M J Antony: Winding up cramps

OUT OF COURT

The Supreme Court says merged firms don't die, only humans do.

Irreconcilable personality clashes in the boardrooms sooner or later move to the courtrooms. They take different forms. One of them comes in the shape of a petition for winding up the company. Part VII of the Companies Act deals with winding up proceedings. While most aspects of these proceedings have been debated threadbare by corporate lawyers and decided by Indian and English courts during the past two hundred years, there is apparently one question on which no precedent has cast light. This issue was dealt with recently by the Supreme Court in Seven Trent Water Purification Inc vs Chloro Controls (India) Pvt Ltd.

In this case, Chloro Controls India and Capital Controls (Delaware) set up a joint venture called Capital Controls India Pvt Ltd. Later, the Delaware company amalgamated with another US corporation, Severn Trent. There were serious differences between the foreign and Indian partners, who held equal shares. Seven Trent ultimately terminated the JV agreement and moved the company judge of the Bombay high court for winding up Capital Control India and removing the Indian managing director. The single judge ruled that the original company 'died' and, therefore, its rights devolved on the new corporation according to Section 439(4)(b) of the Companies Act. On appeal, the division bench set aside the view of the company judge. It said that Seven Trent had not been registered as a member of the company and, therefore, it was not entitled to file a petition for the winding up of the company. The US corporation then approached the Supreme Court.

The main question considered by the Supreme Court is whether the foreign firm can claim to be a 'contributory' and move a petition for winding up. A contributory is defined in Section 428. In short, the term denotes a person liable to contribute to the assets of a company in the event of its being wound up and includes the holder of any shares which are fully paid-up. A creditor, a representative or someone who has a relevant court order can move such a petition.

However, the position of the contributory is different. The Supreme Court gave a strict interpretation of Section 439(4)(b). It ruled that a contributory can move a winding up petition only if he had held the shares of the company in his name for at least six months during the 18 months immediately before the commencement of the winding-up proceedings. One of the reasons for borrowing this provision from the English law is to keep out a person buying shares in a company in order to qualify himself to wreck it. Such malicious petitions are not unknown to corporate law. In the present case, the US firm had not fulfilled the condition of holding shares for the specific period. It had not even applied for rectification of the register.

It is often argued that with the merger, the original company suffered a 'civil death' and the amalgamated company became its successor. This contention was put forward in this case too with great vehemence and it found favour with the company judge. However, the Supreme Court emphasised that "in the context of the company law, the winding up of a body corporate is not the same thing as or equivalent to the death of a member." Citing Stroud's Judicial Dictionary, the Supreme Court said that the word 'death' refers to the ceasing to live of a natural person. The word cannot be used for the dissolution of a partnership or in the context of a deceased debtor or member. As an English judge said in this context, fancy should not take the place of logic. The Supreme Court emphasised that it could not give an interpretation which amounted to re-writing the law or the amendment of a statute.

There were some other questions which had to be settled in this case. Therefore, it was remitted to the high court. However, the ruling on the status of a contributory, the first of its kind, will come as a relief to Indian partners in joint ventures as mergers and acquisitions are happening too often these days. These are often accompanied by personality clashes of the Severn Trent kind, leading to deadlocks in the functioning of the companies exactly when they want to spread their wings. By giving precedence to the rules, the Supreme Court has prevented the bigger partners from taking impulsive steps to get rid of inconvenient ones after amalgamation.