Saturday, August 2, 2008

Supreme Court on Winding-up Petition by a Contributory

Usually, in a merger, the resulting company becomes entitled to all the rights (and subject to all the liabilities) of the merging company. This includes the exercise of rights in respect of shares in other companies (which we shall call target companies) held by the merging company, as the resulting company would become the owner of those shares. However, it appears that would not be true in all cases, unless the procedure for registration of the transfer of these shares from the merging company to the resulting company has been completed.

In a post contributed by Mihir Naniwadekar, a 4th Year B.A., LL.B (Hons.) student at the National Law School of India University, Bangalore, he analyses a case where the resulting company found itself in a position where it was unable to exercise rights as a shareholder (that it inherited from the merging company) as the shares were not registered in its name in the books of the target company. Mihir’s post is set out below:

Recently, the Supreme Court of India in Severn Trent Inc. v. Chloro Controls (India) Pvt. Ltd. [(2008) 4 SCC 130] dealt with an interesting point of law related to the locus standi of a contributory to file a petition for winding up.

The facts of the case are clear. Chloro Controls (India) Private Limited and Capital Controls Delaware Company, Inc. set up joint venture company, Capital Controls India Private Ltd. Later on, Capital Controls Delaware merged into Severn Trent Water Purification Co. Inc., and pursuant to the merger agreement, Capital Controls (Delaware) went out of existence. The authorised capital of the Indian joint venture company was Rs. 75,00,000 divided into 7,50,000 equity shares of Rs. 10/- each. Capital Controls Delaware (now Severn Trent) held 50% of the equity share capital of the company. The other 50% of the shareholding of the company was held by Chloro Controls (India) Private Limited. Even after the merger between Severn Trent and Capital Controls Delaware, the name of Severn Trent was not entered into the register of Capital Controls (India). Severn Trent terminated the Joint Venture Agreement vide its letter dated July 21, 2004 due to alleged breaches committed by Chloro Controls (India) Private Limited. In the termination notice, Severn Trent called upon the other shareholder to take steps for winding up of the company. When no such steps were taken, Severn Trent filed a petition for winding up on just and equitable grounds. This petition was contested by Capital Controls (India) as well as by Chloro Controls (India). Among various other grounds, the respondents also objected to the maintainability of the petition.

It was contended that Severn Trent was not a shareholder on the company’s register and, therefore, had no standing to maintain the petition for winding up. It was further contended that at no point of time was any application for transfer of share certificates and/or substitution of the name of Severn Trent made. Severn Trent, on the other hand, asserted that it had stepped into the shoes of Capital Control (Delaware), and was entitled to file a petition for winding up. The Company Judge allowed the petition, and an appeal was preferred before the Division Bench of the Bombay High Court. The Division Bench held that the petition was not maintainable on the grounds of Severn Trent being a contributory, but remanded the matter to the Company Judge to decide whether Severn Trent could file the petition on the grounds of its being a creditor. Appeals were filed against this order before the Supreme Court. In the Supreme Court, it was argued that although Severn Trent was a contributory, it was still not entitled to bring a petition for winding up because certain essential conditions were not complied with.

The issue before the Supreme Court called for an interpretation of Section 439(4)(b) of the Companies Act, 1956. Under this Section, a contributory is not entitled to present a petition for winding up unless the shares in respect of which he is a contributory, or some of them, (a) were originally allotted to him; or (b) were held by him and registered in his name for a certain period; or (c) devolved on him through the death of a former holder. Severn Trent did not dispute that category (a) was inapplicable in the case; but argued that it should be held to have conformed to categories (b) and (c). Essentially, the contention was that the requirement of the shares having to be “registered in his name” was not a mandatory requirement, and could be waived in certain circumstances. Otherwise, a company (particularly in cases where two groups of shareholders are severely hostile to each other) could prevent a contributory from bringing a petition for winding up by simply refusing to register the shares in the name of the contributory. Alternatively, Severn Trent argued that the shares could be deemed to have devolved upon it through the “death” of the former holder. After the merger between Capital Control (Delaware) and Severn Trent, the former had effectively met its “civil death”, and its shares had then devolved upon the latter.

The Court relied on a string of English decision beginning from In Re a Company [(1894) 2 Ch. 394] to negate these contentions. The Court held that the plain language of Section 439 could not be modified or read down; and to come under category (b), it was essential that the shares should be held by the contributory and registered in his name. Section 439(4) was held to be a complete code in this respect, leaving no room for equitable considerations to be used to allow a petition in cases where a strict reading of the provisions would not allow one. Adverting to Severn Trent’s contention that the company could simply refuse to register the shares in the name of the contributory, the Court stated, “… if there is omission, default or illegal action on the part of the Company in not registering the name of the contributory even though he/it can be said to be a contributory by holding the shares… the law provides a remedy.” And as Severn Trent had not availed of any such remedy, the Court held that the maxim ‘in equity, what ought to have been done must be taken as having been done’ was inapplicable. The Court also held that the category (c) listed above – “devolved on him through the death of former holder” – would be applicable only to personal representative in his individual capacity and not to corporate entity or juristic personality. Further, it was stated that the word ‘death’ normally applies to the death of a natural person. Severn Trent’s appeal was accordingly dismissed. As to the issue of its locus standi as a creditor, the matter was sent back to the Company Judge.

This case is significant because it is perhaps the only clear Supreme Court decision on the issue of locus standi of a contributory to bring a petition for winding up. The case now conclusively settles that Section 439(4) is an exhaustive code on the subject of winding up by contributories; and in order to present a petition for winding up, a contributory must be able to bring itself within the wordings of the categories mentioned in Section 439(4)(b); with all the categories being construed according to a strict literal meaning.

2 comments:

winding up petition said...

According to Begbies Traynor’s Red Flag Alert, over 140,000 companies in the UK have shown dramatic signs of financial worries in Q4 2009.

Anonymous said...

I WANT TO KNOW WHETHER A WINDING UP PETITION CAN BE MADE ON A PVT LTD COMPANY WHO HAVE FAILED TO PAY OFF RS.50.00 LACS OF SHORT TERM LOAN OF 3 MONTHS