Application of Principle of ‘Dissolution of Partnership’ to invoke Winding Up

Application of principle of ‘dissolution of partnership’ to invoke winding up of Company under Section 433(f) of Companies Act, 1956

Deadlock in the management of the company is one of the grounds which may make it equitable and just for the court to wind up a company under Section 433(f). Section 433 provides for the circumstances in which a company may be wound up by the court. Sub-section (f) provides that a company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. Section 433(f) of Companies Act, 1956 is similar to Section 222(f) of the English Companies Act, 1948.

Principle of dissolution of partnership applies to companies either on the ground of complete deadlock or on the ground of being domestic or family companies. A complete deadlock would be created where the board has two real members or the ratio of shareholding is equal. In the case of domestic or family companies, the courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from management but from benefits as shareholders. Lack of probity has to result in prejudice to the company’s business, affecting rights of complaining parties as shareholders and not as directors. If a deadlock can be resolved by the articles there is no deadlock to bring in winding-up and if there are alternative remedies the company should not be wound up.[1]

The Supreme Court in Hind Overseas case[2] referred to English cases of Ebrahimi v. Westbourne Galleries Ltd.[3] and Yenidje Tobacco Co. Ltd.’s case[4] to hold that- “When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership.”

Similarly in Synchron Machine Tools P. Ltd. & Ors. vs. U.M. Suresh Rao[5], the High Court of Karnmataka also noted that- “It is open to the court to pierce the veil and determine the real structure of the company. If the apparent structure of the company is not the real structure and it is in reality a partnership, the principles of dissolution of the partnership may be applied in adjudicating the petition for winding up….In order to determine whether in reality the company is a partnership, the following norms are to be satisfied: (i) shareholdings should be more or less equal; (ii) the company must have been formed or continued on the basis of a personal relationship involving mutual confidence; (iii) an agreement or understanding that all or some of the shareholders shall participate in the conduct of the business; (iv) restriction on the transfer of shares so as to ensure the continuation of the element of mutual confidence between the shareholders.”

[1] Hind Overseas Private Limited vs. Raghunath Prasad Jhunjhunwalla and Anr., (1976) 3 SCC 259

[2] (1976) 3 SCC 259

[3] [1972] 2 All ER 492

[4] [1916] 2 Ch 426

[5] [1994]79CompCas868(Kar) para 37