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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

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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

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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

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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

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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

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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.

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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.

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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.

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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.

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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

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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.