India: Power of the Court Under the "Just & Equitable Clause"

The just and equitable clause confers very wide discretionary powers on the court¹. In ordering a company to be wound up under this clause, the courts have to take into consideration the interest of the company, its employees, creditors, shareholders and the general public².

For a long period of time the term ‘just and equitable’ were read ejusdem generis. In Cowasjee v. Nath Singh Oil Co.³, the court held that "though the court is not bound to construe this clause ejusdem generis, as only covering grounds of a like nature with those specified in Clauses 1 to 5, yet it will require grounds of a like magnitude before acting under the clause."

In Kilpest (P) Ltd. v. Shekhar Mehra⁴, the court observed that the term 'just and equitable' has undergone a radical change in the social and economic conditions in our country. The term 'just and equitable' has lost its technical meaning and has acquired a more meaningful and pragmatic one.

The courts have thus held the words ‘just and equitable’ to be words of the widest significance and as not limiting the jurisdiction of the court to any case. It is a question of fact and each case must depend on its own circumstances⁵. No general classification can be made to show under what circumstances the court can invoke the ‘just and equitable clause’. However, the courts have taken the assistance of this clause wherever it was of the opinion that the running of the company was not viable or beneficial to the shareholders.

The court does not get jurisdiction only because of the provisions of law mentioned by the applicant. 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. This lack of confidence must be based on the conduct of the directors, not in regard to the private life or affairs, but with 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 the lack of probity in the conduct of the company's affairs, the former is justified by the latter, and ‘just and equitable’ that the company be wound up⁶.

The relief under the ‘just and equitable’ clause is discretionary and the court may refuse to make an order of winding up if it is of the opinion that some other remedy is available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursing the other remedies⁷. It is therefore necessary for a contributory seeking the discretionary powers of the court under Section 433(f) not only to establish that the circumstances prevailing in the company are such that a winding up of the company is the only alternative but also to show that there are no other remedies available⁸. Where an alternative remedy is available, section 433(f) cannot be invoked and also the principle of dominus litus cannot be applied⁹.

Before passing an order of winding up under the ‘just and equitable’ clause the court has to take into account a number of considerations such as the opinion of the majority shareholders¹⁰, interest of the workers¹¹, public interest¹², etc.

The various cases under which the just and equitable clause may be invoked are:

1. Deadlock between the directors of the company. There need not be a paralysing dead lock in the management, a justifiable lack of confidence in the management of the company is sufficient for the court to invoke the just and equitable clause to order its winding up¹³. Where the relation between the directors is such that they would not speak to each other except through the secretary, the court found it ‘just and equitable’ to order winding up¹⁴.

In Veeramanchineni Seethaiah v. Venkatasubbiah¹⁵, the Madras High Court held that mere difference between the majority directorate and the minority directorate should not be a ground to invoke the just and equitable clause for ordering winding up of the company. Similarly, in the case of Hind Overseas Ltd, Re¹⁶, the Calcutta High Court observed that winding up cannot be ordered on the ground of friction and disputes between directors.

2. Where the main object for which the company was incorporated has failed or where the company has lost its substratum. The Supreme Court in Seth Mohan Lal v. Grain Chanbers Ltd¹⁷, observed that the substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed, or it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities.

In Rajab Nagindas Doshi v. British Burma Petroleum Co.¹⁸, the Bombay High Court held, where a petition for winding up has been made on the ground of loss of substratum, even if the company has thereafter embarked upon a subsidiary business as mentioned in the Article of Association, there is no reason why an order of winding up should not be passed, as the subsequent developments need not be taken into account.

Following the above rule, winding up ordered where the affairs of the company came to a stand still¹⁹ or where the company did no business for seventeen years²⁰, etc.

3. Where the company cannot carry on its business without incurring losses. A mere apprehension by the shareholders that the company might incur losses instead of profits is no ground to order winding up²¹. The Allahabad High Court in Registrar of Companies v. M.K. Bros. Ltd²², observed; it will be needless, indeed, for a company to carry on business where there is no hope of achieving the object trading at a profit. This view has been supported by the Bombay High Court in the case of Shah Steamship Navigation Co, Re, wherein it was observed; "the court will not be justified in making a winding up order merely on the ground that the company has made losses; and is likely to make further losses".

4. Where the company is being run by the majority shareholders in a manner which is detrimental to the minority shareholders, ie., the majority have adopted a very aggressive and a squeesing policy. In R. Sabapathi Rao v. Sabapathi Press Ltd.²³, the court held that where the directors of a company are able to exercise a dominating influence on the management of the company, and the managing director is able to outvote the minority of the shareholders and retain the profits of the business between members of the family and there are several complaints that the shareholders did not receive the balance sheet, nor was the auditors report read in the annual general meeting and dividends were not regularly paid, it would constitute a sufficient ground for winding up.

5. If the company has been formed by fraud or for illegal purposes. In Poor Housing Association v. Thopa Naidu²⁴, the Madras High Court held that where the main object of a company is the conduct of lottery, the mere fact that some of its objects were philanthropic will not prevent the company from being ordered to be wound up as being one formed for an illegal purpose. However, where the majority of the shareholders waive the fraud then there can be no action for winding up²⁵.

6. Public interest. The courts have in a large number of cases wound up companies on this ground. Where the company posed danger to investing public it was ordered to be wound up²⁶. This ground has also been used to prevent the companies from being wound up. In Manjulalbhai v. Jayanth Vitamins Ltd²⁷, on the ground that winding up would result in unemployment to 700 workers on muster rolls, the court refused to pass an order of winding up.

The ‘just and equitable clause’ confers very vast powers upon the courts. The courts have observed that, the non-mention of the provision of law will not prevent the court form passing an order of winding up²⁸. However, the courts have laid down certain parameters within which this power is exercised. The paramount consideration of the court however remains the proper functioning of the company i.e., in the interest of the stake holders. Where the court is of the opinion that the company is only a fraud upon the shareholders or that the object of the company is to defraud the creditors or that the company is not functioning in the manner it is expected to, then there is nothing preventing the court from invoking this clause and order winding up. The courts have, however, used this clause with great circumspection and caution.