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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 ..... 2,500 shares of Rs. 100 each and the capital subscribed, or credited as paid-up, is Rs. 1,24,000 consisting of 1,240 fully paid-up shares of Rs. 100 each. The objects of the company were manifold; but of them the principal one was to carry on the business in tractors and to run a workshop by acquiring and taking over the assets and goodwill of a private 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting was to he held on 9th July, 1955. In the nature of things, the petitioner took it as a move to expropriate his shares and to bring about his total exclusion from the company and its affairs. The present petition was then presented on 4th July, 1955, together with an application for an interim order to restrain the company from holding the proposed meeting 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. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... They were the only shareholders and the directors of the company. They fell out and a long drawn litigation was going on between them. They were not even on speaking terms and complete deadlock had, therefore, arisen. One director formed the quorum. In case of difference, the matter was every time to be referred to arbitration. It was held that if this were a case of partnership there 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is quite obvious that all the reasons that apply to the dissolution of private companies, on the grounds of incompatibility between the views or methods of the partners, would be applicable in terms to the division amongst the shareholders of this company, and I agree with your Lordships that this is a case in which it would be just and equitable that this company should be wound up, and the partners 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 consiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner himself, the rest of the directors are not shown to have any apparent or conceivable common cause to form a party against the petitioner or to be antagonistic to him or his interest. If there is an honest difference of views between the petitioner and the other directors, and the petitioner, on that account, has lost confidence in them, the view of the majority must prevail; and the petitioner 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h those sent by the company. Each of the directors has further testified that four of the employees of the respondent company were induced to leave their services and were employed by the petitioner in his private concern. There are affidavits of three other employees to the effect that they too were approached by the petitioner to give up their services with the company and also to disclose certain secrets concerning 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have plainly said that while ceasing to be a working director he would continue to be a director. In any case, the language used in the letter was possible of the interpretation placed on it by the board. The most that can be said is that the board committed an honest mistake in interpreting the letter; the action was not mala fide or based upon fraudulent intention to oust the petitioner. The petitioner himself, in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he directors cannot be a general one, it must be with respect to the particular transaction which the director intends to enter into. There is not even a suggestion that the purchases were made with the consent, express or implied, of all the directors. I cannot agree with Mr. Tulli that section 86F is confined in its application to contracts which are to be performed at some future time, and that it does not apply to an individual 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 "f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eficial to the company." The question whether the word "capital" in the above section means the authorised capital or the subscribed capital of a company came up before me in S. Pritam Singh v. Kotkapura Bus Service Ltd. ILR 1954 Patiala 602 It was held that the term "capital" in section 105C means the company's subscribed capital and, therefore, when the directors decide to increase the subscribed capital by issuing further shares, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he was entitled to those shares, or some of them, for himself. The mainstay of the petitioner is that he did not sign the minutes or note down his presence that day. He, therefore, affirms that his name as one of the directors who participated in the meeting was subsequently added in the minutes. The assertion, however, is not supported by actual facts. Except for a couple of meetings, he did never sign the minute-book in token of his presence. Every time 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 subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the petitioner. No present right of the petitioner seems to be affected. He never was, nor is he now, anxious to get any more shares for himself. As a matter of fact he is anxious to get rid of those he already has. The only question with which I am here concerned is whether it is just and equitable to wind up the company, and I have absolutely no doubt that it is not aground which does lead to that conclusion. It is next urged that the board is not properly constituted 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 va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is placed on regulation 85 of Table A of the Companies Act. The regulation says: "The director shall have power at any time, and from time to time, to appoint a person as an additional director who shall retire from office at the next following ordinary general meeting, but shall be eligible for election by the company at that meeting as an additional director." Minutes of 1st February, 1954, while co-opting Swam J. Singh as a director, make it clear that "he shall hold office 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 requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier, shown to be invalid. Regulation 89 provides for the contingency giving rise to the second question. The regulation says: "The continuing directors may act notwithstanding any vacancy in their body, but if and so long as their number is reduced below the number fixed by or pursuant to the regulations of the company as the necessary quorum of directors, the continuing directors may act for the purpose of increasing the number of directors to that number, or of summoning a general 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 regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and decide the reasonableness of the remuneration. On the basis of the material on record, it is not possible for me to hold that they had singularly erred or that their action was not bona fide. The grounds urged, individually or collectively, in my opinion, are in no way sufficient to lead to the irresistible conclusion that it is just and equitable to wind up the company. The petition is being opposed by the shareholders, except the petitioner. They all show confidence in the management of the company, desire 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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