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Miscellaneous Application No. 77 of 1964, decided on 1st August 1966.
S. 162‑Winding up of company ‑Court may order company to be wound up if its substratum is gone and particularly if majority of shareholders is deceptive‑Court not bound to accede to wishes of shareholders or creditors one tray or other.
Whether the Court orders meetings of the shareholders to be held or not, it is not bound to accede ‑to the wishes of the majority of creditors or shareholders, and in the event of the desire of the majority of shareholders being against winding up, the Court may yet order the company to be wound up if its substratum is gone. This is particularly so if the majority is a deceptive one.
Re : The British Oil and Cannel Company (1857) 15 L T 601 distinguished.
In re: Coly & County Bank (1875) 10 Ch. 470; In re: Langham Skating Rink Company (1875) 5 Ch. 669; Halsbury's Law of England, Vol. VI, 3rd Edn., para. 1064, p. 1552; Indian Company Law by K. M. Ghosh, 4th Edn., p. 4.70 ; R. Sabapathy Rao v. Sabapathy Press A I R 1925 Mad. 489; Sabapathy Press & Co. v. Sabapathi Rao A I R 1930 Mad. 240; Loch v. John Blackwood, Ltd. 1924 A C 783 P C and Gopal Cheeti v. The Ripon Press and Sugar Mill Co. ‑Ltd. A I R 1925 Mad. 633 ref.
S. 6(1) (iii)‑Company- Memorandum of Association‑Large number and variety of business included in Memorandum----Company, nevertheless, cannot be allowed to go outside the main objects for which it was formed.
A company cannot be allowed to go outside the main objects for which it was formed. Every possible business which a company is permitted to carry on by virtue of its memorandum of association is not its main object. The large variety of operations that are mentioned in it are intended to serve as subsidiary to its main object.
Re : Red Rock Gold Mining Company (1960) 61 L T 785 and Govind v. Rangnath A I R 1930 Bom. 572 rel.
E. V. Castellino for Petitioners.
Dingomal for Respondent.
Permanand and Talati for the Supporters.
Dates of hearing: 22nd and 23rd November 1965.
This is a petition under section 162 of the Companies Act, 1913 for winding up Messrs Graxalt Refineries Limited.
2. The facts which form the background of this petition, as disclosed by counsel who have appeared in this case, are that Messrs Graxalt Refineries Limited is a public limited company, which was incorporated at Karachi on the 30th of August 1941. Its authorised capital is Rs. 5 lac which is divided into fifty thousand shares of Rs. 10 each. Out of this capital, forty thousand shares of the value of Rs. 4 lac have been issued and subscribed. They are now held as follows :‑
|
| Shares. |
| Petitioners and his supporters hold | 1,100 |
| The Managing Director and his group hold | 16,145 |
| Out of the remaining shares: |
|
| Other Pakistanis hold | 3,465 |
| Indians hold | 18,277 |
| and Goanese hold | 1,013 |
3. The company was treated as an evacuee company in 1952, but was declared to be non‑evacuee in 1958. At present it has three directors whose names are Mr. Taker Shaikha, Mrs. Taher Shaikha and Mr. G. A. Baig. Mr. Taher Shaikha is the Managing Director of the company, his wife is an ordinary director and Mr. G. A. Baig is his nominee as well as the chairman of the Board of Directors. Mr. And Mrs. Shaikha hold 12,67.8. shares and Mr. Baig holds 510 shares. Mrs. Javeda Z. Anjarwalla, who is a near relative of Mr. Taher Shaikha and apparently lives in his house, holds 712 shares. Mr. Shaikha receives Rs. 6,000.00 per year by way of his salary as the Managing Director.
4. The business of Messrs Graxalt Refineries Limited has been simply to refine salt. This process was applied to the salt that was produced by Messrs Grax Limited in which Mr. Shaikha is said to have the controlling interest. No business has been done by Graxalt Refineries Limited from 1955. The reasons, according to Mr. Dingomal, are that the company was involved in litigation with the Custodian's Department from 1952 to 1958 and the uncertainties of the situation were such as to induce the belief that the safer course was to stop business. Addition ally, according to counsel, there was no demand in the market for refined salt, nor have there been any prospects of the revival of such demand. Moreover, according to counsel, the land of the company has been in danger of being compulsorily acquired by the Government for establishing a steel mill on it. The overall conclusion which was drawn by the management from this situation has been that it was neither practicable nor proper for the company to revive its business at any time after 1455 un to this day to 1966.
5. The above explanation for stopping business does not fully disclose the financial plight of the company, which has been continuously running in loss for over a decade. Copies of the balance‑sheets relating to the years 1954, 1956 and 1958 to 1964 have been produced. The last of these balance‑sheets shows that the value of the fixed assets of the company has depreciated to Rs. 5,750.00. Counsel for the parties have supplied the information that the original value of these assets was Rs. 1,48,850.03. Rs. 3,51,583.01 are shown in the balance‑sheet as invested in 500 shares of the State Bank of Pakistan, and Rs. 2,990.00 in the shares of Grax Limited at the rate of Rs. 100 per share. As only the face value of both of these shares is mentioned in the balance‑sheet, I enquired from Mr. Dingoinal as to what was the market value of the shares of Grax Ltd. He replied that that company was not in a good shape, and that its shares had no market value. This disclosure was very important. The balance- sheet further shows that a loan of Rs. 13,959.00 was made to Grax Ltd. Mr. Dingomal stated that it was not a bad debt; but this optimism was not shared by Mr. Castellino and Mr. Permanand. According to them, the Managing Director had floated another company known as Messrs Al‑Athar Limited and had purchased its shares of the value of Rs. 99,000.00 in 1960 with the funds of Graxalt Refineries Ltd. That money, according to Mr. Dingomal, has been refunded in full in 1964, but the situation is not free from reproach because about a lac of rupees of Messrs Graxalt Refineries Limited did remain locked up with Al‑Athar Limited for four or five years with no benefit to the investing company and to the exclusive advantage of Al‑Athar Limited. The purchase of the shares of Al‑Athar Limited and of Grax Limited has been criticised by Mr. Castellino and Mr. Permanand as transactions indicating lack of good faith of the Managing Director.
6. The above‑mentioned business and financial condition assume a serious look if it is kept in mind that the company is shown to incur unproductive expenses every year. The following expenses are shown in the Profit and Loss account for the year ended the 31st of December 1964.
|
| Rs. |
| Salaries and allowances | 2,230 |
| Printing and stationery | 201 |
| Advertisement charges | 37 |
| Postage and telegrams | 45 |
| General charges | 8 |
| Bank charges | 7 |
| Office rent | 240 |
| Audit fee | 900 |
| Professional charges | 2,035 |
| Depreciation | 909 |
| Written down value of furniture and cycles written off | 695 |
| Managing Director's allowance | 6,000 |
The balance‑sheets indicate that the company made some profit in 1954. After that its business was closed. In 1956, it incurred a loss of Rs. 20,829‑13‑9, in 1958 of Rs. 7,657‑7‑5, in 1959 of Rs. 13,744‑9‑0, in 1960 of Rs. 10,799‑8‑0, in 1961 of Rs. 7,582.38, in 1962 of Rs. 5,190.92 and in 1964 of Rs. 6,221.00.
7. Against the background of these facts, the petitioners have asked for the winding‑up of the company under section 162 of the Companies Act, 1913. The petition contains six grounds in support of the prayer, as follows :‑
(i) The company has stopped production from. 1955 upto date.
(ii) The company has suffered a total loss of Rs. 58,590.00 up to the end of December 1963.
(iii) Heavy depreciation in the value of plant, machinery, furniture, fittings and other equipment has taken place.
(iv) The Managing Director has invested the funds of the company in his other concerns by purchasing their shares for the company, and has additionally granted loans to Grax Limited in the amount of Rs. 88,406.00 and to Al‑Athar Limited in the amount of Rs. 2,388.00.
(v) The Managing Director is drawing salary in the amount of Rs. 6,000.00 per year.
(vi) The substratum of the company his disappeared in asmuch as the company has stopped its business from 1955 and indulged in granting loans to and investing money in Grax Limited and AL‑Athar Limited to the disadvantage of the company itself and has been paying salaries to the Manag ing Director at the rate of Rs. 6,000.00 per year.
8. The replies submitted on behalf of the company do not contain a substantial denial of the facts set out above; nor has Mr. Dingomal, counsel for the company as well as for the Managing Director and his group, attempted to question them. They are amply established. But counsel has contended that the mere fact that business has been stopped from 1955 onwards, is not an adequate ground for winding up the company; nor are the losses a sufficient ground for that purpose. He explained that exigencies of the market and unforeseen circum stances sometimes compulsorily lead to tae exercise of sound discretion in favour of cessation of business; therefore, the petitioners, who hold a tiny party of the total share capital of the company should not be granted the vetoing power to wind up the company if, in the opinion of the majority of the share holders the company should continue to exist. He referred to the following short judgment in Re : The British Oil and Cannel Company ((1857)15 LT 601).
"The Vice‑Chancellor, after reviewing the facts of the case, said that the assets and the way in which the company had been managed were both unsatisfactory. The question was, whether the case came within the 5th rule of the 69th section of the Companies Act, 1962, and he was of the opinion that it did. It would, however, be best that the company should, if possible, be wound up voluntarily, and nothing shed be done until a meeting had been held to effect this purpose; but, if a voluntary winding‑up were not then agreed upon, he would order the company to be wound‑up compulsorily."
The above judgment does not help counsel because winding‑up, in any event, is its result, counsel referred to In re: Coty and County Bank ((1875) 10 Ch. 470) in support of the proposition that if a company which is a weak concern, has made an arrangement which is beneficial on the face of it, then such a company can be expected to realise its assets as the liquidator appointed by the Court; there fore, the request of a share‑holder, who has a very small interest in the company, to wind it up should not prevail against the wishes of the majority of the shareholders and of the creditors. He applies this proposition to the present case by saying that the petitioners and their supporters hold 1,100 out of 40,000 shares, and that there are no creditors of the company excepting for the share holders themselves as investors of share capital. He contended that 18,277 shareholders being Indians and 1,013 shareholders being Goanese have expressed no opinion in respect of the winding‑up of the company, but out of 20,710 Pakistani shareholders the Managing Director and his group represent 16,145 shares which constitute an overwhelming majority as against the peti tioners and their supporters. He supplemented this contention by referring to In re: Langham Skating Rink Company ((1875) 5 Ch. 669), and paragraph Itf64 at page 1552 of Vol. VI of Halsbury's Laws of England (Ed. III). In Langham Skating Rink Company the petition for Winding‑up the company was presented by three share‑holders. No allegation was made in the petition that the company was insolvent, although there was an allegation that business had not been carried on. Moreover, there were facts about which the learned Judge observed that :‑
"More plain and distinct insolvency, in my opinion, cannot be suggested."
A meeting of the shareholders was called during the proceedings, but its deliberations were not found to be satisfactory; therefore, the Court ordered:
"Under these circumstances, I think I am bound to direct that there shall be another meeting held, and that at that meeting the wishes of the contributories shall be collected after a full and clear explanation of the manner in which it is proposed to conduct the affairs of this company."
Mr. Dingomal, therefore, contended that no order for winding‑up this company be made by Court because the better course was to order a meeting of the share‑holders to be firstly called so that they may decide as to how they propose to conduct the affairs of the company. He also relied on the following observation which appears in the above‑mentioned paragraph of Halsbury's Laws of England:‑
"On a shareholder's petition, when the creditors do not sup port or oppose the petition, or where the interests of share-holders only are concerned, as in a case where it is alleged that the substratum of a solvent company is gone, the wishes of the shareholders only will be regarded."
9. The above observations are however, based on the judg ment in Langham Skating Rink‑Co. What Mr. Dingomal has not noticed is that whether the Court orders Meetings of the share holders to be held or not, it is not bound to accede to the wishes of the majority of creditors or shareholders, and that in the event of the desire of the majority of shareholders being against winding up, the Court may yet order the company to be wound up if it substratum is gone. This is particularly so if the majority is a deceptive one. Thus the following observation appears in Halsbury's Laws of England after those which have been quoted from that book above:‑
"In the case of a petition by a shareholder, the Court will likewise give effect in general to the wishes of the majority of shareholders. It is not, however, bound to accede to the wishes of the majority either in the case of creditors or share holders. In the case of shareholders, the Court may make a winding‑up order, even though the majority of shareholders wish the company to continue in existence, if the substratum of the company has gone, or there are other grounds why the company should be wound up, or it may make a compulsory order, even though the majority are in favour of voluntary win ding‑up, if such majority is deceptive and does not represent the majority of independent shareholders, or if in the circumstances a compulsory order will be more beneficial than a voluntary winding‑up."
10. Let me note here that the majority opinion on which Mr. Dingomal desires to rely is a deceptive one In this case, because 19,290 shareholders who are Indians and Goanese, cannot express their opinion owing to the existing political relations with India. Out of the remaining shares, which are held by Pakistanis and number 20,710, a vast majority of 14,275 shares is held by the Managing Director, his wife, his close relative and nominee. In these circumstances, the opinion of the majority of the Pakistani shareholders, in reality, represents the opinion of a single individual who happens to be the only shareholder that is being benefited by the existence of the company and who has utilised the funds of the company in a manner which the other shareholders are entitled to regard as selfish, if not shady. In these circumstances, the insistence of Mr. Dingomal that the opinion of the majority be ascertained by calling a meeting of the shareholders amounts to asking for exercise of vetoing power by the Managing Director himself. The following observations made by K. M. Ghosh, at page 470, of his Indian Company Law, (Edn. VI) are noteworthy in this respect :‑
"Where one director can exercise a dominating influence on the management of the company and the Managing Director can outvote the minority and retain the profits between the members of his family and there are several complaints of irregularity and the rate of dividend is steadily diminishing, there are sufficient ‑grounds fur entertaining a winding‑up petition and for calling upon the directors to enter upon their defence:
It is just and equitable to wind up a company when there is a justifiable lack of confidence to the conduct and management of the company's affairs owing to the management being held in one family which is in a position to dominate the other shareholders and monopolise the company's affairs for their own individual benefit."
The above views are supported by R. Sabapathy Rao v. Sabapathy Press (A I R 1925 Mad. 489), Sabapathi Press & Co. v. Sabapathi Rao (A I R 1930 Mad. 240), Loch v. John Blackwood, Ltd. ((1924) A C 783 P C) and Gopal Cheeti v. The Ripon Press and Sugar Mill Co. Ltd. (A I R 1925 Mad. 633).
11. Mr. Dingomal did not feel cornered when he was faced by the above authoritative views because‑he denied, in spite of the facts which have been alleged and admitted in this case, that the substratum of the company has disappeared. . He said that, in his view of the matter, all that could be said against the company was that it has suspended its business temporarily and is waiting to start some other business in terms of its memorandum of association. There is no stigma, according to him, on the company because it has no creditors to satisfy and no debts to pay. But this is not a sound contention because it disregards (i) absence of business; (ii) impracticability of the main object; (iii) the domination of the Managing Director, and (iv) his dubious utilization of company's funds. Moreover, it is erroneous as a legal proposition. Its error is that whereas the substratum of a company is said to disappear when the prospects of substantially carrying out the main object or the company ceases to exist, his view is founded on a general reliance on all the 61 objects of the company that are set out in its memorandum of association. Every possible business which a company is permitted 'to carry on by virtue of its memorandum of association is not its main object. The large variety of operations that are mentioned in it are intended to serve as subsi diary to its main object. The main object of the company is set out in clause (1) of its memorandum as follows :‑‑
"(1) To Manufacture, prepare, refine, buy, sell, manipulate, import, export and deal in salts, marine minerals and their derivatives, by‑products of salt and mineral and generally to undertake and execute all kinds of commercial, financial, trading and other operations and transactions in connection with the same."
The achievement of the above object can require a large variety of subsidiary ventures to be started by way of facility and con venience, but they are ancillary to the main object and cannot take its place. For instance, the company is entitled to do the following businesses;
"(3) To carry on business as shipowners, charterers and carriers by Land and Sea.
(23) To act as Managing Agents of any company or Firm I carrying on such business as this company is authorised to carry on when such act is calculated directly or indirectly to benefit this company.
(27) To lend moneys to such persons or Companies and on such terms as may seem expedient, and in particular to customers and others having dealing with the Company and to guarantee the performance of contracts by any such persons or Companies.
(34) To carry on the business of railway, tramway, Omnibus van, carriage, and boat proprietors and carriers of passengers and goods by land or sea."
But it is obvious that the company is not entitled to carry on, as its main business, the business of shipowners, of leasing and mortgaging property, of acting as managing agents, of lending money, or of running railway trains, although these ventures may be started by the company in support and for the furtherance of its central object.
12. The contention of Mr. Dingomal is thus contrary to an important principle of interpretation of the memorandum of association of companies. See in this connection the following observations of K. M. Ghosh in Indian Company Law (Edn. VI) at page 67:
"Wide powers taken in general words will be construed as merely ancillary to the specific objects mentioned in the earlier clause. A mining company should take powers to construct railways, tramways, canals, roads etc.,' and also to acquire lands and to dispose of them. Similarly, a bank or a loan company should take powers to develop, turn to account or improve land that may come into its possession.
Where the memorandum of a company in its fitful clause took power generally to transact any business of merchant or capitalist either as principal or agent, this wide power was cut down by the Court to conform with the main objects of the company.
Courts are not disposed to construe even the widest powers in such a way as to enable a company to go outside the main objects for which it was formed."
The above views are supported by Re: Red Rock Gold Mining Company (61 L T 785) and Govind v. Rangnath (A I R 1930 Bom. 572). In this case, the main object is set out in the first clause which has admittedly become impracticable. The company has abandoned it for the last twelve years or so.
13. I enquired from Mr. Dingomal as to what other business could be done by the company and was informed that none has been tried as yet. Moreover, counsel said that the choice of a new business was to be made by the majority of shareholders for which purpose the Court may order a meeting to be held. He had no explanation to offer as to why the Managing Director had failed to call a meeting for this purpose, nor did he explain as to why the Managing Director had no views in this regard in spite of the fact that he controlled the majority of exercisable votes.
14. The resistence of the Managing Director and his group to the petition for winding up the company is obviously unreason able and biased. The petition is, therefore, accepted, and Messrs Graxalt Refineries Ltd. is ordered to be wound up under clauses (iii) and (iv) of section 162 of the Companies Act, 1913. The Official Assignee is appointed to be the Official Liquidator with all the powers exercisable in terms of sections 179 and 181 of the Act. He is to take over the property and assets of the company and to use them as advantageously as practicable until the winding‑up proceedings are over.
K. B. A.
Petition accepted.
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