December 6, 2020

Case Brief: Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao And Ors.

Companies Act

Citation: [AIR 1956 SC 213], AIR1956SC213, 1956()ALT279(SC)

Name of the Court: The Supreme Court of India

Judges/Coram: Vivian Bose and T.L. Venkatarama Aiyyar, JJ.

Theme: Winding up and Internal Management by the Board of Directors under the Companies Act.

Subject: Company Law

Judgement: India

Procedural History:

· Remedies sought: Winding up of the Company under section 162 (v) and (vi). Alternatively, it was sought that action be taken under section 153- C.

· Single judge bench of the Andhra High Court – ruled in favour of the appellants and ordered for the company to be wound up under section 162 (vi). The court also ruled for two administrators to be appointed under section 153-C for a period of 6 months and granted them powers of the directorate to recover dues, pay debts and convene shareholder meetings.

· Appeal to a larger bench of the High Court – Affirmed the trial courts finding that action under Section 153- C was justified. Dismissed the appeal.

· This judgment relates to the appeal preferred to the Supreme Court.

Facts:

· Respondent alleges that the affairs of the company are being grossly mismanaged, as large dues to the government were pending for electricity supplied.

· Pl alleges that the directors misappropriated company funds.

· Plaintiff also alleges that as the directors have the majority in voting strength they are acting against the rights and interest of the shareholders.

· Plaintiff filed an application for winding up

Issue I: Whether the application under section 153- C of the Companies Act, 1956 maintainable at the appeal stage, without proof to the effect that the applicant had obtained consent of the requisite number of shareholders under section 153-C (3)(a)(i)?

Holding I: Yes.

Reasoning I:

Rule: Section 153 –C (3)(a)(i) – requires the member to obtain the written consent of not less than one hundred members of the company or not less than one-tenth the number of members, whichever is lower.

Rule Proof:

· The applicant submitted that in his application he had obtained the consent of 80 shareholders, which constituted one-tenth the number of members.

· Against this the petitioner challenged the validity of 28 consents obtained (13 – were not shareholders, 13 – later revoked their consent, 2 – had signed twice). It was raised that number of those that consent fell to 52 and this would not meet the threshold limit under 153- C.

Rule Application:

· Argument struck at maintainability of application and must have been raised at the trial court level. The court found no grounds to permit this to be raised in appeal.

· The court also found that the validity of an application is to be judged on the facts at the time of institution, unless there is a statutory provision to the effect an application cannot be assessed by events subsequent to presentation. Therefore, the court found that even if those who consented revoked their consent later, it would not be valid. With them the number of members that consented to institution of the application is 65 (without the 13 that were not shareholders and 2 that signed twice) and this meets one-tenth of the members threshold prescribed under 153 – C.

Issue II: Whether the facts found make out a case for passing a winding up order under section 162, of the Companies Act, 1956?

Holding II: Yes.

Reasoning II:

Rule:

Section 162 (v) of then Companies Act and Section 162 (vi) of the Companies Act , 1956

Rule Proof:

  1. The respondent had made an application under section 162 (v), wherein winding up could be ordered if a company is unable to pay its debts. Though the respondent alleged that the company was unable to pay its dues to the government, the court stated that there was no evidence to the effect that the company was unable to pay the amount and was insolvent. Therefore section 162 (v) was inapplicable as a ground for winding up.
  2. The respondent also referred to section 162 (vi) in his application, the court held that just because the vice chairman was found guilty of misconduct would not create ground for winding up.

Rule Application:

  1. The court stated that to take action under section 153 – C, the conditions required for passing an order for winding up under section 162 must exist.
  2. The court cited re Anglo-Greek Steam Company [1866] L.R. 2 Eq. 1 and In re Diamond Fuel Company [1879] 13 Ch. D. 400, where it was stated that mere misconduct is not grounds for winding up, unless such acts have rendered the company insolvent
  3. As per Halsbury’s Laws of England, Third Edition, Volume 6, page 534,the terms ‘just and equitable’ was interpreted, not to be read as being ejusdem generis with the preceding words of section 162. The courts opined that merit in winding up has to be gauged on a case –case basis.
  4. More than misappropriation of funds is required for winding up to be an equitable remedy.
  5. Therefore, the court held that a justifiable lack of confidence’ in the conduct and management of the company’s affairs by the directors must exist. This lack of confidence is to be grounded in regard to the company’s business and not relating to the private affairs of the directors.
  6. Additionally the lack of confidence must not be from being outvoted but , must be a valid fear over company affairs and management.
  7. In this case the court held that the misappropriation, in addition to the large dues owed to the government, the large power the directors accrued and lack of shareholder engagement to set things right was reason for winding up.

Issue III: Whether action under section 153-C of the Companies Act, 1956 was warranted, given the Vice Chairman found guilty of misconduct has been removed?

Holding III:Yes.

Reasoning III:
Rule Proof:

The appellants submitted that action under 153-C was unnecessary as the Vice Chairman was removed and present management was setting things right.
Rule Application:

The court held that the chairman either co-operated with the vice chairman in carrying out acts of misconduct and maladministration or gave up the management to the vice chairman.

Therefore, action under Section 153 – C becomes necessary.

Issue IV:Whether the appointment of administrators under section 153 – C of the Companies Act, 1956 would amount to judicial interference in internal management?

Holding IV:No

Reasoning IV:

Rule: Courts do not at the behest of shareholder interfere with the internal management of the company by the board of directors, provided they act within the mandate of the Articles of Association of the company.
Rule Proof:

  1. The appellants submitted that appointing administrators to run the company, interferes with internal management of the company by directors.

Rule Application:

  1. The court held that the rule applies only when the company is a running concern and when the application for wining up is made the company, it is done to put an end to the existence of the company. This would mean a transfer of management to the court from management by directors in accordance with the Articles of the company.
  2. Therefore, the rule of internal management does not apply when section 153 –C is invoked in pursuance of a winding up application filed under section 162. Contention stands rejected by the court.

Judgment: Appeal dismissed.

Contributed by: Meghana Santosh (O. P Jindal Global Law School)

The views of the author are personal only. (if any)

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