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TMI Blog1956 (3) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... te concern, known as Hindson Automobiles, Patiala. The petitioner and three others, namely, Shri Ram Lal Kad, Shri Anad Kumar Chopra and Shri Prem Pal Garg, were the promoters of the company and they were also the sole proprietors of the said firm. They floated the company by taking ten shares each of the total value of Rs. 4,000 and formed its first permanent directors. According to the agreement with the said firm, the company, besides paying in cash for the purchase of its assets, allotted, two hundred fully paid-up shares of Rs. 100 each to each of its four promoters for the transfer of goodwill of the firm, valued at Rs. 80,000. The same day, viz., 1st February, 1954, two hundred fully paid-up shares were allotted to Shri Swarn J. Singh against cash payment of Rs. 20,000 and he was co-opted as a director. The five directors were thereafter appointed to act as the company's working directors, on a remuneration of Rs. 500 per month each. In the minutes of 1st January, 1955, fifty fully paid-up shares each were allotted to Shri Sat Pal and his brother Mr. Raj Pal and hundred such shares were allotted to their mother Shrimati Pritam Devi, against their loan of Rs. 20,000 already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on the said date. In reply to the summons, the respondent company denied that the proposal was meant to expropriate the petitioner and further stated that they had already decided not to hold the meeting on 9th July. The matter was consequently dropped and the application dismissed. The petitioner relied upon clause (6) of section 162 of the Companies Act, and alleges that in view of the present state of affairs it is just and equitable that the company should be wound up. The circumstances relied upon are: (i)Illegal allotment of shares to Shri Sat Pal, Shri Raj Pal and Shrimati Pritam Devi, inasmuch as the mandatory provisions of section 105C were not complied with. (ii)Unwarranted and wrongful exclusion of the petitioner from the office of a director and the subsequent attempt to expropriate his shares. (iii)The number of directors was reduced to less than four, the minimum number provided by the articles-Shri Sat Pal did not hold the necessary qualification, and Shri Swarn J. Singh had ceased to be a director when he was not elected in the next following annual general meeting. (iv)The directors were recklessly wasting the funds of the company "with a view to harm the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re would clearly be grounds for a dissolution, and that the same principle ought to be applied where there was in substance a partnership in the guise of a private company. LORD COZENS-HARDY M.R. at page 431 observes: "Is it possible to say that it is not just and equitable that that state of things should not be allowed to continue, and that the court should not intervene and say this is not what the parties contemplated by the arrangement into which they entered? They assumed, and it is the foundation of the whole of the agreement that was made, that the two would act as reasonable men with reasonable courtesy and reasonable conduct in every way towards each other, and arbitration was only to be resorted to with regard to some particular dispute between the directors which could not be determined in any other way. Certainly, having regard to the fact that the only two directors will not speak to each other, and no business which deserves the name of business in the affairs of the company can be carried on, I think the company should not be allowed to continue." Warrington L.J. in his concurring judgment at page 435 observed as follows: "I am prepared to say that in a case like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners allowed to take out their money and trade separately if they please." In In re Davis and Collett Ltd. [1935] 1 Ch 693; 5 Comp. Cas. 467, the petitioner and the respondent held the capital of the company substantially in equal shares. It was held that where the capital of a private company is so owned as to make the company in substance a partnership and one director has purported by means of irregularities to acquire complete control of the company and to exclude the other director from the management of it, it may be "just and equitable" within the meaning of the section that the company should be wound up. Great Indian Motor Works Ltd. v. Chandi Das Nundy [1953] 23 Comp. Cas. 287 is the last decision relied upon by Mr. Tulli. There, the entire body of shareholders consisted of the petitioner, his brother, Mr. Kristo, three sons of Kristo and a first cousin of Kristo's wife. The three directors were the two brothers and the brother-in-law of Mr. Kristo. The whole business of the company was being engineered for the benefit of Mr. Kristo who held the majority. The company was not being run fairly for the benefit of its shareholders. Principles for the dissolution of partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r can have no cause for any justifiable complaint. His remedy would ordinarily lie in appealing to the general body, which forms the domestic tribunal in case of a limited concern. There is no allegation, much less proof, of any misappropriation or malversation of funds by the directors, or that any one of them, because of the preponderance of his voting power, is managing the affairs of the company for his personal advantage. The mere fact that the petitioner can be or is being out-voted by the majority in the internal management of the company, or that he is being singled out by the rest of the directors, ought not to be regarded a sufficient ground to wind up the company under the just and equitable clause. In Seethiah v. Venkatasubbiah [1950] ILR 1950 Mad. 59 mere incompatability of good relations between two rival factions in the directorate, in the absence of some other strong ground such as misappropriation or malversation of funds, was not regarded as sufficient for ordering winding up of the company under clause (6) of section 162. There was nothing particularly wrong with the management of the company, except that the petitioners were holding views different from those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the company's business. Generally speaking a director stands in a fiduciary position to the company. Being a director and therefore in a fiduciary relation to the company, he is always expected to guard the company's interest and surely not to utilise the position and knowledge possessed by him in virtue of his office to the detriment of the company's interest and for his personal advantage. A corporate body can only act by agents and it is of course the duty of its agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which may conflict, with the interests of those whom he is bound to protect. It seems, the petitioner realised the situation and submitted his resignation shortly after he started his own business, but sometime later he changed his mind and preferred to stick to his guns. The main point repeatedly stressed by Mr. Tulli is that the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his letter dated 29th April 1955, described it as an "error which obviously has been due to some misunderstanding.'' The resignation, with the above interpretation, was accepted on 13th February, 1955. Statutory information of the petitioner having ceased to be a director was filed with the Registrar on 24th February. Entry No. 511 dated 15th February, in the company's despatch register, relates to the intimation of the decision sent to the petitioner. The petitioner says he did not receive the intimation and that he came to know of the resolution only on inspection of the records with the Registrar. He put forth his interpretation of the resignation for the first time in his letter of 29th April, 1955. It is difficult to believe that the company's letter was not actually despatched and it did not reach the petitioner, or that the petitioner did not come to know of the resolution much earlier. What I am inclined to think is that the petitioner, for some reasons, changed his mind subsequently and chose to take advantage of the inadvertent omission of sufficient clarity in his letter. I cannot, therefore, arrive at the conclusion that it is established that the petitioner was frau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dual sale or purchase, or to a contract which is performed and completed the moment it is entered into. Emphasis in this connection is laid on the use of the plural "contracts" and the word "for" in the phrase "shall not enter into any contracts for the sale, purchase or supply of goods and materials with the company." An agreement enforceable by law is a contract. The agreement may be given effect to the moment it is entered into or it may be executable at some future time. In either case it will be a contract, if it is permissible by law. The plural includes the singular as well, and its use does not in any way lead to the interpretation placed on the section by Mr. Tulli. Similarly, no particular significance can be attached to the use of the word "for". Grammatically, this is the only preposition that could be appropriately used for connecting the term "contracts" with the three nouns that follow. In no way does it signify that the section covers only those contracts which are executory in nature, and not those which are executable at the time they are entered into. I do not see any force in the argument that the word "of" would have been used if the section was intended to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section applies and it is obligatory for the directors to offer the shares to the existing shareholders before allotting them to any other person. It is further held that if the shares were not so offered, their allotment to others would be irregular and hence invalid. In Nanalal v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp. Cas. 179 , the question as to the precise scope of section 105C was not finally decided because in their Lordships' opinion, on any interpretation of it, the provisions of the section were substantially complied with. Their Lordships, however, favoured the view that section 105C becomes applicable only when the directors decide to increase capital within the authorised limit by issue of further shares. It is consequently urged that before shares could be allotted to Mr. Sat Pal and others the shares ought to have been offered to the existing shareholders, and since that was not done the allotment was illegal and inoperative. Mr. Kapur, on behalf of the respondent, in the first instance, takes up his stand on the minutes of the first meeting of the board on 1st January, 1954, whereby shares of the value of Rs. 2,50,000 (out of the authorised capital of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a note with respect to his presence was made by someone else; the petitioner does not deny to have attended any of those meetings. Statutory presumption of correctness attaches to the entries in books regularly maintained by a limited company. It is for the person alleging the contrary to prove it. The facts in the present case are that in the petition it was nowhere alleged that the petitioner did not attend the meeting on 1st February. Even in his reply affidavit submitted on 18th February, 1955, the petitioner did not swear to that effect. A casual reference to it was, however, made in the replication submitted by him that day. On the other hand, the other four directors who attended the meeting, in their affidavits submitted much earlier, vouchsafe to the petitioner's participation in the said meeting. Moreover, the minutes were read out and confirmed (without any objection) in the next meeting on 9th February. The presence of the petitioner is noted, in the usual mode, in the minutes of this meeting. Neither in his reply affidavit nor in his replication the petitioner did any where allege that he did not in fact attend the meeting on 9th February. The inference, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituted and that the number of its members is reduced to less than the minimum. The contention that Shri Sat Pal had ceased to be a director on 9th March, 1955, is unassailable. According to article 19, a director must hold in his own name shares of the face value of Rs. 20,000. Shri Sat Pal cannot be said to have ever attained that qualification. He could not, in that matter, take advantage of the shares standing in the name of his brother or mother. He was appointed a director on 9th January, 1955. He ought to have obtained the specified share qualification within two months of his appointment, as required by section 85(1) of the Companies Act. Section 86-1(a) lays down that the office of a director shall be vacated if he fails to obtain the share qualification necessary for his appointment within the time specified in section 85(1). Shri Sat Pal, therefore, ceased to be a director on 9th March, 1955. When the law provides that a director shall vacate office on the happening of some event the director automatically vacates his office on the happening of that event; the board has no power to waive the event, Consequently, Shri Sat Pal could not legally act as a director after tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... until removed by the directors or by the shareholders." This appointment of his was confirmed in a general meeting of the shareholders held on 4th April, 1954. Mr. Tulli, however, stresses that this could have no effect, for, as provided by regulation 85, Swam J. Singh should be deemed to have retired on 25th June, 1955 when the first ordinary general meeting of the company was held. Since he was not elected in that meeting he ceased to be a director that day and could not act as such thereafter. The petitioner had resigned. Swarn J. Singh ceased to be a director on 25th June, 1955, and Sat Pal had ceased to be a director much earlier. This reduced the number of directors to three. Article 17 requires "that until otherwise determined by the company in general meeting", the number of directors shall not be less than four. It is, therefore, urged that there was no legally constituted board after 25th June, 1955, and that the same state of affairs still continues. Now, regulation 85 of Table 'A' in the First Schedule is not a compulsory regulation; it is within the competency of a company to adopt it or not, or to adopt it with any modification. The respondent company by its articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting of the company, but for no other purpose." According to article 32 of the company, until otherwise determined by the directors, two of them form the quorum. Their number being still more than the necessary quorum, the continuing directors, notwithstanding the vacancy, are legally entitled to carry on the management. It is only where the number is reduced below the necessary quorum that the directors are not competent to function for any purpose other than those specified in the regulation. I do not see force in Mr. Tulli's argument that since the number of the continuing directors has gone below the minimum number of four there is no legally constituted board and therefore the regulation can have no application. What he precisely contends is that you must have a board of four before there can be a quorum. The learned counsel, in this connection, forgets the significant distinction between the cases where directors too few in number can and cannot act as continuing directors. If there never existed a board sufficient in number, the continuing clause (in Regulation 89) would be of no help in authorising the board to carry on business. But where 1 the board, which was origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sire that they should be allowed to carry on the business on which they have jointly and willingly embarked. Interest of the general body of shareholders is a matter of primary consideration in such cases. It may suit the petitioner's purpose, but I am not at all satisfied that the winding up order will be to the advantage of the entire body of shareholders of the company's creditors, or that it is necessary to safeguard their interest, Some of the shareholders have subscribed large sums to the capital of the company. Their stake is much more than that of the petitioner, whose subscription in cash towards the capital amounts only to Rs. 1,000. I have no hesitation to agree with Mr. Tulli that the "just and equitable clause" ought not to be confined to circumstances ejusdem generis with those set out in the foregoing clauses of section 162. But, wide as the powers are, they ought to be exercised with great care and circumspection. There must be very strong grounds for exercising the discretion, particularly at the instance of a shareholder and against the unanimous view of all the rest of them. No such case, I am sure, is made out by the petitioner. I also do not see any justific ..... X X X X Extracts X X X X X X X X Extracts X X X X
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