a company by its directors, so long as they are acting within the power
conferred on them under the Articles of Association.
But this rule can by its very nature apply only when the company is a running concern,
and it is sought to interfere with its affairs as a running concern. But when an application is
presented to wind up a company, its very object is to put an end to its existence, and for that
purpose to terminate its management in accordance with the Articles of Association and to
vest it in the Court. In that situation, there is no scope for the rule that the Court should not
interfere in matters of internal management.
And where accordingly a case had been made out for an order for winding up under S.
162, the appointment of administrators under S. 153-C cannot be attacked on the ground that
it is an interference with the internal management of the affairs of the company. If a
Liquidator can be appointed to manage the affairs of a company where an order for winding
up is made under S. 162, administrators could also be appointed to manage its affairs, when
action is taken under S. 153-C. This contention must accordingly be rejected.
- In the result, the appeal fails and is dismissed.
