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TMI Blog1970 (6) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... to close the business of manufacturing cotton yarn and cotton cloth and also resolved to sell and dispose of the textile machinery of the company and authorise the board of directors to carry out this resolution. Pursuant to this resolution, the textile machinery was sold and since then the company is not doing business of manufacturing cotton yarn and cotton cloth or any business incidental to the manufacture of cotton yarn and cotton cloth. There is some controversy as to whether the company is doing any business since 1941, and if so, what, to which aspect I would presently advert. It may, however, be stated that from 1941 till the filing of the present petition, the only thing the company appears to be doing is to lease out land in its possession and from the income derived therefrom, dividend at the rate of 10 per cent. is being distributed to its members. The issued and subscribed capital of the company is Rs. 9,90,000 divided into 9,900 shares each of Rs. 100 fully paid. Though the company was primarily formed for manufacturing cotton yarn and cotton cloth which was its main object, its memorandum of association provides for a number of other objects. But it appears that bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company as per special resolution would fall under clauses ( a ) and ( d ) of section 17(1) of the Companies Act. It is, therefore, necessary to consider whether the proposed alteration would fall under clauses ( a ) and ( d ) of section 17(1) of the Companies Act. They are as under : "17. Special resolution and confirmation by court required for alteration of memorandum. (1) A company may, by special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another, or with respect to the objects of the company so far as may be required to enable it ( a )to carry on its business more economically or more efficiently;... ( d )to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company." The scheme of section 17 indicates that a company may alter the objects clause of its memorandum of association but the proposed alteration must be such as would fall within one or the other clauses of sub-section (1) of section 17. There is no unfettered or uncontrolled power conferred on a company to alter the objects clause of the memorandum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally or efficiently by empowering the company to undertake a new activity. I would presently point out that, since 1941 till to-day, the company is not carrying on any business and, therefore, the proposed alteration would not fall within clause ( a ). The next question is whether the proposed alteration would be covered by clause ( d ). It would be open to the company to alter the objects clause of its memorandum of association in order to carry on some business which under the existing circumstances may conveniently or advantageously be combined with the business of the company. Such a case would be covered by clause ( d ). In order to attract the application of clause ( d ), the company must be presently doing some business and its proposed new business could be conveniently and advantageously combined with the existing business. Before clause ( a ) or ( d ) could be invoked, it pre-supposes that there must be an existing business of the company which the company must be carrying on. and with this existing business the new business, which is proposed to be started, after alteration in the objects clause, could be conveniently and advantageously combined. It would, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to undertake such a business and that activity of the company was ultra wires the company. That of course is true. The question however is whether the company can seek to alter its memorandum so as to enable it to start new business at a time when the company is not carrying on any business. If the company is carrying on some business in a proper grammatical sense of those words, obviously, it would be open to the company to alter its memorandum of association so as to enable it to start a new business which must of necessity be of such a character that it can be conveniently or advantageously combined with its existing business. But the language of clause ( d ) leaves no room for doubt that the company must be carrying on some existing business before it can take recourse to the provision contained in clause ( d ) to enable it to alter its memorandum of association which would empower it to start a new business. In the afore-mentioned decision reference is also made to In re Drages Ltd. [1942] 1 All. ER 194. In that case, the principal object of the company was to carry on business of house-furnishers. The company met with indifferent success and at the relevant time the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company in Ahmedabad City and manufacturing cotton textiles and selling the same. Admittedly, that business has been closed since 1941, and all the machinery has been disposed of. But Mr. Gandhi very strenuously urged that since 1941, when the company closed down its textile mill and disposed of the machinery, the company has been regularly doing business of leasing out the land as well as tenements and structures standing on the land and it is earning a decent profit out of it and that it has been able to declare every year a dividend of 10 per cent, on its ordinary shares. It is not in dispute that the company has been leasing out the land or the superstructures standing thereon and must be earning rent. Mr. Gandhi showed to me the balance-sheets of the company for the last 10 years and he was right when he stated that the company has been declaring a dividend of 10 per cent, on its ordinary shares. The question whether the company is carrying on any business since 1941. In other words, the question is whether this company which was primarily set up with the main object of starting and running a textile mill can be said to be doing business stricto sensu if since the closing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause 3 of the memorandum of association of the petitioner-company is in pari materia with clause 12 set out in Palmer's Company Precedents and the declaration made in sub-clause (38) of clause 3 of the memorandum of association is in pari materia with clause 13 as set out in Palmer's Company Precedents. Having pointed out that clauses 12 and 13 as set out in Palmer's Company Precedents are to be found in the memorandum of association of the company which has the effect of treating each clause as the main object and as providing independent objects of the company, it was urged that the same effect should be given to the various sub-clauses of clause 3 of the memorandum of association of this company. Having said this, it was attempted to be urged that the activity of the company of leasing out the land since the closure of the mills is an independent activity carried on under an independent clause and would be at least a business carried on by the company and that would be the existing business of the company. Sub-clause (23)(1) of the memorandum of association of the company authorises the company to construct, maintain and alter any building or works necessary, conven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this company was formed for carrying on business of leasing land is something very difficult to accept. If the company was incorporated for starting a textile mill and in fact it did start a textile mill and even carried on the business of manufacturing cotton textiles and selling the same for over 52 years and their because of its financial difficulty closed down the textile mill and as a necessary consequence leased out the unused super-structures and land, it cannot be said that the company is carrying on business. I am not prepared to accept that this company is carrying on business of leasing land or superstructures. As the company was not wound up, the land and superstructures were lying idle. The directors considered it proper to lease the land and earn rent out of it. But such an activity cannot be said as carrying on business of the company. If the company is not shown to be carrying on any business, then the question of altering the memorandum so as to enable the company to start a new business which may conveniently or advantageously be combined with the existing business, does not arise. Mr. Gandhi, however, took me through various decisions indicating as to what s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar of Companies. While confirming the proposed alteration, it was observed that the question whether the proposed business can be conveniently or advantageously combined with the existing business of the company will depend a great deal upon the opinion of the directors. If the directors considered that, under the existing circumstances, it will be convenient to combine the new objects with the existing objects and if it appears that that conclusion may be fairly arrived at, the court ordinarily would not go behind it and hold an inquiry as to whether the opinion of the directors is well founded or is justified. On the facts of that case, the court reached a conclusion that it is not possible to say that the view of the company that the export business can be conveniently or advantageously combined with the existing business is not fair or reasonable and, therefore, the alteration was confirmed. It is not for a moment suggested in this case by me that due weight should not be given to the commercial judgment of the directors as well as of the shareholders disclosed in the special resolution. The question considered by me is entirely different, namely, whether clause ( d ) at all co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be shown that the new business which may be started, if the alteration is confirmed, would be such which could be conveniently or advantageously combined with the existing business. In either case, the company ought to be carrying on some business in praesenti . There must be some existing business of the company which the company is carrying on, on the date on which the company either adopts a special resolution or moves the court for confirmation of the proposed alteration in the memorandum of association. If such be the limit of jurisdiction of the court, in this case, the company is shown not to be carrying on any business, in the sense in which I have understood the words as discussed hereinbefore, and this company cannot alter its memorandum of association. The present position of the company is clearly set out in paragraph 7 of the petition, wherein it is stated that the company is not carrying on any business activity except leasing the properties of the company. In fact, it is a defunct company. The only useful activity, if it can be said to be useful, is of leasing out the land which is not being put to any use for carrying out any of the objects, express or implied, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinbefore mentioned, it would not be necessary to take into consideration this interesting question in this petition. I, therefore, need not refer to one or two cases on this point cited by Mr. Gandhi. Before parting with this judgment, it is necessary to refer to one or two aspects. It is undoubtedly true that this court while considering a petition under section 17 must give due weight to the judgment of the directors and shareholders. But before due weight is given to their judgment it must be shown to the satisfaction of the court that they had applied their mind to all the aspects of the matter, and that their judgment represent the voice of a large majority. The issued and subscribed capital of this company is Rs. 9,90,000 divided into 9,900 ordinary shares each of Rs. 100 fully paid. I was told that these 9,900 shares are being held by 850 shareholders. The annual general meeting of this company, at which the special resolution proposing the alteration in the memorandum of association was adopted, was attended by 17 out of 850 members. I was rather keen to know their shareholding. But the information could not be gathered on the spur of the moment. At any rate, 17 out of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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