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TMI Blog1978 (4) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... traffic of such line and to form junctions with the East Indian Railway and to pay for the plans and survey made of the railway to be constructed and the cost of providing and maintaining police for the protection thereof and to make arrangements with the Secretary of State for India in Council, through the Government of India, Railway Department, for the working and carrying on the said railway and any extension or branches thereof, and with a view thereto to enter into the agreement referred to in clause 2 of the company's articles of association. (b) To carry the said agreement into effect and to undertake all the obligations and stipulations thereof, with or without modification." The other objects, which have some relevance, are embodied in sub-clauses (d), (e ), (g), (n), (q ), which are as follows : "(d) To equip, maintain, and work by steam, electricity or other power the said railway or any other railway belonging to the company or which the company may possess a right to run over and work. (e) To carry on the business of tramway, railway, omnibus and van proprietors and carriers of goods and passengers and manufacturers of and dealers in tramway carriages, trucks, loc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gage in or carry on or apply capital to any business other than the business provided by this contract to be carried on by the company and business incidental or subsidiary thereto, or participate or co-operate with any person, company or corporation in carrying on any business other than as aforesaid. Determination of contract and matters consequent thereon. 45. The Secretary of State may determine this contract in manner hereinafter mentioned (that is to say):- (1)If the company shall fail to complete the said railway and make the same ready to be opened for public traffic throughout by the 1st day of January, 1916, the Secretary of State notwithstanding any grants of further time, or any negotiation between the Secretary of State and the company, may determine this contract, by giving to the company notice in writing of such determination (which notice is herein referred to as notice of determination) and the contract shall determine on the date of such notice being given. (2)The Secretary of State may by giving to the company notice in writing of not less than 12 months prior to any of the date next hereinafter mentioned (which notice is herein referred to as notice of purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay Shareholders' Association as also one Ashburner, as executor of his mother, a shareholder, about the non-distribution of the amount to the shareholders. The company passed a special resolution on March 13, 1972, according its approval under section 149(2A) of the Companies Act to the commencement of the business of carriers. The company, pursuant to provisions of section 370, also passed another resolution authorising it retrospectively to make loans to any body corporate on such terms and conditions as the Board would deem fit whether or not under the same management within 30% of its paid up capital and free reserves and also beyond with approval of the Central Government. The balance-sheet and profit and loss account of the company for 1967-68 to 1969-70 indicated that no business of carriers of goods was carried on at all, while on enquiry the company by its letter of May 28, 1973, informed that till then bills for Rs. 70,000 were raised on account of business of carriers. There was no legal business which the company was authorised to carry on and in fact carried on since. On March 28, 1973, the company filed with the Registrar a copy of the special resolution passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company had suspended business for over one year as mentioned in clause (c), and as also (ii ) that as provided in clause (f) it is just and equitable that the company should be wound up as the substratum of the company had gone since the whole of the business for which the company was incorporated to carry on had become impossible on the taking over of the same by the Government. This application was registered as Company Petition No. 373 of 1974. The application was opposed by the company by filing an affidvit-in-opposition by Dhirendra Nath Banerjee on February 21,1975. It was stated therein that purchase price of rupees 16,82,703 was received by the company during April, 1966, to December, 1968. The board of directors invested the amount of Rs. 16 lakhs with Mantoshes who were not closely connected with Bajorias against security of valuable landed properties at Alipore valued at Rs. 24 lakhs. It was stated that the company had been repaid Rs. 9.27 lakhs as principal and Rs. 5.25 lakhs as interest and such investments were made as authorised under clause 3, sub-clause (q), of the memorandum of association of the company. The company at its meeting on March 13, 1972, accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was given by the company on June 1, 1972. No further steps were taken obviously because the Regional Director was satisfied that the company did not suspend its business nor was it just and equitable to wind up the company. Nondisclosure of materials which weighed with the Registrar prevented the company from making proper representation as the company had not suspended its business for more than one year nor did any ground exist for winding up the company under section 433(f). It was further alleged that Regional Director acted mechanically without applying his mind on extraneous and irrelevant materials. The company obtained a rule for quashing the sanction of the Regional Director in constitutional writ jurisdiction but the rule was discharged as there was an alternative remedy. The company denied that its substratum had gone or that it had suspended business for more than one year. The company submitted that in the premises no order should be made on the application which accordingly should be dismissed. In his affidavit-in-reply affirmed on March 4, 1975, the appellant reiterated that money-lending business was ultra vires the company and the Companies Act and there was no cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the shareholders are the best judges to decide how best to run the company in the circumstances. The court further held that there being no creditors to the company and the shareholders having intended to carry on such business with large sums lying accumulated, the company's substratum cannot be said to have gone. When under the memorandum of association no other business can be undertaken, the foundation on which the whole of the company stands crumbled and the case would be one of total destruction. Such state of affairs, if allowed to continue, would affect the interest of the shareholders. If, however, there remain some other object or objects in the memorandum, the substratum of the company cannot be said to have been destroyed, if the shareholders as the best judges, intended to make use of the resources of the company. The question of substratum being gone thus depends on the true construction of the memorandum of association and each case has to be dealt on its own merits. It was held that sub-clause (e) permitted the company to undertake various other businesses besides the business of railways carried on so long and it was within the objects of the company to carry on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken into consideration when the winding up is sought for on ground that it is just and equitable to do so. Even if the shareholders approve of the resumption of other business and the company has in fact started such business, it does not mean or imply that the company will be entitled to carry on such business when such action is otherwise ultra vires its memorandum of association or the provisions of the Companies Act, 1956. The decision of the shareholders will receive due support from the court in considering a winding-up application, only when such decision to carry on a particular business has the warrant of law and within the ambit of its memorandum of association and not merely because it has the support of its shareholders or creditors or is otherwise to their interest or benefit. A consensus of the shareholders or creditors will not override the provisions of law and the Companies Act, 1956, as also the earlier Acts provide for governmental authorities who work as sentinels to ensure and secure the compliance with the provisions of law by the company and its board of directors. It is not a case of waiving a fraud by the majority of shareholders as was the case in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... winding up the company, contended on the other hand that sub-clause (e) provides for business as are incidental to and connected with the main and only business of the company, namely, the running of railway between Burdwan and Cutwa. In fact, the business of carriers of goods and passengers through other means of transport is also carried on by all railways as an incidental part of the business of public transport and it cannot be said that the sub-clause authorises the carrying on of business as carriers as an independent business. As has been laid down in Palmer's Company Precedents, volume II, 17th edition, on conspectus of judicial decisions, the statement of the objects of clause 3 of the memorandum affirmatively determines what shall be the powers of the company with all powers reasonably requisite or incidental to or consequential on the attainment thereof. The statement further restricts the powers of the company to those thus conferred, save so far as other powers are given by statute. As to the construction of objects clause it has to be in accordance with the rules generally applicable to the construction of written documents. The whole document has to be read, the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany has suspended its business for the whole year. As to the loans advanced by the company to Mantoshes, reliance has been placed on sub-clause (q) providing power on the company "to invest the money of the company not immediately required upon such securities as may from time to time be determined". This provision does not authorise the investment of practically the entire funds of the company in investments which were ultimately diverted to concerns controlled by the persons who had been controlling the company as specifically alleged by the Registrar to which there is only a mere genera] denial. Further, "securities" in the sub-clause in the context of the sub-clause obviously mean and imply stocks for temporary investments and not investments in immovable properties, the recovery of money wherefrom might be a time consuming process. The investments accordingly are also ultra vires the powers of the company and such illegal business even if carried on by the company which may not affect the liabilities of third parties to the company in respect thereof, cannot be taken into consideration when considering whether the company has suspended its business for the whole year. As w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been convicted or proceedings are pending. At the initial stage of the hearing of this appeal this court asked the company's counsel in the course of argument to produce for its consideration, the latest balance-sheet and the profit and loss account filed with the Registrar, but unfortunately no such papers or documents were produced before the court to appreciate the current state of affairs of the companyto find out any extenuating circumstances which might impel the court to use a discretion in favour of the company which such company may deserve in equity. A point has arisen as to whether the company should be directed to be wound up on the application of the Registrar for any act of misbehaviour of the directors themselves. It was held by the learned judge that if the directors misbehaved themselves there are other remedies to the shareholders to stop it and it would be quite wrong that partnership between shareholders, so to speak, should be dissolved merely because the persons carrying on the business on behalf of the company, namely, the directors, are misbehaving themselves. It was held in Kitson's case [1946] 1 All ER 435 (CA) that if the directors are doing anything imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emises in a fit case the Registrar has been empowered to file a petition to winding up on grounds, inter alia, of clauses (c) and ( f) of section 433 while it will be too much to expect the minor shareholders to approach the court for such or other remedy. The next contention that has been urged is that the Regional Director gave no reasonable opportunity to the company to make its representation before granting sanction to the Registrar for presenting petition for winding up the company. It will be seen from the correspondence disclosed that as early as 1971, the Bombay Shareholders' Association made a complaint to the Registrar stating that the company had received compensation from the Government, but the company had been silent in respect of distribution thereof to the shareholders in spite of reminder. Complaint was also made by one Ashburner, another shareholder, to the same effect. It appears that on May 2, 1972, the Regional Director issued a notice to the company to show cause why sanction should not be given to the Registrar for filing a petition in court for winding up the company in view of the fact that the company had suspended business for the whole year and of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vember, 1973, and the appeal preferred therefrom was still pending in this court. It was accordingly stated that there has been no occasion for granting to the Registrar sanction for winding up the company on grounds (c) and (f) under section 433. Further, no grounds had been disclosed to the company by the Registrar. It was accordingly submitted that the permission should not be granted. This representation, though dated April 16, 1974, was received by the Regional Director on May 3, 1974, and it is obvious that this representation was before the Regional Director when he accorded the sanction on July 27, 1974. While granting the sanction, the Regional Director had stated that after considering the representation made by the company, he was of opinion that the company had suspended its business for more than one year and that it was just and equitable that the company should be wound up. It has been contended before us by Mr. Gupta that the company was not given the proper opportunity before sanction was granted to the Registrar in the context of the facts referred to above. It appears that the company's representation was duly considered by the Regional Director and the position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Registrar for accord of sanction for winding up the company on grounds that the company had suspended business for more than one year and that it was just and equitable that the company should be wound up. The company gave replies to the Regional Director showing that it carried on business of carriers of goods pursuant to the special resolution under section 149(2A) passed on May 30, 1972. The said notice was not pursued further and obviously the Regional Director was satisfied that no sanction should be granted as submitted by the company. Curiously enough, it was said, the second show-cause notice on similar terms was issued to the company on February 13, 1974, which was obviously inspired by certain observations made by Salil Kumar Roy Chowdhury J., on November 15,1973, while rejecting the company's application for confirmation of the alteration in the memorandum of association approved by the shareholders by the special resolution dated March 26, 1973. This contention is not correct either on fact or in law. It will appear from the correspondence disclosed that there has been further representation since the first show-cause notice from a shareholder of the company and fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kunhaliumma, AIR 1977 SC 282. The contention of the company, however, is misconceived as the limitation starts from accrual of the right to apply. The right to apply accrued only on the grant of sanction by the Regional Director on behalf of the Central Government under section 439(6) and the petition has been filed shortly after the grant of sanction under the Companies Act. There is no question of limitation involved in the premises. The real matter of controversy between the parties is on the question as to whether the substratum of the company had gone with the acquisition or taking over of the railway business of the company. The circumstances in which winding up is sought for is that it is just and equitable that the company should be wound up in view of the disappearance of the substratum of the company. Since the decision in Suburban Hotel's case [1867] 2 Ch App 737, it has been held over years by courts that, if the substratum of the company is gone, that might render it as just and equitable to make a compulsory winding-up order. As has been stated in Palmer's Company Precedents, volume II, page 29 (17th edition), it is now possible to say on authority that the substrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decision in In re Kitson & Co. Ltd. [1946] 1 All ER 435 (CA), where the Court of Appeal was considering an order for winding up the company. The company was incorporated in 1899 and the objects of the company according to its memorandum were, (i) to acquire and take over as a going concern a business carried on elsewhere under the style of K. & Co.; (ii) to carry on the business of general engineering. The company took steps to sell the business of K. & Co. while its subsidiary, B. & Co., carrying on similar type of business, was under requisition by the Government. Greene M.R., delivering the leading judgment, observed (page 438): "...in these substratum cases that there is every difference between a company which on the true construction of its memorandum is formed for the paramount purpose of dealing with some specific subject-matter and a company which is formed with wider and more comprehensive objects." The learned judge observed that when a company is formed to exploit a mine, the court must construe the language used with reference to the subject-matter, namely, a mine. If the mine cannot be acquired or the mine turns out to be no mine at all, the object of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t High Court in In re Motilal Hirabhai Spinning, Weaving and Manufacturing Co. Ltd. [1970] 40 Comp. Cas.1216 noted that the company was started as a textile mill and carried on the business of manufacturing cotton textiles for over 52 years. It closed down in 1941: due to financial difficulty, and derived its income by leasing out the land in its possession. In 1969, it passed a special resolution to start such diverse activities as manufacturer of photographic materials and pharmaceuticals and to set up hotels. The proposed alterations were contended to be covered by clauses (a) and (d) of section 17(1) and the court observed that there should have been some business in presenti but as the company was not carrying on any business, it was not possible to alter the memorandum of association as prayed for, particularly in view of the attending circumstances, as each clause represented an independent business, and it was ; obvious that the board did not apply their commercial judgment. In Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas.91, 102 ; AIR 1976 SC 565, the Supreme Court was considering the applicability of the principles of dissolution of partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considerations and may, in a given case, be superimposed on law. Whether it would be so done in a particular case cannot be put in the strait-jacket of an inflexible formula." Mr. S.C. Sen contended that the decisions cited by Mr. Mukherjee on behalf of the Registrar are outmoded and inapplicable in the context of present day social and economic conditions. The concept of substratum as having disappeared on the basis of a paramount or main object is obsolete and has eroded. Such concept not being of law but of equity, on account of change of social and economic conditions and of State thinking is no longer applicable. The basic principle in the context of attending social and economic condition is substitution of strict legal rights by higher claims of society. It is also the responsibility of the State to keep industry alive if otherwise flourishing, the only exception being absolute deadlock in the conduct of affairs of the company. If there is some prospect, the company should not be wound up and the court can neither be blind to realities nor strictly adhere to the measure of law bereft of humanism, social welfare, equity and fairness with which justice should always be asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the agreement provided that, so long as the agreement to run the railway continued to be in force, the company could not undertake any other business which by implication meant that there was no prohibition to carry on other business if the specific business of running the railway between the two places named became non-existent. The other businesses referred to sub-clauses (d), (e) and (f ) which are relevant, while other sub-clauses refer to powers of the company, all centre round railway. Sub-clause (e) is the only clause which contains provisions for carrying on business of tramway, railway, omnibus and van proprietors, and carriers of goods and passengers. These businesses appear to us to be incidental to the railway business and not independent business as contended by the company, as railways have also to take assistance of other modes of transport on occasions while engaged in the business of public transport and railways are inevitably mentioned in sub-clauses (j), (k), and (1). Even if it is accepted that the company is entitled to carry on only other railway business on the acquisition or taking over of the railway business in 1966, no such business has been undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X
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