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Letters Patent Appeal No. 34 of 1952 decided on 15th April 1953, under section 202 of the Companies Act read with clause 10 of the Letters Patent against the order of Shabir Ahmad, J. passed on the 18th July 1952 in Civil Original Case No. 49 of 1949.
S. 185"--In his hands"--- "to which the company is prima facie entitled"---Meaning--- Discretion of Court---Scope.
It is one of the conditions for the application of section 185 that money or property in respect of which order is sought should be in the hands of the person against whom the order is to be made. Of course, this does not mean that by his own improper act the person concerned can take his case out of the scope of section 185. If he improperly misappropriates it or wastes it, an order may still be passed against him. The proper interpreta tion of the words in his bands' is that the property in dispute is either in fact in his bands or the circumstances are such that the Court will regard it as still in his hands. Of his own default he will not be allowed to take advantage. The Court will, in the particular circumstances of each case, decide whether the property in dispute can still be said to be in the hands of the party against whom the order is to be passed.
The Court need not, when exercising jurisdiction under section 185, enter into an elaborate consideration of facts. If, looking at the facts broadly a case is made out for the liquidator, the Court may make an order leaving the party concerned to establish its right in ordinary proceedings. The initial onus, however, would be on the Official Liquidator to make out a case.
Prima facie does not suggest that the section is only appli cable where there is no doubt about the company being entitled to the money.
A prima facie case only means one which if not overthrown by rebutting evidence will be regarded as sufficient proof.
The section, however, gives a discretionary jurisdiction and the Court will not allow it to be used as an instrument of harassment or as a substitute for an ordinary civil proceeding. The exercise of discretion would depend upon the particular circumstances of each case.
Ss. 185, 2,27-Application under S. 185 may 6e regarded as one under S. 227 if other party not likely to be prejudiced thereby.
S. 227---Principles to be kept in mind while validating transactions-Benefit of company.
Section 227 does not itself provide any criterion for deter mining in what cases dispositions of property should be approved and leaves it to the discretion of Court. Some principles applicable, however are, well established and are in fact the logical conclu sions of section 168 which relates back the winding up order to the date of the presentation of the petition. The moment a winding up order is made the persons first entitled to the assets of the company are the creditors and any act of the company or any payment which affects the proportionate distribution of assets between the creditors is one which the Court will not validate. Court will declare valid acts which are for the benefit of the company and payments which are made in the ordinary course of business for to hold otherwise would be to paralyse the company the moment a petition is filed.
Mahmood Ali with Nazar Muhammad, etc. for Appellant.
A. D. Malik for Respondents.
This judgment will dispose of two Letters Patent Appeals Nos. 34 of 1952 and 37 of 1952 filed against an order passed on a petition filed by the Official Liquidator of Indo Enamel Works Limited (hereinafter called the petitioner) under section 185 of the Companies Act asking that Saeed Ahmad and Ehsan Elahi, Directors of the said Company (hereinafter called the respondents be ordered to pay into Court two sums of Rs. 10,000 and Rs. 1,925 respectively. The learned Single Judge dismissed the application as regards the sum of Rs. 1,925 which was sought to be realised from Ehsan Elahi, and ordered the payment of Rs. 5,998 out of Rs. 10,000 claimed from Saeed Ahmad. Both parties have appealed against the order.
The Indo Enamel Works Limited was started as a limited company sometime in 1943. Or. 11th June 1946, an application for winding up was put in by a creditor on the ground that the company was unable to pay its debts and winding up order was made on 12th January 1948. On 1st December 1949, the Official Liquidator filed the application out of which the present appeals arise against Saeed Ahmad and Ehsan Elahi claiming Rs. 10,000 and Rs. 1,925 from them respectively on the ground that they received these sums from one Mr. Bhoosri to whom the factory had been leased or handed over on the basis of some agreement.
The position of Ehsan Elahi and Saeed Ahmad vis-a-vis the company is that they were its Managing Agents from the start and both of them were Directors, Ehsan Elahi being the Managing Director. They are close relatives, the sister of Ehsan Elahi being married to Saeed Ahmad. It is the case for the Official Liquidator that long after the filing of the winding up petition these gentlemen adopted a device by which they got out of the company as much ready money as they could and appropriated it. The company was running a factory for the manufacture of enamelled articles. This factory they gave on lease (or on the basis of an agreement, it is not material which) to one Mr. Bhoosri and got from him Rs. 10,000 which sum was received by Saeed Ahmad. Afterwards a sum of Rs. 1,925, was received from Mr. Bhoosri on 18th March 1947, by Ehsan Elahi. These sums, the Official Liquidator said, had been improperly received and retained by the respondents.
The respondents in their reply did not deny that they had received the amounts in question. About Rs. 10,000 the plea taken was that Saeed Ahmad was the creditor of the company to the extent of Rs. 30,264 as he had been advancing loans to the company from time to time and that he had received the sum of Rs. 10,000 under the directions of the company towards a partial discharge of his debt: Rs. 10,000 out of his debt were alleged to have been adjusted towards advance payment of his calls and it was stated that as yet there was a balance of Rs. 10,264 due against the company.
As regards the sum of Rs. 1,925 the respondents stated that this was received by Ehsan Elahi under the directions of the company for payment to contractor Ghulam Dastgir of Messrs Amir Bakhsh & Sons, for work done for the company and that Ehsan Elahi had in fact paid that money to Ghulam Dastgir. In view of the admissions made by the respondents the onus of proving that they had received the sum in question under the directions of the company and under the circumstances relied upon by them was placed on the respondents.
The respondents made statements in the witness-box in support of their case and also produced Ghulam Dastgir to support the payment to him of Rs. 1,925 for work done. They also produced one Rasool Shah who deposed that a sum of Rs. 4,000 or Rs. 5,000 had been paid by Saeed Ahmad in discharge of the salaries of the employees of the company. The only documentary evidence produced, however, was the counterfoils of certain cheques and a pass book of Bharat Bank Limited, Lahore. With respect to the account books and registers of the company it is alleged that they had been handed over to one Mr. Monga who was Chairman of the company, and that he had taken them away sometime before the Partition. The learned Single Judge did not ac cept the story of Saeed Ahmad that the company owned him more than Rs. 10,000. Out of the counterfoils and the cheques produced before him only cheques amounting to Rs. 4,002 had been drawn by Saeed Ahmad in favour of Indo Enamel Works Limited. The learned Single Judge said that there was no evidence before him that these cheques had not been drawn to pay the money that Saeed Ahmad already owed to the company but as no evidence was led by the petitioner he accepted that a sum of Rs. 4,002 had been advanced by Saeed Ahmad to the company. On this basis he passed an order for Rs. 5,998 against Saeed Ahmad. With respect to the payment of Rs. 1,925 the learned Single Judge saw no reason to disbelieve Ghulam Dastgir and holding payment to him proved rejected the application with respect to this item.
In order to decide the questions involved in these appeals we have to consider the scope and effect of section 185 of the Companies Act. The section enables the Court, after the making of a winding up order, to make orders for delivery of money or property which may be in the hands of Directors etc. to which the company may be prima facie entitled. The section grants a summary jurisdiction for securing to the liquidator the property of the company and the orders are subject to final adjudication of rights of parties. The Court need not, when exercising this jurisdiction, enter into an elaborate consideration of facts. If, looking at the facts broadly a case is made out for the liquidator, the Court may make an order leaving the party concerned to establish its right in ordinary proceedings. The initial onus, however, would be on the Official Liquidator to make out a case. Learned counsel for the respondents argues that the use of the words "prima facie" in section 185 shows that the section is applicable only to cases where there is no doubt at all with respect to the company being entitled to the property in dispute and that the section is not intended to apply to cases where there may be a dispute about the right of the company to such property. He relies on In re: Palace Restaurants. Ltd. ((1914) 1 Ch. D 492); In re: Vimbos Ltd. ((1900) 1 Ch. D 470) and Eastern Tavoy Minerals Corporation ((1937) 41 C W N 975). We do not think the words prima facie' is capable of such an interpretation. A prima facie case only means one which if not overthrown by rebutting evidence will be regarded as sufficient proof. When we have to set the law in motion under section 476 of the Code of Criminal Procedure, we see whether there is a prima facie case. When in England a bill of indictment is before trial submitted to a grand jury they find a true bill if there is a prima facie case. When in a civil suit we have to decide whether an injunction should or should not issue we find out whether there is a prima facie case or not. Such is the meaning that we ordinarily attach to the phrase and, while standards of proof may vary, we see no reason for attaching to it an entirely different meaning in section 185. But it should, at the same time, be remembered that the section gives a discre tionary jurisdiction and the Court will not allow it to be used as an instrument of harassment or as a substitute for an ordinary civil proceeding. . The exercise of discretion would depend upon the particular, circumstances of each case. Out of the cases cited by learned counsel for respondents In re: Palace Restaurants Ltd. was a case where the application of the liquidator was to the effect that the costs of the solicitors be taxed and the solicitors be ordered to pay the balance of the amount belonging to the company in their hands after deduction of the taxed costs. Astbury, J accepted the application, the only question before him being whether in winding up proceedings costs of solicitors before the winding up could be taxed. On appeal the learned Judges, while they dismissed the appeal holding that the winding up Court had jurisdiction to tax costs, did observe that had the solicitors objected, the Court could not while acting under section 164 (which corresponds to our section 185) have determined the question of costs though it could do so under its general jurisdiction in winding up. It is to be remembered that the liquidator himself bad asked for the taxing of costs and had applied only for delivery of the amount of balance with the solicitors. The learned Judges held that section 164 was not the appropriate section for going into the matter; though they held further that as the solicitors had not objected to jurisdiction, the Court could make an order for payment. If the case was really applicable to the present circumstances, it would go against the respondents, for they too instead of objecting to the exercise of jurisdiction under section 185, put forward details of the advances to the company and taking upon them selves the burden of proving the debts led all available evidence in support. However, the case really bears no analogy to the present case where- a sum of money is received by a director of the company from a debtor of the company and the director puts forward a claim which we find (as will appear when we discuss the evidence) to be untrue. Learned counsel relies on this case as if it laid down that in cases where the liquidator's claim is disputed there is no jurisdiction in the Court to proceed under the section. Apart from the fact that the respondents have submitted to the jurisdiction, the least that can be said is that there should be a bona fide dispute and, as will appear when we discuss the evidence, we find no bona fide dispute as to adjust ment of the sum of Rs. 10,000. The second case cited for the respondents. In re: Vimbos Ltd., is similar to the first. There too the liquidator had himself asked for the taking of accounts from a receiver of the company's property. The learned Judge held, in the first place, that the receiver was not a person who could be proceeded against for he was not an agent, but assuming that he was an agent, the remuneration of an auctioneer or stock broker could not be ascertained in summary proceedings. There is no doubt that the two above-mentioned cases can lend support to an argument that if company's money be in the hands of a person who has admittedly a true claim against the company but the extent of whose claim can only be determined in ordinary proceedings the jurisdiction under section 185 should not be invoked. The proposition is not consistent with Haribans Prasad Ayodhya Prasad v. The National Sugar Mills, Delhi and Abdul Latif Khan (A I R 1933 Lah. 437), where Tek Chand, J., upheld an order passed under section 185 against managing agents for delivery of more than Rs. 45,000 pending the decision of their claim as to remuneration, but as we have stated already we do not find a bona fide dispute in this case. Eastern Tavoy Minerals Corporation, the third case cited, is really an authority for the view that money should be in the hands of the person against whom an order is sought. There is no discussion in the judg ment and we will revert to this question when we deal with the sum of Rs. 1,925.
We now proceed to a consideration of the evidence. Learned counsel for the respondents argues with regard to the sum of Rs. 10,000 that Saeed Ahmad has produced all available evidence. He has made a statement in the witness-box and has produced counterfoils of cheques and a pass book. Mr. H. R. Monga and Mr. Bhoosri, he says, are not available; their addresses not being known. He says the books of the company had been taken away by H. R. Monga and, therefore, the clients, are unable to produce better evidence either with respect to the existence of the debt or with respect to the resolution that was passed enabling Saeed Ahmad to realize this money on account of the debt. Now, .we are not at all satisfied as to the explanation about the books being with Mr. H. R. Monga though we do not find it necessary to decide that question. The books should have been with the Managing Agent or the Managing Director and not with Mr. H. R. Monga. At least the books of the Managing Agency itself should have been produced. There could not possibly be any reason for handing over the books of the Managing Agency to Mr. H. R. Monga. As regards the books of the Agency, the explanation now offered is that no books ever existed and that, as a matter of fact the Managing Agency never actually functioned. But the respondents had already stated, in proceedings under section 177 of the Companies Act arising out of the same winding up order, that the Managing Agency had functioned and secured a large amount of business for the company. It had also been admitted by Sated Ahmad in that case that the records of the Managing Agency did exist. He explains now that he meant thereby only the books of the Indo Enamel Works Limited. It is difficult to rely on his statement alone. The statements of the two respondents in the witness-box hardly inspire any confidence. At places they prevaricate and at others they give clearly untrue replies, and the impression created is that they make statements as it suits them. However, as already stated so far as the question of books is concerned, we do not find it necessary to finally decide it for the question before us, viz., whether Rs. 10,000 was paid in discharge of debt can be decided on a shorter ground. We are only concerned with the question whether the sum of Rs. 10,000 was ordered by the company to be paid to Saeed Ahmad by some resolutions as lie alleges. Even if the sum of Rs. 4,002 or even a larger sum was due to him, if the company had not passed any resolution adjusting this sum against his debt he would have no authority to receive or retain the sum of Rs. 10,000 which would remain the property of the company. Whatever be the position so far as the allegation of any debt is concerned, we are satisfied that there was no resolution by the company adjusting this amount. In this respect we are in a better position to judge the correctness of his statement than the learned Single Judge, for we have before us further available material to help us in reaching a conclusion. On a perusal of the record of the proceedings under section 177 we found an affidavit and a statement of Sated Ahmad with respect to the debt due to him by the company which are in direct conflict with the position taken up by him in these proceedings. In order to give him an opportunity to explain the contradictions we recorded his statement and our conclusion is that he can give no satisfactory explanation. His position in these proceedings is that he had advanced to the company a total sum of Rs. 30,264 out of which Rs. 10,000 has been paid, Rs. 10,000 adjusted towards advance calls, and the balance is still due. The affidavit which he filed in the proceedings under section 177 said:-
"That I advanced from time to time about Rs. 15,000 to the company, out of which Rs. 10,000 were transferred to my shares account with the result that I own fully paid up shares of the company and the balance was credited to me as loan from me in the. books of the company".
When called upon to explain why he stated that Rs. 15,000 had been advanced by him he says he had not included the sum of Rs. 10,000 which he had already received and had only stated what he regarded was balance due to him. When asked to explain why hey had not mentioned that he had received Rs. 10,000 cash when he had even shown an adjustment of Rs. 10,000 towards advance payment of calls, he says, "In that case I had not given a detailed account of the money which the company owed to me". We have co hesitation in rejecting these explanations. He was stating what he had advanced and was also stating what had out of his account been adjusted. There is no reason why he should not have mentioned the sum of Rs. 10,000 if he had really received it in cash. It did not require a detailed account to mention this payment of Rs. 10,000. There was no reason why he should not have mentioned Rs. 30,264 instead of Rs. 15,000. He was obviously not stating the balance which according to him was only Rs. 5,000. While we need not go into the question whether any amount was in fact due to him, we find that the statement that he advanced Rs. 30,264 is untrue. The learned Single Judge found payments by Saeed Ahmad to the company of only Rs. 4,002. The only other payment which counsel for Sated Ahmad says should be held proved is one of Rs. 5,750 which is alleged to have been paid after the receipt of Rs. 10,000. So even if we accept all that is urged by learned counsel for Saeed Ahmad he could-not have been entitled to a payment of Rs. 10,000 on Ist January 1947.
Learned counsel for the respondents tried to make out a new case. Our attention was drawn to the pass book on file in which an account had been opened with a sum of Rs. 10,000 and afterwards from this amount various amounts had been with drawn including one of Rs. 5,750, which Saeed Ahmad stated he had pail towards the salaries of workmen. It was argued that the sum of Rs. 10,000 entered on 28th December 1946 was the one received from Mr. Bhoosri and that out of this Rs. 10,000 Sated Ahmad had been making payments on behalf of, the company. We cannot allow Saeed Ahmad to make out a new case in appeal. The position taken up by him was that this sum of Rs. 10,000 had been paid to him in discharge of his debt. He could only have succeeded if that case was not negatived.
On the facts we have found against Saeed Ahmad with respect to Rs. 10,000. Learned counsel for petitioner urges, however, that he has even a stronger case from a purely legal point of view. The alleged payment of Rs. 10,000 was made during the pendency of the winding up proceedings. Under section 168 of the Companies Act the winding up order relates back to the presentation of the petition. Under section 227 of the Act any payment made after the winding up order is void unless the Court otherwise directs. Learned counsel argues that the alleged payment to Saeed Ahmad being void there is a prima facie case established in respect of this sum under section 185 and that if there was any ground for validating this order Saeed Ahmad should have nut an a petition under section 227 for that purpose. He urges too that the payment alleged-to be in respect of a debt already due could not, according to well-established principles, be validated. In reply to this argument, for Saeed Ahmad while conceding that under section 227 payment would be void unless validated, contends, firstly, that the petitioner cannot rely upon section 227 as this was never pleaded, that he had been called upon to meet a case under section 185 and not 227 and that if the 'petitioner wanted the benefit of section 227 he ought to have made an application to that effect, for the transaction is after all capable of being regularized. Learned counsel contends, in the second place, that the transaction is such as should receive the approval of Court.
We do not see any force in the first contention. Section 22'i does not enact that a transaction shall be void only if so declared by Court. Even if the question of the legality of such a transac tion arose in an ordinary suit, the transaction shall have to be regarded as of no effect. The section declares the transaction void unless the Court otherwise directs. If a party wants to take advantage of such a transaction, it is the duty of that party to make an application to the Court to give a direction in favour of the transaction. Had an application been necessary for this purpose, there was no bar to our regarding the present application even under section 227 unless the other party could show that he would be prejudiced. Learned counsel for Sated Ahmad has argued that he will be prejudiced for it is one thing to have to contest an application under section 185 and another to make out a case for validating a payment under section 227. Validation, he says depends on whether there was any undue preference to any creditor. We are of opinion that for more than one reason the argument cannot prevail. In the first place, the petitioner did not know of any adjustment of the debt of Saeed Ahmad (assuming that there was any payment on account of debt) and had filed an application under section 185 simply alleging that a sum of Rs. 10,000 was with Saeed Ahmad. It was Saeed Ahmad who in his written statement relied upon the transaction. Learned counsel for Saeed Ahmad knew very well that he was relying upon a transaction which was void unless validated and it was his duty to apply to Court for a validating order. We find, in the second place, that section 227 has been discussed in the judgment of the learned Single Judge and even invoked and no objection was taken that the section could not be taken into consideration.
We have even asked learned counsel for the respondents to explain in what way his clients may have been prejudiced by their not appreciating the correct legal position. The only question is whether the payments should be validated. All facts relevant for that purpose are on file and learned counsel is unable to suggest any other fact the proof of which might influence our order under the section.
We now come to the second contention of the learned counsel viz., that the payment of Rs. 10,000 should be declared valid. Section 227 does not itself provide any criterion for determining in what cases dispositions of property should be approved and leaves it to the discretion of Court. Some principles applicable, however, are well established and are in fact the logical conclusions of section 168 which relates back the winding up order to the date of the presentation of the petition. The moment a winding-up order is made the persons first entitled to the assets of the company are the creditors and any act of the company or any payment which affects the proportionate distribution of assets between the creditors is one which the Court will not validate. G Court will declare valid acts which are for the benefit of the company and payments which are made in the ordinary course of business for to hold otherwise would be to paralyse the company the moment a petition is filed. In the present case the allegation is that a payment was made in discharge of an existing debt. From the account of his advances, filed by Sated Ahmad, it is clear that according to him either the whole or a large portion of the debt, which was alleged to have been paid, existed even before the winding up petition was filed. It is well settled that Court will not validate payments of debts and a creditor who receives payment after the presentation of a winding up petition will be compelled to refund, Halsbury, Volume V, Paragraph 1076, Buckley on Companies Acts, 11th Edition, Page 397, All India Home Relief Insurance Co. (in Liq.) (A I R 1939 Sind 196), Tulsidas Jasraj Parekh v. Industrial Bank of Western India (A I R 1931 Bom. 2) and official Liquidators, Gorakhpur Electric Supply Company Limited v. Messrs Siemens (India) Ltd., Calcutta (A I R 1940 All 514). The reason is that if such payments be approved they would effect a pari passu distribution of assets. It would make no difference that the payment was made bona fide. As was pointed out by Marten C. J., in Tulsidas Jairaj Parekh v: Industrial Bank of Western India though payment of debts is the ordinary course of business it ceases to be so after a winding up petition has been presented. Of course, there may be exceptional circumstances where even the borrowing of a debt after the presentation of a winding up petition becomes a necessary to save the company from severe loss and such transaction could be justified on the ground that it was for the preservation of the assets of the company and, therefore, for the benefit of the creditors. The present case, however, is the simple case of alleged payment of a pre-existing debt and the payment too is made to a director. To validate a payment made to a director would be to approve of an unfair advantage that he gained by abuse of his position. We have no hesitation in rejecting the prayer for validating the payment for Rs. 10,000.
With respect to the item of Rs. 1,925 the respondents produced Ghulam Dastgir who stated that he received from Ehsan Elahi the very cheque of Rs. 1,925 which the latter had received from Mr. Bhoosri, Ghulam Dastgir was a contractor who had been doing work for the company. Nothing was brought on the record to discredit his testimony. The learned Single Judge believed him and we agree that there is sufficient evidence of payment to Ghulam Dastgir.
The next question, however, is the effect of this payment. Learned counsel for the petitioner says the payment is void under section 227 and that the result is the same as in the case of the other suns. Had the payment to Ghulam Dastgir been made in the ordinary course of business i.e., for getting work done to carry on the business of the company, we would have declared the payment valid. However, Ghulam Dastgir stated that lie had air had stopped doing any work for the company when he received this payment. That reduces him to the level of an ordinary creditor and as stated above creditors cannot receive payment after the winding up order. So we are unable to declare the payment proper. The question still remains whether Ehsan Elahi can be ordered to pay the sum under section 185. It is correct that if directors make payments to creditors after the presentation of a winding up petition they do so at their own peril and they can be ordered to pay the amounts, vide Peninsular Locomotive Co. Ltd. v. H. Langham Read and others (A I R 1937 Pat. 293). But proceedings have in such a case to be taken under section 281 of the Companies Act and not under section 185. It is one of the conditions for the application of section 185 that money or property in respect of which order is sought should be in tile hands of the person against whom the order is to be made. Of course, this does not mean that by his own improper act the person concerned can take his case out of the scope of section 185. If he improperly misappropriates it or wastes it, an order may still be passed against him. The proper interpretation of the words in his hands' is that the property in dispute is either in fact in hi; hands or the circumstances are such that the Court will regard it as still in his hands. Of his own default he will not be allowed to take advantage. The Court will, in the particular circumstances of each case, decide whether the property in dispute can still be said to be in the hands of the party against whom the order is to be passed. In the present case, Ehsan Elahi may have paid the money bona fide and though he may still be liable for neglect or breach of duty under section 281, we would not invoke section 185. We cannot in these proceedings pass an order under section 281 for he must have a proper opportunity of meeting that case. The Official Liquidator can, if so advised, file a separate application.
As a result of the above discussion, appeal No. 37 of 1952 is accepted in part and Saeed Ahmad is ordered to pay Rs. 10,000. Appeal No. 34 of 1952 is dismissed. There will be no order as to costs in both the appeals:
A. H. Order accordingly.
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