O. P. Basra S/O. Gauri Shanker And Others v. Kaithal Cotton And General Mills Co.Ltd

Judgement

- This is a petition under section 433 of the Companies Act 1956, praying for the winding up of the Kaithal Cotton and General Mills Co. Ltd. Kaithal. This company was registered under the Companies Act on 7th of March 1955, and obtained a commencement certificate on 11th August 1956. The authorised capital of the company is Rs.50 lakhs which comprised of 4,50,000 shares of Rs.10/- each and 50,000 shares of Re.1/- each. The petitioners are share-holders. The petitioners have prayed that the respondent company was liable to be wound up under clauses (c) and (f) of section 433 of the Indian Companies Act on the ground firstly, that the company did not commence Its business within a year from its incorporation although a certificate of commencement was obtained on 11th August 1956. It was alleged that in fact the company had not done any business, whatsoever from the date of its incorporation up-till the date of the petition. Secondly, it was stated that the substratum of the company had gone completely due to the improper and illegal activities of Shri Ishwar Chander Latka, the nominee of the Managing Agents of the company.

2. The issued and subscribed capital of this company was stated to be Rs.12 lakhs out of which Rs.3 lakhs was paid up. By order of this court dated 15th of June 1957, C.O.41 of 1957, the issued and subscribed capital was reduced and out of the amount of Rs.3 lakhs a sum of Rs.2,52.000/- was returned to share-holders in 1957. A number of other allegations were also made but it is not necessary to go into them for purposes of disposal of this petition. In the written statement filed on behalf of the company, the above allegations were denied. It was stated that a licence for forty thousand spindles was secured from the Government of India by the Managing Agents who commanded a great influence in high Government circles and they had placed an order for import of plant and machinery from Japan for setting up a Spinning Mill at Kaithal and that Rs.50.000/- were advanced to Messrs. Indo European Machinery Co. (Private) Ltd. for the import of the said plant and machinery. The licence granted by the Central Government on 17th of December 1955 was cancelled on 10th of December 1958 as the licencee had failed to set up an industrial undertaking within the time specified therefor. The company had done no active business, had not set up any factory and had got no machinery either for running spinning plant or for any other purpose. In this case, two issues were framed:

1. Whether the petitioner had no locus standi to present this petition?

2. Whether the company is liable to be wound up under clauses (c) and (f) of section 433 of the Companies Act.

The first issue has not been pressed and no arguments have been addressed on this issue. The only issue which requires determination is the second issue. The petitioners produced 11 witnesses and on behalf of the company, three witnesses were examined including Shri Ishwar Chander Latka, the Managing Agent of the respondent company.

3. It has not been denied on behalf of the company nor is it disputable that the company did not commence its business within a year from the date of its incorporation in March 1955. In fact, the company had done no active business of any kind till the date of the petition which was filed in this Court on 9th May 1959. According to the provisions of Section 433(c), a company may be wound up by the Court,

"If the company does not commence its business within a year from its incorporation, or suspends its business for a whole year"

The only argument that has been addressed is that the power of the Court is discretionary and the failure on the part of the company to commence its business ever since its incorporation till the date of the petition should be condoned. The ground on which condonation is sought is, that the licence granted to the company by the Central Government had been revoked and Shri. Ishwar Chander Latka, the representative of the Managing Agents, had been subjected to harassment by the disgruntled share-holders and a large number of criminal prosecutions had been launched against him and some civil suits were also filed. This reason appears to me to be completely otiose.

Where the past delay is sufficiently accounted for and where the Court is satisfied that there is a likelihood of the business being resumed, it may not exercise its discretionary power against the company, but if the Court is satisfied, that no business has been or is likely to be commenced, it should pass an order for winding up of the company on the petition of the share-holders. Suspension of a business for a whole year is usually deemed as an indication of absence of intention to carry on the business, unless suspension has been satisfactorily accounted for. This case is not merely one of suspension of business; in fact, there has been no commencement of any business ever since the inception of the company. For reasons to be examined in detail under clause (f) of section 433, I am of the view that the discretionary power of the Court should not be exercised in companys favour.

4. On the ground whether it is just and equitable that the company should be wound up, the following matters deserve notice. R.W.2 Shri Ishwar Chander Latka has admitted most of the allegations. He does not deny that the licence of the company was revoked in December 1958, by the Central Government and the putting up of a cotton ginning factory was one of the principal objects of this company, as also chaff-cutting etc. He admitted that the company had incurred a loss which according to the balance sheet ending 31st March 1958, (P.W.11/2) amounted to Rs.73,000/-besides another amount of loss of Rs.3,468/-. The balance sheet for the year ending 31st March 1959, has not been prepared and no reasonable grounds have been shown for failure to prepare it. The assets of the company in the main consist of the uncalled capital the money due from defaulting share-holders, a plot of land measuring 32 bighas purchased at Kaithal for Rs.10,000/-, and some chaff-cutting machine worth Rs.6,000/- which had been recently installed by the company. According to Mr. Latka the present market value of that land is about Rs.30,000/- or Rs.35,000/-. He also stated that a building of the value of Rs.20,000/-had been constructed on that land though no detail of the real value of the structure are forthcoming The shares of the value of Rs.8 lakhs were underwritten, but at the highest estimate shares the value of Rs.8,000/- or Rs.10,000/- only were purchased, but the share-holders have defaulted and the underwriters did not honour their agreements.

R.W.1 is Hari Krishan Syal who deposed that he had supplied chaff-cutting machinery of the value of Rs.6,000/- during the pendency of these proceedings in the High Court and also under sections 397 and 398 of the Act (vide C.O. No.6 of 1959). He said that he had not been paid anything by the company so far. The company had not invested anything for the machinery supplied to it by this witness. This witness went to the length of saying that on an investment of Rs.8,000/- to Rs.10,000/- by the company, it could earn a profit of Rs.10,000/- a year. He also stated that he knew that the company had no liquid money and that it was running at a loss to the tune of Rs.60,000/- or Rs.70,000/-and that it was not doing any business. In view of the state of affairs disclosed by Shri Latka him self and the other witness of the company Shri Hari Krishan Syal (R.W.1), it is hardly necessary to examine in any detail the oral evidence placed on the record. The sum total of this evidence is that the company has done no business of any kind from the start; it has purchased no plant or machinery to set up a factory. When its issued and paid up capital was reduced by the order of this Court by Rs.2.52,000/- out of Rs.3 lakhs very little money was left with it. Up to the end of the financial year 1958 the company had already incurred a loss exceeding Rs.76,000/- and its asset consist of a piece of land on which a few rooms have been built where chaff-cutting machinery of the value of Rs.6.000/- has been supplied by Hari Krishan Syal and for which the company ha not paid so far.

It is not possible to accept the ipse dixit of Ishwar Chander Latka (R.W.2), that the value of the land is Rs.30,000/- or Rs.35,000/- nor can any credence be given to the optimistic statement of R.W.1. Hari Krishan Syal that on an investment of Rs.8,000/- the company can make Rs.10,000/-a year. This machinery has been installed during the pendency of these proceedings and probably in order to impress the Court that the company had at last started doing something though not at as ambitious a scale as it had intended, when the Government of India had given it the licence in respect of forty thousand spindles. This company has not chosen to place on the record any statements of its profits and loss after March 1958. Obviously, it had done no business and whatever money it had spent subsequently must have been a dead loss to the company. The main object of the company was to set up a cotton mill and it is nowhere within contemplation of achieving its object. It was held in re: Shah Steam Navigation Company of India. Limited, Haji Ahmed Hassam, ILR 32 Bom 415 that if the Court comes to the conclusion that the main original object for which the company was formed has substantially failed or that the substratum of the company is gone it would be considered just and equitable to wind up the company and to pass an order for its compulsory winding up. The following observations in Buckley on the Companies Act, Twelfth Edition, pages 456 and 457 are in point:

"Orders have been made, on the analogy of partnership cases, and following the suggestion made by Lord Cairns In Re: Suburban Hotel Co., (1867) 2 Ch A 237 where the whole substratum of the business has become strictly impossible. Thus, where the principal and substantial object of the company was to acquire a particular gold mine in New Zealand, the title to which altogether failed, or was to manufacture from dates a substitute for cofee under a German patent which could not be obtained, or was to acquire the undertakings of four other companies carrying on business in Russia, which were confiscated by the Russian Government before they could be acquired, the substratum was gone, notwithstanding that the memorandum of association contained general objects, and a majority could not hold a minority to the speculative continuation of a scheme which had proved futile. In each case the petition was a share-holders petition, and was opposed by the large majority of the share-holders and the company was solvent. But a compulsory order was made."

In this case, there is no doubt, that the main object for which the company was formed, and for which, license had been obtained from the Government of India was to set up a cotton mill. That licence, which was obtained in December 1955, the year of the incorporation of the company, was cancelled three years later in 1958. The company could not establish such an undertaking despite the laspe of so many years. During this period no other work was done and the company did not engage itself in any other industrial activity. Chaff-cutting has been recently started during the pendency of proceedings in this Court. It cannot be gainsaid in this case, that the main object for which the company was formed had failed. There usually are listed in the memorandum of association a very large number of objects for which the company is established. Because these countless possibilities have not been exhausted, it cannot be said, that the management of the company can be allowed to go on speculating, one by one through the endless objects mentioned in the Memorandum on the specious ground, that a particular venture is included among the objects. The winding up order cannot be resisted by merely showing that there are large subsidiary powers contained in the Memorandum of the company. Substratum of the company is deemed to be gone when the main object for which the company was formed has become impracticable.

5. My attention has been drawn by the learned counsel for the company to Muralidhar Roy v. Bengal Steamship Co. Ltd., ILR 47 Cal 654 : (AIR 1920 Cal 722). In that case the objects of the company according to its Memorandum were inter alia, to carry on business as carriers by river. The company had a fleet of two flats and a steamer constructed for the river for towing the flats. The company was carrying on its business with a steamer and two flats but the flats had been taken up by the Government. In these circumstances, it was held that that did not prove that the objects of the company, as set out in the Memorandum could not be fulfilled in other ways or by the employment of other agencies and, therefore, the principle of substratum gone did not apply to a case of that description. That was a decision on its own facts. There was a temporary suspension of business of the company for reasons beyond its control, and the suspension was satisfactorily accounted for and was deemed to be due to temporary causes. In the light of the special facts of that case, the request for compulsory winding up was refused. The facts of the case before me are distinguishable from, those of the Calcutta case. The only work which the company wanted to under take, when it was incorporated, was to set up a cotton mill for which it had obtained a licence from the Central Government but had failed to achieve its object till the end of 1958. The Board of Directors did not think of any other alternative undertaking for nearly five years. The facts of the two cases are not comparable so as to induce me to adopt the line of reasoning which found favour with the Court in the Calcutta case mentioned above.

6. The usual tests for determining whether the substratum of the company has disappeared are when (a) the subject matter of the company is gone, or (b) the object for which it was incorporated has substantially failed, or (c) it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that the object of the trading at a profit can be attained, or (d) the existing and probable assets are insufficient to meet the existing liabilities, vide In re Cine Industries and Recording Co. Ltd., AIR 1942 Bom 231. Failure of any one of these tests is deemed a good ground for winding up of the company. There seems to be no reasonable hope that this company will be able of carrying on its business, for which it was formed, profitably. Looking at the entire history of this concern, I am satisfied that its substratum is gone and it is just and equitable that it should be wound up. For the first time, during the course of the arguments, it was suggested that the matter, whether the company should be wound up or not be placed before the domestic forum and a meeting of the share holders be called. In this case, as appears from the statement of R.W.2, Ishwar Chander Latka, the shares of a number of share-holders have been forfeited, and the underwriters did not honour their underwriting agreements. This is a case in which share-holders are not likely to protect their interests and in the past, they never showed any vigilance, otherwise, the company would not have found itself in the straits in which it is at present. In this case, all the facts from which a conclusion can properly be drawn as to whether the company should be ordered to be wound up, or should be permitted to linger on have been placed on record. After giving anxious consideration to the arguments advanced at the Bar, I am of the view that this petition should succeed both under clauses (c) and (f) of section 433. I, therefore, order that the respondent company be wound up the Court and I appoint the Official Liquidator attached to this Court as the Official Liquidator for carrying out the work of liquidation. He should take charge of the assets and records of the company and proceed with the work of the companys liquidation.

Order accordingly.