GAYA SUGAR MILLS LTD Vs. STATE OF BIHAR

JUDGEMENT

(1.) This is an application by three share holders in a limited company, known as the Gaya Sugar Mills Limited, for a winding-up order and, pending the making of such an order, for the appointment of a provisional liquidator, for the present, I am concerned only with the latter application, which is opposed by the company. The Gaya Sugar Mills Limited was originally a private company but was incorporated as a public company in 1934, the capital being 7 lakhs. This capital was increased to 12 lakhs, and then to 40 lakhs, and finally, in 1944, to 1 crore. The reason ion this was that the company embarked on an ambitious scheme to construct a large and up-to-date sugar factory and also a card board factory at Warisaliganj. The original factory is situated at Guraru, which appears to be some distance from Warisaliganj. Warisaliganj was selected as a better site as it is situated in the centre of an area in which good sugarcane can be grown. Land was purchased and buildings were erected at Warisaliganj and orders were placed for new machinery. It is said that delivery was actually taken of machinery worth approximately 25 lakhs. It was hoped that the project would be completed in time to enable the manufacture of sugar to be begun during the crushing season of 1947-48. This hope was, however, falsified, Machinery valued at 8 lakhs arrived at Calcutta, but the directors were either unable to pay for it, or, being unable to find the capital necessary for completing and working the new mill, decided to cut their losses and not take delivery of it. The orders which had been placed for the cardboard factory were countermanded, and in the spring of 1948 the entire project was abandoned, whether for good or temporarily, until the necessary funds could be raised, does not appear very clearly from the record. It is obvisious that a great deal of money was lost, and it is not surprising that dissensions arose among the directors, of which, under the articles of association, there were seven. These culminated in an incident which took place at a meeting of the directors on 10th July 1949.

(2.) It appears that a few days earlier, on 4th July 1949, the managing director, Lala Gurucharan Lal, and his son, Arjun Prasad, obtained payment of a sum of Rs. 60,000, or thereabouts, due to the company by the East Indian Railway Company. Lala Gurucharan Lal and his son were, at the meeting, taxed with using this money for their own purposes. According to the petitioners, Lala Gurucharan Lal thereupon undertook in writing either to refund the money to the company on or before 24th July 1949, or resign his office as managing director. This undertaking is said to have been contained in a letter which Lala Gurusharan Lal handed over to another director, Chandmul Rajgarhia. Neither the letter nor any copy of it has been produced. At about this time, or somewhat later, one of the directors, Bhagwati Prasad Khaitan, resigned, and another, Birdhichand Bhalotia, forfeited his office in consequence of his failure to meet certain calls on his shares, according to the petitioners, Lala Gurusharan Lal did not implement the undertaking he had given. Thereupon, the three remaining directors, namely, Onkarnath Jajodia, Sohanlal Jajodia and Chandmul Rajgarhia, or, more probably, a majority of these consisting of the two former, purported to fill up four vacancies on the board. Simultaneously Lala Gurusharan Lal, Arjun Prasad and, probably, I imagine, Chandmul Rajgarhia, purported to fill up the two vacancies, which certainly existed, with persons other than those appointed by the rival group, The result is that two separate boards of directors, as it were, came into existence, each consisting of seven persons, of whom, however, only three persons, namely, Sohanlal Jajodia, Onkarnath Jajodia and Chandmul Rajgarhia belong to each. Conflicting orders were issued by each board, and the Imperial Bank, Gaya, intimated that it could not carry out the mandates of either. Either before or after this Sohanlal Jajodia instituted a suit in the original side of the Calcutta High Court, asking for a declaration that Lala Gurusharan Lal and his son Arjun Prasad had forfeited their offices and also for an injunction restraining Lala Gurusharan Lal from acting as managing director, A temporary injunction was granted, but later, the order was varied so as to enable the defendants in the suit to negotiate for loans. This suit is set down for peremptory hearing on 5th January 1950. Lala Gurusharan Lal, or his faction, continued in possession of the company's premises at Guraru, an attempt was made by Sohanlal Jajodia to dislodge them by means of an application under Section 144, Criminal P. C. This application was, however, unsuccessful. It was immediately after this that the petitioners applied for a winding-up order. The broad ground on which such an order is asked for is stated thus in para. 46 of of the application: "The main purpose of the company has become impossible for performance and there are no funds adequate for earring on the business of the company, and the company cannot go on except at a heavy loss." Certain particulars are then given which the petitioners regard as going to support the ground they put forward. The existing factory at Guraru has a capacity of 800 tons, and it will probably benefit by the expenditure incurred at Warsaliganj on improving the yield and quality of sugarcane. The crushing season begins this month, and the company in its affidavit states that the necessary preparations have been made. In reply to this affidavit it is stated that, if the boilers have been fired, this was done as a piece of camouflage for the purpose of resisting this application and that labourers are not being paid their wages. I am not prepared to accept this statement. At the same time, the prospects of the share-holders, who, have received nothing since 1946, receiving anything in the immediate future is, I think, myself, somewhat remote. On the other hand, it is conceded that a majority of the share-holders are opposed to the business being suspended and the company wound up. All that the learned Advocate-General says is that the majority consists of Lala Gurusharan Lal and his relations and persons who have a blind and unreasoning confidence in him. Nevertheless, that is a circumstance to which I have to have regard.

(3.) The learned Advocate-General in the earlier part of his address dwelt at some length on certain dealings by Lala Gurusharan Lal with the assets of the company, which he described as fraudulent. I observe that the trustees of the debenture-holders in a recent report merely described these as indications of "inefficient management including indiscreet use of the company's moneys." It may be--and I am not in any way prejudging the matter--that fraud will eventually be established, and it may be that that would justify the making of a winding up order even if a majority of the shareholders are opposed to it. But a finding of fraud cannot be come to on the basis of affidavits. Moreover, what I am now concerned with is not the making of a winding up order but the application for the appointment of a provisional liquidator. Such an application is not ordinarily allowed except on the petition of a creditor who has been unable to obtain payment of his money, or unless the company asks for or agrees to the appointment. The dangers involved in appointing a provisional liquidator and then finding that there is no justification for making a winding up order are obvious. The consequences to the company of the making of a wrong order in such a matter are far more serious than the granting of an injunction which has ultimately to be dissolved. The object in appointing a provisional liquidator is to ensure that there will be a fair distribution of the assets of the company and that one creditor will not be permitted to benefit at the expense of the others. This is well illustrated by a decision cited by the learned Advocate-General. In In re Hammersmith Town Hall Co., ((1877) 6 Ch. D. 112). In that case an application had been presented by certain creditors of the company for a winding-up order. The managing director had been adjudged a bankrupt. Several creditors were pressing unsuccessfully for payment, and a meeting of the share-holders to discuss the situation of the company had been convened for 26th June Also--and this is of importance--an agreement had been entered into for the sale by the company of certain property belonging to it, and this sale was to be completed by 28th June. On 35th June a provisional liquidator was appointed "to take possession of and protect the assets of the company." When citing this decision the learned Advocate-General pointed out that the Government of Bihar had instituted a certain proceeding to recover a sum of more or less 1 1/2 lakhs due from the company on account of sugarcane cess and that the Punjab National Bank had threatened to sell certain stores on which it had a charge in order to realise a sum of 3 lakhs due to it on overdraft. Sis weeks or so have elapsed since this threat was issued and no further action has been taken by the Bank. The value of the stores is more than twice the amount due to the Bank. In neither of these matters has a stage been reached in which it is possible to say that the company is unable to pay its debts. Moreover, the application does not purport to be under Clause (v) but under Clause (vi) of Section 162 of the Act.