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PETITIONER: RAJAHMUNDRY ELECTRIC SUPPLYCORPORATION LTD.

       Vs.

RESPONDENT: A. NAGESWARA RAO AND OTHERS:

DATE OF JUDGMENT: 16/12/1955

BENCH: AIYYAR, T.L. VENKATARAMA BENCH: AIYYAR, T.L. VENKATARAMA BOSE, VIVIAN

CITATION:  1956 AIR  213            1955 SCR  (2)1066

ACT: Indian  Companies  Act, 1913 (VII of 1913),  s.  153-C  sub- clause (3)(a)(i) and s. 162 (v) and (vi)-Application for  an order  under  s.153-C-Validity thereof to be judged  on  the facts at the time of presentation thereof-Subsequent events- Effect thereof-Order under s. 153-C-Whether competent before facts  proved make out a case for winding up under  s.  162- Words  "just  and equitable" in s.  162(vi)-Whether  ejusdem generis with the matters mentioned in clauses (i) to (v)  of the section-Mere misconduct of Directors in misappropriating funds  of a Company-Apart from  other  circumstances-Whether warrants  an  order  for  the  winding  up  of  a   Company- Circumstances  under  which an order for winding up  can  be passed by the court.

HEADNOTE: An  application was filed by the first respondent  under  s. 162 clauses (v) and (vi) of the Indian Companies Act for the winding  up of the Company on the grounds, inter-alia,  that the  affairs of the Company were being mismanaged  and  that the directors had misappropriated the funds of the  Company. In the alternative it was prayed that action might be  taken under  s. 153-C and appropriate orders be passed to  protect the interests of the shareholders.  The High Court held  (i) that  the  charges  set  out in  the  application  bad  been substantially proved and that it was a fit case for an order for  winding  up being made under s. 162(vi) and  (ii)  that under the circumstances action could be taken under s. 153-C and accordingly it appointed two administrators with all the powers  of  directors  to  look after  the  affairs  of  the Company.  On appeal by special leave to the Supreme Court by the Company it was contended that the 1067 application under s. 153-C was not maintainable inasmuch  as there  was  no  proof that the applicant  had  obtained  the consent  of requisite number of shareholders as provided  in sub-clause (3)(a)(i) to s. 153-C, that clause providing that a  member  applying for relief must obtain  the  consent  in writing of not less than one hundred members of the  Company or  not  less than one-tenth of the members of  the  Company whichever is less.  It was alleged that thirteen members who had given their consent to the filing of the application had

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subsequently withdrawn their consent. Held  that 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.  The withdrawal of consent by thirteen of  the members, even if true, could not affect either the right  of the applicant to proceed with the application or the  juris- diction of the court to dispose of it on its own merits. Held  further 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  and  where therefore  the  facts  proved do not make  out  a  case  for winding  up  under s. 162, no order can be passed  under  s. 153-C. The  words "just and equitable" in s. 162(vi) are not to  be construed  ejusdem  generis with the  matters  mentioned  in clauses (i) to (v)  of the section. If  there  is  merely  a  misconduct  of  the  directors  in misappropriating  the  funds  of the Company  an  order  for winding  up  would  not  be just and  equitable  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, s. 162(vi) would be  no bar to the jurisdiction of the court to make such an order. The order for winding up was just and equitable in the  cir- cumstances of the present case. In re Anglo-Greek Steam Company ([1866] L.R. 2 Eq. 1), In re Diamond  Fuel  Company ([1879] 13 Ch.  D.  400),  Spackman’s Case  ([1849]  1  M. & G. 170), Be  Suburban  Hotel  Company ([1867] 2 Ch.  App. 737), Be European Life Assurance Society ([1869]  I,.R.  9  Eq. 122),  In  re  Amalgamated  Syndicate ([1897]  2 Ch. 600) and Loch v. John Blackwood Ltd.  ([1924] A. C. 783, 790), referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 312 of 1955. On appeal by special leave from the judgment and order dated the 19th October 1955 of the Andhra High Court at Guntur  in 0. S. Appeal No. I of 1955 1068 arising  out  of the Order dated the 26th day  of  September 1955  of the said High Court in its Ordinary Original  Civil Jurisdiction in O.P. No. 3 of 1955. M.   S. K. Sastri, for the appellant. D.   Narasaraju, Advocate-General, Andhra (T.  Anantha  Babu and T. V. R. Tatachari with him), for respondent No. 1. D.   Narasaraju, Advocate-General, Andhra (A.   Krishnaswami and K. B. Chowdhry, with him) for respondents Nos. 2 and 3. 1955.  December 16.  The Judgment of the Court was delivered by VENKATARAMA   AYYAR   J.-This  appeal  arises  out   of   an application filed by the first respondent under section 162, clauses  (v)  and (vi) of the Indian 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 mis- managed, 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

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shareholders.  In the alternative, it was prayed that action might  be taken under section 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 Ramamobanrao, 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 section 162, or for  taking  action under section 153-C. The  learned Judge of the Andhra High Court before whom  the application came up for hearing, held that 1069 the  charges set out therein had been substantially  proved, and that it was a fit case for an order for winding up being made  under  section 162(vi).  He also held that  under  the circumstances action could be taken under section 153-C, and accordingly appointed two administrators for the  management of  the Company for a period of six months vesting  in  them all  the powers of the directorate and authorising  them  to take  the  necessary steps for recovering the  amounts  due, paying  the  debts  and  for  convening  a  meeting  of  the shareholders  for the purpose of ascertaining  their  wishes whether the administration should continue, or whether a new Board of Directors should be constituted for the  management of the Company. Against this order, the Chairman, Appanna Ranga Rao,  acting in the name of the Company preferred an appeal to a Bench of the  Andhra High Court.  The learned Judges agreed with  the trial Judge that the affairs of the Company, as they  stood, justified  action being taken under section 153-C, and  dis- missed  the  appeal.  Against this order,  the  Company  has preferred this appeal by special leave.  On  behalf of the appellant, it was firstly contended  that the application in so far as it was laid under section 153-C was  not  maintainable,  as  there was  no  proof  that  the applicant  bad obtained the consent of the requisite  number of  shareholders  as  provided in  sub-clause  (3)(a)(i)  to section  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  bad  obtained the consent of 80 shareholders, which was more than onetenth of  the total number of members, and had thus satisfied  the condition  laid  down in section 153-C, sub-clause  (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 share-holders at all, and that  two members 1070 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 section 153-C, sub- clause (3) (a) (i) was not satisfied. This  point is not dealt with in the judgment of  the  trial court,  and the argument before us is that as the  objection went  to  the  root of the matter and  struck  at  the  very

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maintainability  of  the application, evidence  should  have been  taken on the matter and a finding,  recorded  thereon. We do not find any substance in this contention.  Though the objection   was  raised  in  the  written   statement,   the respondents  did  not press the same at the trial,  and  the question  was  never  argued before the  trial  Judge.   The learned  Judges  before whom this contention was  raised  on appeal  declined to entertain it, as it was not  pressed  in the trial court, and there are no grounds for permitting the appellant  to raise it in this appeal.  Even  otherwise,  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 section 153-C, subclause  (3)(a) (i).  But it is argued that as 13 of the members who had consented to the filing of  the application  bad, 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 1071 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 section 162, and that therefore no action  could be  taken under section 153-C.  We agree with the  appellant that  before  taking action under section 153-C,  the  court must be satisfied that circumstances exist on which an order for  winding up could be made under section 162.   The  true scope  of  section  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 section 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 section 162, no order could be passed under section  153-C.  The question therefore to be determined  is whether  the  facts  found make out a  case  for  passing  a winding up order under section 162.  In his application  the first respondent relied on section 162, clauses (v) and (vi) for an order for winding up.  Under section 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 section 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

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section  162(vi),  and that view has been  affirmed  by  the learned Judges on appeal. 1072 It  was  argued  for the appellant that  the  evidence  only established  that the Vice-Chairman, Devata  Ramamohan  Rao, who   had   been  ineffective  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 clause (vi) must  be construed  ejusdem  generis with the  matters  mentioned  in clauses  (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 bad to the other remedies provided  in  the Act.   The decisions in In re Anglo-Greek  Steam  Company(1) and In re Diamond Fuel Company(2) were relied on in  support of this position.  In In re Anglo-Greek Steam Company(1), it was  held that the misconduct of the directors of a  company was  not a ground on which the court could order winding  up under   the  just  and  equitable  clause,  unless  it   was established that by reason of such mismanagement the company bad become insolvent.  In In re Diamond Fuel Company(2),  it was observed by Baggallay, L.J. that, "...mere  misconduct  or mismanagement on the  part  of  the directors,  even although it might be such as to  justify  a suit   against  them  in  respect  of  such  misconduct   or mismanagement,  is  not of itself sufficient  to  justify  a winding-up order". 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 section 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 section 162(vi) of  the  Indian Act.  In Spackman’s Case(3), Lord Cottenham, L.C.  construed them as ejusdem (1) [1866] L.R. 2 Eq. 1.   (2) [1879] 13 Ch.  D. 400, 408. (3) [1849) 1 M. & G. 170; 41 E.R. 1228, 1230. 1073 generis  with the matters mentioned in the other clauses  to the section, and that construction was followed in a  number of cases.  Vide Re Suburban Hotel Co.(1), In re  Anglo-Greek Steam Company(2), Re European Life Assurance Society(3)  and In re Diamond Fuel Company(4).  But a different view came to be  adopted  in  later decisions  (vide  In  re  Amalgamated Syndicate(5)),  and  the question must now be  taken  to  be settled  by the pronouncement of the Judicial  Committee  in Loch  v.  John Blackwood Ld.(6), where  after  an  elaborate review of the authorities, Lord Shaw observed that, ".......... it is in accordance with the laws of England, of Scotland  and of Ireland that the ejusdem  generis  doctrine (as  supposed to have been laid by Lord Cottenham) does  not operate  so as to confine the cases of winding up  to  those strictly  analogous to the instances of the first five  sub- sections of section 129 of the British Act’. The law is thus stated in Halsbury’s Laws 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

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not   to   be  construed  ejusdem  generis,   then   whether mismanagement  of  directors is a ground  for  a  winding-up order under section 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  share- holders.    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 section 162(vi) (1)  [1867] 2 Ch.  App. 737. (3)  [1869] L.R. 9 Eq. 122. (5)  [1897] 2 Ch. 600. (2)  [1866] L.R. 2 Eq. 1. (4)  [1879] 13 Ch.  D. 400, 408. (6)  [1924] A.C. 783, 790. 1074 which  bars  the jurisdiction of the court to make  such  an order.  Loch v.John Blackwood.(1)was itself a case in  which the  order  for winding up was asked for on  the  ground  of mismanagement by the directors, and the law was thus  stated at page 788: "It   is  undoubtedly  true  that  at  the   foundation   of applications  for  winding up, on the ’just  and  equitable’ rule, there must lie a justifiable lack of confidence in the conduct  and management of the company’s affairs.  But  this lack  of  confidence  must be grounded  on  conduct  of  the directors,  not in regard to their private life or  affairs, but  in regard to the company’s business.  Further more  the lack  of confidence must spring not from dissatisfaction  at being outvoted on the business affairs or on what is  called the  domestic  policy of the company.  On  the  other  hand, wherever  the  lack  of confidence is rested on  a  lack  of probity  in the conduct of the company’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". 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 arrears 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 section  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 removed, and the present  (1) [1924] A.C. 783, 790. 1075 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 section 153-C.  But the findings  of  the courts  below are that the Chairman himself either  actively co-operated  with  the  ViceChairman  in  various  acts   of misconduct  and  maladministration or that he  had,  at  any rate, on his own showing abdicated the entire management  to

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him, and that as the affairs of the Company where in a state of  confusion  and embarrassment, it was necessary  to  take action  under  section 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  in 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 section 162,  the appointment of administrators under section 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  when an order for winding up is made under  section 162, administrators could also be 136 1076 appointed to manage its affairs, when action is taken  under section   153-C.   This  contention  must   accordingly   be rejected. In the result, the appeal fails and is dismissed with costs, of  the  first respondent.  The costs of  the  administrator will come out of the estate.