Rajahmundry Electric Supply Corporation
Ltd. Vs. A. Nageswara Rao & Ors  INSC 74 (16 December 1955)
AIYYAR, T.L. VENKATARAMA BOSE, VIVIAN
CITATION: 1956 AIR 213 1955 SCR (2)1066
Indian Companies Act, 1913 (VII of 1913), s.
153-C subclause (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 eventsEffect thereof-Order under s.
153-C-Whether competent before facts proved make out a case for winding up
under s. 162Words "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 CompanyCircumstances
under which an order for winding up can be passed by the court.
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application had subsequently withdrawn their consent.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 jurisdiction 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 circumstances of the present case.
In re Anglo-Greek Steam Company ( L.R.
2 Eq. 1), In re Diamond Fuel Company ( 13 Ch. D. 400), Spackman's Case
( 1 M. & G. 170), Be Suburban Hotel Company ( 2 Ch. App. 737),
Be European Life Assurance Society ( I,.R. 9 Eq. 122), In re Amalgamated
Syndicate ( 2 Ch. 600) and Loch v. John Blackwood Ltd. ( A. C. 783,
790), referred to.
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 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, 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
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 dismissed 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 one tenth 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 maintainability of the
application, evidence should have been taken on the matter and a finding,
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, sub clause (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
section 162(vi), and that view has been affirmed by the learned Judges on
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 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 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)  L.R. 2 Eq. 1. (2) 
13 Ch. D. 400, 408.
(3) [1849) 1 M. & G. 170; 41 E.R. 1228,
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 subsections
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 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 shareholders. 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)  2 Ch. App. 737.
(3)  L.R. 9 Eq. 122.
(5)  2 Ch. 600.
(2)  L.R. 2 Eq. 1.
(4)  13 Ch. D. 400, 408.
(6)  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. Furthermore 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)  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 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
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.