9911796707
TMI Blog2002 (11) TMI 658X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner referred to certain salient features of the memorandum and articles of association of the first respondent company and from that it is clear that no remuneration is payable to any Director from out of the funds received from any other trust, if such payment is prohibited by the terms of the trust deeds. It is not necessary to refer to other objects. It is stated that the petitioner and the second respondent are the sons of one S.P. Adityan, known as Si. Pa. Aditanar who was a Barrister-at-Law, practising at Singapore. It is stated that Si. Pa. Aditanar returned to India in the year 1942 and started a Tamil daily called, "Daily Thanthi" in the year 1943. It is stated that the said daily was run as a proprietary concern and later it was converted into a trust called, "Thanthi Trust". It is stated that Si. Pa. Aditanar s brother S.T. Adityan, the petitioner and the founder were appointed as first trustees of the said Thanthi Trust. It is not necessary to refer to the supplemental deeds of the trust. It is stated that the main object of the Trust is education, it is stated that one of the trustees of the Trust shall be the Director of the publication, Daily Thanthi and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is stated that there are only 12 shareholders. It is stated that Amudha Adityan who is the wife of the second respondent S. Parvathinathan, T. Balasub-ramanian, R. Narayanan, T.R. Bheemsingh and R. Thananjayan are all employees in the Thanthi Trust and they are directly under the control of the second respondent and they act in accordance with the directions and instructions of the second respondent. The petitioner has also set out the composition of the Board of Directors of the company. 2. The main case of the petitioner is that the first respondent company is liable to be wound up as the company has not carried on any business activity and the first respondent company is in existence only to enable the second respondent to have an absolute control in the Thanthi Trust. It is the case of the petitioner that the corporate character of the company is retained not with any genuine object of carrying on any commercial activity or any other activity, but as an instrument to facilitate the second respondent to have control over the Thanthi Trust and to advance his personal enrichment. It is stated that the company is made to function in order to defraud the public and also to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. It is stated that the second respondent was duly appointed as Managing Director of the company on or from 6-12-1983 and he was functioning as such till 4-8-1990 and thereafter the company is managed by the Board of Directors of the company. The first respondent denies averments referred to in the petition regarding the change in the shareholding. The first respondent has stated that the appointment and functioning of the trustees are regulated by the terms of the Trust Deed and the first respondent was appointed as one of the trustees as early as in 1959. It is stated that the second respondent was also appointed as a trustee under a supplementary deed dated 22-5-1959. It is stated that the proceedings initiated by the petitioner and others for the removal of the second respondent from the trust were unilaterally withdrawn by them after the first respondent as well as the second respondent filed counter statement. It is stated that in the said proceedings the petitioner has repeated some of the allegations made in the present proceedings that the first respondent is an insolvent and ought not to function as a trustee of the Trust. It is stated that the petitioner has withdrawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case has been made out. It is stated that the present attempt is a part of the attempts on the part of the petitioner to interfere in the trust for which he has already proposed a suit by filing a petition under section 92 of the Code of Civil Procedure. It is stated that the petition was not filed with bona fide motive, but with the ulterior object to interfere with the administration of the trust. It is stated that the petitioner has not made out any ground for winding up of the first respondent company. 4. The second respondent has also filed a separate counter statement wherein he has denied various allegations made against him by the petitioner. 5. Mr. C. Harikrishnan, learned senior counsel appearing for the petitioner submitted that the first respondent company is liable to be wound up as the first respondent company has not carried on any activity except functioning as trustee for no remuneration and the only activity of the first respondent company throughout from the date of incorporation is that it has been acting as trustee. Learned senior counsel submitted that the scheme of the Companies Act also warrants that it must carry on some commercial activity with p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to be wound up. He also submitted that the company has no reserve and the company has no liability and the company merely exists in paper. He submitted that the company exists only to nominate the second respondent as trustee in the Thanthi Trust and the second respondent has packed his own men and women in the Board and is controlling the affairs of the Thanthi Trust and by that, he is getting personal advantage and therefore the existence of the company is not in the public interest and hence, the company is liable to be wound up. He therefore submitted that the company cannot act for gratis when it functions as trustee and the first respondent company should receive adequate remuneration for acting as trustee and the absence of any return and the presence of the second respondent as a trustee in the Trust clearly show that the corporate character of the first respondent company has been utilised by the second respondent to meet his own ends and since the second respondent is using the corporate character of the first respondent for his personal advantage, the first respondent company is liable to be wound up. He further submitted that the first respondent company exists only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot a company and since the first respondent company has not carried on any other activity and there is in-fight between the petitioner and the second respondent and hence, the first respondent company is liable to be wound up on just and equitable ground. He therefore submitted that the first respondent is liable to be wound up on the ground that it has not carried on any business activity. He has also submitted that the first respondent is liable to be wound up on just and equitable ground. He submitted that the first respondent is also liable to be wound up as it exists only for the personal interest of the second respondent by nominating him continuously as representative to act as trustee in the Trust. He submitted that the first respondent company has become commercially insolvent and for several reasons mentioned in the petition as well as in the arguments advanced by him, the company is liable to be wound up. 6. Mr. Vedantham Srinivasan, learned counsel for the respondents submitted that the first respondent company while carrying on its objects, need not carry on any business. He also submitted that charitable companies are not intended for any commercial activity and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4), the learned author, at page 394, observed as under: "As charitable corporations exist solely for the accomplishment of charitable purposes, they are necessarily trustees of their corporate property, whether the beneficiaries are members of the corporation, as in the case of hospitals and colleges, or not. Accordingly, like other trustees, charitable or otherwise, they are subject to the jurisdiction of the Court. Though called directors and empowered to make and amend bye-laws for the corporation, apart from any provision in the constitution of the corporation, they have no right to remuneration and cannot amend the byelaws to permit remuneration to be paid to themselves." 9. In the book, The Modern Law of Trusts by David B. Parker, the learned author has observed that a corporation can be a trustee. In Palmer s Company Precedents, while dealing with the topic, Trust Company , learned author has observed that a company can be a trustee in the following words : "To undertake the office of and act as trustee, executor, administrator, manager, agent or attorney of or for any person or persons, company, corporation, government, state, colony, province, dominion, sovereign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices as professional trustees. Clearly they will not be prepared to act unless they are remunerated, but they have no greater right to remuneration than any other trustee, though there are special provisions where they are appointed by the Court. Technically, trust corporation , for the purposes of the relevant 1925 Property Acts is defined therein as meaning the Public Trustee or a corporation either appointed by the court in any particular case to be a trustee or entitled by rules made under the Public Trustee Act 1906, section 4(3), to act as Custodian trustee; it also, as a result of the Law of Property (Amendment) Act 1926, section 3, includes the Treasury Solicitor, the Official Solicitor, and other officials prescribed by the Lord Chancellor, a trustee in bankruptcy and a trustee under a deed of arrangement, and in relation to charitable, ecclesiastical and public trusts, local or public authorities and other corporations prescribed by the Lord Chancellor." 13. In Gomathinayagam Pillai v. Mantharamurthi High School 76 L.W. 229, a Division Bench of this Court, presided over by learned Chief Justice Ramachandra Iyer, held that a company can be a trustee and laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If such an interpretation is given, then the trustee companies will have no place of existence at all in the Companies Act. 15. As far as section 25 of the Companies Act is concerned, it deals with the companies formed for promoting certain charitable objects, like, promotion of commerce, art, science, religion, charity or any other useful object and intends to apply its profits or other income in promoting its objects and to prohibit the payment of any dividend to its members. But the trust companies do come within the purview of section 25 of the Companies Act, as section 25 deals with the companies formed to promote charity and the provision has no application to the case of trust-company which is to act as a trustee. Therefore section 25 has no application in the case of trust-company. 16. In my view, section 11 of the Companies Act should only be regarded as an enabling provision and it is not exhaustive covering all cases of companies that may be formed under the Companies Act. What is required for the formation and incorporation of a company is that the company must be formed with certain objects which are lawful. Section 33 deals with the registration of memorandum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociation for British, Foreign and Colonial Ships [1875] 10 Ch. 542 has been referred to : "If you come to the meaning of the word gain it means acquisition. It has no other meaning that I am aware of. Gain is something obtained or acquired. It is not limited to pecuniary gain. We should have to add the word pecuniary so to limit it. And still less is it limited to commercial profits. The word used, it must be observed, is not gains but gain in the singular. Commercial profits, no doubt, are gain, but I cannot find anything limiting gain simply to a commercial profit. I take the words as referring to a company which is formed to acquire something or in which the individual members are to acquire something, as distinguished from a company formed for spending something, and in which the individual members are simply to give something away or to spend something, and not to gain anything." (p. 168) After referring to the above observation of Sir George Jessel, M.R., the learned Judge in Tan Waing s case ( supra ) has laid down the law as under: "...Suppose the business of money lending was carried on by the society at a loss, what would be the result ? Clearly the mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the object of which is to make a gain in the business. But, the companies falling under section 11 of the Act are not exhaustive and there may be some companies which are not commercial companies, but still they are companies for the purpose of the Companies Act. It is very well to remember that the objects of the company are different from the nature of activities to be carried on by the company. In my view, it is not necessary that the activity of the company should be always commercial in nature. No doubt, it is incongruous to say that a company exists to carry on one of its objects, viz., to act as a trustee, but really earns no income from the activity. In my view, the earning of profit is not a pre-requisite for a trustee company and if it is held that there must be an activity with a view to earn profit in the case of trust companies, then, most of the trust companies will fail. In my view, that is not the intent of the Legislature. A question may arise as to the position of a shareholder in such a trust company. One way of looking at the problem is that having known that it is a trust company and invested his money, the shareholder cannot complain that there is no retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occurs." (p. 76) 24. The decisions relied upon by the learned senior counsel for the petitioner are all cases where the company was formed for the purpose of making gain and the observations made in that context are not applicable to the case where the company was formed to act only as a trustee. I therefore hold that the activity of the company formed with the object of acting as a trustee can also be treated as business activity and the business does not necessary mean or limited only to commercial activity. So long as the company carries on legal and lawful objects, the company can be said to have been formed for lawful purposes, I have already held that the trust company need not always exist to make profit or to carry on commercial activity. 25. The Supreme Court in Barendra Prasad Ray v. ITO [1981] 129 ITR 295 1 has held that the expression, business does not mean any trade or manufacture and it is being used as including within its scope professions, vocations and callings for a fairly long time and the word business is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny may charge their clients at any commission at the prescribed rates. It also provides that the rate of remuneration is subject to the revision of the court and liable to reduction in case of its being deemed excessive. But, a close reading of the article, viz., Administration of Trusts by Joint Stock Companies in The Law Quarterly Review shows that it is possible to have a trust company and unless it is made by lawful Act, it is not possible for the trustee to get remuneration for the services rendered. He also submitted that the company must indulge in some activity which must result in the benefit of the company and the object of the activity must be to earn income. He therefore submitted that the company must carry on some business activity. I am unable to accept the said submission as the Companies Act makes a distinction between the commercial companies and the companies which are to function as trustees and where there is a prohibition either under the Trusts law or under the deed of Trust to receive remuneration by trustees, the trust companies cannot be wound up only on the ground that it has failed to receive remuneration for acting as a trustee. The question whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ife is to pursue, and on fulfilment of its object, it must seek to earn profit. The law has been laid down with reference to a commercial corporation as the Court of Appeal was dealing with the company which was a commercial corporation. Therefore, it cannot be stated that the said observation would perforce apply to the case of a trust company. It is true that it will be open and permissible for a trustee company to pursue its objects of being a trustee by carrying on the activities on a commercial scale, depending upon the terms of the deed of trust or the orders of the Court, as the case may be, but the non-receipt of remuneration or its willingness to perform the functions as a trustee without remuneration would not detract from its essential quality of a corporation when it pursues its activities without the receipt of remuneration. In my view it would all depend upon the willingness of the corporation and the terms of the deed of trust or the orders of the Court, as the case may be. I therefore hold that a trust company is a legal entity under the company law so long as it pursues its object of acting as a trustee. The non-receipt of remuneration is not material, and on that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the trust deed, it is not open to the trustee to claim remuneration. Therefore the non-receipt of remuneration is not material. As far as the benefits to members are concerned, I find that except the petitioner, other shareholders of the company names of whom are given in the petition have not raised any objection that they have not received any benefit from the company. Since it is a company formed to act as a trustee, the non-receipt of remuneration is immaterial. Further, I have already observed that the first respondent company has other objects also and in future, it may expand its activity in carrying on other objects and in such situation, it will be possible for the members to obtain return on the investment. Further, the right of the shareholders in the shares is not confined only to the receipt of dividend, but it varies and the rights of shareholders are bundle of rights and so long as shareholders exercise their rights as shareholders in the company, it cannot be stated that the shareholders are not exercising their rights as shareholders in the company. 32. The submission of Mr. C. Harikrishnan, learned senior counsel that the capital of the company has got ero ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench of this Court in Kannan Adityan s case, the Supreme Court has, granted special leave to appeal and the Supreme Court has also issued certain interim directions and one of the interim directions of the Supreme Court is that the trustees are to use the surplus income of the trust for the benefit of the trust and not for any other purpose, and the trust was also directed to render statement of account covering all 12 centres of publication of Daily Thanthi. Therefore, when the Supreme Court has granted special leave to appeal, and the matter is pending before the Supreme Court, I am unable to express any opinion on the said question, particularly when the Supreme Court has given a direction that the account of the trust should be audited and surplus money should be used for the benefit of the trust and not for any other purpose. Moreover, the allegations are subject matter of the proposed suit and I am of the view, this Court must refrain from making any observation on the allegations made in the company petition that the first respondent has been nominating the second respondent and the second respondent is in control of the trust and there has been diversion of trust funds by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn and does not carry on the business as that of the company; or where the directors withhold information from shareholders in circumstances which give rise to suspicion that they are attempting to buy their shares at an undervalue; or where the misconduct of directors or promoters can only be successfully investigated in a winding up by the court. Misconduct of directors or of liquidators, or the fact that its business has been carried on at a heavy loss (if the company is not insolvent), or the issue of shares at a discount, is not per se a ground for winding up; nor is the fact that the company has acted dishonestly to outsiders, or that a majority of shareholders insufficient to pass a special resolution wish it." 36. Learned senior counsel referred to the decision of the Supreme Court in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla AIR 1976 SC 565 wherein the Supreme Court while considering the expression, just and equitable held as under : "The sixth clause of section 433, namely just and equitable is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier clauses prescribe definite conditions to be ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so relevant and the Court held that to invoke the just and equitable clause, there must be material that the petitioner was oppressed and unjustly excluded from the management of the company. The Court also held that the conduct of the parties should also be taken into consideration. The decision of the Andhra Pradesh High Court fully supports the case of the first respondent. The petitioner has not produced any material to show that he was oppressed or excluded from the management of the company unjustly. The company, on the other hand, was holding Annual General Meetings periodically and no complaint has been made by the petitioner at the time of Annual General Meetings. 40. I am of the view that there are no materials at all except allegations made by the petitioner that it is just and equitable to wind up the first respondent company. As observed by the Supreme Court, the company court will have to keep in mind the position of the company as a whole and also the interests of the shareholders and to see that they would not suffer in the fight of power that ensued between two groups. On the facts of the case, except the petitioner, no other shareholders has come forward in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to prove the allegations and the allegations have to be established in the Civil Court. Therefore, the mere fact that there is an infight between the petitioner and the second respondent is not a ground to hold that the first respondent company should be wound up on just and equitable ground. 41. I am unable to accept the submission of Mr. C. Harikrishnan, learned senior counsel for the petitioner that the company should be wound up on the ground of its inability to pay debts. It is no doubt true that section 433( c ) deals with a case of a company which does not commence its business within a year from its incorporation. Section 434(1)( c ) deals with a case where the company is unable to pay its debts. In other words, the company has to be commercially insolvent to attract the provisions of section 434(1)( c ) of the Companies Act. Learned senior counsel for the petitioner referred to the averments made in the petition and submitted that the company has become commercially insolvent. He referred to the balance sheets of the company from the year 1986 onwards to show that the company has become insolvent. However, the balance sheets of the first respondent company clearly esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of trustee in the trust and the company petition has been ostensibly filed on just and equitable grounds, and the result of admitting and allowing the company petition would be the same, namely, the removal of the second respondent from the post of trustee. It is, no doubt, true that as contended by Mr. C. Harikrishnan, learned senior counsel for the petitioner, the scope of the civil suit is different as the proposed suit is one under the general law and the scope of the company petition is different. But, it will not be open to convert the proceeding in the company court which are of summary in nature and to use the finding arrived at in the summary proceeding, if it is favourable to the petitioner, in the civil proceeding. It is in the sense that the proceedings under the company law are abuse of the process of the court and it is well-settled that the proceedings herein cannot be used for some oblique or some extraneous purpose. The matter can be looked from another angle. Suppose, the proposed suit is decreed and the company petition is dismissed, the petitioner will not be prejudiced as the main relief sought for would be achieved in the civil suit. Equally, if the propose ..... X X X X Extracts X X X X X X X X Extracts X X X X
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