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TMI Blog1963 (11) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. S. A. No. 70 of 1962. The agency agreement turned out to be very profitable. The company maintained its accounts on the mercantile basis, the yeas adopted being the calendar year. Its main source of income was the commission earned from Indian Sugars and Refineries Ltd. Since the year 1950, the company has been able to declare very substantial dividends to its share-holders. 3. For the year ending 30-12-1959 the directors of the company reported to its shareholders that the commission earned during the year had not yet been received from the principals and concluded by saying: You will note that the disbursement of the proposed dividends to our shareholders will depend on our being able to collect outstandings from our principals . At the general body meeting of the company held on 30-12-1959, the following resolution relating to the declaration and payment of dividend was passed: that a dividend of ₹ 100 per share (taxable) on the equity shares be paid to such shareholders as appear on the register of members as on date, payments to be effected when commission due from principals are realized. It is admitted that the commission due from the India Sugars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. C. K. Krishnaswami made a formal demand on the company for the payment to him of the dividend declared towards the close of the year 1959, which amounted to Rs, 11,620 and a further sum of ₹ 6300 as payable to the Factors Limited, in respect of a similar claim. Mr. Parasrampuria, who was the Managing Director of the company, did not repudiate the claim on any such ground as that the resolution of the general body declaring the dividend was in any way illegal. He, however, complained by his letter dated 24-5-1960, that his pre, decessor in office, Mr. A. C. K. Krishnaswami, had failed to produce the minutes book and certain documents belonging to the company and made a demand for their return. On the same day he wrote another letter informing Mr. A. C. K. Krishnaswami that there was another claimant to the dividend. There was a slight change in regard to the claim for past dividends in the letter sent sometime later where Mr. Parasrampuria claimed that the price paid by him for the transfer of the shares included the dividends already declared. The demand of Mr. A. C. K. Krishnaswami and Factors Ltd. for payment to them of the dividend was not met Sometime later on 5-7-1960 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey will be enabled to get the dividend for the year 1959,. although the transfer of the shares in their favour by Mr. A. C. K. Krishnaswami took place only in the following, year. that is not perhaps all. On 27-12-1960 the Additional Collector, Bombay, issued a prohibitory order against, the company from either transferring the shares held on Mr. Hariprasad and Smt. Godavari Bai or paying dividends, in respect thereof, as such shares belong to one R. S, Morarka, against whom the Income-tax Department had a claim for unpaid tax. It has not been made clear before us as to how Mr. Morarka was entitled to the shares and in what circumstances or at whose instance the attachment order came to be issued. 8. There can be little doubt that the winding up proceedings are the outcome of the differences between Mr... A. C. K. Krishnaswami who is reported to be still keeping, with him the minutes book and certain other documents of the company, and Mr. Parasrampuria, who can be said to be responsible for the non-payment of the dividends for the year 1959. 9. We shall now turn to the petition filed by Mr,. Hariprasad. That, as we said, was based on the inability of the company to pay two s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th for more than three weeks. We are, with respect, unable to share the view expressed by the learned Judge. Under the Indian Companies Act, a company can be wound up, on the petition of a creditor, for its inability to pay his claim after proper demand had been made by him and on the lapse of three, weeks from the date of service of such a demand. Where, however, the company disputes the claim, the court will see whether such a dispute is a genuine one, or merely one to cover up its unwillingness or inability to pay. in. the Patter case a winding up order should ordinarily follow. In Buckley on the Companies Acts , 13th Edn., the learn fed author has observed at page 450 : A creditor who cannot obtain payment of his debt is entitled as between himself and the company 'ex debito justitiae to an order if he brings his case within the Act. He is not bound to give time. Again, at page 451 A winding up petition is not a legitimate means of seeking to enforce payment of a debt which is 'bona fide disputed by the company. A petition presented ostensibly far a winding up order but really to exercise pressure will the dismissed, and under circumstances may be stigmatiz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould ordinarily investigate that question. The court has, however, a discretion in the matter. If it finds that the defence is a substantial one, it can direct the creditor to establish his claim in an independent action. It has an equal discretion to decide the dispute particularly in cases where the defence to the claim is unsubstantial; and once it is proved , that the debt is due to the petitioning creditor, it should proceed with the winding up petition. 10. Section 433 of the Indian Companies Act declares the circumstances in which a company may be wound up by the Court. That section provides that a company may be wound up by the court if it is unable to pay its debts. Section 434 defines when a company must be deemed to be unable to pay its debts. Sub-clause (a) of Section 434 states that if a creditor who is entitled to receive a sum of more than ₹ 500 from the company, has made a demand, in the manner prescribed by the section, on the company, and the company has, for three weeks thereafter, neglected to pay his dues, it shall be deemed to be unable to pay its debts. Sub-clause (c) to Section 434(1) says: If it is proved to the satisfaction of the court that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the latter case, it will no doubt be open to the court to find out, on a consideration of the value of existing assets and liabilities of the company, whether it is really in insolvent circumstances. But in the former case no such investigation is called for; nor even, can it be undertaken. it will be sufficient for the purpose if there be a failure on the part of the company to meet the demand in terms of the statute'. For the purpose of application of Section 434(1)(a), therefore, what all will be necessary to find will be whether the amount was due to the creditor on the three dates, namely, the date of issue and service of the notice under that provision, the date of the presentation of the petition and the date of passing of the order for winding up. If by any of the dates mentioned above, the claim had been discharged, the fiction will cease to operate and he company cannot be regarded as one unable to pay its debts. In re, Imperial Hydropathic Hotel Co., Blackpool v. Hampson, 1882-49 L T 147, Cotton, L. J. said that where a statute requires the court to treat a company as if it were insolvent, that is, unable to pay its debts if certain things were done, the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidends as well. At any rate, in the absence of evidence' in that behalf, one cannot assume that what Mr. A. C. K. Krishnaswami intended to transfer was the shares plus the dividend that had already been declared as payable; thereon. It will be interesting to recall that in the affidavit filed by Mr. Banka before the learned Judge, he solemnly stated that he was entitled only to the future dividends. That would exclude the past dividend that had already become payable. Even apart from that consideration the true rule is that a transfer of shares, effected after the dividend had been declared by the company, cannot, as against the company, convey title to receive payment of the dividend to the transferee, although he expressly bought it cum-dividend. In Chumial Khushaldas v. Adhyaru, (S) , it was held that a transfer of shares, after a dividend had been declared by the company, could only create an equity between the buyer and seller of shares, the former being entitled to such dividends. Therefore the transfer of shares, though expressly made cum-dividend after such dividends had been declared, could not, as against the company, carry the dividend to the buyer. 13. As regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acter as such, by way of dividends etc., shall not be deemed to be a debt due by the company. Support for the contention has also been sought in two decisions, namely, In re, Leicester Club and County Racecourse Co., Ex parte, Cannon, (1855) 30 Ch D 629 and In re, Consolidated Gold-fields of New Zealand Ltd., 1953-1 Ch 689. Both the cases relate to proof of certain claims in the course of winding up of a company. They cannot be regarded as laying down that, even outside the winding up proceedings, a share holder member to whom a dividend became due is not a creditor of the company, so long as company is functioning. As pointed by the Supreme Court in Bacha Guzdar v. Commissioner of Income-tax, Bombay, , the right to participation in the profits of the company in a share-holder even exists independently of any declaration of the dividend by the company. A declaration is necessary only for the enjoyment of profits. It will follow that once a declaration of dividend is made and it becomes payable it will partake the nature of a debt due from the company, to the shareholder. In re, Severn and We and Severn Bridge Railway Co. 1896-1 Ch 559, it was held that when a company declared a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that were laid down But, I agree, it must be out of profits, although those profits were not profits in hand. Section 205 of the Act only prescribes that the dividend' shall be paid out of profits of the company. It does not say further how those profits have to be ascertained. Profits of a year, under the mercantile system of accounting, only means the excess of receipts for the year over expenses and outgoings during the same year. It is not? necessary that such excess should be in the form of cash in the till of the company. It will be open to a company' to declare a dividend on the basis of its accounts, whether such accounts are kept in the cash or mercantile basis. Where it is based on the estimated profits, which had not actually come in the form of cash to the company, it will be open to it to pay such dividends from out of other cash in their hands or perhaps even to borrow and pay. them off. That will not amount to paying dividend out of capital. We are, therefore, in agreement with the learned Judge that the declaration of dividend in the present case, even before the actual receipt of assets, was valid. It has been argued for the respondent that whatever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... waive their right to exercise any of those powers. Again, where there is an express statutory direction enjoining compliance with certain prescribed forms, it cannot be dispensed with. In the instant case the object of Section 207 of the Act, as we stated is to protect the individual share-holders against the acts of the company. To such a case it will be inappropriate to apply the making. Reliance was, however, placed on the decisions in Commr. of Income-tax, Bombay City v. Laxmidas Mulraj, AIR 1948 Bom 404 and Parshotamdas Thakurdas v. I. T. Commissioner, , as instances where dividends declared payable on a future date or made contingently on the happening of an uncertain event, were accepted as valid. Those cases were concerned with the Companies Act, 1913, where there was no provision like Section 207 of the present Act. Secondly, the problem in those cases related to the taxability of the. income in the hands of the share-holder. No question arose there as to the validity or invalidity of the declaration of dividend. In our view, Section 207 mandatarily requires that dividends declared by a company should be paid to the share-holders within the time specified therein. Any r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... senting the alien share-holders to claim the dividend, Lord Buckmaster observed : It is contended on behalf of the appellants that there is no right whatever in the custodian trustee to any part of either of these sums of money, because either the conditions that were attached to the resolution for payment were good and they were at liberty to permit the enemy share-holders to satisfy the debt owing by the English company out of the foreign assets, or, if they were Dad, the whole declaration of dividend was bad throughout, there consequently was never any declaration of dividend, and no debt is due from the company to the custodian trustee.. I will not pause to consider what the ultimate effect might be upon the directors of the company if the latter branch of this argument found favour in your Lordships' minds, because I think it is founded upon a mistaken view of these resolutions. In truth, the company did in plain terms declare a dividend, and it was that, and that only, that was within the competence either of the directors or of the company. The conditions which were attached, except the one as to the date of payment, are conditions which there was no power whatever t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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