9911796707
TMI Blog1960 (12) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company's Solicitors, M/s. Kanga and Co., pending the hearing and final disposal of the petition on merits in the trial Court. The usual formalities such as advertisement and notices being served, and the necessary preliminaries having been completed, the matter has now come up before me for final hearing. Before adverting to the affidavits that were tendered before me at the stage of the final hearing and the reasons, which induced the petitioners to do so, it is necessary to set out the facts in so far as they are necessary for determining the matters of controversy between the parties. I will begin with the facts which are either admitted or over which there is not much dispute. 2. The aforesaid Company was incorporated in the year 1930 under the Indian Companies Act. 1913. It appears that the shares of the Company were purchased by the present share-holders in about the year 1937. The authorised capital of the Company is rupees four lakhs divided into eight thousand shares of ₹ 50/- each. The subscribed and paid-up capital of the company is rupees three lakhs divided into six thousand fully paid-up shares of ₹ 50/- each. The said six thousand shares in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vil Court for the recovery of the amount of dividends due to them. In the course of appeal before the High Court, an undertaking was given by the members of Brijlal group to the effect that the dividends would not be distributed till the disposal of the suit pending before the City Civil Court. The appeal, therefore, was not pursued and the matter was dropped. On 6-12-1959 the licence granted to the Company by the Government under the provisions of the Indian Electricity Act expired. It may be mentioned at this stage that since its incorporation the only business that the Company was carrying on was to run the undertaking of supply of electricity energy to the citizens of Akola. On the termination of the licence, the Bombay State Electricity Board has taken over the work of distributing the electric energy to the citizens of Akola and the immovable properties of the Company also were taken charge of by the said Board. The Company. Through their Directors, have laid their claim for compensation by reason of the Company having been taken over by the Government. They have also contended that some of the Immovable properties belonging to the Company have been wrongly taken possession o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company was founded; that all these objects are independent and that it is incorrect to say that the substratum of the Company has gone or has been destroyed merely because the present undertaking was taken over the by Government. They have also denied the allegations relating to oppression and flouting of the interests of the petitioners and contended that the management of the Company is being run smoothly and on economic lines. There is no question of a deadlock. They point out that there are no allegations either of misconduct or misapplication of funds or mismanagement. They, therefore, deny that there is any case for winding up of the Company. 6. When the case reached the stage of hearing, the petitioners put in an affidavit along with a copy of the letter (Ex. A). In this affidavit they tried to introduce new matter pointing out that fresh developments have taken place since the date of filing of the petition and that these events go to the root of the matter and will conclusively establish that not only the substratum of the Company has gone but that it is not possible for the Company to start any fresh adventure. In this connection, they point out that the six membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the petitioners, contended that this event has taken place recently and long after the filing of the petition and therefore, it was impossible for them to make mention of that event in the petition. According to him, the circumstances, which supervened between the filing of the petition and the date of hearing, will have to be taken into account for the purpose of determining the question, whether any nucleus has been left over to the Company for starting any fresh undertaking in fulfillment of the various objects mentioned in the objects clause of the memorandum of association. Mr. Banaji, learned counsel, who appears on behalf of the Company, and Mr. Dalal, who appears on behalf of the members of Brijlal group, have vehemently opposed the introduction of new matter and new set of allegations in this petition. Mr. Banaji contended that the petitioners must confine themselves to the four corners of the allegations made by them in the petition and it is not open to them to introduce new set of allegations, which will change the complexion of the petition. He further suggested that it was quite open to the petitioners to lodge a fresh petition for winding up of the company on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would not be proper to drive the petitioners to file a fresh petition merely on the technical ground that the amendment would introduce new matter. I do not think that either the Company or the share-holders will be taken by surprise, if the affidavit is allowed to be introduced at this stage as all the share-holders were parties to the undertaking. It is true that the Company is not a party to the undertaking and at a later stage of this discussion, I will consider the effect of the Company not being a party to the said undertaking. But, when all the share-holders including the Directors of the Company are parties to the undertaking, it will be too much to say that the Company will be taken by surprise, if this new matters is allowed to be introduced. It is mainly on these considerations that I have allowed the petitioners to put in the affidavit except of course paragraphs 5 and 6 therein. Having allowed the petitioners to put in their affidavit, I am in duty bound also to allow the Company to put in its counter affidavit and accordingly, the Company has put in a counter affidavit of Narandas Ramjidas, one of the Directors of the Company. 8. I will now proceed to discuss t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjects which appear to be more or less independent of each other. I will discuss this question in greater length at a later stage after referring to the relevant authorities on this point. Before doing so, I may refer to the other clauses which are mentioned with the preamble Without prejudice to the generality of the preceding objects, the Company's objects will include the following and as many as twelve objects have been included in this category. 9. Mr. Bhatt referred me to a passage appearing under the caption 'Main object' rule in Palmer's Company Precedents, 17th Edition, 1956 (Part 1) at p. 276. It would be worthwhile to cite the passage in its entirety: According to these authorities, where the objects of a company are expressed in a series of paragraphs the true rule of construction is to seek for the paragraphs (commonly the first) which appear to embody the main or dominant object of the company, and to treat all the other paragraphs, however, generally expressed, as merely ancillary to this main object, and as limited and controlled thereby. Assuming that there is any such rule of construction, it is, of course, to be borne in mind that l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear that this rule of construction will be excluded by the language adopted in the memorandum and the learned author has referred to the various devices that are adopted for getting rid of the inconvenient rule of construction. This can take place when several objects are expressly stated to be independent objects. It may also take place when some of the objects are set out after the preamble without prejudice to the generality of the preceding object . The learned author has also referred to the decision in Cotman v. Brougham, 1918 A. C. 514 and to the distinction that was made in that case by Lord Parker between a case where the question was whether the main object or substratum had ceased to exist and a case where the court is considering as to whether a particular transaction is ultra vires the Company. The learned author has suggested that the ratio of the case in 1918 AC 514 is that the well-known rule of construction may be adopted for the purpose of determining whether the main object or substratum has ceased to exist with a view to considering whether the company should be would up. 10. It is in this background that we have to turn to the decision in 1918 A. C. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be held to be the company's main or paramount object, and on this construction no one could be quite certain whether the Court would not hold any proposed transaction to be ultra vires. At any rate, all the surrounding circumstances would require investigation. Fresh clauses were framed to meet this difficulty, and the result is the modern memorandum of association with its multifarious list of objects and powers specified as objects and its clauses designed to prevent any specified object being read as ancillary to some other object. For the purpose of determining whether a company's substratum be gone, it may be necessary to distinguish between power and object and to determine what is the main or paramount object of the company, but I do not think this is necessary where a transaction is impeached as ultra vires. A person who deals with a company is entitled to assume that a company can do everything which it is expressly authorised to do by its memorandum of association and need not investigate the equities between the company and its shareholders. It is at once clear that Lord Parker was dealing with the argument that was advanced before him to the effect that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. AIR1958Bom155 . In my opinion, this passage does not assist Mr. Bhatt in the argument which h is advancing. It is true that while Lord Wrenbury has deplored, or we can even say deprecated, the practice which has recently grown up of including multifarious objects as independent objects or as objects put down after 'without prejudice' preamble, Lord Wrenbury stated that he had to reconcile himself with this practice much against his conviction and without considerable reluctance. Now, it is one thing to deplore a practice prevailing in the matter of drafting the memorandum of association and quite another to say that although the memorandum specifically says that certain objects are independent of each other or followed by 'without prejudice' preamble, still an investigation should be made with a view to find out as to which is the principal or paramount object and which are the ancillary objects of the Company. I find from subsequent rulings cited before me that this decision has never been interpreted to lay down any rule of construction of the objects clause of the memorandum and as pointed out above, even Palmer has used very cautions language and said The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been mentioned. The learned Judge held that in such a case the objects specified in general words may be treated as ancillary objects. In the case of the memorandum of the Company in the present case the process is reverse. This is not a case of specific object followed by general words. On the other hand, this is a case of general words followed by a specific object and also other objects. The general object is stated to be as follows: The objects for which the Company is established are to carry on the business and undertaking of an Electric Energy Supply Company in all its branches and departments including all industries primary or subsidiary to the said business. . . . . . . Then there is reference to specific objects, one of which is 'to work out the Akola Electric License granted by the Government of Central Provinces to Vakharia and others . Again general words have been used viz, and any other like electric license which the company may be entitled to work hereafter. . . . . . . . It is, therefore, impossible to conclude that the working of the Akola Electric License was the main or the principal object of the Company. One of the main or principal obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pealed. It was held: (i) since the main and paramount object of the appellant company was to carry on an engineering business of a general nature the disposal of the business of K and Co., which had been acquired about 46 years before, did not amount to a destruction of the substratum of the appellant company ; (ii) the intention of the board of directors, at a given moment, to discontinue the business of engineering had no effect on the determination of the question whether the substratum had gone. It is significant to note that the first object in the memorandum in that case was a specific business, i.e., to acquire and take over the business carried on under the style of K and Co. The specific object was followed by the general object to carry on the business of general engineering and yet it was held by Lord Greene, M. R. that the main and paramount object was to carry on the business of general engineering. I will refer to the second proposition set out above presently and in another context. Before doing so, I may set out a few observations made by Lord Greene M. R. At page 438. They are as follows: . . . . . .but the question we have to decide is wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude. Although it is followed by a specific object, several other general objects again have been mentioned, all in one clause, and all of them appear to be independent of each other. Therefore each of them will have to be treated as principal and independent object. I may incidentally point out that reference was made to Cotman's case 1918 AC 514 in the judgment of Morton LJ in Re Kitson and Co. Case, (1946) 1 All ER 435 and to the observations made by Lord Parker. It is significant to note that these observations were not treated as enunciating a rule of construction to the memorandum of association for the purpose of determining the question as to whether the substratum has failed. Reference to certain passages were made only with a view to point out the double purpose for which the objects are set out in the memorandum. 12. In Re Taldua Rubber Co. Ltd., (1946) 2 All ER 763, the memorandum was in the following terms: The objects of T. Rubber Co., Ltd., were stated in the widest terms and included power 'to enter into and carry into effect the agreement draft of which is referred to in Art. 3 of the Articles of Association'. This agreement (which was entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Akola Electric license. 13. Mr. Bhatta contended that if the main object of the company was to carry on the business and undertaking of an Electric Energy Supply Company even that object had failed and was incapable of achievement because of the change in the Government policy. The statement that the Government policy has changed has not been specifically traversed in the affidavit put in on behalf of the company although it is challenged that everyone knew that the Government policy had changed. Any reference to the policy of the Government is bound to be of an indeterminate character, because the policy is never static and is always liable to change and fluctuate. Although for the time being it may be the policy of the Government not to renew the licences of private companies there is no guarantee that this policy will not change in future. But, apart from this, as stated above, there are several other objects which are independent of one another and it is impossible to say that the company cannot carry on the other objects, which have been stated in extenso in the memorandum. 14. I will now turn to another question which is of an incidental character, on which some st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d nor was it proved that the shareholders had any such intention; but assume that it was. A little time afterwards something might happen to make them change their minds. They might see a profitable opportunity of using the Company's money again in the engineering business. What has intention to do with it? We are dealing with the question of substratum and to say that the substratum can exist at one moment and cease to exist a moment later, or vice versa simply through a change of intention of the board or of the shareholders (I know not which) seems to me to lead into a morass. The observations in (1946) 2 All ER 763 are still more clear . Wynn-Parry, J., observed: There then remains the question whether the absence before the court today of any concrete scheme for dealing with the proceeds of the sale is a reason for making a winding-up order. It has been observed by counsel for the petitioner that there is no reported case to be found where a petition has been rejected where those who oppose the making of the winding-up order did not bring before the court some concrete scheme, and he urged on me that, on the true view of the judgment of Lord Greene, M. R. In 1946 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted Official Liquidator thereof. In my opinion, the question as to whether the Company is really in a position to start a new business is very relevant in considering the question as to whether the substratum has disappeared. This is clear from the observations contained in the cases in which reliance was placed by Mr. Banaji. In the Editorial Note in Re Kitson and Co., case 1946 1 All ER 435, it is stated: The material time for consideration is the date of the winding up petition, and if the company is them in a position to carry on a business within the principal object of its memorandum it is quite irrelevant that the directors held a different intention at some earlier date. It is this consideration which included me to admit the affidavit in this petition. In the counter affidavit put in on behalf of the Company, it is pointed out that there are nine partners in the firm of Sarupchand Prithiraj that the Income Tax liabilities are not the liabilities of the firm as such but are the liabilities of some of the partners of the firm and that although six shareholders of the Company are liable for Income Tax dues, their liabilities are individual and in any case the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perties of the partners. It is equally possible that the partners may pay off their share of the liabilities and in that way may free themselves from the undertaking at present given by them. The question raised in the present affidavits is based on a number of hypothetical considerations and at this time, we cannot make any assertion to the effect that the compensation money will be wiped out in the process of satisfying the Income Tax dues of the partners of the firm. In case, such an eventuality materialised, it is quite open to the petitioners to make a fresh application for winding up of the Company. After all, the passing of an order for winding up is a matter within the discretion of the Court. The remedy of compulsory liquidation is obviously a drastic remedy and should be availed of only when a clear case has been made out justifying such an action. We cannot proceed to wind up the Company on assumptions. If the Company is wound up today on the hypothetical consideration that the compensation money will not be available to the Company for being utilised in starting a new venture and if tomorrow it turns out that the compensation money is actually available for being utilis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. The decree passed by the City Civil Court is under appeal before the High Court. Furthermore, we cannot embark upon the investigation in the present case as to whether there was justification for the directors in withholding the amounts of dividends due to the petitioners. In any case it is sufficient to point out that the petitioners have ample remedies in properly constituted suits. Another question that was raised in the same context was that in case the amount of compensation is available to the company and falls into the hands of the directors and the latter decide to start a new undertaking with the nucleus of those funds, then it was argued that the starting of that venture will not only be without the consent of the petitioners but will be very much against their wishes. It is argued that it would be improper to subject the minority of the shareholders to the risk of a new undertaking to which they are not a party. In this contention reference was made to a passage at p. 702 of Palmer's Company Law. 12thEdn., 1959 under the heading 'Contributory's Petition, which is as follows: The substratum is held to be gone when the main object for which the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs one director was to form a quoram, and if any dispute or difference should arise consequent whereon inability to pass a directors' resolution should result the matter in dispute should be referred to arbitration, the award to be entered in the minute-book as a resolution duly passed by the board. The company's business was successfully carried on until June, 1915, when differences arose between the parties. One of such differences was referred to arbitration, which, after a protracted hearing involving costs exceeding 1000, resulted in an award to which R declined to give effect. He brought an action for fraudulent misrepresentation against W and the parties became so hostile that neither of them would speak to the other, communications having to be conveyed between them through the secretary of the company. In spite of this the company continued to transact business and large profits were made. Under these circumstances, W presented a petition alleging that a complete deadlock had arisen, that the substratum of the company was gone, and that it was 'just and equitable' within S. 129 of the Companies (consolidation) Act, 1908, that a winding up order should be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has a right to except, and that such impossibility has not been caused by the person seeking to take advantage of it. Lord Cozens-Hardy, M. R. Then proceeded: Now here we have this fact, Mr. Rothman has commenced an action charging Mr. Weinberg with fraud in obtaining the agreement under which he, Rothman, sold his business to the company. I ask myself the question; When one of the two partners has commenced and has not discontinued an action charging his co-partner with fraud in the inception of the partnership, it is likely, is it reasonable, is it common sense to suppose those two partners can work together in the manner in which they ought to work in the conduct of the partnership business? Can they do so when things have reached such a pass, as they have here, that after an arbitration lasting eighteen days, an arbitration on the only point which was referred which terminated in favour of Mr. Weinberg, and to which Mr. Rothman declines to give effect in this sense, that although the award decided that Litiger had not been dismissed and ought to be continued as a servant of the firm until removed. Mr. Rothman will not allow him to come and do his business, so that he, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. No shareholder has a right to participate in the governance of the affairs of the Company and, as stated above, the nature of the dispute between the parties is such that it is quite possible for the petitioners to have recourse to other remedies and they have actually had recourse to them. They have filed suits in the City Civil Court for the recovery of the moneys due to them by way of dividends. They had also started an action under Sections 397 398 and 402 of the Indian Companies Act, 1956, for directions to check what they called mismanagement or oppressive management of the Company. Reference was also made to a case reported in Anantha Raghurama v. East Coast Transport and Shipping Co. (Private) Ltd., 28 Com Cas 20: AIR 1958 And Pra 259. This case is also reported in ILR (1957) And Pra 308. In that case one of the five share holders of a small private Company presented a petition for an order for winding up the company on the grounds that (1) there were serious misunderstandings among the shareholders of the company. (2) one of the shareholders was actively engaged in promoting the interests of a firm which was conducting a similar rival business, and (3) two other share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g outvoted on the business affairs of the Company. There is no suggestion, whatsoever, that there is any lack of honesty or probity on the part of management. That being the case, mere trotting out of allegations viz., that disputes have arisen and that the minority group has lost confidence in the majority group, will not be a sufficient group for winding up the Company. The above observations of the Privy Council have been cited with approval by the Supreme court in Rajamundry Electric Supply Corporation Ltd., v. Nageshwara Rao [1955]2SCR1066 . It is not necessary to refer to the two other decisions relied on by Mr. Banaji viz., IN re janbazar Manna Estate, Ltd. AIR1931Cal692 and Seethiah v. Venkatasubiah AIR 1949 Mad 675 because they reiterate the view laid down by the Privy Council in Loch's case and state in general terms that the view of the majority of the shareholders must prevail and the mere fact that there is difference of views cannot be considered to be sufficient reason for winding up the Company. 20. It only remains to deal with a small point that was made out by Mr. Bhatt based on certain observations in Re Baku Consolidated Oil fields Ltd., (1944) 1 All ER 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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