1963 (11) TMI 89 - HC - Companies Law

Summary

Issues Involved:
1. Inability of the company to pay its debts.
2. Validity of the resolution declaring dividends.
3. Rights of transferees to dividends declared before the transfer of shares.
4. Application of Section 207 of the Indian Companies Act.
5. Whether creditors who are also shareholders can file a winding-up petition.

Detailed Analysis:

1. Inability of the company to pay its debts:

The petition for winding up was based on the company's inability to pay its debts, specifically two sums claimed by Mr. Hariprasad: Rs. 1750 towards dividends for 1959 and Rs. 7605.62 standing to his credit in the company's books. The company disputed both claims. The learned judge found that the company was financially sound despite its failure to meet Mr. Hariprasad's demand within the statutory period. The court disagreed with this view, emphasizing that under the Indian Companies Act, a company can be wound up if it fails to pay a creditor's claim after a statutory demand. The court cited "Cardiff Preserved Coal and Coke Co. v. Norton, 1867-2 Ch A 405" and "Buckley on the Companies Acts" to support this position, concluding that a winding-up order should follow if the company does not genuinely dispute the claim.

2. Validity of the resolution declaring dividends:

The resolution dated 30-12-1959 declared a dividend of Rs. 100 per share on equity shares, conditional on the realization of commission from principals. The company later declared another dividend for the same year, which was seen as an attempt to favor new shareholders. The court found the initial resolution valid, affirming that dividends could be declared based on estimated profits, even if not yet received in cash. This followed the principle from "Stringer's Case; In re, Mercantile Trading Co., 1869-4 Ch A 475," which states that dividends need not be in cash at the time of declaration.

3. Rights of transferees to dividends declared before the transfer of shares:

Mr. A. C. K. Krishnaswami transferred his shares to Mr. Parasrampuria in April 1960. The court held that there was no assignment in writing of the dividends declared before the transfer, and thus, Mr. Krishnaswami retained the right to those dividends. This was supported by the principle that a transfer of shares after a dividend declaration does not convey the right to the dividend to the transferee, as noted in "Chumial Khushaldas v. Adhyaru, (S)."

4. Application of Section 207 of the Indian Companies Act:

Section 207 mandates the payment of declared dividends within a specified period. The resolution's condition that dividends be paid upon realization of commissions was seen as contravening this section. The court held that shareholders cannot waive this statutory requirement, as it protects individual shareholders against the company's arbitrary actions. The court referenced "Aramayo Francke Mines Limited v. Public Trustee, 1922-2 AC 406" to illustrate that conditions contrary to statutory requirements do not invalidate the original declaration of dividends.

5. Whether creditors who are also shareholders can file a winding-up petition:

The court rejected the argument that shareholders owed dividends cannot be considered creditors for winding-up purposes. It cited "Bacha Guzdar v. Commissioner of Income-tax, Bombay," affirming that once a dividend is declared, it becomes a debt due from the company to the shareholder. The court also referenced "In re, Severn and We and Severn Bridge Railway Co. 1896-1 Ch 559," which held that declared dividends create an immediate debt payable to shareholders.

Conclusion:

The court directed the winding up of the company based on its inability to pay debts, specifically the declared dividends for 1959. However, the order was to be kept in abeyance for three weeks to allow the company to pay or deposit the dividends due to Mr. A. C. K. Krishnaswami and Mr. Hariprasad. If the payments were made, the winding-up petition would be dismissed; otherwise, the winding-up would proceed. The appellants were entitled to their costs, and no order was made regarding Smt. Godavari Bai's claim as she had not made a statutory demand.