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Civil Miscellaneous No 337 of 1963 in Judicial Miscellaneous No. 40 of 1958, decided on 23rd October 1964.
Ss. 93, 97 & 235 Contravention of requirements of S.93‑Gives rise to personal right of action in favour of subscriber and entitles him to compensation‑Provisions of S. 235 not attracted‑Object of S. 235: augmenting assets of company suffering loss due to misapplication, retainer misfeasance, etc.‑No evidence that either any subscriber or company itself suffered any loss due to non‑disclosure in prospectus facts mentioned in. Ss. 93 (f) & 93 (1)‑Provisions of S. 235 cannot be invoked.
Indian States Bank's case A I R 1934 All. 855; Rao Sahib's case A I R 1942 Mad. 365 and Peninsular Locomotive Co. Ltd. v. H. L. Reed and others A I R 1937 Pat. 293 distinguished.
S. 103----Company amalgamating and taking over business of another pre‑existing company‑Business carried on by such pre‑existing company prior to amalgamation‑Cannot be deemed business done by amalgamating company in violation of provisions of S. 103.
Muhammad Ali Sayeed for Applicant.
A: Aziz for Respondents Nos. 3 and 6.
Abdul Aziz for Respondents Nos. 2, 4 and 5.
Sadiq & Ghulamally for Respondent No. 1.
Dates of hearing: 28th September, 13th and 14th October 1964.
This is an application under section 235 of the Companies Act by the Province of West Pakistan as the successor of the Bahawalpur State‑ against 6 directors of Messrs Pak Air Ltd. a public limited liability company now in liquidation. The six directors who have been cited as respondents in this petition are (1) Mr. Mushtaq Ahmad Gurmani, (2) Mr. Yusuf Abdullah Haroon, (3) Mr. Muhammad Hussain Malik, (4) Mr. Fakhruddin Valibhai, (5) Mr. Mahmood Abdullah Haroon, and (6) Mr. Jalaluddin Malik. The respondents are alleged to have been guilty of misfeasance in the affairs of the said Company and it is prayed that the aforesaid directors be compelled to repay or restore or to contribute the money of the Company to the extent set out in the application with interest at such a rate as the Court may think fit. When this petition had first come up an objection was raised that the application was barred by time and this was placed before a Division Bench of which I was one of the members and by our order dated 18‑2‑64 we over‑ruled the objection of limitation raised on behalf of the opponents. The matter was then placed before me for the decision of the application on merits. No evidence has been led by either party and reliance has been placed upon certain books and documents which are already on the record of the case and to which I shall refer presently.
2. The material facts may be shortly stated. A private limited company, namely Messrs Islamic Airways Agencies Ltd., was incorporated at Karachi on 4th December 1947. Amongst the directors of this company were the present respondents 2, 3, 5 and 6, namely Messrs Yusuf Abdullah Haroon, Muhammad Hussain Malik, Mahmood Abdullah Haroon and Jalaluddin Malik. This company went into business on 1st January 1948. Then on 31‑7‑48 the Pak Air Ltd. was incorporated as a public limited liability company. On 5th November 1948 the prospectus of this company was filed with the Registrar Joint Stock Companies, Karachi. On that day a meeting of the Board of Directors of Pak Air Ltd. was held in the registered office of the Company at Haroon Chambers, South Napier Road, Karachi. Several resolutions were passed. It was resolved that Mr. Mushtaq Ahmad Gurmani, who was then the Prime Minister of Bahawalpur State, be elected as Chairman of the Board of Directors for the current year. By another resolution the draft agreement between the Company and the Islamic Airways Agencies Ltd., providing for the appointment of the Islamic Airways Agencies Ltd. as the managing agents of the company was approved and the seal of the Company was affixed to the agreement. By yet another resolution Mr. W. B. L. Vollani, Barrister‑at‑Law, was appointed the legal adviser of the company and also of the managing agents.
3. The certificate of registration of the company was obtained from the Registrar on 15‑11‑48. On 24‑11‑58 another meeting of the Board of Directors was held which was presided over by Mr. Mushtaq Ahmad Gurmani. In that meeting the following resolutions Nos. 3, 4 and 5 which are material were passed:
"(3) Resolved that the following be taken over by the company from the Managing Agents Messrs Islamic Airways Agencies Ltd., Karachi at cost or book value‑
(a) Dakotas‑6.
(b) Sky Masters DC‑4‑2.
(c) Aircraft spare parts accessories and engines, etc.
(d) Furniture, Fittings, etc. and
(e) Motor Lorries, Trucks, Cars, etc.
(4) Resolved that a director or an officer of the Company be allowed to travel on any of the Company's air routes, for his own business or pleasure, 3,000 miles per year free of cost or 10,000 miles per year at half rates, provided he informs the company of the exercise of his option in the beginning of each year.
(5) Resolved that the expenditure and income of services run by the Islamic Airways Agencies Ltd. from the very start be taken over by the Company. Further resolved that a statement of assets and liabilities be put up at the next meeting."
The next material meeting was held on 12th May 1949 in which the following resolution No. 6 was passed:
"(6) In pursuance to previous resolution of the Board, the Director‑in‑charge placed before the Board the accounts relating to assets and liabilities of the Islamic Airways Agencies Limited and the following resolution was passed:
That the accounts pertaining to assets, liabilities, income and expenditure of the Islamic Airways Agencies Ltd. which was actually operating or, behalf of Pak Air Ltd. then under formation. be now amalgamated with the accounts of the Pak Air Ltd."
The formal amalgamation as provided in the above resolution took place on 30th June 1949.
4. On 12th December 1949 the second air crash of the company occurred in consequence of which the Company suspended its business and its licence was cancelled by the Government of Pakistan. On 4th December 1958 an application for the winding up of the company was made by the Province of West Pakistan under section 162 of the Companies Act. This was registered as Judicial Miscellaneous No. 40/58. It may be explained that 10,000 shares of Rs. 100 each had been purchased by the Bahawalpur State soon after the incorporation of this company. At that time Mr. Mushtaq Ahmad Gurmani was the Prime Minister of the said State and it was by virtue of this share‑holding by the State that he was made a director of the Company and was also elected the Chairman by the resolution of 24th November 1948, which has been referred to above. The State of Bahawalpur was integrated in the Province of West Pakistan by the Establishment of West Pakistan Act of 1955. By virtue of section 9 of the said Act the assets and liabilities, etc. of the State vested in Her Majesty for the purposes of the Government of West Pakistan. Consequently tile Province of West Pakistan became a successor‑in‑interest of the Bahawalpur State and it was for this reason that it became competent to apply for the winding up of the company. Upon this application having been filed this Court by its order dated 17th March 1959 appointed Mr. G. Raymond, Official Assignee as the Provincial Liquidator. On 25‑5‑59 an order for the winding up of the Company was passed. The Official Liquidator made his first report under section 177 (b) of the Companies Act on 4th May 1960 and a second report on 16th December 1960. The present petition under section 235 of the Act was filed on 14th March 1962.
5. The allegation of misfeasance is based upon the taking over by the company of certain losses of the Islamic Airways Agencies Ltd. in consequence of the resolutions passed on 24th November 1948 and 12th May 1949 which have been reproduced above. The amounts of the so‑called losses are set out in para. 11 of the petition and which are said to have been taken over by the company. These are:
Rs.
"(a) Net loss as per Profit and Loss Account 2,25,048
(b) Preliminary expenses 7,137
(c) Bad debts 1,134
(d) Debit balance of Islamic Airways Agencies
Ltd. 1,12,079
(e) Amount credited to Islamic Airways Agencies
Ltd. for fuel, oil, housing and landing charges ... 2,73,279
Total losses taker. over by Pak Air Limited ... 6,18,857"
(sic)
'In pare. 12 (f) of the petition it is stated that amongst the aforesaid losses or liabilities taken over by the Company and listed in para. 11 of the entry of RS. 2,73,279 (item‑e) has been explained by the respondents but the remaining entries continue to be unexplained. This item was, therefore, excluded before me at the time of the hearing by Mr. Muhammadali Saeed, the learned Advocate for the applicants.
6. The respondents in their written statement hove denied the allegations of misfeasance, Amongst other things it has been said that the taking over of the assets and liabilities of the Islamic Airways Agencies Ltd. was properly done; that the directors themselves were not experts in Company's Law and were guided by the legal advice of their legal adviser and that any omission with reference to compliance with the provisions of the Companies Act was not wilful or deliberate; that the accounts of the Company were duly audited by chartered accountants and passed; that this application was misconceived and the applicants were not competent to make it. In addition to the various defences the respondents have also pleaded their individual absence of responsibility', in the matter.
7. I shall now proceed to deal with the contentions which were raised before me by Mr. Muhammadali Saeed, the learned Advocate for the applicants and upon the basis of which he urged that a case of misfeasance within the meaning of section 235 had been made out. These contentions are: (1) That the directors were not competent to take over the losses of the Islamic Airways Agencies Ltd. or any of its liabilities, (2) that in the prospectus of the Company it has not been mentioned that the liabilities of the Islamic Airways Ltd. were being taken over by this Company; (3) that the agreement for the taking over of the Islamic Airways Agencies Ltd. was a material contract and this should have also been set out in the prospectus and that this was not done; and (4) that the Company commenced its business without a certificate of such commencement by the Registrar as required by section 103 of the Act.
8. It may now be convenient to reproduce section 235 of the Act in which the present application has been made:
"235 (1) where, in the course of winding up a company, it appears that any person who has taken part in the formation or promotion of the company, or any past or present director, manager or liquidator, or any officer of the Company has misapplied or retained or become liable or accountable for any money or property of the Company, or been guilty of any misfeasance or breach of trust in relation to the Company, the Court may on the application of the liquidator, or of any creditor or contributory made within three years from the date of the first appointment of a liquidator in the winding up or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer, examine into the conduct of the promoter; director, manager, liquidator or officer, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the Company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the Court thinks just.
(2) This section shall apply notwithstanding that the offence is one for which the officer may be criminally responsible."
It would be noticed that the purpose of this section is to enable the Court to make an order, assuming that a case of misfeasance, misapplication or breach of trust has been made out, to compel the director, promotor etc. to contribute to the assets of the Company by way of Compensation the amount which may be provided to have been misapplied or retained or in respect of which misfeasance or breach of trust may have been committed. This is not a case in which the Province of West Pakistan as a successor of the State of Bahawalpur which held 10,000 shares of this company is claiming compensation to the extent of its loss occurred by acts of commission or omission of the directors. That claim would have to be by means of a suit and would be barred by time. What is desired by this application is to enquire into misfeasance for the purposes of section 235 to compensate the Company, though it may be that in effect all the share‑holders may profit if the company was compensated. It may also be noted that the inquiry contemplated under section 235 is of a summary character. With these observations I shall proceed to examine the points urged on behalf of the applicants as formulated above.
9. With regard to the first point, the contention of Mr. Muhammadali Saeed was that neither in the memorandum of association nor in the articles of the company there was any provision for taking over by the Company of the business of Islamic Airways Agencies Ltd., much less its liabilities. This contention losses sight of clause 20 of the memorandum which reads:
"To amalgamate with any other company whose objects are similar to those of this company whether by sale or purchase (for fully or partly paid up shares or otherwise) of the undertaking, subject to the liabilities of this or any such other company as aforesaid with or without winding up or by sale or purchase for fully or partly paid up shares or otherwise Company as aforesaid or by partnership or any arrangement of the nature of partnership, or in any other manner."
Then amongst the powers expressly given to the directors by Article 142 of the Articles of Association the following amongst other powers are given:
"142 (b) To purchase or otherwise acquire on behalf of the company any property, rights or things which the company may purchase or acquire at such price, and generally on such terms and conditions as they shall think fit."
It is clear from these provisions that the Board of Directors were competent to take over the business of the Islamic Airways Agencies Ltd. In doing so they had necessarily to take over its assets as well as its liabilities. This was done by the resolutions of the Board which have been reproduced above. Now it has not been alleged, much less proved, that there was any dishonesty, fraud, bad faith or improper motive on the part of the directors What is being said is that they did not have the powers to do so‑ In my opinion the Memorandum of Association and the Articles did give the power to the Board to take over the business of the said private company. If the power was there then the action of the directors cannot be questioned unless upon grounds of fraud, negligence, or breach of trust, etc. This is not the case here. It was streneously urged by the learned counsel as to how could the company take over the losses of another concern. But those were the terms and if the company was going to take over the running business of the Islamic Airways Agencies Ltd. with its machines, spare parts, workshop, furniture or routes, etc. it would have to pay for the liability as well.
10. We may now revert to the five items reproduced in para. 5 above in respect of which the misfeasance has been alleged in this petition. The 5th item (e) has been accepted as having been adequately explained. Then with regard to the 4th item (d) the objection was that in the books of the company this entry of Rs. 1,12,079 had been done away with by a reverse entry made on 30th June 1949. 1 have examined the general ledger of the company with the aid of the learned Advocates of the parties and I am satisfied that this objection is misconceived. In the ledger of the firm there is a Khata of Islamic Airways Agencies Ltd. In this Khata there were various items of debt due to the Islamic airways. When these were recovered from time to time credit fur it was given in the Khata of Islamic Airways. The total of these amounts comes to the figure stated above. It was then realised that the Islamic Airways had already been given credit for this figure because their debit balance to this extent had been taken over by the Pak Air Ltd. and constituted a part of the consideration. That being so, it was realised that these amounts when recovered could not be put on the credit side in the Khata of Islamic Airways. it was in these circumstances that these total recoveries amounting to the sum mentioned above which appeared on the credit side of the Islamic Airways was reversed by the entry of 30th June 1949. It appears at page 208 of the ledger and I have marked it in red. These two items, namely (d) and (e), having been explained the remaining items need no further explanation. These were the liabilities which the company took over along with the assets which included the licences for routes, running business, etc. of the Islamic Airways. The amounts involved are not disproportionate to the nature of the business and it must be remembered that the authorised capital of the company was one crore and the paid up capital was Rs. 51,31,600.
11. The next two contentions of Mr. Muhammadali Saeed related to the omission in the prospectus, firstly, of the liabilities of the Islamic Airways which v; as being taken over by the company, and secondly the non‑disclosure of the Contract which the Company had with the Islamic Airways for taking over. Reference was made to section 93 (f) and (l). There is no doubt that this section provides that these facts had to be stated in the prospectus. The prospectus of this company. Exh. A‑1, does not contain either of these two things. It as published on 5th November 1948. Mr. Saeed argued that when the prospectus of a public company is published and public capital is invited the persons who propose to buy shares of the company should have all material information s including the existence of a material contract or the proposed taking over of a liability. The argument proceeded that the omission of the mention of these facts in the prospectus misled the share‑holders and that this amounted to misfeasance within the meaning of section 235. Certain decisions of the English Court in the Chancery Division were cited by Mr. Saeed but he himself conceded that they were not of much help. Then certain Indian decisions were cited and these may be noted. The first one of these is a judgment of the Allahabad High Court in the case of Indian States Bank (A I R 1934 All. 855). In this case certain allotments of' share were made without application and payment of allotment money, This was in violation of section 101 of the Companies Act. In this case it was found that the directors were party to a deliberate fraud in the floatation of the Company and the conduct of its business and liable under section 235.
12. The second decision cited, by Mr. Muhammadali Saeed was a judgment of Madras High Court in the case of Rao Sahib (A I R 1942 Mad. 365). In this case a director had accepted a gift of shares without paying for them in order to qualify him to be a director, This was again in violation of the provisions of section lot and it was held that the director was guilty of misfeasance. It was observed that section 233 would apply to every act of a director whether of commission or omission which is a breach of duty of the company in consequence whereof loss results to the company.
13. The third case was a judgment of the Patna High Court reported in Peninsular Locomotive Co. Ltd. v. H. L. Reed and others (A I R 1937 Pat. 293). In this case it was found that the directors had entered into a contract and had made payment on it during the winding up proceedings. It was held that they did so at their own peril and excepting those cases in which it would be held that the payment was necessary for the winding up or for the carrying on of the business of the company pending the hearing of the winding up petition the directors could not be entitled to relief under section 281 of the Act and would be liable to compensate the company under section 235.
14. In my opinion, none of these cases are applicable to the facts of the present case, nor can they be of any assistance to the argument of the learned counsel which was based upon the violation of section 93 of the Act which relates to the various things which have to be stated in the prospectus of a company. Now, section 97 of the Act provides for a penalty if a prospectus is issued which does not comply with the provisions of section 93, and if a person who is knowingly responsible for the issue of such prospectus is made liable to pay a fine not exceeding Rs. 50 for every day from the issue of the prospectus until compliance. Sub‑clause (2) of section 97 contains the ground of immunity in cases of non compliance or contravention of the requirements of section 93. Then we come to section 100. This provides that every person who is authorisedly named in the prospectus as a director shall be liable to pay compensation to all persons who subscribe for any share on the faith of the prospectus for all loss or damage they may have sustained by reason of any misleading or untrue statement therein. It would thus be noted that upon a contravention. of the requirements of section 93 a personal right of action arises in favour of a subscriber who acting on the faith of the prospectus has suffered loss or damage by reason of any misleading or untrue statement. When such a claim is made the claimant will have to establish these facts, and if he does so he will be entitled to compensation. But when we come to section 235 we find that its main object is to increase the assets of the company by making a director and other persons named therein to contribute to the assets of the company byway of compensation in respect of any misapplication, retainer, misfeasance or breach of trust as the case may be. Section 235 appears in Part V of the Act which relates to the winding up of the company and having regard to its provisions it is clear that it is attracted when the company as such has suffered. It is in that case that compensation is ordered to that extent. Now, in the present case, can it be said that the company has suffered on account of the failure of the directors to mention in the contract the taking over of the Islamic Airways Agencies or by mentioning that the Company was going to take over the assets and liabilities of the Islamic Airways Agencies. There is no evidence, nor is there any suggestion that by reason of these omissions any of the subscribers were misled, nor is it shown as to how the company has suffered any loss and as to what is the extent of that loss. In fact most of the subscription was by the directors themselves. It may be of interest to note that the resolution of 24th November 1948 was passed in a meeting which was presided over by Mr. Mushtaq Ahmad Gurmani himself. He became the director in his capacity as the Prime Minister of the Bahawalpur State which had bought 10,000 shares of the company. Could the Bahawalpur State then urge that it had been misled into buying these shares because of the two omissions in the prospectus which have been referred to above Could the Bahawalpur State make a claim for compensa tion against any particular director as provided by section 100 of the Act Would it not be estopped upon the ground that its own prime minister was one of the directors and had presided over the meeting of the Board when the relevant decision of taking over was taken and particularly when there is complete absence of any allegation of dishonesty, fraud or breach of trust. Is it then permissible for the Province of West Pakistan who are the successor‑in‑interest of the Bahawalpur State to claim compensation for the company by recourse to section 235 of the Companies Act The answer, in my opinion, must clearly be in the negative. In view of my conclusions I repel the two contentions raised by Mr. Saeed with reference to section 93 of the Act.
15. The last point urged was upon the alleged contravention of section 103 of the Act. The argument of Mr. Muhammadali Saeed, as I understood it was that inasmuch as the Islamic Airways Agencies were in fact doing business on behalf of the Pak Air Ltd. which came to be constituted later it should be held that the latter company had commenced its business before obtaining the certificate of commencement from the Registrar as required by section 103. It may be of interest to note that this ground is destructive of the earlier contentions raised on behalf of the petitioners that the Pak Air Ltd. was not entitled to take over the liabilities of the Islamic Airways. However, in my opinion, this contention is without any substance. No business was commenced of the Pak Air Ltd. before the grant of the certificate of commencement. The fact that the Islamic Airways was doing business and it had been contemplated that that business would be taken over by the Pak Air Ltd. does not lead to the result that the Pak Air Ltd. Was itself doing business and that it was doing so in violation of section 103 of the Act.
16. No other points were pressed before me and in view of my conclusion upon the points that were pressed I dismiss the application with costs.
K.B.A. Application dismissed.
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