1968 (12) TMI 52 - SC - Companies Law

Was there a fiduciary relationship between the appellant and the old company and if so did the appellant-company by availing themselves of this fiduciary character gain a pecuniary advantage of 1, 50, 000 ? Is the suit barred by limitation ? and Are the plaintiffs as shareholders of the old company entitled to maintain the suit ? Held that - We agree with the High Court that the appellant stood in a fiduciary relationship towards the old company and was bound to protect its interests. The onus is upon the appellant-company to establish affirmatively that the transaction was righteous and that it did not gain any pecuniary advantage by availing itself of its fiduciary character. We are inclined to think that the appellant-company has discharged this difficult burden of proof. The transaction was just and fair and that the appellant did not gain any pecuniary advantage by availing themselves of their fiduciary character or under circumstances in which their interests were in conflict with those of the old company. In saying so we must not be understood to say that we encourage transactions of this type. Having regard to their fiduciary character the appellant-company might well have avoided entering into the transaction. The High Court passed a decree for money and net for recovery of immovable properties. A suit for such a relief would be governed by article 120. Even if the suit is treated as one for recovery of possession of the properties it would be governed by article 120 and not by article 144. The old company could not ask for recovery of the properties until they obtained a reconveyance from the new company. The cause of action for this relief arose in 1939 when the properties were conveyed to the new company. A suit for this relief was barred under article 120 on the expiry of six years. After the expiry of this period the old company could not file a suit for recovery of possession. It follows that the suit is barred by limitation. The law in our country is very different. Here the winding-up precedes the dissolution. There is no statutory provision vesting the properties of a disnlved company in a trustee or having the effect of abrogating the law of escheat. The shareholders or creditors of a dissolved company cannot be regarded as its heirs and successors. On dissolution of a company its properties if any vest Li the Government. It follows that the plaintiffs are not entitled to maintain this suit.

Summary

Issues Involved:
1. Fiduciary relationship and pecuniary advantage.
2. Limitation period for filing the suit.
3. Plaintiffs' entitlement to maintain the suit as shareholders.

Comprehensive, Issue-Wise Detailed Analysis:

1. Fiduciary Relationship and Pecuniary Advantage:
The primary issue was whether there existed a fiduciary relationship between the appellant and the old company, and if the appellant-company gained a pecuniary advantage of Rs. 1,50,000 by availing itself of this fiduciary character. The court acknowledged that "any person bound in a fiduciary character to protect the interests of another person should not put himself in a position where his interest and duty conflict." The appellant-company, as the secretary of the old company, had intimate knowledge of the company's income, prospects, and market value of the properties, thus establishing a fiduciary relationship. However, the court found that the transaction was "just and fair," with no fraud, concealment, or undue influence. The Wapshares were fully informed and had legal advice, and the sale was satisfactory to them. The court concluded that the appellant did not gain any pecuniary advantage by availing themselves of their fiduciary character.

2. Limitation Period for Filing the Suit:
The second issue was whether the suit was barred by limitation. The conveyances were executed in 1939, and the suit was filed on December 21, 1950. The court held that the plaintiffs could not claim relief on the ground of fraud, and thus, article 95 of the Indian Limitation Act, 1908, did not apply. The suit was governed by article 120, which has a limitation period of six years. Since the cause of action arose in 1939, the suit was filed beyond the limitation period and was therefore barred by limitation.

3. Plaintiffs' Entitlement to Maintain the Suit as Shareholders:
The third issue was whether the plaintiffs, as shareholders of the old company, were entitled to maintain the suit. The old company was dissolved on March 1, 1940, under section 209H of the Indian Companies Act, 1913. The dissolution ended the company's existence, and no application was made within two years to declare the dissolution void under section 243. The court noted that "the Government takes by escheat or as bona vacantia all the properties of a company dissolved under the Indian Companies Act, 1913." Consequently, the plaintiffs could not maintain the suit, as the properties and rights of the dissolved company vested in the Government.

Conclusion:
The court allowed C.A. No. 1174 of 1965, setting aside the High Court's decree and restoring the trial court's decree, which dismissed the suit. C.A. No. 1935 of 1966 was dismissed. There was no order as to costs in the Supreme Court and the High Court.