RAJAHMUNDRY ELECTRIC SUPPLY CORPORATION LTD. V. A.NAGESHWARA RAO

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This appeal[1] arises out of an application filed by the first respondent under Section 162, clause (v)[2] and (vi)[3], Companies Act, 1913[4], for an order that the Rajahmundry Electric Supply Corporation Ltd. be wound up.

FACTS OF THE CASE

The grounds on which the relief of wound up was claimed were that the affairs of the Company were being grossly mismanaged, 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 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[5], or for taking action under Section 153-C[6].

ISSUES

The question to be determined here in this case is:-

Whether the facts found make out a case for passing a winding up order under Section 162[7]?

CONTENTION OF THE PARTIES

Contention of the appellant:-

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[8]. 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.

Contention of the respondent:-

The first respondent stated in his application that he bad obtained the consent of 80 shareholders, which was more than one-tenth of the total number of members, and had thus satisfied the condition laid down in Section 153-C, sub-clause (3)(a)[9]. 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 shareholders at all, and that two members 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.

The Court is 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.

The Court stated that 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 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. As per the Court, 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.

Further contention of the respondent:-

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.

Further Contention of the appellant:-

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 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.

SECTIONS DISCUSSED

1.Section 162[10] of the Companies Act, 1913:-

 Circumstances in which company may be wound up by Court.

 A company may be wound up by the Court–

           (i) if the company has by special resolution resolved that the company be wound up by the Court:

           (ii) if default is made in filing the statutory report or in holding the statutory meeting

          (iii) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year

         (iv) if the number of members is reduced, in the case of a private company, below two or, in the case of any other company, below seven :

        (v) if the company is unable to pay its debts

            (vi) if the Court is of opinion that is it just and equitable that the company should be wound up.

DECISION

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 Section162(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 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 Vice-Chairman in various acts of misconduct and maladministration or that he had, at any rate, on his own showing abdicated the entire management to 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 appointed to manage its affairs, when action is taken under Section 153-C[11]. This contention must accordingly be rejected.

In the result, the appeal fails and is dismissed.

ANALYSIS

This case was related with the Mismanagement in the Company and because of the gross mismanagement in the Company, the first respondent filed for the winding up of the company against which this appeal arose. It was found that the large amounts were owed  to the Government related to the charges for electric energy supplied by them. It was found that the directors of the company had misappropriated the funds of the Company, and that the directorate which had the majority in the voting strength was destroying the rights of the shareholders. Therefore, under Sec 162(v)[12] and Sec. 162(vi)[13], the request for winding up was submitted before the Court. In this case, after taking into consideration all the relevant sections and the contentions presented by the parties as well as the facts of the case, the Court found the prevalence of the mismanagement in the Company and therefore, the appeal filed before the Hon’ble Court against the winding-up of the company was failed and therefore, dismissed by the company and Court found the winding up order passed by the lower court is valid.

CONCLUSION

This case really dealt with the mismanagement issue in the Company with taking into consideration every important point related to that in that time. The Companies Act of 1913 was dealt in this case and dealing with a case of the post-independent era with an act of pre-independence, though was a serious task for the Court, but Court after understanding every element of this case tried to being out the real intent behind the things conducted in the Company and through that, it found the prevalence of gross mismanagement on the part of the directors of the Company. Therefore, the decision taken by the Court after taking the element of gross mismanagement was justified and in the favor of the justice.


[1] Rajahmundry Electric Supply Corp. Ltd. v. A. Nageshwara Roa & Ors, 1956, AIR 213, 1955 SCR (2) 1066

[2] The Companies Act, 1913, s. 162(v).

[3] The Companies Act, 1956, s. 162(vi).

[4] The Companies Act, 1913.

[5] The Companies Act, 1913, s. 162

[6] The Companies (Amendment) Act, 1930.

[7] The Companies Act, 1913, s. 162.

[8] The Companies Act, 1913, s. 153-C(3)(a)(I).

[9] The Companies Act, 1913, s. 153-C(3)(a).

[10] The Companies Act, 1913, s. 162.

[11] The Companies Act, 1913, s. 153-C.

[12] The Companies Act, 1913, s. 162(v).

[13] The Companies Act, 1913, s. 162(vi).

Also Read  EMPIRE JUTE CO. LTD v. COMMISSIONER OF INCOME TAX 1980 AIR 1946, 1980 SCR (3) 1370

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