JUST AND EQUITABLE DOCTRINE IN WINDING UP

The article is an insight into the meaning and usage of the just and equitable doctrine as mentioned in the Companies Act used at the time of winding up of the company. The article further deals with who can file for a petition for the same.
Estimated Reading Time: 11 minutes

Introduction

The Just and Equitable Doctrine clause confers extensive discretionary powers on the court. Section 433(f) of the Companies Act[1] confers these powers upon the companies. It states that Circumstances in which a company may be wound up by court. A company may be wound up by the court,-

  1. if the company has, by special resolution, resolved that the company be wound up by the court;
  2. if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;
  3. if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
  4. if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two;
  5. if the company is unable to pay its debts;
  6.  if the court is of opinion that it is just and equitable that the company should be wound up.

For a company to wound up under this clause, it requires that the courts consider the interest of the company, its employees, its creditors, shareholders and its general public.[2] Suppose a business is started between two or more people. It has different energy of working. For example, when a new member of a family joins the family business for some months/years, the energy and enthusiasm of working are different from the future. The relationship of mutual trust and confidence is built, and it is the anchor to the company’s core values, without which the purpose of the company will not be fulfilled. In a company, any dispute may arise between the shareholders regarding many issues like the company’s management, which might hamper trust and confidence between the shareholders and managers, essential decisions of the company, etc.

As we all know that a company is not a natural person, and it cannot die naturally like a human being, it can only come to an end if the company and its shareholders decide to terminate the company by a legal process for which there are two methods, i.e., Voluntary and compulsory winding up of the business.

The difference between compulsory and voluntary winding up of business/company is that one is done by mutual consent. In contrast, the other one is done without the consent between the shareholders and partners. When the creditors wind up any company after deciding on settling the dispute by mutual consent, it is known as voluntary winding up without any interruption from the court. In contrast, when the business is winded up by a court’s decision or third party involvement from the legal fraternity, it is known as compulsory winding up.

As discussed above, section 433[3]of the companies act provides several ways of winding up a business or a company by the court. Section 433(f) of the companies act carries very much importance. It specifically states the importance of the court and its decision in winding up any business. If the court, through the facts and circumstances of the case, finds that it is necessary and beneficial for the company to be winded up, it will pass the judgment of winding up the business through just and equitable reasons. The court and Tribunal have all powers to wind up a business based on Just and Equitable Grounds.

This article discusses the importance of Just and Equitable Doctrine under the Companies Act and will discuss the case laws.

Meaning and Usuage of Just and Equitable Grounds

A just and equitable ground is a ground that the court of law can enforce for winding up a business that can no longer run the business properly and fulfil its motive of profit-making and providing services to its customers. The phrase “Just and Equitable” occurs is much legislation, as noticed by us, and it has a long-run history of development.

In, Winding Up, the Just and Equitable Ground[4], Frank Callaway said, “The expression ‘just and equitable’ may be regarded as an example of statutory hendiadys, the reference to equity being not by way of an additional test but to ensure that the justice to be applied will be equitable justice, ‘the justice of the individual case’. Accordingly, justice and equity are referred to herein as one criterion, not two criteria.”

The phrase has a definite and relatively constant meaning even though the statutory usage has constrained this phrase’s application.

This method was described by J C Campbell as follows: “… equity acts in personam. It looks at the situation in which an individual defendant finds himself, in all its factual complexity, and decides what the application of the broad standards of conduct that are equity’s generative principles requires of that person in that situation.” “… if it comes to the decision that there has been a departure from those standards of conduct, it then fashions a remedy that is inherently discretionary. The remedy is inherently discretionary because it represents the judge’s view of what practical course of conduct should be adopted, in the circumstances of the particular case, to redress or make good the departure that there has been from the standards of conduct required by equity, in so far as redress is in practical terms possible”.[5]

The phrase “Just and Equitable” is not a solution for disposing of any cause of action or discretion of judge when they want to use it. Still, it is a provision under legislation established on statutory and equitable principles that shall be applied when any dispute arises in a company or any other place. The court’s discretion in applying this principle should be entirely based on a proper induction and relevant circumstances.[6] The sound discretion should be based on the facts of the case.

For a very long time, the Doctrine of “Just and Equitable” were read to be a part of Ejusdem Generis.[7] In the case of Cowsjee v. Nath Singh Oil[1] , the Hon’ble Court held that though the court is not bound to construe this clause of Ejusdem Generis, as only covering grounds of like nature with those of specified grounds in clause 1 to 5. Yet, it will require a ground of similar nature and magnitude before acting under that clause.

The usage of the doctrine of “Just and Equitable” is used when any business winding up is happening with the just and equitable ground, and the windup is happening because of the standard creditor’s petition. A petition of Just and Equitable is issued in the case of the shareholder dispute. In case there has been any breakdown in the company between the shareholder’s confidence and management. The member of the company can file a just and equitable petition.

Just and Equitable Winding Up Petition

A Just and Equitable Winding Up Petition can is a petition designed to deal with the range of shareholders and any dispute arising between them in a company. A shareholder of a company can file the petition if there has been a breakdown of confidence and management in the company, and later it is up-to to the court on how they decide the case based on the facts and circumstances of the case. The court will decide whether it is required to close or wind up the company or such action will be against the company’s interest and its shareholders.

Under the Insolvency and Bankruptcy Act of 1986[8] and the Companies Act of 2006,[9] these are circumstances that are listed down through which a company can be winded upon the reason of Just and Equitable Ground. Under the Companies Act section 433, as discussed above, the circumstances in which a business can be winded up, section 994 provides who can file a petition and under what grounds.

Who Can File the Petition

Petitions to wind up a business can be filed by any member or a shareholder of a company, for example, the Director of the company, the company’s shareholders or any other person who is liable to do so.

The person who is filing a petition for winding up of the business should only be a shareholder of a company whose assets are also being contributed to its establishment. The shareholder must be registered in the company and must be interested in winding up the business. If they do not have any interest or contribution to the company, they cannot file for the winding-up petition.

Even the minority shareholder in a company has a right to file a petition for winding the company even though the majority of the shareholders are ignoring their right.

The court has observed that the Doctrine of “Just and Equitable” has undergone an essential change in itself and the country’s social and economic conditions.[10] The court understood that the phrase “Just and Equitable” has lost its technical meaning and has acquired a more meaningful and pragmatic nature.[11]

 Hence, a petition can be filed when any requires it of the shareholders, and the court has the discretion of looking into circumstances of the case and passing. The judgement will be beneficial for the company.

Therefore, the term “Just and Equitable” is of most comprehensive significance and it does not limit the jurisdiction of the court in any case. The court will look into the facts and circumstances of the case and accordingly decide on winding up the business on the ground of Just and Equitable.[12]

When Can The Petition For Winding Be Presented?

There are various circumstances and cases under which the petition for Just and Equitable can be invoked. The circumstances may differ from situation to situation for invoking the petition for winding up the business on the ground of Just and Equity. Let’s discuss some of the circumstances and their cases:-

  1. The deadlock between the directors of the company requires that there has to be a deadlock between the directors or shareholders of the company to invoke the petition of winding on the ground of Just and Equitable source. Still, a difference of opinion and loss of confidence between each other is enough for invoking such a petition for winding up the business. In the case of Yenideje Tobacco Co. Ltd[13], it was observed by the court that where the relationship between the shareholders and directors of a company have become such where they don’t speak to each other, except through a secretary then on such circumstances a petition for winding up can be invoked. The court can accept the petition on the ground of Just and Equitable doctrine.

In another case, the Calcutta High Court believed that the Just and Equitable ground for filing the winding up of business cannot be accepted merely because the directors have disputes between them.[14]

  • The company has lost its substratum-     A substratum means any substance or a layer on which a particular thing stands. A company’s substratum is its objectives which they have to fulfil. In the case of Seth Mohan Lal[15], the court stated that the company’s substratum is said to be lost when the object for which the company was incorporated has been lost.
  • The company cannot carry on its business- A petition for winding up of business on the ground of Just and Equitable doctrine can be made when a business cannot run properly or is not able to fulfil its objective of earning profit in the short or long run. It is not able to compete with other companies. In one of the cases, the High Court of Allahabad [16] stated that it is pointless to carry on a business when it cannot earn or make any profit for itself, and it is better to wind up such business on the ground of Just and Equitable reasons.
  • If the company has been made for illegal purposes- If any company has been made for illegal purposes, it is already a crime but can be winded up on Just and Equitable Grounds. A company made for conducting lottery purposes will not prevent it from getting wound up or a similar order passed by the court even though its object is philanthropic.[17]

Conclusion

As discussed above, the term “Just and Equitable” carries very much importance and confers a vast power on the courts. This doctrine is based on the court’s consideration, which allows them to use their discretionary power when required to wind up a business if it is not making a profit cannot fulfil its objective for which it was made. The court will allow the petition of winding up on the grounds of Just and Equitable reasons as presented by the shareholders but only to an extent present on the legislation. The court cannot misuse its powers anytime.


[1] The Companies Act, Section 433, Act of 1956.

[2] Metamachine Seethiah v. Venkatasubbaiah, (1949),  Mad 675.

[3] The Companies Act, section 433, Act of 1956.

[4] (LBC, 1978), at p. 5

[5] J C Campbell QC, Access by trust beneficiaries to trustees’ documents, information and reasons, (2009) 3 Journal of Equity 97, at 141.

[6] Loch v. John Blackwood Ltd [1924] AC 783 at 788.

[7] Ejusdem Generis means to be of a same kind or of a similar class. The rule which is followed through the phase of Ejusdem Generis is that if particular words have a common characteristic then no wider construction should be given to them.

[8] The Insolvency and Bankruptcy Act, Section 122(1)(g), Act of 1986. (India)

(1)A company may be wound up by the court if—

(a)the company has by special resolution resolved that the company be wound up by the court,

(b)being a public company which was registered as such on its original incorporation, the company has not been issued with [F1a trading certificate under section 761 of the Companies Act 2006 (requirement as to minimum share capital)] and more than a year has expired since it was so registered,

(c)it is an old public company, within the meaning of the [F2Schedule 3 to the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009],

(d)the company does not commence its business within a year from its incorporation or suspends its business for a whole year;

(f)the company is unable to pay its debts,

(g)the court is of the opinion that it is just and equitable that the company should be wound up.

[9] The Companies Act, section 994, Act of 2006. (India).

Petition by company member

(1)A member of a company may apply to the court by petition for an order under this Part on the ground—

(a)that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b)that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

[10] Duvva Pavan Kumar& M. Chandana, Power of the Court Under the “Just & Equitable Clause, Mondaq, Published on July 2002.

https://www.mondaq.com/india/corporate-and-company-law/16713/power-of-the-court-under-the-just–equitable-clause#:~:text=The%20relief%20under%20the%20’just,instead%20of%20pursing%20the%20other

[11] Kilpest (P) Ltd. v. Shekhar Mehra, (1997), Comp. LJ 303 (MP).

[12] Bleriot manufacturing Aircraft Co. Ltd., In Re, [1961] 12 TLR 253.

[13] Yenideje Tobacco Co. Ltd, Re, [1916] 2 Ch 426.

[14] Hind Overseas Ltd., Re, [1962] 2 Comp. LJ. 95

[15] Seth Mohan Lal v. Grain chambers Ltd. [1968] Comp. LJ. 275.

[16] Registrar of Companies v. M.K. Bros. Ltd, (1977) 47 Comp. Cas. 314 (All)

[17] Poor Housing Association v. Thopa Naidu, (1933) Mad 16.

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