K.A. Mohammed Shafi, J. 1. This application is filed by the respondent-company in C. P. No. 26 of 1998 to revoke the admission of the winding up petition and to stay all further proceedings till the disposal of the application under Rule 96 read with Rule 9 of the Companies (Court) Rules, 1959. C. P. No. 26 of 1998 is filed by the respondents herein who are the shareholders of the company seeking an order for winding up of the company under Sections 433(e) and 433(f) and 439(1)(c) of the Companies Act.
2. When the company petition came up for admission on June 1, 1998, this court admitted the same and directed issue of notice to the respondent-petitioner herein and to publish in one issue of Indian Express and Malayula Manorama, Cochin edition and in the Official Gazette. The draft publication was produced on June 2, 1998, and was approved by this court and publication was directed to be effected with hearing date July 3, 1998.
3. This petition is filed by the respondent-company in the C. P. on June 18, 1998, seeking revocation of admission of the winding up petition and to stay all further proceedings till the disposal of the application. The respondents have filed a detailed counter-affidavit opposing this application. Both sides were heard in detail.
4. The petitioner-company was incorporated under the provisions of the Companies Act to carry on the business of sale of silk sarees and other dress materials under the name "Remanika" and it is carrying on business in a rented building at M.G. Road, Ernakulam. The company was incorporated on May 4, 1993, with an authorised share capital of Rs. 1 crore divided into 10 lakhs equity shares of Rs. 10 each which is fully paid up.
5. It is alleged by the respondents in the company petition filed by them that difference of opinion arose between the directors of the company and though the first respondent had properly conducted the affairs of the company as its managing director, he was illegally ousted and the present managing director has taken over the management of the company with an illegally constituted board of directors. According to them, the company is now sunk in debts and the company has got a debt of about Rs. 6 crorcs as against the assets of Rs. 1.5 crores. Various suits are filed by the creditors of the company for recovery of the amounts and they are pending in different courts. It is also alleged that the present managing director is engaged in distress sale of the goods which are the only assets of the company and appropriating the entire amount to himself. According to them, there is no possibility to extricate the company from its debts and to revive the business. Therefore, they have sought for an order to wind up the company.
6. In the affidavit filed in support of this application by the present managing director of the company it is contended that the allegations made against the company by the respondents in the C. P. are totally incorrect, false and made with malicious intention and there is absolutely no sustainable ground to wind up the company. The substratum of the company is not lost and the purpose for which the company was incorporated has not ceased to exist. The first respondent--first winding up petitioner who was the managing director of the company at the time of incorporation was systematically engaged in overtrading, spending excessively beyond the capacity of the company and borrowing huge amounts from banks and other financial institutions and spending lavishly for his own personal purposes. The illegal activities and mismanagement of the company by the first respondent created much difficulty to the company and after the present managing director took over the management of the company he has been attempting to set right the company and he has paid huge amounts to the banks and other creditors of the company. All the suits and criminal cases pending against the company are pertaining to the period when the first respondent was the managing director of the company. After the first respondent was ousted from his managing directorship the business of the company is progressing and most of the creditors of the company have informed that they are prepared to wait till the company revamps its activities. The company petition is filed with ulterior motives to prevent others from carrying on business as the first respondent was removed from his managing directorship, due to vengeance. Therefore the admission of the company petition has to be revoked since there are absolutely no bona fides in filing the same. The respondents who constitute minority shareholders are not entitled to seek winding up of the company on the ground of either mismanagement or loss to the company. The first respondent has already filed a company petition before the Company Law Board, Delhi, for reliefs against oppression and mismanagement. The order passed by this court giving direction for advertisement even at the admission stage is against law and has caused great hardship to the company which is a going concern. Therefore, the order is liable to be revoked. In view of the fact that the winding up petition has been filed mala fide and with ulterior motives and the company has serious objections to the company petition, an opportunity should be given to the company to file its objections and the matter has to be heard in detail. Therefore, this court should have declined to order advertisement before notice to the company. The order of admission should be revoked and the petition should be dismissed in limine.
7. The respondents have filed a detailed counter-affidavit opposing the application. According to them, the above application is not maintainable and is filed to protract the proceedings so that the present managing director can continue to appropriate the proceeds from the sale of the only realisable assets of the company, viz., stock-in-trade for his selfish gains. The company has reached a point of no return and cannot carry on its business without adding to the already accumulated debts. The allegation that the first respondent has indulged in overspending and overtrading and has been functioning in a manner prejudicial to the interests of the company and its members is false. The entire financial mismanagement of the company was by the present managing director. This court has exercised its discretion to admit the company petition and also to advertise notice of the petition on being prima facie satisfied and the petitioner-company cannot question that discretion. Therefore, the application is liable to be dismissed.
8. Rule 96 of the Companies (Court) Rules deals with the admission of petition, fixing date for hearing, direction as to advertisement, etc. Rule 96 reads as follows :
"96. Admission of petition and directions as to advertisement.--Upon the filing of the petition, it shall be posted before the judge in chambers for admission of the petition and fixing a date for the hearing thereof and for directions as to the advertisements to be published and the persons, if any, upon whom copies of the petition are to be served. The judge may, if he thinks fit, direct notice to be given to the company before giving directions as to the advertisement of the petition."
9. Rule 24 of the Companies (Court) Rules relates to the advertisements of the petition which reads as follows :
"24. Advertisement of petition--(1) Where any petition is required to be advertised, it shall, unless the judge otherwise orders, or these rules otherwise provide, be advertised not less than fourteen days before the date fixed for hearing, in one issue of the Official Gazette of the State or the Union Territory concerned, and in one issue each of a daily newspaper in the English language and a daily newspaper in the regional language circulating in the State or the Union Territory concerned, as may be fixed by the judge.
(2) Except in the case of a petition to wind up a company the judge may, if he thinks fit, dispense with any advertisement required by these rules."
10. Therefore, from the above rules it is clear that when a petition is filed before the High Court for winding up of a company, the High Court may (1) issue notice to the company to show cause why the petition should not be admitted, (2) admit the petition and fix a date for hearing and issue notice to the company before giving directions about the advertisement of the petition, and (3) admit the petition, fix a date for hearing of the petition and order that the petition be advertised and direct that the copies of the petition may be served upon the persons specified in the order.
11. Even though in accordance with Rule 24 a petition for winding up cannot be put for hearing before the court unless the petition is advertised, it does not stipulate that as soon as the petition is admitted it must be advertised. In case of service of notice to the company to show cause why the petition for winding up should not be admitted, the company can contend that it should not be admitted and the petition amounts to abuse of process of the court. Even if the petition is admitted it is open to the company to move the court that in the interest of justice or to prevent abuse of process of the court the petition should not be advertised. The power to entertain such an application by the company is inherent in the court. All these principles are laid down by the Supreme Court in National Conduits (P.) Ltd. v. S.S. Arora [1967] 37 Comp Cas 786 and Cotton Corporation of India Ltd. v. United Industrial Bank Ltd. [1984] 55 Comp Cas 423. Therefore, the contention of the respondents that the above petition filed by the petitioner to revoke the admission of the winding up petition and to stay all further proceedings during the pendency of the application is not maintainable, is of no force.
12. In the decision in Vyas v. Cochin Refineries Ltd. [1976] KLT 148 a single judge of this court in an application filed by the company opposing the advertisement of the petition on the ground that it will cause serious prejudice to the company, finding that no proper, adequate or reasonable ground for admitting the company petition was made out and no case for ordering advertisement of the petition is also made out, dismissed the company application in limine. In another decision in Kerala State Industrial Development Corporation Ltd. v. Poonmudi Tea Pack Ltd. [1988] 63 Comp Cas 575 ; [1988] 1 ILR 383 (Ker) a single judge of this court overruling the objection raised by the company held that a prima facie case is made out by the petitioner, a contributory and directed advertisement of the petition after admitting the same. Therefore, the maintainability of the above application seeking revocation of admission of the company petition cannot be challenged by the respondents.
13. Counsel for the petitioner submitted that since there is a discretion vested in the court to give notice to the company before ordering publication, the simultaneous notice and publication ordered by this court in this case when the petition came up for admission will cause very grave prejudice and loss to the petitioner-company which is a running concern carrying on the business. He also argued that the winding up of the company is an extreme step and the last resort and winding up can be ordered when the activities of the company are impossible. Therefore, according to him, it is not at all wise to advertise the petition since the publication will mar the entire functioning and business of the company.
14. In support of his arguments counsel for the petitioner relies upon the decision in Malabar Industrial Co. Ltd. v. A. John Anthrapper [1983] KLT 958 ; [1985] 57 Comp Cas 717 (Ker), In that case the shareholder of the company filed the petition to wind up the company under Sections 433(f) and 439(c) of the Companies Act on various grounds. The company raised a preliminary objection regarding maintainability of the petition. The company court overruled the objections and after finding that a bona fide case was made out since by the sale of the only estate belonging to the company the substratum of the company will disappear, ordered advertisement of the petition. The Division Bench of this court in the appeal preferred by the company against that order found that the disappearance of substratum has not been established even prima facie and the order directing advertisement of the liquidation petition was not at all justified. In that judgment the Division Bench held that the objects of the company mentioned in the memorandum of association of the company are wide enough to permit the company to engage itself in various activities and the company is solvent enough to engage itself in other profitable activities with the sale proceeds of the estate. It is also held that even if the only asset of the company is to be sold, the court will be very slow in ordering winding up when the court finds either that the petitioner before it has other efficacious remedy or that the company is solvent enough to engage itself in other profitable activities with the sale proceeds of the estate. It is further held by the Division Bench as follows (page 732 of 57 Comp Cas) :
"An order to wind up is an extreme step. It is the last resort that a shareholder should adopt. The company court will be very slow to interfere with the working of a company. That being so, it would not be wise in the context of the memorandum of association and in the state of the law on the point to direct advertisement of the liquidation petition."
15. That petition was filed for an order winding up the company under Section 433(f) alone. Therefore those principles are not ipso facto applicable to the facts of this case since the petition for winding up is filed under Sections 433(f) as well as 433(e) of the Companies Act.
16. Counsel for the petitioner submitted that the respondents have already filed a petition before the Company Law Board alleging mismanagement and oppression and the alternate remedy available to them is pursued. According to him, the winding up of the company being the last resort, unless and until the respondents established that no other remedy except winding up is available to them, the above company petition cannot be entertained.
17. Counsel for the respondents submitted that the petition before the Company taw Board is only filed against oppression and mismanagement and the above company petition has been filed not oniy on the grounds of oppression and mismanagement but also the inability of the company to pay off its debts among other reasons, Therefore, it is clear that the petition filed by the respondents before the Company Law Board against mismanagement and oppression is no bar against the above petition filed for dissolution of the company on the ground that the company is unable to pay its debts and it is just and equitable that the company should be wound up.
18. Counsel for the petitioner submitted that a new board with a new managing director has been constituted to manage the affairs of the company and sufficient opportunity should be given to the company to set right the irregularities and to revitalise the company. He also argued that the respondents who are the contributories must establish prima facie grounds to admit the petition. In the decision in George v. Athimattam Rubber Co. Ltd. [1964] KLT 1043 ; [1965] 35 Comp Cas 17 (Ker) a single judge of this court has held that misconduct and mismanagement are not by themselves sufficient for a winding up order and in that case almost all the acts of misconduct and mismanagement alleged by the petitioner ' related to periods before the new board took charge. Therefore, even if they are well-founded, in the absence of anything to show that the members of the new board were privy to the mismanagement and misconduct is a matter of no consequence. The new board should be given sufficient time to manage the affairs of the company properly and free it from the results of the past mismanagement, But, in this case, all the allegations are made by the respondents regarding the mismanagement of the present managing director though they are denied by him. Therefore, even if mismanagement was committed prior to the constitution of the new board of directors as it is alleged that the present managing director was responsible for the mismanagement, the above decision is of no help to the petitioner.
19. The petitioner contended that since it is a running concern, at the instance of the respondents who are the shareholders, the court should not intervene in the matters of internal administration and its management by its board of directors so long as they are working within the powers conferred upon them under the articles of association. In support of this contention counsel for the petitioner relied upon the decision in Rajahmundry Electric Supply Corporation Ltd. v. Nageswara Rao [1956] 26 Comp Cas 91 (SC). In that case, even though the Supreme Court held that at the instance of the shareholders the courts will not in general intervene in the matter of internal administration and interfere with the management of a company by its directors so long as they are acting within the powers conferred on them under the articles of association, it is further held that this rule is applicable only when the company is a running concern and it is sought to be interfered with its affairs as a running concern. It is further held that when an application is presented to wind up the company its very objective 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 and in such a situation there is no scope for the rule that the court should not interfere in matters of internal administration. Therefore, the above ruling by the Supreme Court is also of no help to the petitioner in this case.
20. It is clear from Rule 96 and Rule 24 of the Companies (Court) Rules and all the above decisions relied upon by counsel for the petitioner that the question of advertisement and direction regarding advertisement will arise only when the court makes up its mind to admit the petition and to proceed with the same. It is also clear that if the court is satisfied from the allegations made in the petition and the material placed before it that a prima facie case is made out by the petitioner, admission along with simultaneous advertisement of the petition can be ordered and even after the petition is admitted if it is found that the advertisement of the winding up proceedings is likely to cause serious injury and loss of reputation to the company and the petition has to be dismissed ultimately, admission itself can be revoked and the petition can be dismissed.
21. In this case the respondents apart from alleging that there is oppression and mismanagement, also alleged that the petitioner-company is not in a position to discharge its debts and while the debt exceeds six crores of rupees, the assets of the company are only 1.5 crores of rupees. It is also further alleged that various suits and criminal proceedings instituted by the creditors are pending against the company and details of several suits and criminal cases are given in the company petition. Though it is alleged by the respondent-company in the company petition that all those debts are incurred during the period while the first petitioner therein was in the helm of affairs of the company as the managing director and contended that the present management making earnest attempts to pay off those debts, the fact that huge debts are due from the company much in excess of its assets is not denied by the company. It is also contended that this court has already ordered advertisement of the petition by the order dated May 21, 1998, in Company Petition No. 20 of 1996 filed by a creditor of the company reported in Sree Lakshmi Silks v. Remanika Silks P. Ltd. [1998] 94 Comp Cas 440.
22. From the materials available on record it is clear that the above company petition filed by the respondents in this case is not an abuse of process of court or a petition filed with mala fide intention to wreak vengeance against the petitioner herein. On the other hand, there are sufficient materials in this case to establish a prima facie case for winding up of the petitioner-company. It is also clear that this court after considering the materials available on record at the time of admission of the petition and finding that the respondents herein have made out a prima facie case, ordered publication of the winding up petition along with order of admission of the petition. It is submitted at the Bar that after advertisement of the petition affidavits are filed by 21 creditors 17 of them opposing the winding up and the remaining four supporting the winding up of the petitioner-company.
23. Under the circumstances, I find absolutely no ground to revoke the order of advertisement and the order of admission of the petition and to dismiss the company petition in limine as contended by the petitioner. The petitioner is entitled to urge its contentions in the company petition against the winding up order sought for by the respondents in this company application. Therefore, the company application is dismissed.