# HIND OVERSEAS PRIVATE LIMITED v. RAGHUNATH PRASAD JHUNJHUNWALLA AND ANR

- **Citation:** [1976] 2 S.C.R. 226
- **Court:** Supreme Court of India
- **Decided:** 1975-10-10
- **Bench:** A. ALAGm1swAM1, P. K. GosWAMI, N. L. Un1.'Walia
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/hind-overseas-private-limited-v-raghunath-prasad-jhunjhunwalla-and-anr-6771
- **Pages:** 20

## Headnote

Practice-Company cases-Winding up petitions-Duty of the
company
Co'urt . .
English decisions--Usefulness of-Applicability to cases under the Companies Act.
Winding up of companies-The C.ompanies Act (Act l), 1956-Sec. 433 (f)
-Scope of vis-a-vis s. 44(g) of the Partnership Act.
·C
''Just and equitable c/ause"-App/icability in case of par//lership firms in
• the guise of a private company.
D
E
F
G
H
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 i~ 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 ~hare
and VDJ with MPJ should h'ave 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/Sth 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 !he company was Rs. 5 lacs divided
into 2500 equity shares of Rs. JOO/- each.
RPJ and another ACD, an employee and nominee of VDJ, became the subscribers to. the Memorandum of
A~ociation of the co111pany and also became its first directors.
On 23-8-1956,
VDJ and MPJ were appointed ~s 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 1%0 and 1965 except in the year 1961 when there was some lo~.
Finding that there has been a mismanagement of affairs of RPJ and PCJ to
the tm1e of Rs. 8 lacs_ the VDJ group wh.o 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 a[] the powers of RPJ. The extraordi·
nary 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 nnder
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 naluFe of a
'
HIND \WERSEAS V. R. P. JHUNJHUNWALU
·I i'tf
227
partnership and is liable lo be wound up in view of the Ios~ 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 courd .be
resolved by th.c articles: (iii) there we

## Text

_Characters 0–39,998 of 59,652. This is a partial read: ask again with offset=39998 for what follows._

•
A
8
226
HIND OVERSEAS PRIVATE LIMITED
v.
RAGHUNATH PRASAD JHUNJHUNWALLA AND ANR.
October 10, 1975
[A. ALAGm1swAM1, P. K. GosWAMI AND N. L. UN1.'WALIA, JJ.]
Practice-Company cases-Winding up petitions-Duty of the
company
Co'urt . .
English decisions--Usefulness of-Applicability to cases under the Companies Act.
Winding up of companies-The C.ompanies Act (Act l), 1956-Sec. 433 (f)
-Scope of vis-a-vis s. 44(g) of the Partnership Act.
·C
''Just and equitable c/ause"-App/icability in case of par//lership firms in
• the guise of a private company.
D
E
F
G
H
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 i~ 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 ~hare
and VDJ with MPJ should h'ave 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/Sth 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 !he company was Rs. 5 lacs divided
into 2500 equity shares of Rs. JOO/- each.
RPJ and another ACD, an employee and nominee of VDJ, became the subscribers to. the Memorandum of
A~ociation of the co111pany and also became its first directors.
On 23-8-1956,
VDJ and MPJ were appointed ~s 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 1%0 and 1965 except in the year 1961 when there was some lo~.
Finding that there has been a mismanagement of affairs of RPJ and PCJ to
the tm1e of Rs. 8 lacs_ the VDJ group wh.o 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 a[] the powers of RPJ. The extraordi·
nary 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 nnder
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 naluFe of a
'
HIND \WERSEAS V. R. P. JHUNJHUNWALU
·I i'tf
227
partnership and is liable lo be wound up in view of the Ios~ 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 courd .be
resolved by th.c articles: (iii) there were alternative remedies OJ?en: and (!v)
lack of probity did not result in prejudice to the company's busmess affectmg
petitioner's fights as share-holder, but only affected his right as director.
The
appellate Bench, however, allowed the appeal of the respondent RPJ and order-·
ed the winding up of the company in the fact~ and circumstances of the ~se,
viz., impossibDity o[' carrying on business by_ RPJ as a partner. the exclns19n
of RPJ from the partnership concern and loss of mutual confidence between
RPJ. and VDJ group.
Dismissing the appeal by certificate, the Court,
HELD : (I) In an application under s. 433, tho company Court will have
to keep in mind the ·position of the company as a whole and the interests of
the ,hareholders and see that they do not sulfur 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 admitt'°'d on the allegations in the petition. 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
applicatio_n has to In dismissed.
The interest of the applicant alone is not
of predominant consicjcratfon.
It is not" a proper principle to encourage hasty
petitions under s. 433 without first altempting 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 equitabl·" riot only to the persons
applying for winding up but also to the company and to all its ~areholders.
[243 C-D, 240 H, 241 Al
A
c
D
( 2) Section 433 of the Companies Act is modelled on the English Com.,anies
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, howE
ever, with one primary consideration in view that the general interests of the
shareholders may not be readily sacrified at the altar of squabbles of directors of pow~rful groups for power to manage the company.
f240A, C-D]
,I
Ramanandi Kuer v. Ka/a1ra1i Kucr. (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 idenF
tical in terms with.s. 222(f) Qf 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
claw;e, riz .. "just and equitable" is not to be read as being "eju~em generis"
with the preceding five clause~. The just and equitable clause leaves the entire
matter to the wide and wise judicial discretion of the court. The only limitation' 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".
[241-11-El
G
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 wou·nd 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 unrcasonablv in seeking to have the company wound up instead of ptirsuing that other- remedy.
Again uader s. 307
and 398 of the Act there are preventive provisions in the Act as a safeguard
H
against oppression in management.
These provisions also indicate that relief
under s. 433 (f) based on the "just and e<juitable" 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]
A
B
c
D
E
228
SUPREl'vlE COURT REPORTS
[1976] 2 S.C.R.
lvladau Lal and another v. Groiu Chambers Ltd., Mazafjar Nagar and others,
[1968) 2 S.C.R. 252 and S. P. Jni11 v. Kalinga Tubes Ltd. [1965] 2 S.C.R. 720,
followed.
-
(4) In applying the principles of dissolntion of partnership to companieo,
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. Lld. 1916 2 Ch. 426]. The justand equll.
able clause cannot be invoked if a deadlock can be resolved by the articles
and if there are alternate remedie.s.
(In re Cuthbert Cooper and Sons Ltd.,
1937 Ch. 392). If there is no justifiable Jack of confidence grounded on the
.conduct of the directors in the conduct of management of the companies affairs
(Rajahmundry Electric Supply Corporatidn (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.
[2330-E; 236-D]
(5) The principle of "ju~t and equitable., clause baffles a pr-ccise 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 r!ompany and there is no right as such
agreed upon for activi: participation of members who are sought to be excluded from management. the principles of dissolution of partnership cannot
be liberally invoked. Besides, it i's only when shareholding is more or less
equal and there i& a case of complete deadlock in the company on account of
Jack 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 8tructure and on piercing the veil it i9 found that in reality it is a partnership. These
are necessarily equitable considerations and may in a given case be superim-·
posed on Jaw.
Whether it would be so done in a particular cas~ 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 Yenidjc
Tobacco Company Limited, [1916) 2 Ch. 426, discussed.
In re Ebrahimi and Westboume Galleries Lrd. [1973) AC 360, discussed
and considered.
F
Locklz and another v. John Blackwood Limited [1924] AC 783, quoted with
G
H
approval.
Baird v. Lees. [19241 AC 83 and D. Davis · &
Co.
Ltd.
v.
Brunswick
(A iistralia) 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 Jjd.,
Muzaf]arnaf?ar and others, [1968) 2 SC.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 contemplatied; the
idea was deliberatelv abandoned; the company was started with one ACD who
had no relation with MGT group or the VDJ group but an employee of VDJ,
which would negative the idea of partnership· which connotes equal 8tatus 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 enioving an equal partner's freedom and pre&tige but
directly under the supervision and control of VDJ acknowledging a
status
definitely of a subordinate eharacter; The voluntary financial involvement of
a large stake by VDJ carefully sought to be protected against erosion of bis.
interests by constant vigil on the day-to-day working does not fit in with the
..
•
~
HlND OVERSEAS v. R. P. JHUNJHUNWALLA (Goswami, !.) 22 9
.,
,
·conce.pt of a partnership; Even the acc9unt 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 partn\!rship. On the other hand,
the fact that after discus~ion, the parti"s deliberately abandoned the idea of
farming a partnership _would go to show that there there was no intention to
carry on business as partners.
[242E-H]
There are no special featuies which would unquestionably lead to the Conclusion that the company is in substance a partnership and the principle of
"just and equitable clause" cannot be therefore, extended.
[242-H, 245A]
Crv1L 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, 0. P. Khaitan, B. P. Maheshwari, . Suresh
Selhi and R. S. Agarwal for Respondents.
The Judgment of the Court was delivered by
GOSWAMI, J.
This appeal by certificate is agaiust the
common
judgment of the Calcutta High Court in respect oi respondents' application for winding up and appellant's stay application relating to the
Hind Overseas Private Limited, a private limited company (briefly
the company).
A
B
c
D
The question that is raised in this appeal relates to the scope of
E
section 433(f) of the Companies Act, 1956 (briefly the Act)
and
iH particular whether the principles appl~cablc in the case of dissolution of partnership could be involved Ill the case of the company.
The allegations in the winding up petition before the High Court
arc as follows :
The company was incorporated nnder the Act in Augnst
1956.
F
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, tlie entire nominal capital ha:; been issued and
folly paid up.
·
The petitioners (respondents herein), Raghunath Prasad
Jhunjhunwalla and his son, Phoolchand Jhunjhunwalla (hereinafter to be
G
described as R.P.J. and P.C.J. respectively), and the
members
of
their family hold 1875 shares in the company. and the
remammg
3125 shares are held by one V. D. Jhunjhunwalla and the members
of his family.
In or abont the month May, 1956, R.P.J. and V. D. Jhnnjhu1;1walla
(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
H
A
B
c
D
E
F
G
H
230
SUPREME COURT REPORTS
[1976] 2 S.C.R.
opened in the name of 'Raghunath Prasad J hunjhunwalla
Kc
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
car~y 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 dayto-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 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 of 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 Directorin-charge of the company on November 23, 1957 at a mohthly 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 remuQeration
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
inoreased 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 011
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
'
•
,,.
)
HIND OVERSEAS v. R. P. JHUNJHUNWALLA (Goswami, J.) 231
railway sleepers in execution of Government contracts. The busines~
of the company during this period had been always managed by
R.P.J., P.C.J. under the general supeyvision 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-incharge thronghout 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 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 ca!led 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 counter-mantled 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-incharge 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
belongin<Y
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
thei: group in their places instead.
The explanatory statement to that
N ot1ce 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
16-Ll275 Sup. CT/76
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
232
SUPREME COURT REPORTS
[1976] 2 S.C.R,
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 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
•
•
•
HIND OVERSEAS v. R. P. JHUNJHUNWALLA (Goswami, !.) 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 windingup 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.
A
B
c
D
E
The learned Company Judge held that the principle in Yenidje's case
F
(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 J?rivate company could be fairly called a partnership
m the guise of a pnvate company then the things
which
might be a ground for dissolution of a 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;
(1) (1937) Ch. 392.
(2) [1916] 2 Ch. 426.
G
H
A
B
c
D
E
F
G
H
234
SUPREME COURT REPORTS
(1976] 2 S.C.R.
(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
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 and Westbourne Galleries Ltd. and
Others(!) (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 Jaw 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 fro~ it.
It docs, .as
equity always does, e!lable the ~ourt !o sub1ect tl~e exe:c1se
of legal rights to eqmtable cons1derat10ns :
cons1derat10ns,
that is of a personal character arising between one individual a~d another, which may make it unjust, or inequitable,
(l) [1973] A. C. 360.
•
,.
I
I
....
HIND OVERSEAS v. R. P. JHUNJHUNWALLA (Goswami, !.) 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 one, or proba-
.bly 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."
A
B
c
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,
D
1948 which the House of Lords was
considering corresponds to
section 43 3 ( 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
dehvering his reasoned speech has himself noted that-
"lt 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 s~ares. The N~zars, fat~er and son, thus had a majority
of the votes m general meetmg. 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.
E
F
G
H
A
B
c
D
E
F
G
H
236
(2)
SUPREME COURT REPORTS
Both the shareholders were directors
profits equally as remuneration and
were declared.
[1976] 2 S.C.R.
sharing
the
no dividends
(3) One of the shareholders' son acquired shares from his
father and from the second shareholder, Ebrahimi,
and joined the company as the third shareholderdirector 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 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
eariler Yenidje's case (supra) and indeed these are sound principles
depending upon the na;ture, 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 Y enidje'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."
•
•
...
)
HIND OVERSEAS v. R. P. JHUNJHUNWALLA (Goswami, !.) 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 cop.templated by the arrangement into which they
entered?"
*
*
*
*
"Certainly, having regard to the fact that the only two
directors win not speak to each other, and no business which
deserV!;!S 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 th.e 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".
A
n
c
D
E
F
G
H
\
B
c
l)
F
G
H
238
SUPREME COURT REPORTS
[1976] 2 S.C.R.
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 Ebrahimi'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(!), 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("), 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. lf 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 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.