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RAJAHMUNDRY ELECTRIC SUPPLY CORPORATION LTD. V. A. NAGESHWARA RAO, AIR 1956 SC 213

RAJAHMUNDRY ELECTRIC SUPPLY CORPORATION LTD. V. A. NAGESHWARA RAO, AIR 1956 SC 213

 

FACTS

  • First respondent filed an application under Section 162 clauses (v) and (vi) of the Indian Companies Act for an order to wind up the company.
  • The grounds for the relief 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 Chairman of the Company contested the application on the ground that it was the Vice-Chairman 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 trial judge found that action could be taken under Section 153-C and dismissed the appeal.

 

ISSUE

  • Whether the allegations in the application were sufficient to support a winding-up order under Section 162 and whether action could be taken under Section 153-C?

 

HELD
The appeal failed and was dismissed with costs of the first respondent. Mismanagement of directors is a ground for a winding-up order under Section 162(vi) and whether it is just and equitable becomes a question to be decided on the FACTS of each case. 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.

  • 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.
  • The decisions in In re Anglo-Greek Steam Company and In re Diamond Fuel Company were relied on in support of the position that when the FACTS proved do not make out a case for winding up under Section 162, no order could be passed under Section 153-C. However, 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.
  • Loch v. John Blackwood Ld. 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 p. 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.

 

COMMENTARY

“Section 241(l)(fc) provides for relief in cases of mismanagement. For a petition under this section to succeed, it must be established that the affairs of the company are being conducted in a manner prejudicial to the interest of the company or public interest, or that, by reason of any change in the management or control of the company, it is likely that the affairs of the company will be conducted in that manner. If the Tribunal is so convinced, it may, with a view to bringing to an end or preventing the matter complained of or apprehended, make such order as it thinks fit. A very clear illustration of mismanagement contemplated by the section is Rajahmundry Electric Supply Corpn Ltd v A Nageshwara Rao:
A petition was brought against a company by certain shareholders on the ground of mismanagement by directors. The court found that the Vice-Chairman grossly mismanaged the affairs of the company and had drawn considerable amounts for his personal purposes, that large amounts were owing to the Government for charges for supply of electricity, that machinery was in a state of disrepair, that 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 powerless to set matters right. This was held to be sufficient evidence of mismanagement. The court 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.”