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Letters Patent Appeal No. 8 of 1955, decided on 19th January, 1956, under clause 10 of the Letters Patent of the High Court of West Pakistan, Lahore, against the order of B. Z. Kaikaus, J., dated 26th January 1955, in Civil Original No. 49 of 1946, (P L D 1956 Lah. 731) directing that the Karnal Distillery Company Ltd. be wound‑up.
, S. 162‑Liquidation of private company on petition by one of its members not "just and equitable" if petitioner has no equity in his favour.
Where a member of a private limited company, who, while he was its managing director, had mismanaged its affairs; had made profits at the expense of the company and other shareholders; set up a rival business in his own name and was interested in having the company wound‑up and who made an application for winding‑up of the company:
Held: It was not 'just' and 'equitable' that the company be wound‑up because there was no equity in favour of the applicant and the winding‑up was in the interest not of the company but of the rival business of the applicant.
The order of winding‑up was set aside also because the company, being in India, allowing it to carry on its business, would enable the member seeking liquidation to have resort to section 153‑C, Companies Act, as it existed in that country.
A. N. Khanna and Said Akbar for Appellant.
Bal Rai Tuli and Iftikhar‑ul‑Haq Khan for Respondent.
This letters patent appeal seeks to avoid the order of the Liquidation judge, directing the Karnal Distillery to be wound‑up.
The following short pedigree‑table shows the relation ship of the parties interested:‑
Kishori Lal (Died in 1928)
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Suraj = Durga Parshad Ladli Shanti
Mukhi (Died in 1934) Parshad
Parshad
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Madan Lal Sajan Lal
Kishori Lal had a business styled as 'Kishori Lal & Sons' and owned a liquor business known as 'The Karnal Distillery' with its headquarters at Karnal. On his death in 1928, his eldest son Durga Parshad became manager, and upon Durga Parshad's death in 1934, Ladli Parshad took over as the eldest surviving. From a family business it was converted into a partnership in November 1940, and on the 23rd of March 1941, it was converted into a private limited company known as 'The Karnal Distillery Company Limited'. Two branches of the family had each, 1,003 shares, while the branch of Durga Parshad had, 1,004 shares. The Articles of Association provided for three directors, namely, Ladli Parshad, Shanti Parshad and Shrimiti Suraj Mukhi, each to receive Rs. 250 a month. Ladli Parshad was to be the managing director for ten years, with an option to renew for a further period of ten years, and was to get Rs. 1,850 per mensem as salary and Rs. 350 as car allowance. He could change a car every three years. He was also entitled to 7 per cent of profits earned by the company. The Articles of Association provided that share‑holders to the extent of two‑thirds could compel the owners of the remaining one‑third to transfer their shares to them. On the 1st of August 1941, therefore, Ladli Parshad got allotted to himself another 500 shares.
In addition to these advantages, Ladli Parshad during his term of office conferred further benefits on himself. Thus he bought methylated spirit from the distillery itself at cheap rates, solidified it into fuel and sold it to Government at profit during the last Great War. Next, he secured certain contracts from the Civil Supplies Department in the name of the company but reaped the profits himself. He also supplied liquor to Government in his personal capacity. He maintained the company's account in his own name, established a cash credit account with the company and thus used its money for purposes other than those of the company. He establish ed an independent distillery at Hamira in Kapurthala, naming it 'The Jagjit Distillery & Allied Industries.' He excluded other members of the family from management.
It was but natural that with their Rs. 250 per mensem, these branches should be extremely dissatisfied. On the 20th of February 1945, these two branches held a general meeting in which they removed Ladli Parshad from the office of managing director and appointed Shanti Parshad instead. Ladli Parshad having refused to hand over the management. Shanti Parshad filed a suit against him for a declaration that he was the properly appointed managing director, and for a consequential injunction. Ladli Parshad, on the other hand, filed a suit for a declaration that Shanti Parshad had ceased to be a director of the company because he had contravened section 86‑D of the Companies Act by entering into a contract with the company itself. In the suit of Shanti Parshad there was an application for the appointment of a receiver; where upon Suraj Mukhi and Madan Lal were appointed receivers. At this stage the parties entered into a compromise, apparent ly because they were reaching an impasse. The compromise resulted in the following decisions:‑
(1) Ladli Parshad gave up his position as managing director and all three directors were placed on an equal footing, each receiving Rs. 900 a month.
(2) Shanti Parshad was made manager with no salary and no travelling allowance.
(3) All the resolutions, whether in a general meeting or the directors' meeting, were to be unanimous.
(4) Ladli Parshad transferred to the other two branches two‑thirds of the 500 shares which he had acquired in excess of the original shares.
(5) Ladli Parshad was appointed a permanent chairman and director of the company, the other two directors being Shand Parshad and Madan Lal; and no meeting could take place without the chairman.
(6) The provision that owners of two‑thirds shares could force the others to transfer their shares was deleted,
(7) Ladli Parshad was absolved of all liability in respect of anything done by him as managing director.
There were other decisions also, not so important but they were all incorporated in the Articles of Association. The two suits were withdrawn, and Ladli Parshad produced about two and a half lakhs of rupees and distributed them as dividends.
It will be seen that merely by giving up the position of managing director, Ladli Parshad had secured to himself a permanent position, so that neither could he be ousted by a majority of the share‑holders nor could the majority take any step without his consent.
The very first meeting after the compromise shows that it was a Patched‑up affair. The meeting took place on the 4th of November 1945, when Shanti Parshad reported as manager that since the incorporation no provision had been made by Ladli Parshad for the payment of income‑tax, which had by then amounted to about rupees four lakhs. This was resented by Ladh Parshad, but he obstructed payment to the income‑tax authorities by refusing to sign cheques. Other incidents, such as the dismissal of servants of the company by Shanti Parshad as manager, brought matters to a head. On the 25th of February 1946, therefore, Madan Lal and Suraj Mukhi lodged a requisition under section 78 of the Companies Act for the holding of a meeting for the purpose of passing a resolution against Ladli Parshad, removing him from office as chairman and director and suggesting amendments in the Articles of Association. Consequently, on the 3rd of March 1946, the directors met, with the exception of Ladli Parshad, and decided to hold a general meeting on the 28th of March 1946. At this meeting Ladli Parshad was again absent, and the following decisions were taken:‑
(1) Ladli Parshad was removed from the office of chairman and director.
(2) Shanti Parshad was appointed managing director with a remuneration of Rs. 1,000 per mensem and Rs. 200 per mensem as car allowance in addition to Rs. 900 which he was already getting as director.
(3) Suraj Mukhi was appointed director in place of Ladli Parshad and she also was to receive Rs. 900 like other directors.
(4) Article 47, which empowered the owners of two -thirds shares to force the owners of the remaining one‑third to sell their shares to them and which had been deleted in the meeting of 16th October 1945, was restored.
Ladli Parshad having come to know of this meeting, sent a notice on the 1st of April 1946, challenging the legality of the meeting. On the 1st of May 1946, he filed a petition for the winding‑up of the company, the grounds mentioned being: (1) that the company was unable to meet its liabilities and (2) that it was just and equitable under the circumstances that the company be wound‑up.
The learned Liquidation judge did not accept the first ground, and it has not been argued before us. On the second ground, he held that the general meeting of the 28th of March 1946, by which Ladli Parshad was ousted, was illegal, and that as there was a dead‑lock in the affairs of the company and its working had been rendered impossible, it was just and equitable that it should be wound‑up.
The Karnal Distillery Company Limited, represented by the remaining share‑holders, has appealed from this decision.
We propose to deal with this case on the assumption that the general meeting of the 28th of March 1946, was illegal. On that basis the learned Liquidation judge made the following observations:‑
"The position then is that the petitioner is legally entitled to a part in the management of this company and without his assent the business of the company cannot be carried on. The relations between the parties are such that they cannot possibly carry on joint business. The petitioner has by illegal and improper means been deprived of his part in the management of this company as well as of his emoluments as a director and the other party have taken improper control of the management of the company. They have also been receiving improper payments in the form of their own salaries. In addition to this they have passed resolutions forfeiting the petitioner's shares and then selling them so that he is now said to be not a share‑holder at all. In the circumstances, quite apart from the authorities which I will presently consider, it seems to me that it would be proper to wind‑up this company."
Again he says:
"Here there is a deadlock in the affairs of this company which by itself is a ground for winding up. The manage ment is not being carried on by persons who by agreement between the parties were to carry it on and this, according to the passage quoted in Lock v. John Blackwood from Baird v. Lees, may be a good ground for winding‑up. I am referring to the second condition mentioned in that passage which substantially though not literally covers the present case. Shanti Parshad and Madan Lal have by holding meetings that are not in accordance with law excluded the petitioner from business. Shanti Parshad and Suraj Mukhi have been improperly receiving monies to which they were not entitled and it has been urged by learned counsel for the petitioner that if the company is wound‑up, the accounts between the parties can be easily settled in liquida tion proceedings. Considering all these circumstances there cannot be any doubt that an order for winding‑up should be made in this case."
If this were all, we would have no hesitation in holding that it is just and equitable to wind‑up the appellant company. We are satisfied, however, from the observations of the learned judge himself that there is no equity on the side of Ladli Parshad and that he had so misconducted himself, when he himself was the managing director, that the only remedy which seemed open to his younger brother and nephews was by way of revolt and that the form which this revolt took had by necessity to be illegal. "I may make it clear", says the learned Judge, "that I am not at all satisfied that the petitioner himself has been behaving in a proper manner with respect to this company. When this company was formed, he was the eldest member of the family. There were three branches of the descendants of Kishori Lal. To the other two branches he allowed only Rs. 250 per mensem as directors and to himself he allowed not only Rs. 2,450 per mensem but also 7 per cent of the profits. Considering that they were all descendants of the same father, it seems to me that he improperly appropriated to himself the major portion of the profits. He also got the benefit of the use of the company's money by getting a resolution passed that he could have a cash credit account with the company. Not only that, he benefited himself by contracts which he took in the name of the company. There was one contract for supply of bath basins and tubs which was taken by him in the name of the company but the profits of which he received himself. The profits not having been mentioned in the books of the company the, income‑tax officer called upon the company to show any good reason why the profits relating to this contract had not been entered. The company wanted to prove that the profits had been received by the petitioner and the petitioner was asked to produce his accounts before the income‑tax officer to show that he had received these profits himself, but on one pretext or the other he avoided appearance before that officer. The result was that the company was burdened with a total additional tax (income‑tax and E. P. T.) of the amount of Rs. 90,000. I have mentioned already that the petitioner had been carrying on his own business too while he was managing director of the company and that his business was of the same character as that of the company. He was carry ing on business in the name of Ladli Parshad & Sons and Ladli Parshad & Company. In these names he had contracts with the Government. He removed his office of the company from Karnal to Delhi. He was directed by the Excise Department to keep his office in the distillery at Karnal. On account of bad management he was deprived of the licence for manufacturing Indian made foreign liquor and the licence was restored only after the management was taken over by Shanti Parshad. The Financial Commissioner had been administering warnings to him on account of the bad manage ment and had been telling him that he should pay more attention to the company's business than to his personal contracts. There was a contract about solidified fuel which had been taken by the company and which was, as the petitioner himself admits, a profitable contract. This contract he transferred to himself and made a handsome profit out of it. He has been asked as to why he did so and his reply is that this was done with the consent of all the directors. This reply does not satisfy me. He may have secured their consent as he was the eldest member of the family but I would still regard his conduct as leaving much to be desired. He was the managing director of the company whose duty it was to protect the company's interests.
"It has been urged on behalf of the respondent that it had paid about Rs. 4,70,000 as income‑tax and E. P. T.
on account of the period from the beginning of the company up to the 16th of October 1945, when the petitioner was in charge. I do not think that the respondent has succeeded in showing that the whole of this amount was due to that period but there can be no doubt that the petitioner had paid only about Rs. 20,000 as income‑tax and E. P. T. and the remainder of the tax of his, period which amounts to about two lakhs of rupees was paid by the company after he handed over charge. There can be no doubt too that the attitude of the petitioner with respect to the payment of income‑tax due from the company was improper. On the very first meeting of the directors held after the compromise, that is, the meeting of 4th November 1945, a report was made by Shanti Parshad that the income‑tax authorities had demanded payment of income‑tax within two days. The petitioner says he did not even read that report though he admits it was produced in the meeting. He had distributed dividends without paying income‑tax or showing in the accounts that any tax was still due.
"There is another important circumstance to be maintain ed. In August 1944, was started a distillery known as Jagjit Distillery & Allied Industries Limited at Hamira in the Kapurthala State. Of this company the petitioner owns the bulk of shares. He is the managing agent of this company and it is admitted that he receives from it Rs. 5,000 per mensem. This company is no doubt now a rival company for the Karnal Distillery. Even when it was started it could supply liquor to Ambala Division which was one of the divisions to which the Karnal Distillery Company was to supply liquor, and in April 1948, (after filing this petition) the petitioner did get permission for the Jagjit Distillery & Allied Industries Limited to supply liquor to Ambala Division. There can be no doubt that it is to the interest of this rival business that the Karnal Distillery Company should be wound‑up. The petitioner has a far greater interest in the Hamira Company than he has in the Karnal Distillery Company and it is quite obvious that the winding‑up of this company would be very beneficial to him. It has been urged on behalf of the respondent that this is his object in putting in this petition for winding- up.
These statements of fact are not denied by learned counsel for Ladli Parshad. Those of the statements which refer to the orders of Government authorities or, the strictures passed by those authorities are supported by Exhs. R. W 1/5, R. W.l/7, R. W.1/8, R. W.1/9, It. 20/A and R. 21/A. The learned judge has further observed that, although it is not proved that originally the object of the petitioner was to remove a rival business from the filed, "I agree that this may be one of the objects of the petitioner in prosecuting this petition". Since the rival company existed at the date of the petition, we do not regard it as a matter for doubt that the main object of the petition is to efface a rival. The learned judge himself observes that the winding‑up of the company is not likely to yield much for distribution by way of assets. "The only assets are the machinery and the licence. The machinery, which is fairly old, will not fetch a high price, for it can be purchased only by a licensee and the licence cannot be sold at all".
That the liquidation may ruin the business was also within the contemplation of the learned Judge. It was represented to him that the distilling licence would be cancelled, and we have been told that since India is tending towards prohibition, liquidation will be regarded by the authorities as a good opportunity for cancelling the licence. The learned Liquidation judge, however, thought it possible to secure the interest of Shanti Parshad by pointing out that under the Excise Manual the Financial Commissioner had a discretion to cancel the licence and that this was a fit case for using his discretion in favour of Shanti Parshad. "The liquidator can auction the machinery and it will be open to Shanti Parshad and Madan Lal to purchase it and I do not regard it improbable that the share‑holder who purchases the machinery may also be able to retain the licence." He also regarded it possible in the liquidation proceedings to exclude any bid by the petitioner Ladi Parshad or his agent. In short, he seemed clearly to be of the opinion that Shanti Parshad should be enabled to carry on the business, but he felt bound to pass a winding‑up order, partly because a deadlock had been reached and partly because the petitioner Ladli Parshad felt "legally aggrieved".
We must point out that in connection with the present matter two suits instituted by Ladli Parshad are pending in East Punjab Courts also. The first of these was instituted by him on the 30th of December 1946, eight months after the present petition, for a declaration that the resolution passed at the meeting of the 28th of March 1946 were illegal. This was decreed in the first Court, dismissed in appeal but decreed again in second appeal, and now there is a letters patent appeal pending. The second suit was instituted by him on the 7th of July 1951 for a declaration that the sale of his shares by the company was illegal. These shares were sold because he did not refund the dividend which had been distributed him amongst the share‑holders but which the appellant company decided on the 28th of April 1949, to require the share‑holders to refund for the payment of income‑tax. If these suits are decided in Ladli Parshad's favour, they will restore him to his position as director, and the only question left will be whether something can be done to get over the deadlock.
In India the Companies Act has been enriched by the addition of section 153‑C in 1951. It enables a member of the company to make an application to Court where a company acts in a prejudicial manner or oppresses any part of its members, and if the Court thinks that the winding‑up of the company would unfairly and materially prejudice the interests of the Company, or any part of its members, but that otherwise the facts of the case would justify the making of a winding up order on the ground that it is just and equit able to do so, the Court may, with a view to bringing an end to the matters complained of, make such order as it thinks fit. Without prejudice to the generality of the orders which might be made under this section, it has been provided that the Court may pass certain specific orders, such as the purchase of shares or interest of any member of the company by other members or by the company, the termination of any agreement howsoever arrived at between the company and its managing director or any other directors, the alteration in the Memorandum or Articles of Association of the company, etc: We have no doubt that the provisions of section 153‑C are eminently suited to the circumstances of the present case. Ladli Parshad does not care what happens to this business. In fact, it suits him to ruin it so that the Hamira Distillery should thrive the more, and Ladli Parshad's own conduct in the past is such as to make it obvious that Shanti Parshad could not get over his domination without resorting to illegal methods. The compromise of 16th October 1945 could not be said to have been an agreeable affair, though osetensibly it was agreed to. Litigation is ruinous, and Shanti Parshad, who was not in possession, found it less injurious to agree to something; but except that he got Ladli Parshad to resign the managing directorship, every other condition to which he agreed was in favour of Ladli Parshad, and thence forward it was impossible for him or the other share‑holders, even though they were in comfortable majority, to over‑rule Ladli Parshad. We think that if the profits which Ladli Parshad has made at the expense of this company were calculate, they would exceed the salary for eight or nine years which Shanti Parshad and the other co‑sharers sanctioned for them selves in the meeting of 28th of March 1946.
If, therefore, we accept this appeal and leave Shanti Parshad and the other co‑sharers to carry on the business, we leave it open to Ladli Parshad to resort to section 153‑C of the Companies Act, as it exists in India after he obtains a decision in his favour in the declaratory suits. We consider it far from just and equitable to liquidate the company in the interests of Ladli Parshad. We, therefore, accept the appeal with costs throughout and set aside the order of winding -up.
K. A. B./A. H. Appeal accepted.
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