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High Court Appeals Nos. 68 of 1982 and 6 of 1985, decided on 26th May, 1987.

‑‑‑S. 162 (vi) ‑‑Partnership Act (IX of 1932), S. 44(g)‑‑Family business converted into private limited company‑ ‑Private limited company formed by members of more than one family ‑‑Petition for winding up of private limited company‑‑Question: Whether principles of dissolution of private partnership could be pressed into service in the matter of winding up of company by Court under S.162 of Companies Act, 1913‑‑Held: Where family business was converted into private limited company on basis of certain understanding as to extent of participation by the members of family in the management of company, any attempt if made to exclude any member from participation in the management of Company would furnish ground to wind up company on just and equitable ground; similarly if private limited company is formed by members of more than one family on basis of personal relationship involving mutual confidence or understanding as to extent to which each member of the family was to participate in the management of the company, any attempt to exclude any member from participation in the management in breach of understanding would entail grant of winding up petition‑‑Court can lift veil of incorporation to ascertain real nature of working of a private limited company floated by members of a family or families.

Messrs Jaleel Bros. Ltd. and others v. Khawaja Abdul Jaleel High Court Appeal No.21 of 1981 distinguished.

Ladli Prasad Jaiswal v. The Karnal Distillery Co. Ltd. P L D 1965 S C 221 rel.

Sh. Mahmud Niaz Faruki v. ANACO (Pak.) Ltd. P L D 1962 (W.P.) Kar. 71; In re: Kruddon Ltd., Karachi P L D 1972 Kar. 376; Muhammad Ismail Ali Charan v. Pakpor Ceramics Ltd. P L D 1973 Kar. 491; In re: Cine Industries and Recording Co. Ltd. A I R 1942 Bom. 231; Seth Mohan Lal and another v. Grain Chambers A I R 1968 S C 772; Hind Overseas Private Ltd. v. Raghunath Prasad Jhunjhunwalla and another A I R 1976 S C 565; Mahamood Ahmd v. Karachi Road Transport Corporation Ltd. P L D 1970 Kar. 229; Mirza A. Rustom v. Messrs Karim Silk Mills Ltd., Karachi and another PLO 1975 Kar. 40; Messrs Usman Textile Mills Ltd. and others v. Board of Director, Usman Textile Mills Ltd. and another P L D 1976 Kar. 10; In re: Yenidji Tobacco Company Limited 1916 Ch. D 426; Loch and another v. John Blackwood Limited 1924 A C 783; In re: Davis and Collect Limited 1935 Ch. D 693; In re: Lundie Brothers Ltd. P C C D (1965) 1051 and Ebrahim v. West bourne Galleries Ltd. and others (1972) 2 All E R 492 ref.

‑‑‑S. 290‑‑Companies Act (VII of 1913), S. 153‑C‑‑Marked difference between phraseology of S. 153‑C of the Act and S.290 of the Ordinance‑ ‑Proceedings filed prior to coming into force of Ordinance XLVII of 1984‑ ‑Provisions of S.290 of Ordinance would not be applicable.

‑‑‑S. 162‑‑Petition for winding up of Company‑‑Contention that petition was filed for collateral purpose of avoiding petitioner's prosecution in criminal cases‑‑No sufficient material on record available on basis of which it could be held that the criminal complaints against the petitioner had any merits‑‑Held, in absence of such material, it could not be concluded that the object of the petitioner under S.162 was to frustrate criminal prosecution.

In re: Bellador Silk Ltd. (1965) All E L R 667 ref.

Rashid Akhund and Liaquat Merchant for Appellant.

J.H.Rahimtoolah and Kazi Mehfooz Ahmed for Respondents.

Dates of hearing: 28th, 29th, 30th April and 4th May, 1987.

Since the above two appeals involve inter alia a common point of law, we intend to dispose off the same by this common judgment. The brief facts leading to the filing of the above two appeals are:‑

The appellant is a private limited company incorporated under the Companies Act, 1913 in 1975 with an authorised capital of Rs.5,00,000 divided into 5000 shares of face value of Rs.100 each. The paid up capital of the company was Rs.2,50,000. The break up of the share‑holdings and directorship is as follows: ‑

(i) W T.M.Yousuf 500 shares

(ii) Mrs. Rabia wife of Two

T. M. Yousuf. 500 shares Directors

(iii) Adam son of

Haji Tar Muhammad 500 shares

(iv) Suleman son of Haji Tar Two

Mohammad Brothers of Adam 500 shares Directors

(v) Usman Husein 500 shares One

Director

Respondent No. 3, who had 20% holding filed J. Misc. 24/1981 under Section 153‑C of the Companies Act, 1913 (hereinafter referred to as the Act) for enforcing his rights as shareholder, whereas he also filed J. Misc. 25/1981 under Section 162 of the Act for winding up of the appellant Company on the ground that he was excluded from participating in the management /affairs of the Company. The above two petitions were resisted by the other shareholders having 80% shareholdings and also by the Company as the latter was managed by the other group. The learned Company Judge by judgment, dated 15‑9‑1982 dismissed the former J. Misc. but granted the latter J. Misc. on the ground that as respondent No. 1 was excluded from the management of the Company by the removal from the Directorship, the principles of dissolution of Private Partnership Firms would be applicable. The Deputy Registrar (Judicial) of this Court was appointed as the Official Liquidator of the Company with all powers and was directed to perform such functions ‑and take such proceedings as were required under the provisions of the Act. The appellant Company being aggrieved by the above order has filed the above appeal.

H.C.A. 6 of 1985.

This appeal has been filed by the four brothers, appellants 1 to 4 and the Private Limited Company as appellant No. 5 against one respondent, who is real brother of appellants I to 4 and who was one of the three Directors in the Company which was incorporated on 17‑8‑1986 (sic) and of which respondent was its first Managing Director. The Company had an authorised capital of Rs.5,00,000 divided into 50,000 shares of Rs.10 each, whereas the issued and subscribed capital of the Company was Rs.4,00,000. The appellants 1 to 4 having 8,000 shares each i.e. 80% share holding and respondent having 2,000 shares i.e. 20%. It is an admitted position that prior to 24‑2‑1979 each of the Directors could operate accounts severally but on the aforesaid date it was resolved that two Directors were to sign the cheque and not one. It was the grievance of the respondent that by the aforesaid resolution the majority share‑holders excluded him from the management of the Company. The respondent, therefore, filed J.M. 41/79 on 24‑10‑1979 for winding up of the Company. He also filed J.M.43/1979 on the same day for rectification of the shares register to the effect that he was in fact holding 13,334 shares and not 8,000 shares. While the above petition was pending a general meeting of the share‑holders was held and respondent No.1 was ousted from the Directorship because of the majority of appellants 1 to 4. The above two petitions were resisted by the appellants. However, the Company Judge by his judgment, dated 23‑12‑1984 allowed J.M. 41/1979 on the ground found favour with him in his aforesaid earlier judgment, dated 15‑9‑1982, which is subject‑matter of above H.C.A. 68/1982 but dismissed J.M.43/1979, and appointed the Official Assignee as the Official Liquidator of the Company with all powers and he was directed to perform such functions and take such proceedings as were required under the provisions of the Apt. The appellants, therefore, filed the above appeal.

2. We intend to deal with the main contention of the learned counsel for the appellants jointly in both the above appeals after dilating upon the individual contentions advanced by the learned counsel for the appellants in the two appeals. It will, therefore, be appropriate to take up the contentions of Mr. Rasheed Akhund learned counsel for the appellant in H.C.A. 68 of 1982.He has inter alia urged as follows:‑

(1) That even if there was illegal exclusion of the respondent or removal from the Directorship the Court should have remedied the illegality but should not have granted petition under Section 162 of the Act in view of the facts of the present case.

(2) That since the respondent had not approached the Court with clean hands, his petition should have been dismissed.

(3) That factually in view of Article 12 of the Companies (Managing Agencies and Election of Directors) Order, 1972, hereinafter referred to as the Order, the respondent remained as the Director and the alleged illegal removal by the majority share‑holders was of no consequence.

(4) That in fact section 290 of the Companies Ordinance, 1984 hereinafter referred to as the Ordinance was applicable and not section 153‑C of the Act and it is the interest of all the share‑holders and the Company ‑is to be considered while deciding a petition for winding up and not of the share‑holder who approached the Court for winding up.

On the other hand Mr. J. H. Rahimtoola has submitted as follows: ‑

(1) That the learned Company Judge has taken into consideration all the relevant facts while granting the petition.

(2) That respondent had not approached the Court with unclean hands but in fact the conduct of the appellants I to 4 was questionable.

(3) That before the learned Company Judge, it was contended by the appellants that Article 12 of the Order is not applicable, whereas before this Court a contrary stand has been taken. He has further submitted that in any case the appellants had removed the respondent from the directorship even without giving any notice of the meeting.

(4) That section 290 of the Ordinance has no application to the instant case as the petition was filed several years prior to the enforcement of the said Ordinance.

3. In support of the above first contention that the learned Company Judge should have not granted the petition for winding up but should have remedied the alleged illegal acts committed to section 170(1‑A) of the Act which provides that "if, on a petition presented by any member of the registrar, the Court is of the opinion that, although the facts would justify the making of a winding up order, the making of such order would unfairly prejudice the member or members concerned, the Court may make such order as it thinks fit in the circumstances for regulating the conduct of the affairs of the company and bringing to an end the matters complained of."

It was urged by Mr. Rasheed Akhund that in view of the above provision the learned Company Judge should have taken into consideration the interest of all the members and not of the respondent alone. Whereas it was submitted by Mr. J.H.Rahimtoola that the reference to the member or members concerned is to the member or members, who have filed the petition for winding up and not all the members/ shareholders.

Be that as it may, the learned Company Judge has taken into consideration this aspect and has found that it was just and equitable to order the winding up of the Company. We see no reason to take different view on this aspect of the matter.

We may dilate upon the above submission of Mr. Rasheed Akhund noticed hereinabove, namely that section 290 of the Ordinance was applicable and not section 153‑C. It may be observed that he has referred to the above section of Ordinance and submitted that in fact it corresponds to section 153‑C of the Act. He has also pointed out that under clause (b) of the subsection (2) of section 290 the Court has to take into consideration the fact, whether the winding up of the Company would unfairly prejudice the members or creditors and not only the member or members who have filed the petition for winding up. It is true that there is a marked difference between phraseology of section 153‑C of the Act and section 290 of the Ordinance inasmuch as the interest of the creditors has also to be taken into account while considering an application under section 290. In our view, section 290 of the Ordinance is not applicable to the present case as the petition was filed prior to the enforcement of the Ordinance and secondly, the learned Company Judge has declined the respondent's application under section 153‑C of the Act.

4. As regards Mr. Akhund's submission that the respondent had not approached the Court with clean hands, it may be observed that he has pointed out that from the time of incorporation of the Company till 30‑6‑1980 when the respondent voluntarily resigned from the Managing Directorship, he was managing the affairs of the Company as the Managing Director and that during his above tenure he had mismanaged the affairs of the company inasmuch as the Company had to lodge 8 criminal cases against the respondent. He has invited our attention to the extract from the cash book and pointed out that on the last date of his working as the Managing Director the respondent created a credit in his favour for a sum of Rs.75,000 and shown payment of Rs.75,000 to one Ibrahim Dawood. It was vehemently urged that these entries were made incorrectly. He has also invited to the letters/ affidavits filed by Ibrahim Dawood in which he has allegedly stated that he had not received Rs.75,000.

On the other hand Mr. J.H. Rahimtoola has submitted that factually the respondent had advanced a sum of Rs.75,000 to the Company in respect of which the respondent filed Suit No.5889/1982 in the Court of 3rd Civil Judge, Karachi and got a decree against the appellant recently and that the alleged letter/ affidavit of Dawood are not worth relying as he had himself given different version in different affidavits. The learned Company Judge has held that there is not sufficient material on record to conclude in favour of the appellants' above allegations. We are also inclined to hold that on the basis of the material on record we cannot hold that factually the above two entries in the two sums of Rs.75,000 each were fabricated. Though Mr. Rahimtoola has not placed a copy of the decree allegedly obtained by the respondent in Suit No.5889/82 but Mr. Rasheed Akhund, learned counsel for the appellant was unable to contradict the above statement for want of instructions. As regards the second entry in respect of payment of Rs.75,000 to Ibrahim Dawood, it may be pointed out that he has given affidavit in favour of the appellants at one Stage and then in favour of the respondent and then again he has changed his stand. In view of the above contradictory stand taken by Ibrahim Dawood, no implicit reliance can be placed on his affidavits/ letters.

We may also deal with the second limb of Mr. Rasheed Akhund's above argument, namely, that factually the respondent had filed the petition for collateral purpose in order to avoid the prosecution in criminal cases, which were initiated by the Company against the respondent and which were pending. In furtherance of his above submission he has referred to the case of the Re: Bellador Silk Ltd. (1965) All England Law Reports 667, in which the petitioner who was a Director filed the petition for winding up. The real object was to get satisfaction regarding repayment of loan to credit of Companies in which the petitioner had interest. It was held by a learned Single Judge of the Chancery Division, England that the object of the filing of the petition was to bring pressure in order to achieve a collateral purpose and, therefore, it was abuse of the process of the Court. The petition was dismissed.

Mr. J.H. Rahimtoola has submitted at the bar that all criminal complaints filed by the appellant Company have been dismissed by the Courts concerned. How6er, he has not placed the orders of the dismissal on record. Mr.Rasheed Akhund was unable to confirm or contradict the above statement for want of instructions.

Be that as it may, the learned Company Judge has not dilated upon the merits of the above criminal complaints as it might have prejudiced either of the parties. It will suffice to observe that there is not sufficient material on record on the basis of which it can be concluded that the appellants' aforesaid criminal complaints had any merits. In the absence of any such material, it cannot be concluded that the object of the respondent in filing of the petition was to frustrate the above criminal complaints or to avoid his prosecution.

5. This leads us to the last submission of Mr. Rasheed Akhund noticed hereinabove that in view of Article 12 of the Order the attempt on the part of the majority share‑holders to remove the respondent from the Directorship was of no consequence and, therefore, this could not have been made a ground for granting the winding up petition. It may be pointed out that before the learned Company Judge, it was urged by the learned counsel for the appellants that Article 12 of the Order was not applicable and that in terms of section 86(g) of the Act read with the Memorandum and Articles of Association of the Company the majority share‑holders were entitled to remove the respondent from the Directorship. This stand is directly in conflict with the present stand taken by the appellant before us. It has been concluded by the learned Company Judge that no notice of the general meeting on 25‑2‑1981 in which the respondent was removed from the Directorship was given to him. Mr. Rasheed Akhund had candidly conceded before us that since no notice was given it was illegal removal and in fact was of no consequence. According to him in any view of the matter the respondent remained the Director of the Company inspite of the above resolution and, therefore, was in fact not removed. We will dilate upon this question more in detail while. dealing with the main contention of both the learned counsel for the appellants but for the time being suffice to observe that the majority share‑holders in fact removed the respondent from the Directorship though the appellants' attempt might have been in conflict with Article 12 of the Order, or was illegal for want of notice for the meeting.

6. Mr. Liaquat Merchant in support of H.C.A. No. 6 of 1985 has submitted as follows:‑

(1) That Article 39 of the Articles of Association of the Company did not create a vested right in the respondent to hold office of the Managing Director.

(2) That even resolution of 1979 providing that the accounts were to be operated by two directors jointly and not by one ceased to be effective upon the seizure of the respondent as a Director and, therefore, this could not have been a ground for the grant of winding up petition.

(3) That the filing of J.M.43/79 by the respondent in which he sought rectification of the shares register in the form of showing that he owned 13,334 shares and not 8,000 shares as was shown, was in conflict with his J.M.41/79 for winding up of the Company.

Mr. J. H. Rahimtoola on the other hand has urged as follows:‑

(1) That Article 39 of the Articles of Association contained the arrangement, which was arrived at between the brothers for running the Company.

(2) That the act of appellants 1 to 4 to exclude the respondent from operating the accounts was in fact further completed by the ouster of the respondent from the Directorship.

(3) That there was no inconsistancy between 3‑Ni.41/79 and J.M. 43/79.

7. Adverting to the above first ‑osubmission of Mr. Liaquat Merchant, it may be pertinent to reproduce Article 39 which reads as follows: ‑

"39. The Directors nay from time to time appoint one or more of their body to the office of the Managing Director for such term and on such remuneration (whether) way of salary or commission or participation in profits or partly in one way and partly in another) as they may think fit, and a Director so appointed shall not, while holding that office, be subject to retirement by rotation, or be taken into account in determining the rotation of retirement of Directors, but his appointment shall be subject to determination ipso facto if he ceases for any cause to be a Director of if the Company in General Meeting resolve that his tenure of office as Managing Director be determined."

A perusal of the above quoted Article indicates that the Directors were to appoint one or more of their body to the office of the Managing Director for such terms and on stieh remuneration as they may think. It further shows that once a Director so appointed was not subject to retirement by rotation but his appointment was subject to determination ipso facto if he ceases to a Director or if the Company in General Meeting resolves that, tenure of office as Director be determined. It is an admitted position that the respondent was appointed as the First Managing Director of the Company and remained as such till his exclusion by the appellants I to 4. The learned Company Judge has concluded as follows:‑

"If the view that was taken by me in Nagina Film's case is correct, the present Winding up petition will be maintainable on the ground of exclusion, physical or legal, of the petitioner from the management of the company. In my opinion, in view of the law laid down by the Supreme Court in Ladli Prasad's case the petitioner's winding‑ up petition is maintainable on the ground of physical or legal exclusion from the management of the company as on lifting the veil of incorporation of this company it is found that in fact this company was being run and managed as if it were a partnership firm. The five brothers who were the only share‑holders of this company held equal shares in the company i.e. 8,000 each and right from the date of the incorporation of the company in 1966, the petitioner remained its Managing Director till the disputes arise between the brothers sometimes in early 1979.1t has also come on record that till the disputes started all the Directors had powers to operate the bank accounts of the company singly. No dividends were declared but the shares in the profits of the company were apparently distributed amongst the brothers through remunerations or other methods. The normal method of distribution of profits in a company is through declaration and distribution of dividents which practice has not been followed in the case of the present company. The fact that the share‑holders belong to the same family in fact they are real brothers and they hold equal shares and that no dividend was declared but profits made by the company were distributed through other means to the share‑holders and the way in which the company has been run makes it clear that all the five brothers had agreed that the company will be run with the active participation of all the brothers in the management of the company and, therefore, it is clearly indicated that the company was being run as if it was a partnership firm. As such whatever interpretation is given to the principles laid down by the Supreme Court in Ladli Prasad's case, in the case of the company in question, the ground of exclusion of one of the brothers from the management of the company is a ground on which a winding up petition can be maintained under the just and equitable clause."

8. The above conclusion of the learned Company Judge is supported by the material on record. It is true that even above‑quoted Article 39 contemplates the termination of the Managing Directorship is the events mentioned therein and under Article 32 the Company in the General Meeting can fix the number of Directors. The powers are also contained in section 86(g) of the Act for the removal of a director by extraordinary resolution subject to the provision contained inter alia under Article 12 of the Order referred to hereinabove. In view of the above quoted conclusion of the learned Company Judge the factum that Article 39 itself contemplates termination of the Managing Directorship in the events mentioned therein or that Article 32 empowered the Company in its General Meeting to fix the number of Directors or that under section 86(g) of the Act the power to remove a Director is contained though subject to Article 12 and the other provisions of the order referred to hereinabove, is of no consequence.

9. As regards Mr. Liaqat Merchant's second submission that even the resolution of 1979 providing restriction as to the operation of the accounts by two Directors, instead of one, had ceased to operate in December, 1981 when the respondent ceased/failed to get himself elected as a Director, it may be observed that the learned Company Judge has rightly concluded that the alleged resolution passed in 1979 providing that the two directors were to operate the bank accounts instead of one, which was the practice from the inception of the incorporation of the Company was in fact a device to render the respondent ineffective as a Managing Director and to prevent him from the participation in the affairs of the Company. The ouster of the respondent from the Directorship in the meeting held on 28‑12‑1981 was in fact the completion of the act of ouster.

Adverting to Mr. Liaquat Merchant's contention that filing of J.M. 43/79 by the respondent in which he sought rectification of the shares register in the form of showing that he owned 13,334 shares and not 8,000 shares as was shown was in conflict with his J.M.41/79 for winding up of the company, it may be observed that there seems to be no inconsistancy as even in case of winding up of the company the share‑holders would be entitled after the discharge of all the liabilities, to the assets proportionate to their holding and, therefore, if respondent's J.M.43/79 would have been granted, he would have been entitled to proportionate increase in his shares in the assets of the wound up Company.

10. We may point out that though both the winding up petitions were supported by other grounds but the learned Company Judge was of the view that other grounds were not sufficiently established.

Mr. J.H. Rahimtoola in terms of Order XLI, Rule 22, C.P.C. attempted to support the two judgments under appeal even on the grounds which were not found in f6v6ur of the respondents. In our view, the findings recorded by the learned Company Judge on the grounds seem to be correct. Since we are inclined to maintain the above two judgments on the ground found favour with the learned Company Judge, it is not necessary to dilate upon the same in detail.

11. This leads us to the main submission namely, whether the principles of dissolution of a Private Partnership can be pressed into service in the instant two cases or to put it differently whether the ratio of the case of Ladli Prasad Jaiswal v. The Karnal Distillery Co. Ltd. reported in P L D 1965 S C 221 is applicable to present cases. In the above Supreme Court case inter alia, the following observations were made:

"Now in the case of a private limited company the tendency of the Courts has uniformly been to treat it more or less as a partnership and to apply the same principles in the winding up of a private limited company as would entitled a partner to have a partnership firm dissolved. Commonly the exclusion of a partner from the management of the firm, the existence of a state of deadlock between the partners or the justifiable lack of confidence in the management have been regarded as just and proper grounds for dissolving a private limited Company.',

12. It may be pertinent to point out that clause (vi) of section 162 of the Act corresponds to clause (g) of section 44 of the Partnership Act, 1932. The former provides that 'if the Court is of opinion that it is just and equitable that the company should be wound up', whereas the latter reads that 'on any other ground which renders it just and equitable that the firm should be dissolved'.

13. M/s. Rasheed Akhund and Liaquat Merchant, learned counsel for the appellants in the present two appeals have vehemently submitted that the principles of dissolution of a private partnership firm cannot be made applicable to the instant cases and that the above case of Supreme Court namely Ladli Prasad's case is distinguishable from the present cases.

Mr. Rasheed Akhund as well as Mr. Liaquat Merchant have referred to the following cases in addition to distinguishing the above Supreme Court Case and the English cases relied upon by Mr. J.H. Rehmatoola, learned counsel for the respondent:‑

(i) Sh. Mahmud Niaz Faruki v. Anaco (Pak.) Ltd., reported in PLD 1962 (W.P.) Karachi 71, in which learned Single Judge of erstwhile High Court of West Pakistan, at Karachi Bench, inter alia observed that the mere fact that the Directors had a prepondrating voting owner and that they have not allowed the other share‑holders to join in the management of the company is no ground to order its winding up.

(ii) In re: Kruddon Ltd. Karachi reported in PLD 1972 Karachi 376. In the above case the then Chief Justice of the erstwhile High Court of Sind and Baluchistan, inter alia, held that a private limited company is not required to be wound up whenever a share‑holder wishes that it should be, as would be the case in a partnership at will, when one of the partners desires the dissolution of the firm.

(iii) Muhammad Ismail Ali Charan v. Pakpor Ceramics Ltd. reported in PLD 1973 Karachi 491, in which a learned Single Judge of the erstwhile High Court of Sind and Baluchistan inter alia, pointed out a private company is like a firm in many ways but there are also differences between them, inasmuch as in the absence of a contract to the Contrary, every partner is entitled under the partnership Act to share in the management of the firm, but a member of a company cannot possibly claim any right to manage it. It was also observed that the rule in Partnership suits is not fit to be extended to winding up petitions. It was also pointed out that there will be an analogy between the position of a director and a partner only if the appointment of the director is for a fixed period, otherwise he can be removed by an extraordinary resolution under section 86 (G) of the Act.

(iv) Unreported Judgment of a Division Bench of this Court delivered on 26‑4‑1982 in the case of M/s. Jaleel Bros. Ltd. and others v. Khawaja Abdul Jaleel (High Court Appeal No.21 of 1981) in which a division Bench set aside the Judgment of a learned Single Judge granting the winding up petition and distinguished Ladli Prasad's case in the following words:

"So far as the exclusion of the partner Director from the management of the Company referred to by the Supreme Court is concerned, that condition will not be applicable to the present case because in the case of Ladli Prasad Jaiswal v. Karnal Distilling Co. Ltd. there were three Directors only, all of whom had equal shares in the company with equal power of vote and equal share in the management. It was in that context that the Supreme Court had held that exclusion of the Director from the management of the Company/Firm may be treated as a ground for winding up the Company. In the present case the person who has filed the winding up petition does not have equal share in the management with the other directors. He is holding only 131 per cent of the total shares. Out of all the Directors/ Share‑holders he is the only one man who has applied for liquidation of the Company, whereas all other share‑holders (except Khawaja Ilyas whose conduct has still been waiting), who are none else then his brothers, sisters and mother, a‑re deadly opposed to the winding up petition. Hence the exclusion of Respondent No.1 from the management of the Company shall not be a ground for winding up of the Company and the rule laid down in the case of Ladli Prasad Jaiswal v. Karnal Distillery Co. Ltd. shall not be attracted so far as this ground of exclusion of the respondent from management, is concerned.

There are other reasons also for which exclusion of the respondent from the management of the Company or as Director of shareholders, should not entitle him to have the Company wound up.

(14) Mr. Liaquat Merchant has also referred to the following cases:‑

(i) in re: Cine Industries and Recording Co. Ltd. reported in A I R (29) 1942 Bombay 231, in which a learned Single Judge of the Bombay High Court held that the fact the petitioner holds only 5 out of total of 1696 shares is not reason for refusing winding up order but the main consideration is interest of shareholders and creditors and that the fact that majority of shareholders and large number of creditors are opposing petition and rest of creditors are taking no part. The learned Single Judge also dilated upon the term "Commercially insolvent."

(ii) Seth Mohan Lai and another v. Grain Chambers reported in AIR 1968 S C 772. In the above case the Supreme Court of India while construing clause VI of section 162 of the Companies Act held that the Court may make an order for winding up a company if the Court is of the opinion that it is just and equitable that the Company be wound up, and that in making an order for winding up on the ground that it is just and equitable that a company should be wound up the Court will consider the interests of the shareholders as well as of the creditors. It was also observed that substratum of the Company is said to have disappeared when the object for which it was incorporated has substantially failed or when it is impossible to carry on the business of the Company.

(iii) Hind Overseas Private Ltd. v. Raghunath Prasad Jhunjhunwalla and another reported in AIR 1976 Supreme Court 565, in which the Indian Supreme Court made the following observations on the question as to when principles of dissolution of a private partnership firm can be pressed and cannot be pressed into service.

"When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides,' it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the Company is not the real structure and on piercing the veil it is found that in reality it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company."

(iv) Mahmood Ahmad v. Karachi Road Transport Corporation Ltd. reported in PLD 1970 Karachi, 229. In the above case a learned Single Judge of the erstwhile High Court of West Pakistan while construing Sections 162 and 174 of the Companies Act., held that a company after having run at loss since inception without any prospects of resusciation, proving its commercial insolvency, was fit to be wound up.

(v) Mirza A. Rustom v. Messrs Karim Silk Mills Ltd. Karachi and another reported in PLD 1975 Karachi, 40. In the above case a learned Single Judge of the erstwhile High Court of Sind and Baluchistan while construing Section 162 of the Companies Act, held that factum whether grant of winding up petition is just and equitable must be dealt with reference to the interests of persons concerned in the matter e.g., shareholders and/or creditors of company. It was also held that since there was no allegation that the company was unable to pay its debts or that interest of creditors or shareholders were in jeopardy, no ground was made out for winding up. In the above judgment it was also pointed out that lack of probity must be against the interest of the Company itself and on behalf of the company and not in relation to public exchequer. In the above case one of the grounds pressed into service for winding up of the company was that it was not maintaining proper accounts inasmuch as it disclosed undeclared income under Martial Law Regulation No.32 of 1969, which ground was not found sufficient.

(vi) Messrs Usman Textile Mills Ltd. and others v . Board of Directors, Usman Textile Mills Ltd. and another reported in PLD 1976 Karachi, 10. In the above case a learned Single Judge of this Court held that a Chief Executive appointed by Board of Directors elected under Article 10 of the Companies (Managing Agency and Election of Directors) order (2 of 1972) is not a chief executive contemplated by Article 4 (2)(a) and was not a holder of a public office and was removable by Board of Directors.

15. On the other hand Mr. J.H. Rahmitoola has placed reliance on the following cases:‑

(i) The above case of Ladli Prasad Jaiswal v . The Karachi Distillery Co. Ltd. (PLD 1965 Supreme Court 221) in which the Hon'ble Supreme Court, inter alia, made the observations quoted hereinabove in Para 11 and held that the principles of dissolution of private partnership firm is applicable to a private limited Company.

The facts of the above case were that one Kishori Lal was carrying on business of manufacture and sale of liquor in the name of Kishori Lal and Sons at Karachi. He died in 1906, leaving behind three sons Durga Prasad, Ladli Prasad and Shanti Prasad. After the death of Kishori Lal, Durga Prasad as senior member of the family took over the management of the business which had then become a joint family business. He also died in 1934, leaving behind two minor sons, Madan Lal and Sajjan Lal and a widow Suraj Mukhi. The appellant before the Supreme Court Ladli Prasad being the eldest son after the death of Durga Prasad took over the management of the business as Karta of the said family and the business continued as a joint family business till November, 1940 when the joint family was partitioned but the joint family business was converted into a partnership firm and, thereafter, on 23‑3‑1941 the partnership firm was converted into a private limited Company under the name and style uf Karnal Distillery Company Limited. The shareholders of the company were the members of the joint family. There was litigation between the share‑holders which resulted into a compromise between the parties through the intervention of common friend. Under the compromise Ladli Prasad agreed to give up his position as Managing Director and it was agreed that all the three directors would be placed on an equal footing, each being entitled to a remuneration of Rs.900 per month. Shanti Prasad was made Manager with no salary and on travelling allowance and hence forward all resolutions, whether of a general meeting or of the directors, were to be passed unanimously. The above compromise was approved in the general meeting of the company held on 16‑10‑1945. However the above compromise did not last very long and inter alia in the meeting held on 28‑3‑1946, of which the appellant Ladli Prasad had no notice, he was removed from the Directorship. He filed a petition for winding up which was allowed by a learned Single Judge of the Lahore High Court but upon Letters Patent Appeal a Division Bench reversed the Judgment of the Learned Single Judge on the ground that there was no equity on the side of the appellant as his conduct while he was Managing Director was not amenable, that liquidation would ruin the business and, that since the company was now situated in India and its business was carried on there it would be more appropriate to leave the parties to seek remedy under the provisions of the new section 153‑C introduced in 1951 in India in the Companies Act which enabled the Courts in India to make appropriate orders for putting an end to disputes between the share‑holders of a company without putting an end to the company itself in order to protect the interests of the company or any part of its members.

Upon appeal the Hon'ble Supreme Court reversed the judgment of the Division Bench and restored the Judgment of the learned Single Judge and made following observations:

'Upon a review of these decisions we have no hesitation in accepting the principle laid down by Lord Cozens‑Hardy, Master of the Rolls, in the case of Yenidji Tobacco Company Limited, which has been consistently followed in England and applying the same principle to the facts of the present case. We have come to the conclusion that the company with which we are concerned was in substance a partnership, for its, shareholders were only the members of the family of Kishori Lal and no outsider was interested, Under the unanimous resolution of the 16th October, 1945, the appellant was made a permanent Director and Chairman of the Board of Directors and he was to have an equal voice in the management of the affairs of the company. Indeed, no decision could be taken to bind the Company which was not arrived at unanimously by all the three directors of the company who together formed the quorum for a director's meeting. In these circumstances, since the trial court has found that the resolution of the 28th of March, 1946, which purported to remove the appellant from the directorship of the company was an illegal resolution and this finding has not been reversed by the Letters Patent Bench, which has proceeded upon the assumption that the resolution was illegal, it clearly follows that the appellant was wrongfully excluded from participation in the management of the affairs of the company and indeed a deadlock was thereafter created by the refusal of the other directors to allow him to participate in the management. The subsequent conduct of the other co‑directors and the appellant leaves no room for doubt that feelings had become so embittered that conciliation was now well nigh impossible. They were determined to exclude the appellant completely. Indeed, they had gone even to the extent of forfeiting his shares and selling them to others.'

(ii) In re Yenidji Tobacco Company, Limited, 1916 Chancery Division Page 426 in which the facts were that two persons were carrying on business as tobacconists and cigarette manufacturers but they amalgamated their business and formed a private limited company. One of them filed a petition for winding up on the grounds of (a) dead lock (b) substratum of the company was gone and (c) It was just and equitable. The court of Appeal while confirming the decision of a learned Single Judge held that the same principles are to be applied where there was in substance a partnership in the guise of a private company. It was further held that the filing of the petition amounted to a complete deadlock and it .was just and equitable that the company should be wound up.

(iii) Loch and another v. John Blackwood Limited 1924 Appeal Cases 783, in which the Privy Council while considering the phrase "just and equitable" held that the power to wind up the company under the above clause was not confined to cases in which there were grounds analogous to those mentioned earlier in Section 127 of the Companies (Consolidation) Act, 1908.

(iv) In re Davis and Collect Limited, 1935 Chancery Division page 693. In the above case, learned Single Judge of the Chancery Division held that where the capital of a private limited company is so owned as to make the company in substance a partnership and one director has purported by means of irregularities to acquire complete control of the Company and to exclude the other director or directors from the management, it may be just and equitable that the company should be wound up.

(v) In re Lundie Brothers Ltd. reported in Privy Council, Chancery Division 1965 Page 1051, in which a learned Single Judge of the Chancery Division held that unjustified exclusion of director from participation in company's affairs would be a just and equitable ground for winding up. It may be pointed out that a private limited company was formed for taking over the partnership business which was carried on by the directors/shareholders of the Company.

(vi) Ebrahim v. Westbourne Galleries Ltd. and others reported in. (1972) 2 All E R 492. In the above case appellant and respondent had carried on business in partnership as credit dealers having equal shares in the management and profits. In 1958 they formed a private limited company for taking over the above partnership business, each were having 500 shares of L 1 each. Under the Articles shares could not be transferred without the directors' consent. Soon after the formation of Company N's Son, G, was appointed a director and each of the two original shareholders transferred to him 100 shares. The company made good profits, all of which were distributed by way of directors' remuneration. No dividends were even paid. However differences arose between the appellant and N., with whom sided. The appellant was removed from the directorship. He filed a petition for winding up, which was granted by a learned Company Judge on the ground that there was breach of good faith, that partners owed to each other by excluding one of them. The court of Appeal upon an appeal reversed the Judgment. However, the House of Lords upon further appeal set aside the judgment of the Court of Appeal and restored the Judgment of the learned Company Judge. It was held that just and equitable provision in Section 222 (f) of the Companies Act, 1948 was an equitable supplement to the common law, of the company to be found in its memorandum and articles and that it recoginsed that there might be circumstances in which the mutual rights of the members were not exhaustively defined in the articles, e.g. where they had entered into membership of the company on the basis of personal relationship involving mutual confidence or an understanding as to the extent to which each of the members was to participate in the management of the Company's business.

16. From the above cited cases inter alia the following principles of law are deducible.

(i) That in a particular case the principles of dissolution of partnership may be applied if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership.

(ii) That generally the exclusion of a partner from the management of the firm, existing of a state of dead lock between the partners or justifiable lack of confidence in the management have been regarded as just and proper grounds for dissolving a private limited company.

(iii) That when the members of a Company had entered into membership of the Company on the basis of personal relationship involving mutual confidence or an understanding as to extent to which each of the member was to participate in U‑1 management of the company, exclusion of any member from the management in breach of the above understanding would entail the grant of winding up petition.

(iv) That if a Company is floated by more than one family or several friends and relations in the absence of agreement for active participation of the members who are sought to be excluded from the management, the principles of dissolution of partnership cannot be liberally invoked but in the case of agreement for the active participation in the management by all the members of all the groups, the exclusion from the management of any group will attract the application of the principles of dissolution of partnership of a firm.

(v) That in case where a family partnership is converted into a private limited company, the Court will be more inclined to apply the principles of dissolution of a private partnership firm in case any member of the family is excluded from the management of the Company be the other member of the family holding majority shares.

(vi) That simpliciter the factum that some Directors had preponderating voting power and have not allowed the other share‑holders to join in the management of the Company is no ground to wind up the Company.

(vii) Where one Director purports by means of irregularities to acquire complete control of the company and to exclude other director/or Directors from the management, it may be just and equitable that the Company be wound up.

(viii) That the ground just and equitable is not controlled by the grounds preceding to the above ground in Section 162 of the Act and is also not confined to cases in which there are grounds analogous to those mentioned earlier.

(ix) That the position of a director and a partner is analogous if the appointment of a Director is for a fixed period otherwise he can be removed by an extraordinary resolution under section 86‑G of the Companies Act.

(x) That in the absence anything contrary in a partnership deed every partner is entitled under the Partnership Act to share the management of the firm but a shareholder generally in a company is in the absence of a pre‑in corporation agreement /understanding cannot claim any right to manage the company.

(xi) That if a shareholder brings a petition for winding up of a company, the court will inter alia consider the factum whether majority of shareholders and large number of creditors are opposing the petition.

(xii) That while considering a petition for winding up the ground of lack of probity must be against the interest of the Company itself and on behalf of the company and not in relation to the public exchequer.

(xiii) That there is a marked distinction between a private partnership firm at will, of which dissolution can be sought by a partner as a matter of right and a private limited company, of which winding up cannot be obtained by a shareholder without any recognised justifiable ground.

17. M/s. Rasheed Akhund and Liaquat Merchant made efforts to distinguish the above cases of Ladli Prasad and Ebrahimi, in as much as, by pointing out that in both the above cases prior to the incorporation of a private limited company there was a partnership and there was requirement that all resolutions of the company were to be passed unanimously. Mr. Liaquat Merchant has analysed distinguishing features in the case of Ladli Prasad as under:‑

(i) That there was a prior partnership between the share‑holders.

(ii) That presence of all the directors was required for constituting qorum.

(iii) That there was requirement of passing of all resolutions unanimously.

(iv) that there was dead lock in the working of the company.

(v) that no other litigation was pending between the share‑holders.

(vi) that there was physical and illegal exclusion of the director etc.

18. It is true that neither in High Court Appeal No.68/1982 nor in High Court Appeal No.6 of 1985, there was any prior partnership between the shareholders nor there was any pre‑incorporation written agreement nor there was any requirement that the resolutions be passed unanimously, nor there was any requirement of the presence of all the directors for constituting quorum, nor the shareholding was equal. However, the learned Company Judge in both the above appeals on the basis of the material concluded that the Company was incorporated on the basis of certain understanding and the arrangement. We have already quoted herein above the findings of the learned Company Judge in relation to High Court Appeal No.6 of 1985 in para 7 hereinabove, whereas the findings recorded by him in respect of High Court Appeal No.68 of 1982 are as follows:‑

"In the light of the principles enunciated in paragraph 15 and 16 of this Judgment, it is now proposed to discuss and consider the remaining grounds urged by the petitioner and which are the removal of the petitioner from the office of the director of the Company, reduction in the number of directors from five to three, and exclusion of the petitioner from the management and administration of the company. It is an admitted position that for about five years since the incorporation of the company, the strength of the board of directors remained five and during this period various meetings of the board took place. Out of the five directors, petitioner was one and two directors represented each of the other two groups. In the articles of association of the company, the names of the first directors are mentioned and these were also the five representing the three family groups. Petitioner's holding in the company has been 20% of the paid up capital and the two other groups held 40% each. On the basis of the said shareholdings, the groups were represented on the board of directors. Petitioner holding 20% shares, in the circumstances, got one seat on the board of directors. Similarly the other two groups got two seats each. In view of these admitted facts it is established that the agreement or understanding between the three groups while forming the company was that so long as the petitioner held 20% shares he will be entitled to one Directorship, and the other two groups, two Directorships each. It is, therefore, obvious that the agreement was that the strength of the Board of Directors would remain five and would not be reduced and the petitioner would be a part of the management. If the petitioner had been told that the majority share‑holders would have the right to reduce the strength of the board of directors in order to oust him or his nominee from the Board, petitioner would not have agreed to join hands and pool his resources with the other two groups in floating the Company. The basis of essential term of the agreement between the promotors was that the petitioner holding only 20% shares and in a minority would nevertheless be a part of the management as a director of the Company. In the instant case it is admitted on behalf of the respondents that the strength of the board of directors was reduced from five to three by the majority share‑holders. As a consequence of this reduction, the petitioner, though still representing 20% share‑holding, has lost his right of one directorship, the majority representing 80% now being legally capable to elect all the three Directors. Mr. Rasheed Akhund learned counsel for the respondents, had argued that the petitioner had been removed from the office of director of the Company and the number of directors had been reduced from five to three by the board of directors and these actions were taken by or on behalf of the majority share‑holders in exercise of their legal rights. The reasons for the reduction of the number of directors from five to three was none other than to deprive the petitioner of his right to a directorship and to participate in the management of the Company.

19. We are inclined to hold that if a family business partnership is converted into a private limited company on the basis of certain understanding as to the extent of participation by the members of the family in the management of the Company, any attempt to exclude any of the members from participation in the management of the Company will furnish a ground to wind up the Company on the ground of just and equitable.

We are also inclined to hold that if a private limited company is formed either by the members of one family or by members of more than one family on the basis of personal relationship involving mutual confidence or an understanding as to the extent to which each of the member of the family was to participate in the management of the Company, any attempt to exclude any of the members from the participation of the management in breach of such understanding will entail grant of winding up petition. We are also of the view that the Court in order to ascertain the real nature of the working of a private limited company floated by the members of a family or more than a family can lift the veil of incorporation.

In the instant cases, in High Court Appeal No. 68 of 1982 three families floated the Company each of the three families was given one Directorship according to its shareholding i.e. the respondent having 20% share was allocated one Directorship, the other two groups each having 40% shareholdings were given two Directorships each. This arrangement was incorporated as a part of the Articles of Association of the Company. No dividend at any time from the date of incorporation till the dispute arose was paid. Each group was paid through remuneration of directorship or other methods. The finding of the learned Company Judge that the attempt on the part of the majority shareholders to reduce the number of directorship from 5 to 3 was with the object to exclude the respondent from participation in the management of the Company was in violation of the understanding ‑is support by the material on record.

Similarly, in High Court Appeal No.6 of 1985 the Company was floated by five real brothers. The learned Company judge has recorded his findings as to the basis on which the Company was incorporated and managed from its inception till the dispute arose and the factum that the majority shareholders attempt to exclude the respondent in the said appeal from participation in the management of the affairs of the Company, first by resolving that a cheque was to be signed by two directors and not by one as was the practice and then ousting him from the Directorship in breach of the understanding.

20. The unreported Judgment of. " a Division Bench of this Court in the case of Jaleel Bros. Ltd. referred to hereinabove in pars. 4, is distinguishable in as much as in the said case the petitioner in the petition for winding up while himself was the Managing Director for quite considerable long period started parallel business in the same items of goods and attempt to obtain certain foreign agencies belonging to the Company to its detriment. 21. In our view, the two judgments, under appeal are in accordance with law and do not call for any interference by this Court in the above two High Court Appeals. The above two appeals have no merits and, therefore, the same are dismissed, but there will be no order as to costs.

K. B. A. /A‑146/ K Appeals dismissed.

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