Section 11
Prohibition
of associations and partnership exceeding certain number
[1968] 38 COMP. CAS. 572 (BOM)
HIGH COURT OF
v.
S. Dalmia
MODY, J.
NOVEMBER 18, 21, 1966
J.M. Gandhi for the Petitioner.
M.M. Sanghvi for the Respondent.
D.P. Madon for the
JUDGMENT
This is a petition under the Arbitration Act for determination as to the validity of an arbitration agreement.
The petitioner
is a member of the Stock Exchange,
The petitioner wanted the said disputes to be
decided by arbitration as provided by the rules, bye-laws and regulations of
the Stock Exchange,
The respondents in the affidavits filed on their behalf in the matter of this petition raised numerous contentions. It is, however, unnecessary to refer to them because, Mr. Sanghvi, their learned counsel, stated at the outset of the hearing before me that the respondents admit that there exists a subsisting arbitration agreement between the parties in the terms contained in the form of the contract note annexed as exhibit A to the petition and as contained in the rules and bye-laws of the Stock Exchange, Bombay, in respect of all the transactions which the petitioner alleged had taken place between the parties hereto and by reason whereof the petitioner claimed the sum of Rs. 36,468.75 mentioned in the petition. He, however, stated that although the respondents admit the factum of the arbitration agreement as stated by him, the respondents wanted to contend and contended that that arbitration agreement is not a valid agreement in law. He stated that he wanted to raise the following two contentions :
"(1)The Bombay Stock Exchange is an illegal association and that empowering the governing board or the president of the Exchange to appoint an arbitrator on behalf of the defaulting party is not in accordance with the Arbitration Act, and
(2) There was no arbitration agreement as the bye-laws of the Bombay Stock Exchange had not been published in the Gazette of India or the Gazette of the former State of Bombay or the State of Maharashtra after they had been sanctioned by the Central Government in 1957 and, hence, the bye-laws had not become effective having regard to the provisions of section 9 of the Securities Contracts (Regulation) Act of 1956".
These two contentions, although not taken by the respondents in the affidavits filed on their behalf, were foreshadowed when this petition reached hearing before another judge of this court and as the petitioner did not oppose respondents urging those contentions and as those contentions concerned the legality of the Stock Exchange itself, as also of its rules, bye-laws and regulations, a notice was directed to be issued to the Stock Exchange. In consequence of that notice, the Stock Exchange has appeared at the hearing of this petition before me through its learned counsel Mr. Madon, who has urged contentions on behalf of his client.
During his argument Mr. Sanghvi appeared to reformulate his said two contentions into three contentions as follows :
"(1)that in view of the provisions of section 11 of the Companies Act, 1956, and because the Stock Exchange is an unregistered association of more than 20 persons, it is an illegal association and that therefore all its rules, bye-laws and regulations being those of an illegal association are themselves illegal and that therefore the provisions for arbitration contained in the bye-laws is itself illegal and not binding on the parties. He further contended that although that provision for arbitration in accordance with the rules, bye-laws and regulations of the Stock Exchange is again incorporated in the contract notes between the parties, it is not a valid agreement even as a contract between the parties;
(2) that its bye-law 250 confers a power on the governing board, or the
president of the Stock Exchange to appoint an arbitrator on behalf of the
respondents, but that the provisions of that bye-law conflict with the
statutory provisions of section 9 of the Arbitration Act, 1940, and, that,
therefore the provision contained in bye-law 250 is void and ineffective ; and
(3) that under the provisions of sub-section (4) of section 9 of the
Securities Contracts (Regulation) Act, 1956, (hereinafter referred to as
"the Act") the bye-laws of a recognised stock exchange can have
effect only after they are published in the Gazette of India and the Official
Gazette of the State in which the stock exchange is situated, that they have
not been so published and that the bye-laws have therefore not become effective
at all and that therefore there can be no effective arbitration agreement in
law."
The Act, which is an all-India Act, was enacted on the 4th day of
September, 1956. It came into force on the 20th of February, 1957, being the
date mentioned in the notification issued by the Central Government in exercise
of its powers under sub-section (3) of section 1 of the Act. The Stock
Exchange,
The first of the said three contentions of Mr. Sanghvi is that the Stock Exchange is an illegal Association in view of the provisions of section 11 of the Companies Act. The relevant sub-sections of section 11 are sub-sections (1), (2) and (5) and they read as follows :
"11.(1) No company, association or partnership consisting of more than ten persons shall be formed for the purpose of carrying on the business of banking, unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law.
(2) No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law.
(5) Every person who is a member of company, association or partnership formed in contravention of this section shall be punishable with fine which may extend to one thousand rupees".
In order to attract the prohibition contained in sub-section (2) of section 11, four conditions must be fulfilled : Firstly, it must be a company. association or partnership consisting of more than twenty persons ; secondly, it must not have been registered as a company under the Companies Act nor must it have been formed in pursuance of some other Indian law ; thirdly, that it must have been formed for the purpose of carrying on any business but other than that of banking ; and, fourthly, that that business must have for its object the acquisition of gain by the company, association or partnership or by the individual members thereof. There is no dispute that the Stock Exchange is not a company, nor a partnership, but that it is an association. There is no dispute that it has not been registered as contemplated by sub-section (2) of section 11. There is no averment that this Association, viz., the Stock Exchange, consisted of more than twenty members. Upon being so called upon by Mr. Sanghvi, however, Mr. Madon admitted that since the Stock Exchange became a recognised Stock Exchange under the Act in 1957, it has always consisted of more than twenty members. That requirement of fact therefore exists in the case of the Stock Exchange. The two questions, therefore, which survive for determination are :
"(1)Whether the Stock Exchange was formed for the purpose of carrying on business?, and
(2) Whether that business had for its object the acquisition of gain either by Association or by the individual members thereof ?"
For the determination of those two questions, it is necessary to ascertain the purpose for which the Association was formed, namely, whether its purpose was of carrying on business and, secondly, if the purpose was that of carrying on business, whether the business had for its object the acquisition of gain by the Association or by the individual members thereof. In view of the provisions of sections 2(g) and section 3(2) of the Act it is clear, and there is no dispute, that rules relate in general to the constitution and management of a stock exchange, whereas bye-laws relate to the regulation and control of contracts. The Bombay Stock Exchange has rules, has bye-laws and has regulations also. The regulations are, however, merely incidental and ancillary to and form part of the bye-laws.
Mr. Sanghvi relied upon several rules and bye-laws of the Stock Exchange to support his contention that the Stock Exchange was formed for the purpose of carrying on business and that the object of the business was the acquisition of gain by the Stock Exchange and/or its members.
The objects of the Stock Exchange are set out in its rule 4, which has fifteen objects clauses. Clauses (i), (ii) (iii), (iv) and (xi) are relevant and together with their respective headings they read as follows :
"OBJECTS
4. The Exchange is established—
The interests of brokers, dealers and the public—
(i) to support and protect the character and status of brokers and dealers and to further the interests both of brokers and dealers and of the public interested in securities, to assist, regulate and control the trade or business in securities, to maintain high standards of commercial honour and integrity, to promote and inculcate honourable practices and just and equitable principles of trade and business, to discharge and to suppress malpractices, to settle disputes and to decide all questions of usage, custom courtesy in the conduct of trade and business ;
Buildings
(ii) to erect, construct, extend and maintain in Bombay a suitable building to be used as a brokers' hall and for such other purposes of the exchange as may be determined upon such building to be for ever called 'The Sir Dinshaw Petit Brokers' Exchange Hall', and to erect, construct and maintain such other building or buildings as may be considered necessary or desirable either for the purposes of the exchange or for the use of its members or for any other purpose and to alter, add to or remove any such building or buildings;
Acquisition of Property.
(iii) to acquire by purchase, taking on lease or otherwise and develop any property movable or immovable and any rights or privileges necessary or convenient for the purpose of the exchange and in particular any land, buildings, easements or safe deposit vaults;
Safe Deposit Vaults.
(iv) to use the safe deposit vaults for purposes of storage, gratuitously or otherwise letting on hire and otherwise disposing of safes, strong rooms and other receptacles for money, securities and documents of all kinds;
Clearing House and Banking and
Stock Clearing Corporation.
(xi) to establish and maintain or to arrange or appoint agents to establish and maintain a clearing house for the purpose of the trade or a bank or a stock holding and clearing corporation and to control and regulate the use and administration thereof".
Mr. Sanghvi contended that these clauses show that the Stock Exchange was formed for the purpose of carrying on business, the business being that of a stock market, of a safe deposit vault and of a clearing house. In support of his contention that it was a business, he relied upon the words "the business of the stock exchange" occurring in rules 118, 119 and item (xi) of rule 120. In further support of that contention, he relied upon some of the bye-laws, being bye-laws 1, 3, 4, 91 and 116. Under bye-law 1, the stock exchange is to remain open on certain days as mentioned therein, which are referred to as "business days". Bye-law 3 empowers the governing body to "close the market". Bye-law 4 empowers the president to "close the market". Bye-law 91 provides that the exchange shall maintain a clearing house which shall be under the control of the governing board and that the clearing house shall act as the common agent of the members for clearing contracts between members and for delivering securities to and receiving securities from members and for receiving or paying any amounts payable to or payable by such members in connection with any of the contracts and to do all things necessary or proper for carrying out these purposes. Mr. Sanghvi contended that therefore the Stock Exchange was itself envisaged as an entity, that it was a market, and was carrying on the business of a market and that it was formed to carry on the business of a safe deposit vault and a clearing house. He further contended that that business had for its object the acquisition of gain by the association and/or by the individual members thereof. He pointed out certain rules and bye-laws which, according to him, show that the association was formed for making such gain. He pointed out that the association, viz., the Exchange, can recover from its members entrance fees under rule 32, admission fees under rule 33, annual subscriptions under rule 68 from the authorised clerks, annual subscription under rule 242 from persons who were granted permission for dealing in shares in the market under bye-law 38, fees and charges in respect of arbitration between members and non-members under bye-law 264 and between members under bye-law 312, as also commission in respect of defaulter member's assets under bye-law 341. He further pointed out that the clearing house was a business of the exchange because the exchange is empowered to make charges in respect of the clearing house under bye-law 116, as also charges for closing out under bye-law 188. He further pointed out that the said clause (iii) of rule 4 shows that the exchange can acquire immovable property by way of safe deposit vaults and that under clause (iv) of rule 4 the Stock Exchange is empowered to use the said safe deposit vaults for the purposes of storage not only gratuitously but even otherwise by letting on hire and otherwise disposing of safes, strong rooms and other receptacles for money, securities and documents of all kinds.
Now, to my mind, the main purpose for which the Exchange was formed is contained in clause (i) of rule 4 and it is "to support and protect the character and status of brokers and dealers and to further the interests both of brokers and dealers and of the public interested in securities, to assist, regulate and control the trade or business in securities.....". The real purpose is to further the interests of not only the brokers and dealers, but also of the public interested in securities and for that purpose to regulate and control the business in securities. The other purposes about buildings, acquisition of properties, safe deposit vaults and clearing house contained in clauses (ii), (iii), (iv) and (xi) of rule 4 are merely incidental or ancillary to that main purpose. There is no mention anywhere in the rules which shows that the Exchange was formed with the object of carrying on any trade or business. These rules and the purpose for which the Exchange was formed must be judged in the background of the Act and the new rules and bye-laws which it adopted after the Act came into force.
The preamble of the Act states that it is an Act to prevent undesirable transactions in securities by regulating the business of dealing therein. The preamble shows that the object of the Act was to regulate the business of dealing in securities. Clause (j) of section 2 defines "stock exchange" as meaning "any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities". Under section 3(1) any stock exchange desirous of being recognised for the purposes of the Act has to make an application to the Central Government. Section 3(2) requires, inter alia, that every such application shall be accompanied by a copy of the bye-laws of the stock exchange for the regulation and control of contracts and also a copy of the rules relating in general to the constitution of the stock exchange. Under section 4(1) the Central Government may grant recognition to a stock exchange if the Central Government is satisfied and this is material— that its rules and bye-laws are in conformity with such conditions prescribed with a view to ensure fair dealing and to protect investors and that it would be in the interest of the trade and also in the public interest to grant recognition to the Stock Exchange. As stated earlier, after the Act was passed, the stock exchange first adopted new rules and bye-laws but did not bring them into force, submitted them to the Central Government for its approval, and, after the Central Government approved them by communicating that it was willing to grant recognition, it brought the new rules and bye-laws into effect on and as from 31st August, 1957. It is, therefore, clear that the Stock Exchange adopted the new rules and bye-laws for the only purpose of regulating and controlling the trade or business in securities. Clause (i) of rule 4 says so in so many words. It is nowhere stated in the rules that it was formed for the purpose of carrying on any trade or business. It did not adopt the new rules till the, Government actually intimated, after scrutinising them, that it was prepared to accede recognition to the Stock Exchange. That shows the desire on the part of Stock Exchange to comply with and carry out the very purpose of the Act which is to regulate the business of dealing in securities to prevent undesirable transactions.
Now bye-law 5 provides that the trading sessions for effecting transactions shall be held on the floor of the Exchange subject to certain exceptions provided in the other bye-laws. I have been informed by Mr. Madon across the bar that the Exchange has something like 500 members. The transactions are to be effected on the floor of the Exchange, which is called "the ring". The Stock Exchange must provide adequate space for the purpose. The space must, of necessity, be fairly large. The other bye-laws show that there are certain hours of business during which the transactions are to be effected on the floor of the Exchange. To put through and effectively attend to the transactions, members must of necessity have their offices very close to the floor of the Exchange. It would be difficult for all its members to find office accommodation in the vicinity of the floor of the Exchange for all of them. The Stock Exchange must therefore of necessity have available a sufficiently large building for this purpose. It would be very difficult for it to acquire it on hire. It must, therefore, own a large building, having a ring and sufficient accommodation by way of offices for its members. It is obvious that it is because of that reason that clauses (ii) and (iii) of rule 4 empower the Stock Exchange to own or construct buildings. Mr. Sanghvi argued that the owning of immovable property was a business of the Stock Exchange. Mere owning of immovable property, however, can at the highest be an investment and not a business. It would be a business in immovable property only if there is buying and selling. That is not even the contention of Mr. Sanghvi. But in this particular case, as seen earlier, the power to own immovable property is conferred on the Stock Exchange for the only purpose of enabling the Stock Exchange to efficiently discharge its primary purpose of regulating and controlling transactions in securities. It is but incidental thereto.
For the purpose of carrying out its various functions as a stock exchange, the Stock Exchange would need funds for purchasing or at least hiring a building, for engaging the necessary staff, for stationery, for postage and various other like expenses. The Stock Exchange must, therefore, have some source for providing the funds required for that purpose. To acquire such funds the obvious source would be to charge its members. In my opinion, it is for that purpose that the bye-laws provide that the Stock Exchange shall be entitled to levy the fees and charges mentioned in rules 32, 33, 68 and 242 and bye-laws 38, 264, 312 and 341. In my opinion, the power conferred on the Stock Exchange to recover such fees and charges does not make it a business of the Stock Exchange. Such fees and charges are not levied for the purpose of making it a business of the Stock Exchange by way of a market.
It is such a well known fact that I can take judicial notice of it that modern exchanges, whether in securities or any commodities like cotton, bullion, etc., provide a clearing house for facility of carrying out the large volume of business effected on the particular Stock Exchange. If A sells a hundred shares of a particular company to B, B sells the 100 shares to C, C sells the 100 shares to D and D sells the 100 shares to E, normally each of the four sellers would deliver the shares to his purchaser and each of the four purchasers would pay to his own seller the price for those shares. Instead of having the shares pass through four hands in this way the clearing house merely collects the shares from the initial seller A and delivers them to the final purchaser E. If the sales are at different rates, A receives from the clearing house the full price according to his sale and E pays to the clearing house the full price according to his own purchase and the intervening parties merely pay to or receive from the clearing house by way of adjustment only the differences on the basis of the rates of their own contracts. That is the primary function of the clearing house. The larger the volume of the transactions the greater will be the facility afforded by the clearing house. Of course, an exchange, whether in securities or in other commodities, may avail itself of the facility of a clearing house by employing an independent person like a bank to act for it as a clearing house. Such an independent agency would, however, charge its own commission. It would, therefore, be in the interest of the Exchange and its members that such commision is eliminated by the Exchange itself providing this facility. The elimination of such commission benefits not only the members of the Exchange, but also the investing public, because the members would otherwise, in their turn, in some way, pass on that charge to the investors. Modern Exchanges, therefore mostly provide their own clearing houses. Now, for providing that facility, the Stock Exchange would require a large staff, plenty of stationery and would have to incur various other incidental expenses. To meet the cost it is but natural that the stock exchange would levy some charges by way of clearing house charges. It is for that reason that bye-laws 116 and 188 empower the Stock Exchange to levy certain clearing house charges.
In these circumstances, in my opinion, the provision in clause (xi) of rule 4, enabling the Stock Exchange to establish and run a clearing house and in the bye-laws enabling the Stock Exchange to levy charges by way of clearing house charges is not for the purpose of the Stock Exchange carrying on a business as a clearing house. Sufficient importance must also be given to the provision in the said clause (xi) that the power to establish a clearing house is for the purpose of the trade, meaning the trade in securities, to be carried on under the aegis of the Stock Exchange. The clause does not empower the Stock Exchange to conduct a clearing house for any other trade. I therefore hold that though having a clearing house was, in view of the said clause (xi), one of the purposes for which the Stock Exchange was formed, the clearing house was not its business and that it was merely incidental to its primary function or purpose of regulating and controlling transactions in securities.
In the course of effecting transactions in securities and by way of carrying out such transactions, the brokers, i.e., the members of the Stock Exchange, receive very valuable shares and securities with blank transfer forms executed by the vendors. The vendors would deliver the securities with the blank transfer forms signed by them to their own brokers, who would deliver them to the clearing house and the clearing house would then deliver them to the brokers of the purchasers and the brokers of the purchasers would deliver them to their own clients who have purchased the securities. The process would take some days for its completion. During that period the securities with the blank transfer forms must be safely kept. It is, therefore, but natural that the modern facility of a safe deposit vault must be easily accessible to the members of the Stock Exchange. It is, therefore, that clauses (iii) and (iv) of rule 4 confer on the Stock Exchange a power to acquire safe deposit vaults, but confined for the purpose of the exchange, to use them as such gratituously or otherwise by letting the same on hire. The power to own and use a safe deposit vault is in the very terms of the two clauses restricted to the purpose of the Exchange. It makes it incidental to the main purpose of the Stock Exchange which is to regulate and control transactions in securities. The construction and running of a safe deposit vault requires an initial inevstment as also running expenses. To meet the same it is but natural that the Stock Exchange may levy some fees or charges on such of its members as make use of it. But the fact that the owning of a safe deposit vault and letting it to be used by members is a necessary incident to the main purpose of the Stock Exchange of controlling and regulating transactions in securities and the fact that the two clauses (iii) and (iv) of rule 4 are limited to the purposes of the Stock Exchange clearly show that the power conferred on the Stock Exchange was not for the purpose of carrying on the business of a safe deposit vault.
It is, therefore, clear that none of these activities mentioned by Mr. Sanghvi which the Stock Exchange is empowered to conduct under rule 4 was for the purpose of carrying on any business and the Association, viz., the Stock Exchange, cannot be said to have been formed for the purpose of carrying on any business. Business, moreover, has the motive or purpose or object of profit. But these activities of the Stock Exchange are only for effectually regulating and controlling transactions in shares and securities. Profit may, of course, result because the fees and charges which the Stock Exchange may levy cannot be so fixed that their aggregate would, every year, equal its anticipated expenses. Loss also may result if the fees and charges turn out to be less than the expenses in fact incurred. But what is more important is that these activities are not intended for the Stock Exchange making a profit or gain. The most significant factor which cannot be over-emphasised is that there is no rule or bye-law or regulation of the Stock Exchange which empowers or even envisages a distribution by the Stock Exchange of its profits between its members. When an association of persons carries on business, its fundamental aim would be to make profits for distribution between its members. There is, however, no such provision in the case of the Stock Exchange, Bombay. It, therefore, shows that it was intended that the Stock Exchange was to carry on the said activities of what Mr. Sanghvi called a market and of owning immoveable properties and of a clearing house and of a safe deposit vault as merely incidental to the main function of the Stock Exchange of regulating and controlling transactions in shares and securities and not as and by way of a business by itself. This also shows that the Stock Exchange does not have for its object the acquisition of gain either for itself or for its members. Now, so far as the members are concerned, the activities of the Stock Exchange may result in benefit to its members, such benefit to the members being by reason of earning more profits or gains for themselves because of the beneficial control exercised by the Stock Exchange. But whatever its members may earn in that way would not be the direct result, but would only be an indirect result, of the activity of the Stock Exchange of regulating and controlling the transactions in shares and securities. As a matter of fact, it would really be only a benefit but not a gain. If the Stock Exchange were, for example, to make a profit and to distribute it between its members, it can be said that the activity was being carried on by the Stock Exchange with the object of securing gain to its members. But here such is not the object. Its activities merely enable the members to make a larger gain. But it is possible that the effect of its activities may be different on its different members in spite of the regulation and control by the Stock Exchange. In spite of such regulation and control some of its members may, in respect of their transactions on the Exchange, make greater gains than other members and indeed some other members may conceivably make losses. This, to my mind, conclusively shows that the activities of the Stock Exchange do not have for their object the securing of gains for its members. It is, therefore, clear that although the Stock Exchange was admittedly an association of more than twenty persons, it is not formed for the purpose of carrying on any business, much less a business which has for its object the acquisition of gain either by the. Stock Exchange itself or by the individual members thereof. It, therefore, does not contravene the provisions contained in sub-section (2) of section 11. I, therefore, hold that it was not an illegal association as contended on behalf of the respondents.
In view of that finding it is unnecessary for me to deal with the arguments which Mr. Sanghvi advanced as to the validity or otherwise of the arbitration agreement on the basis of his contention that the Stock Exchange is an illegal association by reason of its contravention of sub-section (2) of section 11 of the Companies Act.
Mr. Sanghvi's second contention was that the provisions of bye-law 250 conflict with the provisions of section 9 of the Arbitration Act and that because the arbitration agreement between the parties is made subject to the bye-laws of the association and in any event in itself incorporates by agreement that provision which is contained in bye-law 250-the arbitration agreement is invalid in law.
Bye-law 250, in so far as it is material for the purposes of this petition, provides that if after one party to a dispute has appointed an arbitrator ready and willing to act, there is failure, neglect or refusal on the part of the other party to appoint an arbitrator within seven days after service of written notice of that appointment or within such extended time as the governing board or the president may on the application of the other party allow, the governing board or the president shall appoint an arbitrator. That provision of the bye-law 250 has been bodily incorporated in Form "A" on the basis whereof, it is common ground between the parties, an arbitration agreement exists between them. On the facts of this case that provision as contained in bye-law 250 has become capable of being invoked because the petitioner appointed his own arbitrator and through the Stock Exchange called upon the respondents to appoint their arbitrator, but the respondents failed, neglected and/or refused to do so.
The relevant part of section 9 of the Arbitration Act is as under :
"9. Where an arbitration agreement provides that a reference shall be to two arbitrators, one to be appointed by each party, then unless a different intention is expressed in the agreement,—.........
(b) if one party fails to appoint an arbitrator, either originally or by way of substitution as aforesaid, for fifteen clear days after the service by the other party of a notice in writing to make the appointment, such other party having appointed its arbitrator before giving the notice, the party who has appointed an arbitrator may appoint that arbitrator to act as sole arbitrator in the reference, and his award shall be binding on both parties as if he had been appointed by consent:.....".
Mr. Sanghvi contended that the preamble of the Arbitration Act shows that it was enacted to consolidate and amend the law relating to arbitration. He drew my attention to various provisions of the Arbitration Act to show that the provisions contained in the Arbitration Act constitute a code by itself and that as shown by many of the sections of the Arbitration Act, the jurisdiction of the court, by way of a suit or proceeding before it, is excluded in matters in respect of which there is an agreement of arbitration. For the decision of the present contention I am prepared to proceed on the basis that the Arbitration Act is a consolidating Act. Mr. Sanghvi then contended that where there is an arbitration agreement and one party to that agreement appoints an arbitrator but the other party after due notice fails to appoint its own arbitrator, then the provisions of clause (b) of section 9 of the Arbitration Act must apply and the arbitrator appointed by the first party must become the sole arbitrator as if appointed by consent by both the parties. He pointed out that bye-law 250, however, contains a different and conflicting provision because it enables the governing board or the president of the Stock Exchange to appoint a second arbitrator to act jointly with the arbitrator appointed by the first party. He contended that, therefore, the provision of bye-law 250 violates the statutory provision of section 9 of the Arbitration Act and that, therefore, not only is that provision void, but it also renders the entire arbitration agreement void because it takes away an integral part of the machinery contemplated by that bye-law.
Now, in my opinion, this entire contention proceeds on a misconception or a misinterpretation of the provisions of section 9 of the Arbitration Act. The material words of section 9 are, "unless a different intention is expressed in the agreement". In my opinion, the provision contained in section 9, read with its clause (b), can operate only if and in so far as a different intention is not expressed in the agreement of arbitration. To put it in different words, in cases in which a particular arbitration agreement contains no provision to operate in the contingency contemplated by clause (b), the statutory provision contained in that clause will, by implication of law, provide for the deficiency. Conversely, to the extent that an arbitration does contain a provision to meet that contingency, the provision contained in clause (b) of section 9 will not apply. If full provision for the contingency is made in an arbitration agreement, clause (b), read with section 9, will have no application whatever. If, however, an arbitration agreement does envisage that contingency and provides for it, but does not provide for it fully, that part which is left unprovided for will be covered by the provision in clause (b) read with section 9. Mr. Sanghvi, however, contended that the words "unless a different intention is expressed in the agreement" merely enable the parties to provide in the arbitration agreement that the provision of section 9 will not apply, but not to affirmatively provide a term which is not in accordance with or conflicts with the provision of section 9. In my opinion, that contention cannot be accepted. Firstly, it is clearly against the plain and simple construction of the clear and unambiguous language of section 9. Secondly, the interpretation Mr. Sanghvi canvasses for is that parties to an arbitration agreement can provide in their agreement that the provisions of section 9, read with its clause (b) shall not apply. A conscious deliberate stipulation that section 9 read with its clause (b) shall not apply—discloses firstly a consciousness on the part of the parties to the agreement that the reference is to be to two arbitrators and secondly, a consciousness that there can arise a contingency where one party to the agreement may appoint an arbitrator but the other may not, and thirdly that the stipulation that section 9 read with its clause (b) shall not apply, will leave such a contingency unprovided for and may thereby frustrate the entire arbitration agreement. It would lead to an absurd or anomalous result. The section cannot be so interpreted as to lead to such a result. I, therefore, reject this second contention of Mr. Sanghvi.
The third contention of Mr. Sanghvi was that, in view of the provisions of sub-section (4) of section 9 of the Securities Contracts (Regulation) Act, 1956, the bye-laws of the Stock Exchange, Bombay, would have been valid only if they had been published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the Stock Exchange, Bombay, was situated, that is, in the State in which Bombay was, meaning the State of Bombay as it then was, or the State of Maharashtra, newly created thereafter, that the bye-laws were not published in the Gazette of India and also in the Gazette of the then State of Bombay or the present State of Maharashtra, that the bye-laws do not therefore become legally effective and that therefore the agreement of arbitration, the factum of which is admitted by the respondents, is not effective in law. This contention of Mr. Sanghvi about publication is confined only to the bye-laws, which include the regulations and as it does not apply to rules, reference to the provisions about rules will be omitted.
The material provisions of the Act concerning recognition by the Central Government of a Stock Exchange for the purposes of the Act are as follows :
"3. (1) Any Stock exchange, which is desirous of being recognised for the purposes of this Act, may make an application in the prescribed manner to the Central Government.
(2) Every application under sub-section (1) shall contain such parti culars as may be prescribed, and shall be accompained by a copy of the bye- laws of the Stock Exchange for the regulation and control of contracts and also a copy of the rules relating in general to the constitution of the Stock Exchange.......
4. (1) If the Central Government is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require,—
(a) that the rules and bye-laws of a stock exchange applying for
registration are in conformity with such conditions as may be prescribed with a
view to ensure fair dealing and to protect investors ;
(b) that the stock exchange is willing to comply with any other conditions (including conditions as to the number of members) which the Central Government, after consultation with the governing body of the stock exchange and having regard to the area served by the stock exchange and its standing and the nature of the securities dealt with by it, may impose for the purpose of carrying out the objects of this Act; and
(c) that it would be in the interest of the trade and also in the public interest to grant recognition to the stock exchange ;
it may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such form as may be prescribed".
Sub-section (2) of section 4 lays down the conditions which the Central Government may prescribe under clause (a) of sub-section (1) and contains conditions relating to, inter alia, the manner in which contracts shall be entered into and enforced as between members.
Sub-section (3) of section 4 is as follows :
"Every grant of recognition to a stock exchange under this section shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the stock exchange is situate, and such recognition shall have effect as from the date of its publication in the Gazette of India".
In this connection the dates stated earlier must be borne in mind. It was on the 9th of April, 1957, that the Stock Exchange, Bombay, passed its new rules, bye-laws and regulations and made an application for recognition and forwarded with it a copy of its new bye-laws and regulations. On 6th August, 1957, the Government of India intimated to the Stock Exchange its willingness to recognise it as a recognised stock exchange. It was thereafter on the 13th of August, 1957, that the Stock Exchange, Bombay, resolved to bring the said new rules, bye-laws and regulations into force as from 31st August, 1957. It was only thereafter, on the 31st of August, 1957, that the recognition granted by the Central Government to the Stock Exchange, Bombay, was published in the Gazette of the Central Government as required by sub-section (3) of section 4. It is, therefore, clear that the recognition became effective from 31st August, 1957.
Now the relevant portions of section 9 of the Securities Contracts (Regulation) Act are as follows :
"9. (1) Any recognised stock exchange may, subject to the previous approval of the Central Government, make bye-laws for the regulation and control of contracts.
(2) In particular, and without prejudice to the generality of the fore going power, such bye-laws may provide for.....".
There are clauses (a) to (w) mentioning diverse topics in respect of which bye-laws can be made.
"9. (4) Any bye-laws made under this section shall be subject to such conditions in regard to previous publication as may be prescribed, and when approved by the Central Government, shall be published in the Gazette of
India and also in the Official Gazette of the State in which the principal office of the recognised stock exchange is situate, and shall have effect as from the date of its publication in the Gazette of India :
Provided that if the Central Government is satisfied in any case that in the interest of the trade or in the public interest any bye-law should be made immediately, it may, by order in writing specifying the reasons therefor, dispense with the condition of previous publication".
Now it is clear that under sub-section (4) of section 9 what are to be published are the bye-laws made under section 9, which means sub-section (1) of section 9. Sub-section (1) of section 9 provides that any recognised stock exchange may make bye-laws. Therefore, sub-section (1) confers a power on a recognised stock exchange to make bye-laws. What sub-section (1) contemplates are bye-laws made by a stock exchange after recognition is granted to it because it speaks of a recognised stock exchange making bye-laws and it is such bye-laws made by a stock exchange after recognition is granted to it which are required by sub-section (4) to be published. The bye-laws of the stock exchange, Bombay, were, however, made by it before recognition was granted to it and they cannot and are not of the nature falling under subsection (1) of section 9 and cannot be held to have been made under section 9 and the requirement under sub-section (4) could not and did not apply to them. They are, therefore, valid although not published in the Official Gazette as contemplated under sub-section (4). For easy reference the bye-laws made by a stock exchange before its recognition may be referred to as "pre-recognition bye-laws" and those made after its recognition under the provision contained in section 9 as "post-recognition bye-laws". On a plain reading and construction of the unambiguous language of sub-sections (1) and (4) of section 9, I hold that only what I have called the "post recognition bye-laws" require to be published and not what I have called "pre-recognition bye-laws".
Mr. Sanghvi, however, advanced an alternative contention. He contended that the scheme of the Act requires, firstly, that section 9(1) must be construed to include pre-recognition by-laws also and, secondly, that the word "may" in section 9(1) must be read and be construed as "shall", that is an imperative requirement and that a stock exchange which had pre-recognition by-laws must, after its recognition, comply with that imperative requirement, either make new bye-laws or at least re-make even the same pre-recognition bye-laws and publish them as required by section 9(4).
Under the provisions of section 3(2), the application of a stock exchange for recognition is to be accompanied by a copy of its bye-laws. Under the provisions of section 4(1) the Central Government can grant recognition to a stock exchange after it is satisfied after making such inquiry as may be necessary in that behalf and obtaining further information that the bye-laws are in conformity with such conditions as may ensure fair dealing and protection to the investors. The provisions of section 3(2) read with section 4 on the one hand and section 9, sub-sections (l) and (4) on the other are similar and parallel but only to a limited extent. Pre-recognition bye-laws require Government satisfaction as stated in section 4(1). Post-recognition bye-laws require Government's approval as stated in section 9(1). That feature is similar. But although section 4 by its sub-section (3) provides that the recognition granted by the Government to a stock exchange should be published in the Gazette, it does not provide that the bye-laws on the basis of which the Government was satisfied and granted recognition should be published in the Official Gazette. Sub-section (4) of section 9 provides that the post-recognition bye-laws shall be published in the Official Gazette. This feature is dissimilar. Mr. Sanghvi contended that the provisions of sub-section (4) of section 9 show that mere approval by the Government was not considered sufficient, but that the legislature thought that in addition thereto the bye-laws must receive publicity by being published in the Official Gazette. He contended that unless pre-recognition bye-laws are held to fall within section 9, there will be a differentiation on this very material point of publication between the pre-recognition bye-laws and the post-recognition bye-laws.
Now this is an argument based on the scheme of the Act for gathering what the intention of the Legislature was. There is no reason in this case why the clear and unambiguous language of sub-section (1) of section 9 should be construed to include what it does not, namely, the pre-recognition bye-laws, so as to attract the provisions of section 9(4) as to publication. Where the Legislature so intended, that Legislature has provided for publication of the bye-laws, namely, in the case of the post-recognition bye-laws in sub-section (4), and one would expect that if the Legislature intended the pre-recognition bye-laws to be similarly published, it would have made a similar provision in respect of the same. But curiously enough it is section 4 which deals with the Government's satisfaction about the pre-recognition bye-laws and sub-section (3) of section 4, although it provides for publication, confines it to the fact of the recognition of the stock exchange, and significantly omits any provision for the publication of the pre-recognition bye-laws on the basis of which recognition is granted. As this argument is based on a consideration of the scheme of the Act, it should be noticed that a power was conferred on a recognised stock exchange to make rules by adding section 7A by a subsequent amendment. Sub-section (1) of section 7A confers that rule-making power and sub-section (2) of section 7A contains a provision that such rules, when made, must be published in the Official Gazette. That provision about rules is parallel to the provision about bye-laws in section 9. What are to be sent to the Government along with an application for recognition are both rules and bye-laws. There is an omission about the provision about publication in the Official Gazette of not only the bye-laws but also the rules on the basis whereof recognition is granted to the stock exchange. The provision about rules clearly shows an intention on the part of the Legislature that it was never intended by the Legislature that either the rules or the bye-laws on the basis of which recognition is granted should be published in the Official Gazette. The addition of section 7A subsequently by an amendment shows that only when rules are subsequently made by an association after recognition is granted to it, that the rules should be published in the Official Gazette and that that provision is similar to that in respect of the post-recognition bye-laws contained in section 9. To my mind, the omission about publication of pre-recognition bye-laws, as also pre-recognition rules, has been deliberately made by the Legislature, that there is no justification in ascribing an intention to the Legislature that it wanted publicity by way of publication in the Official Gazette in respect of pre-recognition bye-laws also and that on the basis of such assumed intention to disregard the clear words of sub-section (1) of section 9 and include pre-recognition bye-laws also within its ambit.
Mr. Sanghvi then contended that sub-section (1) of section 10 of the Securities Contracts (Regulation) Act confers on the Central Government a power independently of a stock exchange to "make bye-laws for all or any of the matters specified in section 9 or amend any bye-laws made by such stock exchange under that section". He contended that section 10(1) refers this power to make bye-laws or to amend bye-laws to those under section 9 and that if section 9 is not construed to include pre-recognition bye-laws, the Central Government will not have the power to make or amend bye-laws in respect of pre-recognition bye-laws but that that power will be confined only to post-recognition bye-laws. He contended that the legislature could not have intended such an anomalous position and that therefore section 9(1) should be construed to include pre-recognition bye-laws also.
Now, the power under section 10(1) applies in two cases, namely, (1) to make bye-laws for all or any of the matters specified in section 9 and (2) to amend any bye-laws made by such stock exchange under that section. Now so far as the first power is concerned, the words "For all or any of the matters specified in section 9" merely refer to the topics mentioned in section 9 for which bye-laws can be made, namely, "for the regulation and control of contracts" as mentioned in sub-section (1) and the various illustrative topics mentioned in items (a) to (w) in sub-section (2) of section 9. The first power refers only to the topic or topics in respect of which the power can be exercised but not to the conferment of the power itself. Moreover, the word used is "make" bye-laws. The power to make would include the power to rescind, alter or modify. By virtue of the provisions of section 21 of the Central General Clauses Act, a power to issue rules or bye-laws would include a power to add to, amend, vary or rescind rules and bye-laws. Inasmuch as the power to make bye-laws is not confined to the bye-laws made under section 9, that provision would apply equally to post-recognition bye-laws, as also to pre-recognition bye-laws and the Central Government would have equal power to alter or amend or rescind bye-laws of either category. There would, therefore, be no disparity or dissimilarity in the powers of the Government in respect of those two categories of bye-laws.
Mr. Sanghvi replied upon the phraseology of section 10(1) when it confers the said second power. He argued that it confers upon the Government power to amend bye-laws made by a recognised stock exchange "under that section". Now, as contended by Mr. Sanghvi, it is quite clear that this power refers to the bye-laws made under section 9, namely, post-recognition bye-laws, only and that the power to amend is conferred by section 10(1) only in respect of post-recognition bye-laws, but not in respect of pre-recognition bye-laws. But that difference, to my mind, is of no substance because the power to amend pre-recognition bye-laws is included in the first power which confers power to make bye-laws, because the word "make" includes also the power to amend, alter or rescind. The said second power to amend was again specifically granted, perhaps, only by way of abundant caution, but such addition does not justify placing a narrow construction on the first power and confine it as referring only to post-recognition bye-laws and exclude thereform pre-recognition bye-laws.
Mr. Sanghvi then contended that under sub-section (3) of section 9 of the Securities Contracts (Regulation) Act the bye-laws made under section 9 may specify the bye-laws the contravention of which shall make a contract entered into otherwise than in accordance with the bye-laws void under sub-section (1) of section 14. He further pointed out that section 14, sub-section (1), provides that any contract entered into in any State or area specified in the notification issued under section 13 which is in contravention of any of the bye-laws specified in that behalf under clause (a) of subsection (3) of section 9 shall be void. He pointed out that after bye-laws are framed, there can possibly be violations of many of the bye-laws, but that section 9(3) provides that there must be a separate bye-law which must specifically, as it were, enumerate the bye-laws the violation of which will make the entire contract void. He contended that section 14 gives the legislative sanction making the violation of the bye-laws enumerated or specified under section 9(3) void. He pointed out that the provisions of subsection (3) of section 9 is confined only to the bye-laws under section 9. He contended that, therefore, if section 9(1) is construed not to include pre-recognition bye-laws, there would be no such legislative sanction making the violation of any bye-laws void, because the provision of section 14 itself is confined to the bye-laws made under section 9. He contended that the Legislature could never have intended that there should be such dissimilarity about making the violation of specific bye-laws void between post-recognition bye-laws and pre-recognition bye-laws.
Now, the provisions of section 14(1) can only apply in a State or area specified in the notification issued under the provisions of section 13. The granting of recognition to a stock exchange is independent of section 13. Recognition can be granted to a stock exchange even if it is in a State or area in respect of which no notification under section 13 is issued. Therefore there is a distinction so far as section 14 is concerned even between different recognised stock exchanges, namely, those in respect of which there is a notification under section 13 and those in respect of which there is no such notification. Therefore, even in respect of recognised stock exchanges, even if there be a bye-law specifying the bye-laws the contravention of which shall make a contract entered into otherwise than in accordance with the bye-laws under section 9 void, if no notification has been issued, the sanction provided by section 14 will not exist, whereas in respect of recognised stock exchanges in respect of which there is a notification under section 13, the sanction provided by section 14 would apply. As there is such a distinction even within the category of recognised stock exchanges themselves there is no reason to assume that the legislature did not want to make a similar distinction between the post-recognition bye-laws and pre-recognition bye-laws. As a matter of fact, there is no obligation under the Act cast upon all recognised stock exchanges to have a bye-law of the nature contemplated under sub-section (3) of section 9. The Government can, therefore, if it so thinks fit, after issuing a notification under section 13, and if it thinks that it is so necessary in the particular case of a stock exchange make it a condition of recognition that the stock exchange shall, immediately upon recognition, pass a bye-law of the nature contemplated in sub-section (3) of section 9. The distinction may possibly have been made due to another reason. In the case of post-recognition bye-laws the legislative sanction making contracts void on the ground of violation of the bye-laws would be that under section 14. In the case of pre-recognition bye-laws, however, the legislative sanction would be under the other laws of the land, e.g., the Contract Act. That would be so because all the transactions on the stock exchange would be entered into with a term that the same are subject to the bye-laws, which would be the pre-recognition bye-laws, and non-compliance with the bye-laws would render the contract void. But it is not justifiable to speculate as to the reasons why the Legislature made this distinction between post-recognition and pre-recognition bye-laws and there is no reason why a plain construction of the unambiguous provisions of sections 9, 13 and 14 should not be accepted and they should be construed to mean something else than what they, on the face of them, mean on the ground of a supposed intention of the Legislature. Therefore, this contention urged by Mr. Sanghvi is not of such force as to give to the language of sub-section (1) of section 9 a meaning other than the natural meaning attributable to it on the clear language of that sub-section so as to include pre-recognition bye-laws within the ambit of sub-section (1) of section 14.
The last contention in this connection urged by Mr. Sanghvi was that the word "may" in sub-section (1) of section 9 must be read as "shall" and must be construed to have imperative force. Mr. Sanghvi contended that if "may" is read as "shall" sub-section (1) of section 9 casts an obligation upon a recognised stock exchange, even if it has pre-recognition bye-laws, to immediately, upon recognition, make bye-laws and follow the procedure laid down in that behalf by section 9. He contended that it may be that if the Government has been satisfied as to the bye-laws of a particular stock exchange immediately prior to its recognition, the stock exchange may have merely to re-make the same bye-laws, without any change, merely with a view that the same may comply with the requirement as to publication in the Official Gazette. To my mind, the acceptance of this contention would reduce to an absurdity the provision of sections 3 and 4 which requires the satisfaction of the Central Government as to the bye-laws of the stock exchange before recognition is granted to it. That provision of sections 3 and 4 will be rendered unnecessary, because section 9(1) itself provides that before a recognised stock exchange makes any bye-laws, it shall first seek and obtain the approval of the Central Government. The approval of the Central Government can, therefore, be obtained by reason of the application under sub-section (1) of section 9 and there would then be no necessity for the Central Government to first satisfy itself about the provisions of the bye-laws of a stock exchange before granting a stock exchange recognition, because such bye-laws, being pre-recognition bye-laws, would, on the argument of Mr. Sanghvi, have no effect whatever and it would be totally unnecessary for Government to waste its energy and time over it. There is another difficulty also in the way of accepting this particular contention of Mr. Sanghvi, as, on his contention, the pre-recognition bye-laws will have no efficacy or operation whatever, and a stock exchange, after it is granted recognition, must, of necessity, permit no transaction of its exchange in the interval between the date of recognition and the date when it makes its bye-laws, gets the approval of the Government under sub-section (1) of section 9 and the bye-laws are published in the Official Gazette as required by subsection (3) of section 9. On the clear language of sub-section (1) of section 9 there is no reason whatever to read "may" as "shall". But what is more, these are the difficulties or anomalies which will result in construing "may" as "shall". There is no justification for doing so. I therefore reject this contention of Mr. Sanghvi.
In the result, I negative the entire contention of Mr. Sanghvi as to the construction of sub-section (1) of section 9 and I hold that what I have called pre-recognition bye-laws do not fall within the ambit of section 9 and do not require publication under sub-section (4) of section 9.
Mr. Gandhi, the learned counsel for the petitioner, had advanced arguments on an alternative basis. He contended that even if it be held that the pre-recognition bye-laws required publication under section 9 and the pre-recognition bye-laws of the Stock Exchange, Bombay, not having been so published, are invalid, the material provision about arbitration is contained in the agreement of arbitration between the parties contained in the contract which they have entered into in the Form 'A' annexed to the petition and that, therefore, that arbitration agreement is valid as a valid contract irrespective of and inspite of the provisions of section 9 of the Securities Contracts (Regulation) Act. As I have held that the pre-recognition bye-laws do not fall within the ambit of section 9 and do not require publication and are therefore valid, it is not necessary for me to consider this alternative contention urged by Mr. Gandhi.
Under the circumstances, I hold and declare that the arbitration agreement, which, it is common ground, does exist between the parties hereto in the terms contained in the form of the contract note exhibit A to the petition and as contained in the rules and bye-laws of the Stock Exchange, Bombay, is valid and subsists in respect of all the transactions which the petitioner alleges had taken place between the parties hereto and by reason whereof the petitioner claims the sum of Rs. 36,468.75 mentioned in the petition.
Costs must follow the event. I, therefore, order that the respondents shall pay the petitioner's costs of this petition. This petition is an adjourned chamber matter. The hearing before me has lasted, I am told by counsel, for about 28 hours. Lump sum costs are therefore totally inadequate. I therefore direct that the respondents shall pay the petitioner's costs as taxed costs where one counsel is allowed.
Mr. Purohit applies that I should make an order under rule 600 of the rules applicable on the original side of this court that the taxing master may allow as instruction item a sum exceeding Rs. 1,000. As regards the facts the preparation required in this matter was not very significant. It is true that the respondents had in the affidavit denied the factum of the contracts, namely, their signature on the acknowledgment slips relating to the contracts and the petitioner had to keep his evidence ready to prove the respondents' signatures. But the work relating to the same was not considerable. The rest of the petition and the arguments thereon were only on point of law mainly confined to the provisions of the Securities Contracts (Regulation) Act and the rules, bye-laws and regulations of the Stock Exchange, Bombay. I, therefore, do not think that there is any reason to make any order under rule 600 as applied for.
Mr. Madon applied that the respondents should be ordered to pay the costs of the Stock Exchange, Bombay, also. Mr. Sanghvi contended that it was the court which issued the notice to the Stock Exchange, Bombay, and it is in pursuance of that notice that the Stock Exchange has chosen to appear and the respondents should not, therefore, be ordered to pay the costs of the Stock Exchange. Now, it is true that the Stock Exchange has appeared because of the notice issued by the court. As a general rule, the costs of the party to whom a notice is issued by the court and which appears in pursuance thereof to protect its interests are at the discretion of the court and the court may or may not award such costs against the losing party. In this particular case, however, the contentions raised by the respondents in respect of the Stock Exchange were of extremely far-reaching consequences. The respondents challenged the legality of the very existence of the Stock Exchange when they contended that it is an illegal Association. They also challenged the entire set of rules, bye-laws and regulations of the Stock Exchange. To my mind, this case is not an ordinary case where a notice is issued to a party by the court and the party appears to protect its interests. To the extent that the legality of its very existance was challenged, the Stock Exchange can be said, in a sense, and in a very limited sense, to be interested in protecting its interests. But the challenge to the legality of its existence and to the legality of its rules, bye-laws and regulations affect not only Stock Exchange, but the entire investing public in the State and even outside it who had pending dealings on the Stock Exchange which were subject to the rules, bye-laws and regulations. If any of these contentions of the respondents had succeeded, it would have had devastating effect upon thousands of pending contracts in stocks and shares made subject to the rules, bye-laws and regulations of the Stock Exchange, Bombay. Such contracts would be in various stages of completion and thousands of persons would have faced difficulties in giving and taking delivery or in receiving payments under those contracts. As a citizen of Bombay, I can take judicial notice that such pending contracts would ordinarily be of the magnitude of millions of rupees. Mr. Sanghvi contended that the Stock Exchange appeared on this petition only for the purpose of protecting its own interests and that the respondents should not therefore be ordered to pay the costs of the Stock Exchange. This contention, which the respondents have instructed their counsel to advance, is, to say the least, a naive one. If it was held on this petition that the Stock Exchange was an illegal association or that the rules, bye-laws and regulations, lock stock and barrel, of the Stock Exchange were inoperative and invalid by reason of their not having been published in the Official Gazette as contended by the respondents, the result would have affected not merely the petitioner and the respondents but every one having pending dealings on the Stock Exchange. A judgment of that nature would definitely have received publicity and the public is hardly likely to consider the niceties of law whether that judgment is binding on the Stock Exchange or not. But, even if that judgment can be held not to be binding on the Stock Exchange, as it is not a direct party to the petition, the holding of the rules, bye-laws and regulations of the Stock Exchange as being invalid would undoubtedly affect all pending transactions on the Stock Exchange, unless, of course, my judgment is set aside or modified by a higher court. But damage would be done. In a matter of such far-reaching consequences one can very well appreciate that the Stock Exchange may not rest content by relying merely on the petitioner to urge all the contentions against the contentions of the respondents without it itself appearing on this petition. In my opinion, therefore, the Stock Exchange has appeared not merely for the protection of its own interests, but also for the protection of the interest of the investing public, which is one of its duties as can be seen from clause (a) of section 4 of the Securities Contracts (Regulation) Act, 1956. In that sense, not only was the Stock Exchange entitled to appear, but it was under a duty to appear and it has discharged not only its personal functions but its public functions and has in that sense appeared in representative capacity. The Stock Exchange is therefore entitled not merely to recover its costs of this petition from the respondents, but also to recover taxed costs and as it is appearing in a representative capacity, it is entitled to recover costs taxed as between attorney and client. I, therefore, order that the respondents shall pay to the Stock Exchange, Bombay, its costs of this petition when taxed on the basis of one counsel being allowed as between attorney and client.
[1939] 9 Comp Cas 254 (RANGOON)
v.
The King
SpaRgo, J.
January 31, 1939
A.C. Rodriguez for the Appellant.
Spargo, J. — The appellant Dawson, described as an accountant, has been convicted of an offence under Section 4, sub-section 2, Companies Act, 1913, punishable under Section 4, sub-section 5 of the Act. It is said that he formed a company known as the "Indo-Burma Union Limited" for the purpose of carrying on business that had for its object the acquisition of gain by the company without registering the same. Nothing was mentioned in the charge of the requirement for an offence under sub-section (2) that the company must consist of more than twenty members, but I do not consider that any miscarriage of justice has been caused by this omission as appellant was throughout defended by counsel and evidence was given to show that there were many more than twenty members who subscribed for shares. He was also convicted of carrying on 'business under the name and style of Indo-Burma Union Ltd., using the word limited without the company being incorporated with 'limited liability' an offence under Section 283, Companies Act. As to this second charge Mr. Rodriguez who argued the appeal for the appellant said that he could not contest that appellant had so carried on business and it will not therefore be necessary to say any more about this conviction.
I have read all the evidence in the case with care, a task which was not made any easier by the fact that the sheet that is numbered 50 should apparently be numbered 38. What is proved by the evidence and is indeed apparently not contested is that several "district organizers" were appointed numbering seven, who were induced by Dawson to subscribe money for shares in the Indo-Burma Union Ltd. These district organizers induced other persons at Dawson's instance to subscribe money for shares in the company and they were designated agents of the Company. The evidence shows that U Aindawtha, one of the district organizers, brought in six agents; another, Ba O, brought in five; Saw Joseph brought in seven; Maung Saw Maung brought in one. Apparently subscriptions were collected in small sums from other persons who were not designated agents, perhaps because their subscriptions were too small, for Saw Joseph says he sold more than 400 shares of the Company whereas those taken by the agents he introduced totalled only 210, and there is a list of subscribers numbering 250. San Kyaw who was employed as executive officer of the Company says that there were about 250 shareholders in the Company and actually 34 members were carrying on the business of the Company. There can be no doubt therefore that the Company consisted of more than twenty persons. The main point argued by Mr. Rodriguex is that in order for an association of persons to be illegal it must be shown that there is a legal relationship between more than 20 persons inter se giving rise to joint rights or obligations or mutual rights and duties. He says that all that the prosecution has been able to do here is to show that each of the so-called shareholders has entered into a contract with Dawson either with him personally or through his agents and there is no relation established between one shareholder and any other. Reference was made to Neelamega Sastri v. Appiah Sastri. This case concerned a chit fund and it was contended that the managers of the chit fund with the subscribers formed an association and the Full Bench found "that the parties to the instrument are not an association within the meaning of Section 4, Companies Act, 1882."
The basis of the decision was that in order "to constitute an association within the meaning of the Section, the existence of the legal relation between more than twenty persons giving rise to joint rights or obligations or mutual rights and duties is absolutely necessary."
Mr. Rodriguez says this authority applies to the present case. The shareholders, agents, organizers, and appellant together form an association of persons just as the subscribers and managers of the chit fund did in the Madras case. He says that it makes no difference that in the case under appeal the object was to form a trading company whereas in the Madras case it was to form a chit fund. In fact he said that in order that sub-section 2, Section 4 should apply to an association of persons they must be shown to be in partnership. He would read the Section as though in subsection 2 the words "Company" and "Association" were left out. If that had been the intention of the section, it would have been very easy so to frame it. I consider that there are many ways in which people can be associated together. One is, they may be members of a company, another is they may be partners; and the other ways are grouped together under the word "Association". One such way is the formation of a chit fund, and in such a case Neelamega Sastri v. Appiah Sastri, will apply. But where the object is to form a company it does not and there is no need to show the existence of a legal relation between the persons forming the company. Then it is said that there has only been an offer on the part of the subscribers asking for shares accompanied by a sum of money; that offer has not been clinched and turned into the form of an actual contract by acceptance. The money is still in deposit but nothing was done to clinch the contract. Then how can it be said that the individual subscribers were shareholders in this concern or entitled to joint rights—rights as shareholders? Mr. Rodriguez said that if there had been a meeting between these so-called shareholders, legal relations might have been established between them so as to make sub-section 2 of Section 4 apply. This argument is based on the notion that legal relations must be shown to exist between the subscribers for shares to a company before the sub section applies and I have dealt with this argument above. In my opinion, as soon as the appellant collected the money for the shares the bargain was clinched. The subscriber paid his money for shares in the Indo Burma Union Limited and for no other purpose. Appellant and his fellow directors were carrying on a business under that name, and it is idle to say that this does not come under sub-section 2 because no share certificates were issued. In my view sub-section 2 of Section 4 did apply to the case.
Mr. Rodriguez spent some time describing appellant's efforts to get his company registered. He applied for registration on 30th March 1937 but the memorandum had to be returned for amendment. It was re-submitted on 4th September 1937 and 12th October 1937 and each time had to be returned so as to comply with the regulations. Then no further application was made. The fact then remains that the company was not registered. The efforts to register it seem to have been genuine. Appellant went to the length of printing his memorandum of association and paying over Rs. 140 in stamp fees. I do not know why he did not secure the registration of his company as the defects in his memorandum seemed easy to put right. But he did not and therefore the offence is proved. It was argued that as the offences are non-cognizable, the police should not have investigated them and the Court should not have tried them. It is true that the offences are non-cognizable but I cannot find that the case was investigated under Chapter 14, Criminal Procedure Code. It was not sent up under that Chapter but apparently by a private complaint by U Tin. Even though the case were wrongly investigated and sent up by the police there seems to me to be no obstacle to its being tried by the Magistrate. King-Emperor v. Sada, referred to by Mr. Rodriguez does not show that there is any such obstacle. I am of opinion that the fine imposed on the appellant for the first offence is heavy in view of the fact that he made genuine efforts to register his company, though they may have been clumsy efforts and I reduce the fine for the first offence to Rs. 40 and in default of payment of the fine one month's simple imprisonment. The sentence for the second offence is unaltered except that the imprisonment in default is to be simple and shall not run concurrently with the imprisonment in default of payment of the fine imposed for the first offence.
HIGH COURT OF KARNATAKA
K.N. Eswara Rao
v.
K.H. Shama Rao & Sons
Y. BHASKAR RAO, CJ.
AND N.S. VEERABHADRAIAH, J.
O.S.A. NO. 15 OF 1995
OCTOBER 1, 1999
Section
583, read with section 11, of the Companies Act, 1956 - Unregistered company -
Winding up of - Whether where number of persons in a firm is more than 7 but
less than 17, firm will clearly come within meaning of `unregistered company'
and, therefore, winding up petition would not be barred by virtue of section 11
- Held, yes - Whether where dispute is only between partners regarding share in
profit ingredients of section 583(4) cannot be said to have been made out and,
in such a case, winding up petition would not be maintainable - Held, yes -
Whether where proceedings under Indian Partnership Act, 1932 had already been
instituted and were pending, winding up petition under section 583 (4) could
not be entertained - Held, yes
FACTS
The
respondent partnership firm was constituted with 17 partners. Subsequently,
dispute arose between the appellant partner and others, as a result of which
the partnership was reconstituted. The appellant presented company petition
alleging that the reconstitution was unilateral and he was provided with 3 per
cent share in the profit and loss of the firm whereas he was entitled to 5 per
cent share. He further alleged that the managing partner had not paid his share
for the amount received in respect of the lease of certain premises. The
appellant contended that since respondent had not made any payment towards the
share of the appellant, he was entitled to exercise his right as a partner and
also in the capacity as a creditor for seeking winding up of the firm. The
Company Judge dismissed the petition on the ground that the firm contravened
the provisions of section 11 and, further, there was no material to warrant to
exercise powers under clauses (a), (b) and (c) of section 583 (4).
On appeal :
The facts
clearly showed that the firm consisted of more than 7 persons and, thereby,
came within the meaning of `unregistered company' as defined under section 583(4).
Section 11(2) makes it clear that no partnership shall be formed consisting
more than 20 persons for carrying on any other business etc. Section 11(3)
makes it clear that in case of joint families, while computing the number of
persons, the minor members have to be excluded. It was an admitted fact that
the number of persons in the firm was more than 7 and less than 17. Therefore,
there was no contravention of section 11. In that view of the matter, insofar
as the finding of the Single Judge holding that the company petition was barred
under section 11, was not sustainable the same was to be set aside. It is
manifest from section 583(4) that firstly if the firm ceases to carry on
business, secondly it is unable to pay the debts and thirdly if the Court is of
the opinion that such firm is liable to be wound up, it enables the aggrieved
party to present an application for winding up of the firm. In the instant
case, the dispute was only between the partners regarding the share in profit.
According to the appellant, he was entitled for 5 per cent share in the profit
whereas he was given only 3 per cent and it was also the further case of the
appellant that the managing partner had not paid his share for the amount
received in respect of the lease of the premises in favour of respondent No.
18. From the very reading of the petition, it was clear that the ingredients of
section 583(4) were not made out. In that view of the matter, though the law
provides for dissolution of the unregistered company, as the appellant failed
to make out the requisite ingredients for presenting the petition, it was to be
held that the petition was not maintainable on the grounds pleaded. Secondly,
it was not in dispute that the appellant had already instituted proceedings
under the Indian Partnership Act for rendering of the accounts as well as for
seeking partition of all the joint family properties. In that view of the
matter, the proceedings being already pending even much earlier to the filing
of the instant petition, the same could not be entertained. Hence, the appeal
was to be dismissed.
CASES REFERRED TO
G.P.
Ganapaiah Maiya v. M.T.R. Associates [1986] 59 Comp. Cas. 359 (Kar.), World
Wide Agencies (P.) Ltd. v. Mrs. Margarat T. Desor AIR 1990 SC 737, Vasantrao v.
Shyamrao AIR 1977 SC 2021 and Bangalore Timber Industries v. Madras Sapper
Ex-Servicemen's Rehabilitation Association [1988] 63 Comp. Cas. 733 (Kar.).
JUDGMENT
Veerabhadraiah, J. -
This appeal is directed against the order in Co. P. No. 44 of 1995 dated
17-4-1995 passed by the learned Single Judge dismissing the company petition.
2. The brief facts of the case are as follows :
The
appellant presented the company petition before the learned Single Judge for
winding up of the first respondent partnership firm K.H. Shama Rao & Sons
which is an unregistered company, for award of cost and for such other reliefs
on the allegations that a partnership firm was constituted in the name and
style of K.H. Shama Rao & Sons (respondent No. 1) under the deed dated
1-1-1977 among himself, his brothers, respondents 5, 9, 12 and 16 including the
petitioner-appellant representing their family branches. In the meanwhile, a
dispute arose between the appellant on the one hand and the respondents on the
other hand. Accordingly, respondents 2 to 7 reconstituted the partnership firm
by a deed dated 2-4-1992. As per the said deed, the share of the appellant was
3 per cent in the profit and loss of the firm to the extent of 40 per cent. In
fact, the deed dated 2-4-1992 is an unilateral one at the instance of
respondents 2 to 7 wherein the appellant actually is entitled for 5 per cent
which was reduced to 3 per cent under the said deed. After the partition deed
dated 2-4-1992, the respondents resisted to pay his share. The appellant had to
receive Rs. 3,000 p.m and no payments have been made. In fact, the premises in
question has been leased in favour of respondent No. 18 on a monthly rent of
Rs. 60,000. Actually, the appellant is entitled for an amount of Rs. 12,500
inclusive of a sum of Rs. 4,500 due and also entitled for a sum of Rs. 750 p.m.
from the month of October, 1991 and March, 1992 with an interest of 18 per cent
p. a. The appellant has also filed O.S. No. 3671 of 1988 in the Court of the
City Civil Judge, Bangalore for a decree for partition of the suit schedule
properties in which he is entitled for 1/20th share. In the said suit, the
respondents have filed the written statement contending that the petitioner's
right in the partnership asset is only 3 per cent. The appellant has also filed
O.S. No. 1932 of 1988 against the respondents for mandatory injunction to
render accounts. In the said suit, the respondents have the written statement
and admitted that the appellant is a partner. In view of the fact that the
respondents have not made any payment towards the share of the appellant, he is
entitled to exercise his right as a partner and also in the capacity as a
creditor for seeking winding up of the respondent No. 1 firm. The learned
Single Judge dismissed the petition on the ground that it contravenes the
provisions of section 11 of the Companies Act, 1956 (`the Act') and further
observed that there are no materials to warrant to exercise powers under
clauses (a), (b) and (c) of sub-section (4) of section 583 of the Act. Being
aggrieved of the dismissal of the company petition, the appellant has come up
with this appeal.
3. The learned counsel for the
appellant contended that there is no bar to maintain a petition under section
583(4) (a), (b) and (c) to seek winding up of the partnership concern and in
fact there is no contravention of section 11. The finding of the learned Single
Judge holding that it is in contravention of section 11 is erroneous. He
further contended that in case on hand, section 11 is not at all applicable as
the partners of the firm are less than twenty. In that view of the matter, the
findings of the learned Single Judge is not based on merits. Therefore, prayed
to allow the appeal and to remand the matter to the learned Single Judge to
proceed with the matter for winding up of the firm.
4. On the other hand, the learned counsel for the
respondents submitted that the partnership firm is registered under the Indian
Partnership Act, 1932. The learned Single Judge has clearly held that the
winding up petition is in contravention of section 11. He nextly contended that
the appellant has filed a suit for rendering of the accounts and also a suit
for partition. Virtually, the relief prayed is for dissolution of the partnership
firm. There are no merits in the appeal and the learned Single Judge has taken
into consideration all the material facts. Accordingly, prayed to dismiss the appeal.
5. In the light of the submissions, the points for
consideration that arise are :
"1. Whether the winding up petition filed is in contravention of
section 11 of the Companies Act ?
2. If so,
the order of the learned Single Judge is liable to be interfered with ?"
6. It is an admitted fact that the firm in question
is registered under the provisions of the Indian Partnership Act. As per the
description of the respondents in the cause title, 17 persons have been shown
as the partners. In the pleadings also, it is stated that the partnership firm
was reconstituted by a deed dated 2-4-1992 whereas it is the case of the
appellant that actually he is entitled for 5 per cent profit whereas the profit
of the appellant has been fixed at 3 per cent. It is further seen from the
pleadings itself that the firm is due to him an amount to an extend of Rs.
12,500 and that he had also filed O.S. No. 3671 of 1988 in the Court of the
City Civil Judge, Bangalore claiming a decree for partition of his 1/20th share
in the schedule properties and he had also filed another suit O.S. No. 1932 of
1988 for rendering of accounts with effect from 3-1-1966. These facts clearly
evidence that the firm consists of more than 7 persons and thereby, comes
within the meaning of unregistered companies as defined under section 583(4).
Sub-sections (2) and (3) of section 11 reads thus :
"(2) No company, association or partnership
consisting of more than twenty persons shall be formed for the purpose of
carrying on any other business that has for its object the acquisition of gain
by the company, association or partnership, or by the individual members
thereof, unless it is registered as a company under this Act, or is formed in
pursuance of some other Indian Law.
(3) This
section shall not apply to a joint family as such carrying on a business; and
where a business is carried on by two or more joint families, in computing the
number of persons for the purposes of sub-sections (1) and (2), minor members
of such families shall be excluded."
Sub-section
(2) makes clear that no partnership shall be formed consisting more than 20
persons for carrying on any other business etc. sub-section (3) makes clear
that in case of joint families, while computing the number of persons, the
minor members have to be excluded. It is an admitted fact that the partnership
came to be reconstituted by a partnership deed dated 2-4-1992 in which the
share of the appellant was 3 per cent of the profit whereas his claim is for 5
per cent. The number of persons in the said deed is more than 7 and less than
17. Therefore, we find that there is no contravention of section 11. In that
view of the matter, in so far as the finding of the learned Single Judge
holding that the company petition is barred under section 11 is not sustainable
and the same is hereby set aside.
7. The company petition came to be filed under
the provisions of section 583(4) (a), (b) and (c). Section 583 deals with
winding up of unregistered companies. It is open for the partners or any one of
the creditors to maintain a petition under the provisions of section 583(4).
The learned counsel for the appellant relied on the decisions reported in—
(1) G.P.
Ganapaiah Maiya v. M.T.R. Associates [1986] 59 Comp. Cas. 359 (Kar.)
(2) World
Wide Agencies (P.) Ltd. v. Mrs. Margarat T. Desor AIR 1990 SC 737,
(3) Vasantrao
v. Shyamrao AIR 1977 SC 2021; and
(4) Bangalore Timber Industries
v. Madras Sapper Ex-Servicemen's Rehabilitation Association [1988] 63 Comp.
Cas. 733 (Kar.).
8. In the case of World Wide Agencies (P.)
Ltd. (supra), the matter which came up for consideration was regarding the
locus standi of the legal representatives of the deceased shareholders, members
and the maintainability of the petition under sections 397 and 398 of the Act.
It is in that context held that the petition for winding up is maintainable in
the alternative under section 433(f) of the Act. In the case supra, that an
application came to be filed under section 397, 398 as well as under section
433(f). Earlier to the amendment, it was the Company Court which had the
jurisdiction to consider the application filed under sections 397 and 398 to
exercise powers and to examine for prevention of oppression and mismanagement
and so also for grant of relief in case of proof of mismanagement. Under the said
circumstances, it is held even in the alternative, the petition for winding up
is maintainable under section 433(f). That after the amendment, the
jurisdiction of the Company Court under sections 397 and 398 was taken away and
it is the Company Law Board which was empowered to deal with the matter. In the
case on hand, the facts are entirely different. Therefore, the same ratio
cannot be applied though it is held that the petition under section 433(f) is
maintainable for winding up.
9. That while considering the status of an
unregistered company in so far as the dissolution of the partnership firm, this
Court in the case of G.P. Ganapaiah Maiya (supra) held if the ingredient of
sub-section (4) of section 583 are made out even in case of unregistered firm
of partnership consisting of more than seven persons that a petition for
winding up is maintainable. It is further observed that the proceeding under
the Act are summary in character whereas in case of suits filed for dissolution
of partnership will be in the civil nature which consumes elaborate time for
disposal of the matter. This is one of the reasons why it was held that the
petition for dissolution is maintainable.
10. In the case of Vasantrao (supra), the Supreme
Court has clearly held that an aggrieved party had an option to institute a
suit for winding up of an unregistered company and further held that Part X of
the Companies Act does not come in the way of the operation of the Indian
Partnership Act. This makes clear that the aggrieved party either has a
recourse under the Companies Act or under the Indian Partnership Act.
11. This Court in the case of Bangalore Timber
Industries (supra) went a step ahead and held that there is no bar to maintain
a petition under the Act for winding up even though the partnership or
association consists of more than 20 members.
12. Now what we have to consider is, whether it is
open for the appellant to maintain a petition under section 583(4). Section
583(4) reads thus :
"(4)
The circumstances in which an unregistered company may be wound up are as
follows :
(a) if the company is
dissolved, or has ceased to carry on business, or is carrying on business only
for the purpose of winding up its affairs;
(b) if
the company is unable to pay its debts;
(c) if the Court is of opinion
that it is just and equitable that the company should be wound up."
It is
manifest from the reading of the section that if the firm ceases to carry on
business, secondly unable to pay the debts and thirdly, if the Court is of the
opinion that such firm is liable to be wound up, it enables the aggrieved party
to present an application for winding up of the firm. In the case on hand, the
dispute is only between the partners regarding the profit in the share capital.
According to the appellant, on his share that he is entitled for 5 per cent
profit whereas he was given only 3 per cent and it is also the further case of
the appellant that the remaining partners, i.e., the managing partner has not
paid his share for the amount received in respect of the lease of the premises
in favour of respondent No. 18. From the very reading of the petition, we need
to observe that the ingredients of section 583(4) are not made out. In that
view of the matter, though the law provides for dissolution of the unregistered
company, as the appellant failed to make out the requisite ingredients for
presenting the petition, we have to hold that the petition is not maintainable
on the grounds pleaded. Secondly, it is not in dispute that the appellant has
already instituted proceedings under the Indian Partnership Act for rendering
of the accounts as well as for seeking partition of all the joint family
properties. In that view of the matter, the proceedings being already pending
even much earlier to the filing of this petition, we have to hold that this
petition cannot be entertained.
13. For the reasons mentioned above, we do not find
any merits in this appeal. Accordingly, the appeal fails and stands dismissed.
High Court of Punjab & Haryana
Makhan
Singh Devinder Pal Singh
v.
V.S.
AGGARWAL, J.
Section 583 of the Companies Act, 1956 -
Unregistered companies - Winding up of - Whether where petitioner failed to
show that respondent-company had seven or more partners, prima facie it would
have to be taken that it was not an unregistered company - Held, yes - Whether
in such a case no petition for winding up by itself would be maintainable -
Held, yes
The petitioner filed a petition under section
583 for the winding up of the respondent-company alleging that it had failed to
repay its debts. It was alleged that the respondent was a partnership concern.
But the petitioner contended that it had no knowledge about the other partners
except four.
It had been alleged that the respondent was a
partnership concern. But a vague assertion had been made that there were seven
partners. Only four had been named in the petition. Despite repeated
adjournments, the names of other partners had not been forthcoming to permit
the court to conclude that there were seven or more partners. In the absence of
this having been shown, prima facie it must be taken that the respondent was
not an unregistered company and the petition for winding up by itself was not
maintainable.
The petition was, therefore, dismissed in limine.
Cases referred to
G.P. Ganapaiah Maiya v. M.T.R. Associates
[1986] 59 Comp. Cas. 359 (Kar.) and Bangalore Timber Industries v. Madras
Sapper Ex-Servicemen’s Rehabilitation Association [1988] 63 Comp. Cas. 733
(Kar.).
Rakesh Bhatia for the Petitioner.
Aggarwal, J. - Makhan Singh Devinder Pal Singh filed the present petition under
section 583 of the Companies Act, 1956, for winding up of the respondent
company, Raja Oil Mills. It had been asserted that the petitioner firm carries
on business as commission agent of sun-flower seeds. The respondent company is
an unregistered company having its factory as well as registered office at 74,
Industrial Complex, Goindwal Sahib, Amritsar. The petitioner contended that it
has no knowledge about the other partners except four, namely, Lakhwinder
Singh, Satinder Singh, Kulwinder Singh and Jatinder Pal Singh. The respondent-company
was stated to have been indebted to the petitioner-firm and asserting that it
has failed to pay its debts, the petition was filed for winding up of the
respondent firm.
2. The short
question that comes up for consideration is as to whether such a petition is
maintainable or not ?
3. Under section
433 of the Act, a company can be wound up by the court on conditions (a) to (f)
of section 433 being satisfied. Admittedly, the said provision would only come
into play if the respondent company was duly incorporated under the provisions
of the Companies Act. This is for the reason that under section 2(10) of the
said Act, ‘company’ means a company as defined in section 3 of the Act. Under
section 3 of the Act, ‘company’ means :
“3. Definitions of ‘Company’, ‘existing company’, ‘Private Company’ and ‘Public
Company’.—(1) In this Act, unless the context otherwise requires, the
expressions ‘company’, ‘existing company’, ‘private company’ and ‘public
company’, shall, subject to the provisions of sub-section (2), have the
meanings specified below :—
(i) ‘Company’ means a company formed and registered under this Act
or an existing company as defined in clause (ii);”
4. Admittedly,
the respondent company is not a company incorporated under the Companies Act.
5. On behalf of
the petitioner, it was urged that the petition has been filed under section 583
for winding up of an unregistered company. Section 583 permits an application
to be filed for winding up of an unregistered company. But section 582 of the
said Act defines the meaning of an unregistered company and reads :
“582. Meaning of ‘unregistered company’.—For
the purposes of this part, the expression ‘unregistered company’—
(a) shall
not include—
(i) a railway company incorporated by any Act of Parliament or
other Indian law or any Act of Parliament of the United Kingdom;
(ii) a company registered under this Act;
or
(iii) a company registered under any previous companies law and
not being a company, the registered office whereof was in Burma, Aden or
Pakistan immediately before the separation of that country from India; and
(b) save as aforesaid, shall include any partnership, association
or company consisting of more than seven members (at the time when the petition
for winding up the partnership, association or company, as the case may be, is
presented before the court).”
6. It has been
alleged that the respondent is a partnership concern. But a vague assertion has
been made that there are seven partners. Only four have been named in the
petition. Despite repeated adjournments, the names of other partners have not
been forthcoming to permit this court to conclude that there were seven or more
partners. In the absence of it having been shown, prima facie, it must be taken
that the respondent is not an unregistered company.
7. Reliance on
behalf of the petitioner was placed on the decision of the Karnataka High
Court in G.P. Ganapaiah Maiya v. M.T.R.
Associates [1986] 59 Comp. Cas. 359. But
perusal of the cited judgment clearly reveals that the said court had expressed
the view that it was an unregistered partnership concern of more than seven
persons. In the present case, it is not so. Therefore, the cited decision will
not come to the rescue of the petitioner.
8. In that event,
reliance had been placed on the decision of Bangalore Timber Industries v.
Madras Sapper Ex-servicemen’s Rehabilitation Association [1988] 63 Comp. Cas.
733 (Kar.). In the cited case, the respondent association was a society consisting
of more than 20 persons. It was concluded that it would be an unregistered
company within the meaning of section 582 of the Companies Act. In the present
case, the petitioner failed to show that the respondent has seven or more
partners. Therefore, it is not an unregistered company and the petition for
winding up by itself is not maintainable.
9. For these reasons, the petition must fail and is dismissed in limine.
[1934] 4
Comp. Cas. 339 (LAHORE)
High Court of
v.
Tekchand
and Bhide, JJ.
July 12, 1934
J.L. Kapur, for
the appellants.
Shamair Chand, for the respondent.
Tek Chand and Bhide, JJ.—Civil Appeal No. 1912 of 1932 and Civil Revision No. 82 of 1932 arise out of the same case and will be disposed of together.
On the 31st July 1927, the parties to this case who are proprietors of wool factories at Fazilka in the Ferozepore district entered into a pooling contract by virtue of which they agreed to work the factories in a certain manner and to share the total profits in certain proportions. The contract was for a period of 5 years. Defendant No. 1 was to work his factory for the first 2½ years and defendant No. 3 for the next 2½ years. The plaintiff and defendant No. 2 had the option of working their factories or not as they pleased, but if they worked the factories, they were bound to share profits with other parties to the contract according to the terms thereof. The parties who worked their factories, were bound to submit their accounts of the earnings to the other parties. The plaintiff alleged that defendants Nos. 1 to 3 were working their factories, but had refused to render accounts after the dates specified in the plaint and to give him his share of the profits.
The defendants admitted the execution of the contract. On behalf of the 'Om Press' Company defendant No. 2, it was pleaded that it consisted of more than 20 members and not being registered as required by Section 4 of the Indian Companies Act, no suit could be maintained against it. Defendants Nos. 1 and 3 pleaded that the contract was tantamount to creation of a monopoly and was therefore unenforceable. They also alleged that the plaintiff had himself committed breach of the terms of the contract and was not entitled to sue.
The trial Court upheld the objection that the suit was not maintainable as against the 'Om Press’ and directed its name to be struck off from the defendants; but it decided the other issues in favour of the plaintiff and granted him a preliminary decree for accounts against defendants Nos. 1 and 3. From this decree both parties appealed to the District Judge, who affirmed the decision of the trial Court. Defendants Nos. 1 and 3 have now come up to this Court in second appeal, while the plaintiff has filed a petition for revision of the order of the trial Court holding that the suit was not maintainable against defendant No. 2.
As regards the plaintiff's petition for revision the contention of his learned counsel was that the suit as framed was maintainable against the 'Om Press,' though that association admittedly consisted of more than 20 persons and was not registered as required by Section 4 of the Indian Companies Act. In support of this contention, the learned counsel relied on the provisions of Order 30 of the Civil Procedure Code, relating to suits by and against 'firms.' But those provisions evidently assume that the so-called 'firm' is legally constituted and do not seem to have any bearing on the question of the maintainability of a suit against an 'illegal' association. Section 4 of the Indian Companies Act is mandatory and lays down inter alia that no partnership consisting of more than 20 persons shall be formed for the purpose carrying on any business other than banking unless it is registered as a company under that Act. There is ample authority for the proposition that any company, partnership, or association formed in violation of the provisions of Section 4 is an 'illegal' body and its existence cannot therefore be recognised by law (cf. Palmer's Company Law, 15th edition at pages 411-412, Mewa Ram v. Ram Gopal; Akola Ginning Combination v. Northcote Ginning Factory). The learned counsel for the plaintiff was not able to cite a single authority to the contrary. I have therefore no hesitation in holding that the suit as framed was not maintainable as against the 'Om Press.' The next point urged by him was that the individual members of the association at any rate could be sued and the plaintiff should have been allowed to amend the plaint so as to bring these members on the record. It will be convenient to deal with this question after dealing with the points raised in the appeal filed by the defendants.
The first point raised in the defendants' appeal was that the four proprietors of wool factories, who entered into the 'pooling' contract dated the 31st July, 1927, were themselves an 'illegal' partnership or association within the meaning of Section 4 of the Indian Companies Act and hence no member of the partnership or association could sue the others on the basis of that contract. This point was not raised in the Courts below; but it was urged that it was patent on the record and being a point of law could be entertained even at this stage. The point being a novel one and of some importance the learned Judge in Chambers before whom this second appeal first came up for hearing, has referred the appeal to a Division Bench.
The decision of the above point must rest on the terms of the contract between the parties. The main question for consideration is whether the four parties to the contract formed any 'partnership' or 'association' for 'carrying on business' within the meaning of Section 4 of the Indian Companies Act. Now it is true that the deed speaks of the parties to the contract as 'partners'; but this fact by itself is of little or no significance; for what we have to see is the legal effect of the terms of the deed and this cannot obviously be affected by the loose phraseology used in the document. Section 4 of the Indian Partnership Act defines 'partnership' as a relation between persons who have agreed to share the profits of a ' business carried on by all or any of them acting for all'. In the present instance the parties certainly agreed to share the profits but it does not appear that there was any 'business' carried on by all or any one of them acting for all. The four partners were left to manage their own factories and no partner had any right no interfere with the management of the factories of the other partners. It is true that certain restrictions were imposed on the running of the factories. For instance, it was incumbent on defendant No. 1 and defendant No. 3 to keep their factories running for certain periods and so forth; but this fact by itself cannot in my opinion, convert these factories into a joint business carried on by all. There was no attempt whatsoever to set up any joint management by the appointment of any managing committee or officers to act on behalf of all the partners and in this aspect the present case is clearly distinguishable from Akola Ginning Combination v. Northcote Ginning Factory, on which the learned counsel for the appellants mainly relied. In that case there was a syndicate consisting of 18 factories the object of which according to the memorandum of association was to work the ginning factories of the members jointly for the benefit of all. The agreement contemplated meetings of the association being called from time to time and a Secretary and Treasurer were appointed to manage its affairs. The suit itself was instituted on behalf of the Syndicate.
The learned counsel for the defendants-appellants urged that the four parties to the contract even if they did not constitute a 'partnership' in law, might be looked upon at least as an 'association' within the meaning of Section 4. But this will not help the appellants to any extent for Section 4 of the Indian Companies Act is as follows:—
"(1) No company, association or partnership consisting of more than ten persons shall be formed for the purpose of carrying on the business of banking, unless it is registered as a company under this Act, or is formed in pursuance of an Act of Parliament or some other Act of the Governor-General in Council, or of Royal Charter or Letters Patent.
(2) No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed in pursuance of an Act of Parliament or some other Act of the Governor-General in Council, or of Royal Charter or Letters Patent."
It will appear from the above that Section 4 also requires that the association should be 'carrying on a business'. As stated above, it does not appear from the terms of the contract in the present case, that the parties thereto intended to carry on any business jointly. The expression 'carrying on business' implies, I think, some continuous control of the business by the association; but the agreement does not seem to provide for any control by the association as such. All that the agreement does is to impose certain restrictions on the business to be carried on by each partner in consideration of his getting a share in the combined profits of all the factories. If the business was intended to be carried on jointly, the parties to the contract would have been liable to share their losses as well. But it is very significant that the agreement makes no provision for sharing of losses.
In view of all the facts stated above, it seems to me that the parties to the contract did not constitute any partnership or association and were not carrying on any business jointly and Section 4 of the Indian Companies Act is therefore no bar to the maintainability of the suit by the plaintiff, as against defendants Nos. 1 and 3.
The next point urged by the learned counsel for the defendants-appellants was that as the suit could not proceed against the 'Om Press’, it was not maintainable against the other defendants also as the suit was one for an account and the rights and liabilities of the parties in respect of that account were inter-dependent. But his contention seems to be devoid of force. The agreement between the parties no doubt provides for the sharing of the total profits in certain proportions but this division does not seem to be necessarily dependant on the profits of all the factories being brought together. It is important to bear in mind in this connection that the agreement does not provide for the losses being shared. Consequently the agreement in effect gives each party to the contract a right to a certain share in the profits of the factories belonging to the other parties. The learned Counsel for the defendants-appellants was unable to show any good reason why in the circumstances of the case the plaintiff could not be allowed to claim his share in the profits of the factories of defendants Nos. 1 and 3 independently of any share in the profits of the 'Om Press' to which he may be entitled. I see therefore no valid objection to the preliminary decree against the defendants Nos. 1 and 3 passed by the Courts below.
I shall now deal with the remaining question raised by the learned counsel for the plaintiff, viz., whether the plaintiff should be allowed to amend the plaint, and to sue the individual members of the 'Om Press' instead of suing that press as an association. It is true that the Court has wide powers in this respect, but in view of all the circumstances, I do not think this is a fit case for allowing an amendment at this stage. In the trial Court the plaintiff persisted in his contention that the suit was maintainable against the 'Om Press' as an association and it was only when he failed in the trial Court, that he made a request for amendment for the first time in the lower appellate Court. Besides, the proposed amendment is likely to give rise to some complicated issues, which do not affect the liability of the defendants-appellants. The 'Om Press' is admittedly an illegal association. The contract was with the 'Om Press' as an association and it does not give the names of the members of the association when the contract was entered into. The members of the association have been fluctuating and it would be a matter for consideration whether members, who joined subsequently could be held liable. Lastly although a suit by a third party against the members of an illegal association is maintainable in certain circumstances, it has been held that it would not be maintainable if the plaintiff knew of the illegal character of the association and was himself a particeps criminis (vide Lindley on Partnership, 9th edition, page 140). It will therefore be necessary to see if the plaintiff knew of the illegal character of the association when he entered into the contract. Lastly it will have to be considered whether the members of the 'Om Press' could also claim their share in the profits of the other parties to the contract by way of a set-off. In view of these facts, it seems preferable that the plaintiff should be left to proceed against the members of the 'Om Press' separately, if he is advised to do so.
On the above findings, I would dismiss both the appeal and the petition for revision, and leave the parties to bear their own costs.
[1936] 6 COMP.
CAS. 295 (BOM.)
v.
Keshavlal Kuberdas Amin.
MACKLIN, J.
DECEMBER 5,
1935
G.N. Thakor and P.A. Dhruva, for Appellants.
H.H. Dalal and D.V. Patil for U.L. Shah, for Respondents.
Macklin, J.—The suit which has given rise to this second appeal
was brought by the members of the firm known as "The Bavla Gujarat Cotton
Press" for the specific performance of an oral agreement for a lease
entered upon between the firm and one of its members, defendant 1. The
agreement took place on 21st September 1925, and it has been found as a fact by
the Courts below that its terms were that the plaintiff firm should take the
property upon lease for fifty-one years beginning from the date of the
agreement at an annual rent of Rupees 308-12-0, and that a formal lease was to
be executed; but there is a finding that the date for the execution of the
lease was left indefinite and that it depended upon defendant 1 himself having
a title to convey, upon the Thakore (who is admittedly the owner of the land)
letting it first to Naran, and Naran then letting it to defendant 1. A number
of defences were raised but were overruled, and the execution of a registered
lease was ordered.
In this second appeal by defendant 1 four points are urged; (1) that the
plaintiff firm consists in fact of more than twenty members, and, therefore,
under S. 4, Companies Act, it cannot be recognized for want of registration of
the company and cannot bring this suit; (2) that the agreement upon which the
plaintiffs rely was not so much an agreement for a lease as an actual lease,
and it is void for want of writing and registration under S. 107, Transfer of
Property Act; (3) that the agreement is indefinite in its terms, and both for
this reason and because three years have elapsed from the time when it became
enforceable (assuming that it was enforceable) it cannot now be enforced, and
(4) that defendant 1 is himself a member of the firm with whom the agreement
was executed and thus occupies the position both of plaintiff and of defendant,
and therefore the present suit is bad.
On the first point there is no direct authority applicable to the present
case in the cases decided in India. The question arises in this way. There are
in the list of plaintiffs eleven persons named as members of the firm. Among
the defendants, defendants 1, 2 and 3 are members of the company, so that there
are really at least fourteen members of the company. But plaintiff 3 is
"The Bavla Vishnu Cotton Ginning Factory," and in reply to a question
put by the defendants asking for information as to the number of members of the
Bavla Vishnu Cotton Ginning Factory it
was stated that the firm consisted of four principal partners, of whom
Keshavlal Hirachand had two sub-partners and Vithaldas Khushaldas had three
sub-partners. Now it is incontrovertible that the members of the firm of the
Bavla Vishnu Cotton Ginning Factory must be treated as members of the company
of which the firm is a member. If an authority for this is needed, it is to be
found in Pannaji Devi chand v. Senaji Kapurchand (50 Mad. 175). That case had
an off shoot under a similar name in the Bombay Presidency, and has been
reported in 36 Bom. L.R. 786 as Pannaji v. Senaji, and eventually the Madras
case went in appeal to the Privy Council, and the appellate judgment (which
merely accepts the reasoning of the High Court of Madras and dismisses the appeal)
has been reported in Senaji v. Pannaji (32 Bom. L.R. 1607). The case is relied
upon by the learned counsel for defendant 1 as dealing with a situation which
is analogous to the present situation. There is no difficulty about deciding
that the members of the Bavla Vishnu Cotton Ginning Factory are members of the
plaintiff firm. But there is some difficulty in deciding whether the
sub-partners of Keshavlal and Vithaldas are members of the Bavla Vishnu Cotton
Ginning Factory. If they are members, then the plaintiff firm consists of more
than twenty members The reasoning adopted in Pannaji v. Senaji, (supra) for
holding that the individual members of the four firms which, entered into the
partnership in that case were themselves members of the partnership and that
the partnership, consisting as it did of more than twenty individual L
members, required registration under S. 4, Companies Act, was that the word
"persons" used in S. 4 of the Act was used not in the sense in which
it is defined in the General Clauses Act (in which Act it includes a
corporation or a body of persons) but in the sense of an individual, and that
what the section prohibited was an unregistered association of more than twenty
individuals* It is argued that on the analogy of this case the sub-partners of
the two members of the Vishnu Cotton Ginning Factory must be regarded as
individual members of the Bavla Vishnu Cotton Ginning Factory.
The determination of the question depends upon the position of
sub-partners. The point was raised at a late stage in the trial after all the
evidence had been taken, and there is no evidence to show exactly what part the
sub-partners took in the business. But as they have been described as
sub-partners, it is reasonable to take it that they were in fact what is
usually meant by a sub-partner. A sub-partner is described in Lindley on
Partnership, Edn. 10, at p. 66: he is a stranger who agrees with one of the
partners of the firm to share the profits derived by that partner from the firm,
and it is said by the learned author that this arrangement does not make the
stranger a partner in the original firm but constitutes what is called a
sub-partnership which in no way affects the other members of the principal
firm. A case is cited in which a certain person agreed with one of the partners
in a business that he should be interested in the business so far as to receive
a share of the partner's profits of the business and also that he should have a
right to draw his share from the firm. But it was nevertheless held that he was
not a partner in that firm; that he had no demand against it; that he had no
account in it; and that his rights were limited to a share out of the profits
paid to his principal partner. At p. 553 it is stated that a sub-partner
wishing to have an account of those profits to which he is entitled must bring
his action against the principal alone and not make the other partners in the
firm parties to the action. If it is not open to a sub-partner to sue for
accounts, I do not see how it can be held that he is a partner of the firm.
Moreover in Pannaji v. Senaji, (36 Bom. L.R. 786) there is a passage which
implies that the decision of the High Court would have been different if the
four persons who signed the contract of partnership as representatives of the
firm of which they were members had signed for their own individual benefit,
the firms themselves being only in the position Of sub-partners sharing in the
profits of the four individuals who signed the agreement of partnership; the
firm would then have been taken to consist of four members only and not of the
total number of partners comprising the four firms. This implies that in the
view of their Lordships sub-partners are not members of a firm and the
existence of a sub-partner would not affect the number of members of a firm for
the purposes of S. 4, Companies Act. I hold that in this respect there is no
objection to the suit.
It is then contended that the agreement in fact created an immediate demise of the property and operated
as an actual transfer and therefore required writing and registration
under S. 107, T.P. Act, and in the absence of writing and registration, cannot
now be enforced. I agree that since the plaintiff firm actually took possession
of the property upon the very day of the agreement and paid rent, it is
difficult to say that the agreement did not amount to a lease within the
definition of S. 105, T.P. Act, and to that extent is void. But the agreement
was also an agreement for a lease and I do not know why, in so far as it is an
agreement for a lease, it should be void merely because, regarded as a transfer
of property it is void. In Ariff v. Jadunath Majumdar, (58 LA. 91) the facts
were almost exactly the same, the only difference being that it was a suit in
ejectment in which the defendant pleaded a right under an agreement of lease.
It was held that as there was no lease by means of a registered document as
required by S. 107, Transfer of Property Act, the plaintiff was entitled to
eject the defendant, but that had the defendant been within time (which on the
facts of that case he was not), it would have been open to him to sue for
specific performance of the verbal agreement for a lease and in the meantime to
ask for the plaintiff's ejectment suit to be stayed. That was a case where
under an oral agreement for a lease the defendant was put into immediate
possession of the property, just as the plaintiff was put into immediate
possession of the property here.
It is then contended that the agreement is indefinite. The evidence is
unsatisfactory; but nevertheless both the Courts below have come to a definite
conclusion as to the main terms of the agreement, namely that it was to be for
an annual rent of Rs. 308-12-0 and for a term of fifty-one years. As regards
the formal lease, it is held that no definite date was fixed. The plaintiff
says in his evidence that the lease was to be given in a month or two; but I
doubt if that statement can be taken literally, since the date of the lease
must have depended upon the date when defendant 1 obtained his title to lease
the land, and that would not be until the Thakore had first leased it to Naran
and Naran leased it to defendant 1.
Nor do I see any objection to enforcing the agreement on the score of
limitation. It could not be enforced until the defendant got his title, and it
appears from the judgment of the learned Assistant Judge in appeal that the
deed which the Thakore and Naran had to execute in favour of defendant 1 before
defendant 1 could get his title was not executed until the year 1927. This suit
has been brought in the year 1928 and is clearly in time. The last point
however is serious for the plaintiff. Defendant 1 is a partner of the plaintiff
firm and he is being sued by the plaintiff firm not as a formal defendants but
as a contesting defendant, and he himself has contested the legality of the
suit upon this ground. In Rustomji v. Seth Putshotamdas, (25 Bom. 606)
reference was made to the rule that the same individual, even if he has two
capacities, cannot be both a plaintiff and a defendant in the same action, and
it was held that where an individual was a common partner in two houses of
trade, no action could be brought by one firm against the other firm upon any
transaction which was between them while such individual was a common partner.
So far as it goes, this statement appears to be unequivocal. But their
Lordships stated that the rule was subject to an exception in equity in certain
cases where it might be possible to ascertain the rights and; liabilities of a
member of a firm when all the parties were before the Court; and they said that
although the Courts of equity in England strictly observed the rule that a man
cannot be both plaintiff and defendant, they did not allow it to stand in the
way of their doing justice between the parties, and provided all interested
persons were before the Court, either as plaintiffs or as defendants, they
adjusted and determined their rights. In the case which was then being decided
a question arose as to the right of one of the partners of a firm to recover
money against the firm and the order that was made in the case provided not for
recovery of the money but for a declaration that that member of the firm in the
taking of the partnership accounts was entitled to credit of the sum in
dispute.
This question does not seem to have been considered at all by the learned
Assistant Judge before whom the present appeal was brought, and it may be that
the matter was not raised in this Court; but it was raised in the trial Court,
and the equitable principle referred to in Rustomji v. Seth Purshotamdas, (25
Bona. L.R. 306) was considered but I think misunderstood. I do not think that
the learned Judges who decided Rustomji v. Seth Purshotamdas, (25 Bom. L.R.
606) would have extended the equitable principle to cover a case as the
present, which cannot be adequately dealt with merely by a declaration of a
right to a credit on the partnership accounts. It is contended on the other
side that O. 30, R. 9, Civil P. C, contemplates suits between a member of a
firm and the firm of which he is a member, and that if a suit of the present
kind cannot be included among the suits dealt with in R. 9, then there is no
remedy for the aggrieved party. R. 9 merely says that O. 30 (which deals with
suits by or against corporations) shall apply to suits between a firm and one
or more of the partners therein and to suits between firms having one or more
partners in common. But in his commentary upon R. 9, Sir Dinshah Mulla
expressly states that neither this nor any of the rules of O. 30 alters the
substantative law as it existed before, and therefore apparently, if one or
more partners using the name of the firm under this rule were to bring a suit
against another partner claiming money as due to the plaintiff in connection
with the affairs of the firm, "the only relief which the plaintiff could
obtain would be on account of the dealings and transactions of the
partners." I do not think that it can be said that R. 9 gives the plaintiff
firm a right to bring the present suit and that under the existing law they
have any' remedy at all. Reliance is placed upon a passage occurring at p. 339,
Edn. 10 of Lindley on Partnership, which is this:
'Again, there appears to be no reason why an action should not now be
maintained for the recovery of a debt due from one partner to the firm; nor
why, if two firms have a common partner, an action should not be maintained by
one firm against the other.'
And further on it is said that in all cases in which such actions will
lie, the firm or firms may sue or be sued in their firm name. But the learned
author was referring only to suits for money, and nothing is said as to the
form of the decree that would issue in such a case; and it may well be that the
Courts in the circumstances of each particular case would fall back upon their
power to declare the plaintiff or the defendant entitled to a credit in the
accounts of the firm. In my opinion the suit is bad on this ground, and I
therefore allow the appeal and direct that the suit be dismissed.
In the circumstances I direct that each party bear its own costs
throughout.
[1968] 38
Comp. Cas. 436 (All)
High Court of
v.
Commissioner of
Income-tax
JAGDISH SAHAI, M. H. BEG AND J.N. TAKRU, JJ.
JANUARY 31, 1967, MAY 19, 1967, SEPTEMBER 11, 1967 AND NOVEMBER 30, 1967
P.R. Agarwal, Bharatji Agarwal, U.S. Avasthi and J. Sarup for the
Applicant.
R.L. Gulati for the Respondent.
Jagdish Sahai, J.—The Income-tax Appellate Tribunal, Delhi Bench, (hereinafter
referred to as "the Tribunal") has submitted a statement of the case
and referred the following question of law at the instance of the assessee,
Messrs. Agarwal and Co. (hereinafter referred to as "the assessee")
under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the
"Act"):
"Whether, on the facts and in the circumstances of the case,
registration was rightly refused to the firm on the ground that it violated the
provisions of section 4 of the Indian Companies Act, 1913?"
The assessment years in question are 1952-53, 1953-54 and 1954-55.
The Tribunal submitted one statement of the case and referred one
question of law because the point raised is common to all the three years.
The assessee-firm was constituted in 1934. A deed of partnership
was drawn up on January 24, 1936, but as some of the members died fresh
partnership deeds were subsequently drawn up. The one with which we are
concerned in this case is dated July 7, 1950, a copy whereof has been made a
part of the statement of the case.
According to this document, there were in all 18 partners. The
assessee firm applied for registration under section 26A in all the three
years. The Income-tax Officer refused registration every time on the finding
that the partnership consisted of more than 20 persons which was violative of
section 4 of the Indian Companies Act and for that reason could not be
registered as a partnership. The orders passed in each year were affirmed on the
assessee's appeals by the Appellate Assistant Commissioner and the Tribunal. It
is clear from the statement of the case that some of the partners of the
assessee-firm had joined it only in their representative capacity being kartas
of their respective Hindu undivided families. The appellate order of the
Tribunal has been made a part of the statement of the case and has been marked
as annexure "E" in the referring order. In paragraph 4 of the
appellate order the Tribunal has clearly stated that:
"As already mentioned, the number of partners as mentioned in
the partnership deed was 18. It is common ground that most, if not all, of them
were kartas and represented their respective families in the partnership".
For its finding that the partnership could not
be registered the Tribunal relied upon section 4(3) of the Indian Companies
Act, as it at stood the relevant time:
"4. (1) ...................
(2) No company, association or partnership consisting of more than
twenty persons shall be formed for the purpose of carrying on any other
business that has for its object the acquisition of gain by the company,
association or partnership, or by the individual members thereof, unless it is
registered as a company under this Act, or is formed in pursuance of an Act of Parliament
of the United Kingdom or some other Indian law or Royal Charter or Letters
Patent.
(3) This section shall not apply to a joint family carrying on joint
family trade or business and where two or more such joint families form a
partner ship, in computing the number of persons for the purposes of this
section, minor members of such families shall be excluded.
(4) Every member of a company, association or partnership carrying on
business in contravention of this section shall be personally liable for all
liabilities incurred in such business..".
The Tribunal was of the opinion that several partners of the
assessee-firm having entered into partnership in their representative capacity
of being kartas of their respective Hindu undivided families, the total number
of adult members in such families should be taken into consideration while
determining whether or not the number exceeded twenty.
Mr. Jagdish Swarup strenuously contended that it is well settled
and beyond all controversy that there can be no partnership between two Hindu
undivided families. He contended that, inasmuch as a Hindu undivided family is
not a legal entity or a juristic person and partnership is a contractual
relationship capable of being entered into by someone who is either a sentient
being or a juristic person or a legal entity it cannot enter into a
partnership. He also contended that it would lead to anomalous results if two
Hindu undivided families enter into partnership because the number of partners
would go on varying according to the deaths and births in the two families. He
has placed reliance upon the following cases :
In re Ram Kumar Ramniwas of Nanpara,
Kshetra Mohan-Sannyasi Charan Sadhukhan v. Commissioner of Excess
Profits Tax ,
Commissioner of Income-tax v. Kalu Babu Lal Chand
,
Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax ,
Commissioner of Income-tax v. Nandlal Ganialal ,
Jitmal Bhuramal v. Commissioner of Income-tax ,
Commissioner of Income-tax v. Sivakasi Match Exporting Co.,
Commissioner of Income-tax v. A. Abdul Rahim and Co.,
Commissioner of Income-tax v. Bagyalakshmi and Co. and
Charandas Haridas v. Commissioner of Income-tax .
As a bald proposition of law and in strict technical sense it is
true that a Hindu undivided family cannot constitute a partnership firm but it
is well settled and fully recognized that, even though the partner may be the
karta of a Hindu undivided family, the Hindu undivided family has an interest
in the partnership business. It was clearly pointed out in Ram Kumar Ramniwas
of Nanpara, In re that when the karta acting within his right
under the Hindu law enters into a partnership he makes the entire joint family
liable for the debt of the partnership and entitled to receive the benefits
thereof.
It was also pointed out in Commissioner of Income-tax v. Nandlal
Gandalal
that the coparcener (karta) is undoubtedly accountable to the family for the
income received.
In Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax it was
observed as follows:
"If members of a coparcenary are to be regarded as having
become partners in a firm with strangers, they would also become under the
partnership law partners inter se, and it would cut at the very root of the
notion of a joint undivided family to hold that with reference to coparcenary
properties the members can at the same time be both coparceners and
partners".
It is not necessary to multiply authorities because, in all the
cases cited by Sri Jagdish Swarup, nothing has been said against the position
that, even though the members of a Hindu undivided family as such do not become
partners of a firm in which their karta has become a partner in his
representative capacity representing the Hindu undivided family, they were none
the less fully interested in the partnership business, are liable to pay its
losses and entitled to receive its profits. In other words, in effect though
not in law, they are partners.
The proposition that a Hindu undivided family as such cannot enter
into partnership with another Hindu undivided family or with an individual has
come into existence because the roots of partnership lie in contract and in order to make a
contract there must be a sentient being or a juristic person or a legal entity
which a Hindu undivided family is not.
That being the position, the question to consider is as to what
does section 4(3) of the Indian Companies Act mean ? After all, the legislature
has made the provision and it must be administered. Having considered the
matter I am of the opinion that the words used in the provision mean that when
in effect or for practical purposes a partnership has been constituted between
Hindu undivided families, the partnership would be subject to the provisions of
section 4(3) of the Companies Act. The words used in the section are "where
two or more such joint families form a partnership". It is not possible to
say that because under the Contract Act and the Partnership Act two or more
joint families as such cannot form a partnership, therefore, the words
mentioned above are surplusages. As pointed out earlier by me, those words
clearly mean that, when two or more joint families, in effect, or as a fact
(quite apart from the law) form a partnership, the consequences given in
section 4 of the Companies Act would ensue.
There is a difference between an actual state of affairs and the
legal sanctity to those state of affairs. As a matter of fact, two or more
Hindu undivided families, may constitute a partnership business but it will not
be recognised by law of partnership. The purpose of sub-section (3) is to meet
even those cases where, in effect, two or more joint families form a
partnership though, in law, they should not or could not form such a
partnership. It is a matter of common knowledge that even though in the
technical and strict sense of the law when a karta enters into partnership on
behalf of the Hindu undivided family in his representative capacity the members
of the Hindu undivided family do not become partners of the firm but
nonetheless the firm is "popularly described as one between two Hindu
undivided families". See Kshetra Mohan-Sannyasi Charan Sadhukhan v.
Commissioner of Excess Profits Tax. It is in
order to bring such cases of partnerships popularly called "the
partnership of Hindu undivided families" within the clutches of section 4
of the Indian Companies Act that the legislature used the words "where two
or more such joint families form a partnership". The provision deals only
with a factual state of affairs. The words used by it are "where two or
more such joint families form a legal or a valid partnership". This
provision came on the statute book in 1936, but even before that the position was
clear that a partnership is a creature of contract and for its formation
sentient beings or juristic persons or legal entities were required and a mere
association of individuals like a Hindu undivided family could not form a
partnership. The legislature knew this legal position yet in 1936 thought it
fit and proper to use the words "where two or more such joint families
form a partnership" in section 4(3) of the Act. Mr. Jagdish Swarup, while
admitting that these words must be given their natural and grammatical meaning,
contended that all that these words mean is that only when all the adult
members of one Hindu undivided family entered into partnership with all the
adult members of another Hindu undivided family that sub-section (3) of section
4 of the Indian Companies Act would come into play. I am not prepared to accept
this interpretation of these words ; firstly, because when a Hindu undivided
family is in a state of jointness its individual members (quite apart from the
karta), even though adults, cannot commit the Hindu undivided family either in
law or in fact into a partnership business and, secondly, it would be creating
an anomalous position of a co-partnership along with a coparcenership which is
not permissible so long as the Hindu family is undivided.
The provisions of section 4(3) of the Indian Companies Act cannot
be so read as to militate against the accepted legal position mentioned above.
It is elementary that the members of a Hindu undivided family are coparceners
and not co-partners. Consequently, if the interpretation put by Mr. Jagdish
Swarup were to be accepted an anomalous and difficult position wholly
inconsistent with the Hindu law would come into existence.
Mr. Jagdish Swarup also placed reliance upon Senaji Kapurchand v.
Pannaji Devichand, and cited
the following passage from that report for my consideration:
"We think that under section 4, Companies Act, what we have
to see is whether, where an association or partnership is formed for purposes
of carrying on a business, each of the members will be liable individually upon
contracts made and whether each would have rights accruing to him upon such
contracts".
This decision is of 1930 and cannot throw any light on the words
that came into existence for the first time in 1936. Mr. Jagdish Swarup also
placed reliance upon Commissioner of Income-tax v. Roopnarain Ramchandra. He
contends that this case is an authority so far as this court is concerned on
the interpretation of section 4(3) of the Act. I have very carefully perused
this judgment. Even though their Lordships have not accepted the
Mr. Jagdish Swarup next contended that, inasmuch as the
partnership deed does not show that various kartas have entered into
partnership business in their representative capacity, the question of counting
the adult members of the Hindu undivided families does not arise in the present
case.
The partnership deed is a neutral or colourless document so far as
the question whether the kartas have joined in their individual capacity or as
representatives of the Hindu undivided families concerned. But it is clear from
the statement of the case and from the appellate order of the Tribunal that the
assessee's case throughout has been that the kartas had entered into a
partnership business not in their individual capacity but as representing their
Hindu undivided families.
For the reasons mentioned above, I would answer the question in
the affirmative against the assessee and in favour of the department. In the
circumstances of the case I would make no order as to costs.
M.H. Beg J.—The question referred to us is stated as follows:
"Whether, on the facts and in the circumstances of the case,
registration was rightly refused to the firm on the ground that it violated,
the provisions of section 4 of the Indian Companies Act, 1913?"
I think we ought to approach this question from the angle of the
facts and circumstances of the case found by the Tribunal, and then consider
whether these facts found constitute a breach of the provisions of section 4 of
the Companies Act. The question which causes difficulty may, in my opinion, be
thus put: Do the facts found enable us to conclude that the partnership with
which we are concerned consists merely of individuals who are kartas of their
respective families or of representatives through whom the whole bodies
constituting the joint families are meant to function as partners ? If the
former position is correct, the partnership is legal and not struck by section
4 of the Companies Act. If the latter position was sought to be achieved by the
partnership deed, the so called partnership would be struck by section 4(2) of
the Act.
The partnership deed which had to be interpreted, embodying the
agreement of the partnership alleged to be between "joint families"
and not between individuals, certainly does not mention that the joint families
are partners at all. It does not assign any role to joint families or to any
partners as representatives or delegates of joint families. The partnership
deed is, prima facie, between individuals who are not even described as kartas
or representatives of their respective Hindu joint families. However, the
statement of the case makes the appellate order of the Tribunal a part of the
statement. The appellate order says:
"It is common ground that most, if not all, of them were
kartas and represented their respective families in the partnership".
But, can the partners, who admit that they are kartas representing
their respective Hindu undivided families, make the Hindu undivided families
"partners", as that term is understood in law, by such an admission ?
This is the simple question of some difficulty which we have to answer.
I find it very difficult to accept a distinction between
partnership in law and a partnership in popular understanding or in fact. When
a legislative provision, such as section 4 of the Companies Act, contemplates a
partnership it must be deemed to refer to "partnership" as it is
understood in law. As has been pointed out by my learned brother, the added
provision 4(3) of the Companies Act, which we have to interpret, was enacted
after the Partnership Act of 1932. The legislature must, therefore, be deemed
to be aware of the meaning of the term "partnership" as found in
section 4 of the Partnership Act. Partnership is, as has already been pointed
out by my learned brother, a contract between sentient beings and legal
entities. It is a particular kind of contractual legal bond. A joint family is
not a "person" or such a legal entity which can enter into a contract
of partnership at all. Section 4 of the Partnership Act defines
"partnership" as a relation between "persons" who have
agreed to share the profits of the business carried on by all or any one of
them acting for all. A karta of a joint family can only become a partner as an
individual. I find it very difficult to conceive of a representative making a
group of individuals, such as a joint family, a partner at all as defined by
section 4 of the Partnership Act. The contract of partnership, moreover, cannot
be entered into between groups of persons as entities with changing membership
such as Hindu joint families are. The only manner in which such groups of
persons can be conceived of as partners is as sets of individuals each of whom
is a party to the deed of partnership.
Cases may, however, arise in which groups of persons seek to
become partners through another representing them. In those cases, a problem
will arise whether what the group has tried to do will create a partnership in
the eye of law at all. Such an attempt will entail the consequence that it will
be struck by section 4, sub-sections (2) and (3) of the Companies Act, provided
the intention is to make more than twenty persons partners. Otherwise, no
question of counting the members of the groups as partners would arise. The
relevant section 4, sub-sections (2) and (3) read as follows:
"(2)No company, association or
partnership consisting of more than twenty persons shall be formed for the
purpose of carrying on any other business that has for its object the
acquisition of gain by the company, association or partnership or by the
individual members thereof, unless it is registered as a company under this
Act, or is formed in pursuance of an Act of Parliament or some other Act of the
Governor-General in Council or of Royal Charter or Letters Patent.
(3) This section shall not apply to a joint family carrying on joint
family trade or business and where two or more such joint families form a
partnership, in computing the number of persons for the purposes of this
section, minor members of such families shall be excluded".
It will be noticed that the object of section 4(2) is to limit the
number of persons carrying on business as a company, association, or
partnership to twenty unless the company, association or partnership is
registered under the Act. The object of section 4(3), which was added by Act
XXII of 1936, was to exempt a joint family carrying on joint family trade or
business from the restriction contained in section 4(2) itself. But, as soon as
"two or more such joint families form a partnership" the restriction
becomes operative again. The term "partnership" when used in a
legislative provision must necessarily be given its legal connotation. I do not
think that what could not be a partnership in the eye of law could have been
referred to in section 4(3) of the Companies Act.
In Mulla's Principles of Hindu Law, XIII edition (at page 440), we
find the following definition:
"A joint Hindu family consists of all persons lineally
decended from a common ancestor and includes their wives and unmarried
daughters".
Thus, the term "joint Hindu family" is used to denote a
collection of individuals related in the manner indicated above and that is
all. It is also clarified here: "A Hindu coparcenary is a much narrower
body than a joint family. It includes only those persons who acquire by birth
an interest in the joint or coparcenary property". Now, the section we
have to interpret does not refer to the Hindu coparcenary but only mentions
joint families. It does not indicate that the joint families themselves were to
be treated as partners. If this was the intention, there was no point in
counting individuals but, logically speaking, families would have to be counted
as units of partnership.
Even if the karta of a joint family represents a joint family, he
does so only in the capacity of the manager of the coparcenary property. He is
not a personal representative or agent or delegate of each member of the joint
family in transactions such as partnership. Section 4(3) of the Act does not
deal with the question of joint families carrying on business through kartas or
representatives. Therefore, I find it very difficult to read into section 4(3)
of the Companies Act a concept of joint Hindu families themselves becoming
partners through kartas or representatives. Nor do I see the need for all the
members of different joint families to be included in a partnership simply
because the kartas of those families are partners. The question of counting the
number of members of a joint family can only arise if more than one member of
such a family is actually a partner. Before any person can be said to be
actually a "partner" in the eye of law, the partnership must legally
exist. A partnership consisting of joint families as legal entities or persons
who are partners is not legally possible under our law. Hence, we must
interpret section 4(3), consistently with the law, to denote a partnership of
individuals who belong to two or more joint families. That is all we can
reasonably do as we cannot, by a "sidewind", create a new kind of
partnership not recognised by law.
It may be mentioned here that, according to section 30 of the
Partnership Act, a minor cannot be a partner although he may be admitted to the
benefits of a partnership. Therefore, the object of the inartistically worded
section 4(3) of the Companies Act may well be to make it clear that minors thus
admitted to the benefits of a partnership, simply because they happen to be
members of joint Hindu families carrying on business through coparceners, will
not be counted as partners when the number of partners is determined for the
purposes of section 4(2) of the Act. In my opinion, the provisions of section
4(3) must be read in the context of and in harmony with sections 4 and 30 of
the Partnership Act.
It may also be mentioned that section 6 of the Partnership Act
lays down the mode of determining whether a group of persons does or does not
form a partnership firm. It enables the authority which has to determine the
question to go behind the deed of partnership. In the present case, the
department tried to make out that, as the partners mentioned in the deed were
not the real partners but the real partners were the Hindu undivided families,
the ostensible partnership was not genuine. The argument seemed to be that the
state of affairs apparent form the deed was not the real state of affairs as
regards the parties to the partnership. Curiously, this argument was rejected
on the ground that this was a new stand which could not be taken up by the
department. If this was so, the logical inference was that the partnership deed
represented the actual state of affairs. In other words, the ostensible
partners were the real partners in the case before us. Hence, the question of
counting others does not arise here.
The cases placed before us on behalf of the department itself may
be cited in support of my conclusions. In Firm Bhagat Ram Mohanlal v.
Commissioner of Excess Profits Tax, it was
held by the Supreme Court:
"It is well settled that when the karta of a joint Hindu
family enters into a partnership with strangers, the members of the family do
not ipso facto become partners in that firm. They have no right to take part in
its management or to sue for its dissolution. The creditors of the firm would
no doubt be entitled to proceed against the joint family assets including the
shares of the non-partner coparceners for realisation of their debts. But that
is because, under the Hindu law, the karta has the right when properly carrying
on business to pledge the credit of the joint family to the extent of its
assets, and not because the junior members become partners in the business. In
short, the liability of the latter arises by reason of their status as
coparceners and not by reason of any contract of partnership by them".
As I read that case, the proposition laid down there, that the
contract of partnership which "cuts at the very root of the notion of a
joint undivided family", excludes the possibility of making the members of
the joint family automatically partners on the sole ground that the karta of
the family, who represents his family, is a party to the deed of partnership.
The legal bond in a partnership is the creature of contract. The legal
relationship between the karta and members of the joint family is the outcome
of status. Even where the karta brings the joint family funds into partnership
and may have separate obligations towards other family members under the
personal law for those assets of the joint family, he remains an individual for
the purposes of the Partnership Act and also for the purposes of section 4(3)
of the Companies Act.
Another case relied upon on behalf of the department was Banares
Cloth Dealers Syndicate v. Income-tax Officer, Banares . Here, the
provisions of section 4 of the Indian Companies Act were held to have been
contravened by the partnership found in the case. The question whether there
was a partnership between certain individuals and certain joint families and
certain firms was determined on an interpretation of the deed and on the facts
of that particular case. In the course of his judgment, Desai C. J., keeping in
view the provisions of section 4 of the Indian Companies Act, observed :
"There would have been no sense in prohibiting a Hindu
undivided family's being a partner if there was no such thing as distinct from
its karta's being a partner, i.e., if its being a partner were the same as its
karta's being a partner. In Lachhman Das v. Commissioner of Income-tax the Supreme
Court held that there can be a partnership between a karta and a coparcener and
did not consider the validity of a partnership between a Hindu undivided family
and a coparcener. A partnership between a karta and a corparcener was
recognised because it is not a partnership between the Hindu undivided family
and its coparcener. It was pointed out that when a karta is a partner, the
Hindu undivided family does not become a partner. Here, though nominally the
three kartas were said to be the partners, really the three Hindu undivided
families were the partners".
On the facts of that case, it was held to be an attempt to make
joint families partners through kartas. Hence, a contravention of section 4(3)
of the Companies Act was made out. I would confine what was laid down there to
the particular facts of that case.
I am unable to treat a finding in the present case, that each
karta was a partner in his representative capacity, as equivalent to a finding
that the joint families themselves, as groups of individuals, were partners.
The fact that a karta is a partner in a representative capacity may only mean
that the benefits of the partnership will be reaped by the joint family in
accordance with personal law. That, however, has nothing to do with the
question whether it is a partnership in which the members of the group, that is
to say, members of the joint family, are themselves partners. In the
above-mentioned case, a distinction was drawn between the cases where the karta
was a partner and those in which the Hindu undivided family purported to become
a partner through the karta. Upon the findings recorded by the Tribunal in the
case before us, I do not find it possible to go to the extent of holding that
it means that the undivided families themselves, consisting of groups of
individuals, were sought to be made partners through the kartas.
I find it very difficult to appreciate the meaning of making a
"karta" a partner in his representative capacity. If such an
admission was made on -behalf of the assessee it was apparently meant to
indicate that the benefits of the partnership were shared by the karta with the
other members of the joint family. It did not necessarily mean that the karta
was trying to make the members of the joint family partners through himself.
There is, I believe, a distinction between these two differing sets of
circumstances. In a case in which the karta is a representative of his joint
family, only in the sense that he shares with other members of the joint family
the benefits of the partnership, the joint family itself cannot be said to be a
partner at all. In such cases another jural relationship, governed by the
personal law applicable to the karta and members of the joint family, inter se,
exists in addition to the vinculum juris or the legal bond which is embodied in
the contract of partnership. On the other hand, in those cases where the karta
is merely a vehicle for the assertion of the wills of the members of the joint
family, it may be said that his position as a partner is an attempt to import
members of the whole group as partners. Such a partnership would be a most
unusual and extraordinary kind of partnership. In cases where the karta functions
purely as an individual with a will and mind of his own, unaffected by any
obligation to consider the views of other members of the joint family, I do not
think the members of the joint family can be deemed to be partners even in what
may be regarded as the " popular " sense of the term partnership. It
appears to me that the findings recorded by the Tribunal in the case before us
amount only to making out two sets of jural relationships, one between partners
as individuals who are the only partners in the eye of law, and, another, which
the partners who, as kartas of their respective families, may have towards the
members of their respective joint families. I do not find it possible to make
the two findings given by the Tribunal, one, that the partners are kartas of
their respective families, and, another, that the partnership deed cannot be
held to conceal some ulterior object or set of conditions, consistent with each
other in any other way. Therefore, I am inclined to take the view that, upon
the findings recorded in the case before us, this case is governed by the ratio
decidendi of those cases where there are two different sets of jural
relationships as is the case where there is a partnership and a
sub-partnership.
Upon the view I have taken above, the following observations made
by the Supreme Court, in Commissioner of Income-tax v. Bagyalakshmi & Co., are fully
applicable to the case before us :
"A contract of partnership has no concern with the obligation
of the partners to others in respect of their shares of profit in the
partnership. It only regulates the rights and liabilities of the partners. A
partner may be the karta of a joint Hindu family; he may be a trustee ; he may
enter into a sub-partnership with others ; he may, under an agreement, express
or implied, be the representative of a group of persons ; he may be a benamidar
for another. In all such cases he occupies a dual position. Qua the
partnership, he functions in his personal capacity; qua the third parties, in
his representative capacity. The third parties, whom one of the partners
represents, cannot enforce their rights against the other partners nor the
other partners can do so against the said third parties. Their right is only to
a share in the profits of their partner-representative in accordance with law
or in accordance with the terms of the agreement, as the case may be".
I find that the whole series of cases of dual capacity of partners
have been dealt with very fully by M. C. Desai C. J. in Commissioner of
Income-tax v. Roopnarain Ramchandra, where it
was held, at page 327:
"The effect on a partnership of the fact that a partner is a
karta of a Hindu undivided family is the same as that of a sub-partnership
entered into by him. If D and E, who is a karta of a Hindu undivided family,
enter into an agreement to share the profits of a business carried on by them
only D and E are the partners and the coparceners of E are not partners".
His Lordship then quoted the following passage from Mayne on Hindu
Law and Usage:
"Where a managing member of a joint family enters into a
partnership with a stranger, the other members of the family do not ipso facto
become partners in the business so as to clothe them with all the rights and
obligations of a partner as defined by the Indian Partnership Act. In such a
case, the family as a unit does not become a partner, but only such of its
members as in fact enter into a contractual relation with the stranger; the
partnership will be governed by the Act".
In the above-mentioned case a Division Bench of this court
expressed dissent from the view taken by the Calcutta High Court in Shyamlal
Roy v. Madhusudan Roy. The
Tribunal, in rejecting the assessee's appeal, has purported to rely upon the
view taken by the Calcutta High Court. As I find myself, very respectfully, in
complete agreement with the view taken by Desai C.J. in Commissioner of
Income-tax v. Roopnarain Ramchandra, I do not
think it is necessary to embark on a discussion of the
Those cases, where it was held that a Hindu undivided family
cannot be a partner as it is not a legal person, have already been noticed by
my learned brother in his judgment. I may, however, indicate my reasons for
holding the view that these cases support the interpretation of section 4(3) of
the Companies Act adopted by me.
In Ram Kumar Ramniwas of Nanpara, In re , it was
held by a Division Bench of this court that a Hindu undivided family could not
legally become a partner as a coparcenary unit. It was also observed that the
joint family could be loosely viewed as a partner if the karta, through whom
the joint family may either benefit or make itself liable for the debts of the
partnership, represented the family. It was, however, clarified that, even in
such a case, only the members of the Hindu undivided family whose names appear
in the partnership deed could be deemed to be partners in the eye of law. If only
those members whose names appear in the partnership deed can be regarded as,
partners in the eye of law, the joint families referred to by section 4(3) of
the Companies Act could only be groups of partners belonging to joint families
who can, taken together, be described as "joint families". Such an
interpretation of section 4(3) of the Companies Act appears to be more in
conformity with this ruling than the view that kartas of undivided Hindu
families, merely by representing their families in the partnership or by
bringing the joint family properties into the partnership, make other
coparceners automatically partners. The question of counting the number of the
whole body of members of an undivided family could only arise where the whole
body is sought to be included among the partners. Otherwise, the question of
counting the members of the joint family would not arise at all.
In Kshetra Mohan-Sannyasi Charan Sadhukhan v. Commissioner of
Excess Profits Tax , it was
clearly held as follows by their Lordships of the Supreme Court:
"When two kartas of two Hindu undivided families enter into a
partnership agreement the partnership is popularly described as one between the
two Hindu undivided families but in the eye of the law it is a partnership
between the two kartas and the other members of the families do not ipso facto
become partners. There is, however, nothing to prevent the individual members
of one Hindu undivided family from entering into a partnership with the
individual members of another Hindu undivided family and in such a case it is a
partnership between the individual members and it is wholly inappropriate to
describe such a partnership as one between two Hindu undivided families".
I find it very difficult to hold that the result of this
pronouncement is that a partnership between the kartas of undivided Hindu
families could be appropriately described as a partnership of joint families as
contemplated by section 4(3) of the Companies Act. In any event, the question
of counting the number of members of a joint family among partners could not
arise if the kartas only are the partners in the eye of law.
In Commissioner of Income-tax v. Kalu Babu Lal Chand it was again held by the Supreme Court:
"It is now well settled that a Hindu undivided
family cannot as such enter into a contract of partnership with another person
or persons. The karta of the Hindu undivided family, however, may and
frequently does enter into partnership with outsiders on behalf and for the
benefit of his joint family. But when he does so, the other members of the
family do not, vis-a-vis the outsiders, become partners in the firm. They cannot
interfere in the management of the firm or claim any account of the partnership
business or exercise any of the rights of a partner. So far as the outsiders
are concerned, it is the karta who alone is, and is in law recognised as, the
partner. Whether in entering into a partnership with outsiders the karta acted
in his individual capacity and for his own benefit or he did so as representing
his joint family and for its benefit is a question of fact. If for the purpose
of contribution of his share of the capital in the firm the karta brought in
monies out of the till of the Hindu undivided family, then he must be regarded
as having entered into the partnership for the benefit of the Hindu undivided
family and as between him and the other members of his family he would be
accountable for all profits received by him as his share out of the partnership
profits and such profits would be assessable as income in the hands of the
Hindu undivided family".
As I interpret this decision it lends support to the view that so
far as the partnership itself is concerned, as a jural relationship recognised
by law, the fact that a karta represents an undivided Hindu family has nothing
to do with the jural relationship constituted by the partnership. The jural
relationship covering the rights and liabilities between the karta and the
other members of a joint undivided family is different. The result is that the
fact that the karta is a partner together with the fact that he represents, as
between himself and other coparceners, his undivided Hindu family, does not
make the other members of the coparcenary body partners automatically. If the
other members of a joint family are not partners at all the question of
counting their number does not arise.
In Commissioner of Income-tax v. Nandlal Gandalal it was again held by the Supreme Court:
"The position in Hindu law with regard to a coparcener, even
when he is the karta, entering into partnership with others in carrying on a
business is equally well settled. The partnership that is created is a
contractual partnership and will be governed by the provisions of the Indian
Partnership Act, 1932. The partnership is not between the family and the other
partners; it is a partnership between the coparcener individually and his other
partners (see Kshetra Mohan-Sannyasi Charan Sadhukhan v. Commissioner of Excess
Profits Tax).
The coparcener is undoubtedly accountable to the family for the income
received, but the partnership is exclusively one between the contracting
members, including the individual coparcener and the strangers to the family. On
the death of the coparcener the surviving members of the family cannot claim to
continue as partners with the strangers nor can they institute a suit for
dissolution of partnership; nor can the stranger partners sue the surviving
members as partners for the coparcener's share of the loss. Therefore, so far
as the partnership is concerned, both under partnership law and under Hindu
law, the control and management is in the hands of the individual coparcener
who is the partner and not in the family".
In Jitmal Bhuramal v. Commissioner of Income-tax, it was
observed by the Supreme Court:
"It was held by this court in Dulichand Laxminarayan v.
Commissioner of Income-tax, that
'partnership' being the relation between persons, who have agreed to share the
profits of a business carried on by all or any of them acting for all, and
'persons' who enter into the partnership being called individually 'partners'
or collectively 'a firm' the word 'person' contemplates only natural or
artificial, i.e., legal persons, and neither a firm nor a Hindu undivided
family can be that person. It was again recently emphasised in the case of Charandas
Haridas v. Commissioner of Income-tax, that where
a Hindu undivided family becomes a partner through its karta, the coparcenary
has no place in the partnership but only the karta is everything, and in
Commissioner of Income-tax v. Nandlal Gandalal, it was
pointed out that both under the Hindu law and under the law of partnership, the
Hindu undivided family as such can exercise no control and management over the
business of a partnership, of which the coparcenary is a member through the
karta".
The passage, set out above, may seem to justify speaking of a
Hindu undivided family as becoming "a partner through its karta", but
a careful examination of the passage reveals that, even in a case of this
description the coparcenary as such has no place in the partnership. Read as a
whole, the passage surely means that even in a case in which undivided family could
be said to participate "as a partner" because its karta is a partner
utilising the joint family funds, the coparcenary body is not a partner in the
eye of law. I think we are concerned in the case before us with the legal
effect of a transaction or contract of partnership and not with a mode in which
the factual position may be described. The Supreme Court was not interpreting
section 4(3) of the Companies Act of 1913, in the above-mentioned case.
Therefore, expressions used by it in describing the factual position in the
case could not, in my opinion, be used for the purpose of finding out the
legislative intent and meaning of a provision which was not under consideration
before the Supreme Court at all.
The above-mentioned cases make it clear that a joint Hindu family
cannot be conceived of as a legal entity capable of functioning as a partner in
the eye of law. It follows that where a statutory provision speaks of a
partnership formed of two or more joint families the reference must he to
individual members of joint families forming a partnership and not to joint
families as partners or legal entities or persons acting through kartas.
Section 4(3) of the Companies Act does not appear to me to deal with cases in
which partners will be fictitiously deemed to be joint families even though
this is not possible either in fact or under the law as it stands today. It
appears to me to denote what is an actual partnership of individuals capable of
being recognised by law as a partnership. I, therefore, very respectfully,
dissent from the view adopted by my learned brother. My answer to the question
is in the negative and in favour of the assessee. I, however, concur with my
learned brother that the parties may be left to bear their own costs of this
reference as the provision to be interpreted does present a rather difficult
problem of interpretation on which there has been no clear authority so far.
BY THE COURT
MAY 19, 1967
In view of the difference of opinion between us it is ordered that
this case be listed before a third judge. Put up the record of this case before
the Hon'ble Chief Justice for nominating a third judge to hear this case.
J.N. Takru J. (11-9-1967).-The following question of law has been
referred to me on a difference of opinion between Jagdish Sahai and Beg JJ. as
to the answer to be given to it.
"Whether, on the facts and in the circumstances of the case,
registration was rightly refused to the firm on the ground that it violated the
provisions of section 4 of the Indian Companies Act, 1913?"
The brief facts necessary for the appreciation of the aforesaid
question are these : The assessee-firm is a partnership concern doing business
under the name and style of Messrs. Agarwal and Co. It was originally
constituted in 1934, but as some of its members died from time to time, new
partnership deeds were executed and the one with which we are concerned was
entered into on the 7th of July, 1950, ostensibly between 18 persons. The
assessee-firm applied for registration under section 26A of the Income-tax Act in
respect of the assesseement years 1952-53, 1953-54 and 1954-55. The Income-tax
Officer refused registration for all these years on the ground that, as the
assessee-firm consisted of more than 20 persons, it was invalid under section 4
of the Indian Companies Act and hence could not be registered. The
assessee-firm appealed unsuccessfully to the Income-tax Appellate Tribunal, but
succeeded in getting the latter to make a reference to this court under section
66(1) of the Income-tax Act on the question of law referred to above. The
findings of the Tribunal, on the basis of which the aforesaid question has to
be answered, are as follows:
(1) that the number of partners, as mentioned in the
partnership deed in question, was 18.
(2) that it is common ground that most, if not all the
parties, were kartas and represented their respective families in the
partnership, and
(3) that the total number of persons including the members of
the aforesaid joint families was more than 20.
As the answer to the question depends primarily upon the
interpretation of section 4 of the Indian Companies Act, 1913, it is necessary
to quote the relevant parts of it at this very stage. Thus stated, the section
reads as follows:
"4. (1)
(2) No company, association or partnership consisting of more than
twenty persons shall be formed for the purpose of carrying on any other
business that has for its object the acquisition of gain by the company,
association or partnership, or by the individual members thereof, unless it is
registered as a company under this Act, or is formed in pursuance of an Act of
Parliament of the United Kingdom or some other Indian Law or Royal Charter or
Letters Patent.
(3)This section shall not apply to
a joint family carrying on joint family trade or business and where two or more
such joint families form a partner ship, in computing the number of persons for
the purposes of this section, minor members of such families shall be
excluded...".
Sri Jagdish Swarup, the learned counsel for the
assesee-firm, conceded as I thought he was bound to do that if the partnership
in question was invalid under section 4(2) and (3) of the Indian Companies Act,
the Income-tax Officer would be justified in refusing to register it under
section 26A of the Income-tax Act. He, however, urged a three-fold contention
in favour of the assessee-firm. His first contention was that as a partnership
between two joint families was unknown to law, the latter part of section 4(3)
was liable to be ignored as a superfluous provision which the legislature
enacted either in ignorance or disregard of the real state of law. His second
contention was that as, in any event, two joint families could enter into a
partnership only through their kartas, the other adult members of those
families would not become partners in it and hence their numbers could not be
taken into account in computing the total strength of the partnership. His
third contention, which was based more on practical than legal ground, was that
if the adult members were also to be regarded as partners of the partnership
formed between two joint families then such a partnership could never be
registered under section 26A of the Income-tax Act and the Rules framed
thereunder, as the number of adult members in a joint family being fluctuating
and their shares being unpredictable so long as the family remained joint, no
valid application for registration could be presented by such a partnership.
After hearing the learned counsel for the parties, I am of the opinion that
none of these contentions is sound. I shall, therefore, proceed to record my
reasons for coming to the conclusion beginning with the second and the third
contentions.
Now, the questions whether joint families can enter into
partnerships with individuals or each other, and if so, whether the members
composing them have any legal status vis-a-vis those partnerships have been the
subject-matter of decision both by the Judicial Committee of the Privy Council
and the Supreme Court. The leading case is that of Pichappa Chettiar v.
Chockalingam Pillai , in which
the Judicial Committee was called upon to consider the questions, (1) whether
Virappa Pillai, who was the karta of a joint Hindu family, had entered into the
partnership in question on his own account or as the karta of the joint Hindu
family, and if the latter, (2) whether the result of his joining the
partnership was to make the other members of the joint family also, partners in
the partnership. Their lordships observed that the law on these questions was
correctly stated in Mayne's Hindu Law, edition 9, at page 398, as follows :
"Where a managing member of a joint family enters into a
partnership with a stranger the other members of the family do not ipso facto
become partners in the business so as to clothe them with all the rights and
obligations of a partner as defined by the Indian Contract Act. In such a case
the family as a unit does not become a partner, but only such of its members as
in fact enter into a contractual relation with the stranger ; the partnership
will be governed by the Act".
The aforesaid view was also taken by the Supreme Court in Firm
Bhagat Ram Mohanlal v. Commissioner of Excess Profits tax,
Commissioner of Income-tax,
"It is true that when a karta enters into a partnership
contract he is merely one of the persons constituting the total number of
partners. Behind his back there may be a joint Hindu family or he may be acting
in his personal capacity; but as partnership arises only from contract, in
either case it is only the member who makes the contract of partnership with
strangers who can be considered to be a partner. Likewise, where the kartas of
two joint Hindu families enter into partnership the other members of the joint
families do not ipso facto become partners".
Thus the latest decision of the Supreme Court makes it abundantly
clear that two or more joint families can enter into a partnership through
their kartas and in such a partnership the other members of the joint family do
not ipso facto become partners. In view of these authorities, and particularly
that of Bajranglal Tantai it is too late in the day to contend that a
partnership between two joint families is not possible in law, though it is
true that under those authorities, only the kartas of the joint families are
entitled to be taken into account while computing the number of partners
constituting such a partnership.
The next question falling for consideration is whether section
4(3) of the Companies Act has made any difference to this legal position.
Section 4(3) has been quoted earlier, and on its plain terms, it is difficult
to see how it can be held not to have done so, at least to the extent indicated
therein. As stated earlier, the authorities cited above clearly lay down that
when two joint families enter into a partnership through their kartas, the
other members of those joint families do not ipso facto become partners in it,
from which it follows that their numbers cannot be taken into consideration
when computing the number of the partners of such a partnership. But section
4(3) enacts that for the purpose of ascertaining whether a partnership requires
registration under the Indian Companies Act, all the adult members of the joint
families constituting it would have to be reckoned as partners thereof. This
sub-section therefore makes a clear departure from the accepted position
regarding the members of the joint families, other than their kartas, qua the
partnership entered into between their joint families. The question which next
presents itself for determination is whether there is anything in law or
principle which makes such a departure impossible. As far as I am aware there
is nothing which can be held to do so, nor was Sri Jagdish Swarup able to bring
anything to that effect to my notice. The result, therefore, is that section
4(3) must be held to have created an artificial body of persons, who are to be
regarded, in a loose sense, as partners for the limited purpose indicated in
that section, i.e., for the purpose of calculating the total strength of the
partnership constituted of two or more joint families. That section, however,
does not profess to confer on such adult members the legal status of partners
qua the partnership concerned, and for that, as also for all other purposes,
those partnerships remain subject to the Indian Partnership Act and the law as
laid down in the authorities cited above. Thus interpreted section 4(3)
presents no diffculty in the way of partnership constituted of two or more
joint families, getting itself registered under section 26A of the Indian
Income-tax Act, and an application which is signed only by the kartas and which
specifies their shares only, i.e., the shares of the joint families represented
by them only, cannot be refused registration under that section for want of the
signatures, and the details of the shares, of all the adult members of those
joint families. Thus, the second and third contentions of Sri Jagdish Swarup
have no force and are rejected.
This leaves us with the first contention only. That contention,
however, does not need any consideration as it has become redundant in view of
the opinion expressed by me on the last two contentions of Sri Jagdish Swarup.
Sri Jagdish Swarup also sought to argue that as in the opening
part of section 4(3), the joint family referred to was a joint family which
carried on joint family trade or business, the partnership referred to in the
latter part of that section should be confined to partnerships of two or more
joint families of the kind mentioned in the earlier part, so that if either of
them was not a joint family carrying on joint family trade or business, the
section would have no application to it. This argument is, however, not open to
Sri Jagdish Swarup, (1) because it assumes that the joint families involved in
the present partnership did not carry on joint family trade or business, and
(2) because that question does not arise out of the statement of case referred
to this court.
Sri Ashok Gupta, appearing as an intervener before me, contended
that as in law the Income-tax Officer could determine the validity of the
partnership in question, on the basis of the provisions of the Income-tax Act
and the Partnership Act only, he was in error in judging its validity in the
light of the provisions of the Indian Companies Act. This contention is so
obviously untenable that I would not have made reference to it but for the fact
that reliance for it was placed upon the following passage in the Supreme Court
decision in Ravulu Subba Rao and Others v. Commissioner of Income-tax,
"Thus, registration confers on the partners a. benefit to
which they would not have been entitled but for section 26A, and such a right
being a creature of the statute, can be claimed only in accordance with the
statute which confers it, and a person who seeks relief under section 26A must
bring himself strictly within its terms before he can claim the benefit of it.
In other words, the right is regulated solely by the terms of the statute, and
it would be repugnant to the character of such a right to add to those terms by
reference to other laws. The statute must be construed as exhaustive in regard
to the conditions under which it can be claimed".
The aforesaid observation was made in a case in which a duly
authorised agent of the partners had signed the application for the
registration of the partnership firm on behalf of the principals and as under
the relevant rule framed under the Income-tax Act only an application signed by
the partners can be entertained, the question arose as to whether the rule of
common law which allows a person to act through a duly authorised agent could
be invoked to validate the application. It was in this connection that the
Supreme Court after observing, as follows:
"The Indian Income-tax Act is a self-contained code
exhaustive of the matters dealt with therein, and its provisions show an
intention to depart from the common rule qui facit per alium facit per se. Its
intention again is that a firm should be given the benefit of section 23(5)(a),
only if it is registered under section 26A in accordance with the conditions
laid down in that section and the Rules framed thereunder. And as the word
'personally' in rule 6 requires the application to be signed by the partners in
person, the signature by an agent on his behalf is 'invalid'".
made the observation relied upon by Sri Gupta. It will therefore
be seen that the passage relied upon by Sri Gupta does not even remotely
purport to support his contention.
Thus, for the reasons stated above, I am of the opinion that as
the number of persons constituting the partnership in question exceeds 20, in
all the three years with which we are concerned in this reference, the
Income-tax Officer was right in treating it as invalid under section 4(2) read
with section 4(3) of the Indian Companies Act, and in refusing registration to
it under section 26A of the Income-tax Act, I would, therefore, in agreement
with Jagdish Sahai J., answer the question referred to this court in the
affirmative.
Let the papers of this case be returned to the Bench concerned
with the answer proposed above.
By the court
The question is answered in the affirmative. The assessee shall pay the costs of the department which we assess at Rs. 400.
[1934] 4 COMP. CAS. 214 (NAG.)
JUDICIAL COMMISSIONER'S COURT OF NAGPUR
Bisanchand Champalal Ginning
Factory
v.
Govinda Vishnusa
POLLOCK, A.J.C.
NOVEMBER 13, 1933
M.R.
Bobde, for the Appellant.
M.B. Kinkhede
and N.K. Mohgaonkar, for the Respondents.
Pollock,
A.J.C. — On 7th December,
1928 ten ginning factories in Malkapurentered into a registered agreement to
run the factories in a certain way so as to eliminate competition between
themselves. The contracting parties agreed inter alia to work their factories
only during certain specified periods, to charge on agreed minimum rate, to
supply certain accounts to the trustees appointed under the agreement, and to
pay a certain specified proportion of their earnings into a pool to be kept by
the said trustees and divided between the ten factories in certain specified
shares. The plaintiff firm of Govinda Vishnusa, which was appointed the trustees,
has brought the suit out of which this appeal arises to compel the factories
belonging to the firms of Badrinarayan Ramnath and Motilal
Damodardas,defendants'8and 9, which were parties to the above agreement, but
have refused to carry it out, to supply accounts and to pay such sums as may be
found due according to the stipulations in the agreement. The other
parties to the agreement, defendants 1 to 7, have abided by the agreement and
are merely pro forma defendants. Defendants 8 and 9, who are the appellants in
this Court, pleaded that the agreement in suit was in association of
partnership consisting of more than 20 persons, that it therefore required
registration under Section 4 (2), Companies Act, 1913, and that in the absence
of such registration the suit was not maintainable. The proprietors of the ten
factories which were parties to the agreement are 48 individuals who belong to
16 different Hindu joint families. Some of the factories are owned by one or
more individuals, some by all the members of one joint family, and others by
all the members of two or more joint families. The details are given in para. 6
of the first Court's judgment. Both the lower Courts have held that members of
a joint family constitute one "person" within the meaning of Section
4(2), Companies Act, and a preliminary decree has been passed in the
plaintiff's favour.
In Akola Gin
Combination v. Northcote Ginning Factory where there was a similar agreement
between 18 ginning factories in Akola, Stanyon, A.J.C. held that the definition
of "person" as including any company or association or body of
individuals, whether incorporated or not, which occurs in Clause 39, Section 3,
General Clauses Act, 1897, was not applicable and that the word
"person" in Section 4 (2), Companies Act, denoted individuals and did
not include bodies of individuals whether corporate or not. This decision was
followed by a Bench of the Madras High Court in Pannaji Devichand v. Senaji
Kapurchand, whose decision was upheld by the Privy Council in Senaji Kapurchand
v. Pannaji Devichand. A contrary view was taken by the Allahabad High Court in
Moti Ram v. Muhammad Abdul Jalil, where the. definition in Clause (39), Section
3, General Clauses Act, was applied and it was held that an association of
individuals known as a Hindu joint family was a "person" within the
meaning of Section 4, Companies Act. The Allahabad High Court took the same
view again in Mewa Ram v. Ram Gopal. The question whether a Hindu joint family
is a "person" within the meaning of Section 4, Companies Act, was not
before the Court either in the Akola Gin Combination v. Northcote Ginning
Factory or in Pannaji Devichand v. Senaji Kapurchand but in the latter there is
a reference to the decision in Mewa v. Ram Gopal which was distinguished. As
the view taken by this Court and the Madras High Court that the definition of
"person" defined in Clause 39, Section 3, General Clauses Act, does
not apply to Section 4, Companies Act, has been approved by the Privy Council,
it appears to me that the above cited decisions of the Allahabad High Court
based on the supposition that this definition does apply must be regarded as
unsound. The point in issue appears to me to be in essence one of fact. In
Gungayya v. Venkataramiah, which was followed by Baker, J.C, in Rambhau v.
Prayagdas, Kumaraswami Sastri, J., remarked:
"It is well settled that a contract of partnership between a member
of a joint family and a stranger does not make every member of the joint family
which the managing member represents a partner so as to clothe him with all the
rights and obligations of a partner as defined in Section 239, Contract
Act………..It is no doubt true that as between the members of the undivided family
and the coparcener who enters into a contract of partnership for the benefit of
the family they will be entitled to call upon him to account for the profits
earned by him from the partnership and to share in such profits, but this will
not place them in any position of direct contractual relationship with the
other partners of the firm. Nor would the fact that the entire assets of the
joint family might be available to the creditors of the firm make any
difference. The position of the plaintiff in the present case cannot be higher
than that of a sub-partner. The managing member of an undivided family though
he has the power of representing the interests of the other members is not
their agent in the strict sense of the term so as to clothe the other members
of the family with all the rights of principals in respect of contracts entered
into by their agent. His position is, as pointed by their Lordships of the
Privy Council in Annamalai Chetty v. Murugesa Cheity, more analogous to that of
a trustee."
The case law on the point has been reviewed by a
Bench of the Allahabad High Court in their recent decision in Mirza Mal v.
Rameshwar. Now it is obviously possible for the individual members of a Hindu
joint family to enter into partnership, as defined in Section 239, Contract
Act, so that thereafter they will be
governed by the provisions of Ch. 11 of that Act, which was in force at the
time of the agreement in suit but is so no longer. If the various individual
members of one or more joint families form an agreement of partnership amongst
themselves, then, by virtue of the decision in Akola Gin Combination v.
Northcote Ginning Factory, each individual member must be reckoned a person for
the purposes of Section 4, Companies Act. If however there has been no
agreement of partnership but there is merely a family partnership created by
the operation of law, so that the individual members are governed by the
principles of Hindu Law and not by the Contract Act, then I am of opinion that
the individual members are merely sub-partners in any agreement made on behalf
of the family and that the joint family consisting of these members should be
reckoned as one person for the purposes of Section 4, Companies Act.
The appeal is
therefore allowed and the case is remanded to the first Court for a decision of
the question which of the 48 persons mentioned in the pleadings are partners,
as opposed to sub-partners to the agreement. The parties will be at liberty to
make fresh pleadings and to adduce evidence on this point. If it is held that
more than 20 of these individual members are partners to the agreement, then
the present suit must fail. A certificate will issue for the refund of
court-fees paid in this Court. Costs in this Court and in the lower appellate
Court will be costs in the cause.
Madras High
Court
Companies act
[2003] 41 scl 385 (mad.)
v.
Educational Trustee Co. (P.) Ltd.
N.V.
BALASUBRAMANIAN, J.
NOVEMBER
8, 2002
Section 11, read with section 433, of the
Companies Act, 1956 - Illegal associations - Whether keeping in view provisions
of section 11(1) and 11(2) a company need not always be formed to carry on
business activity with a view to earn profits - Held, yes - Whether word
‘business’ in section 11(2) should be construed in a wide manner and a company
formed with object of acting as a trustee could also be treated as business
activity and that ‘business’ does not necessary mean or is limited only to,
commercial activity - Held, yes - Whether word ‘business’ found in section
11(2) is not confined only to commercial activity for profit in case of
trust-companies - Held, yes - Whether it will be open and permissible for a
trustee-company to pursue its objects of being a trustee by carrying on
activities on a commercial scale, depending upon terms of deed of trust or
orders of Court, as the case may be, but non-receipt of remuneration or its
willingness to perform functions as a trustee without remuneration would not
detract from its essential quality of a corporation when it pursues its
activities without receipt of remuneration - Held, yes
Section 25 of the Companies Act, 1956 -
Charitable companies - Whether trust-companies do come within purview of
section 25 as it deals with companies formed to promote charity and provision
has no application to case of trust-company which is to act as a trustee -
Held, yes
Section 433 of the Companies Act, 1956 -
Winding up - Circumstances in which a company may be wound up - Whether though
scope of civil suit and company petition is different, but it will not be bona
fide to seek two remedies at a time to achieve same object - Held, yes -
Whether mere fact that there is an infight between shareholders cannot be a
ground for winding up of any company on just and equitable ground - Held, yes -
Whether where company has pursued its objects for which it is incorporated,
fact that company has not earned profit till date of filing company petition is
not relevant for winding-up of company - Held, yes - Respondent-company was
incorporated for charitable purpose and was acting as trustees of charitable
trust - Petitioner- shareholder filed instant winding-up petition on ground
that company had stopped its business and failed to earn any profit - Main
allegations were that (i) company was not a bona fide corporate body, but was
kept for some oblique purpose of benefiting second respondent-director by way
of diversion of funds by him, (ii) there was deadlock in affairs of company due
to intense fight between petitioner and respondent director, (iii) other
members of company were employees of trust publishing newspaper and were under
control of respondent-director (iv) capital of company had got eroded, and (v)
company had liabilities to pay its debts and also company was in loss, etc. -
However, verification of relevant balance sheet showed that all relevant
expenses and losses were met by trust and shareholder’s capital remained intact
and company was not indebted - None of remaining shareholders supported these
allegations - Further, civil suit on allegations was pending before
Supreme Court - Whether where petitioner’s case was not that he was a creditor
of company or any notice had been issued by creditor, company could not be
ordered for winding-up - Held, yes - Whether since all serious allegations made
in instant petition were also subject matters of civil suit pending before
Supreme Court, instant winding- up petitions could not be decreed by instant
High Court - Held, yes
Words and phrases - ‘business’ as occurring
in section 11(2) of the Companies Act, 1956
Facts
The first respondent was a private company
limited by shares. The main object of the company was to act as trustees,
managers, secretaries of any trust or institutions having charitable objects.
No remuneration was payable to any director from out of the funds received from
the trust.
The main case of the petitioner was that the
respondent-company had not carried on any business activity. The corporate
character of the company was not retained with any genuine object of carrying
on any commercial activity, rather it was an instrument to facilitate the
second respondent to have control over the trust and to advance his personal
enrichment. The petitioner further submitted that the trust was to be managed
by a body of trustees but this provision was being defeated by the second
respondent by having his associates and persons accustomed to act in accordance
with his directions, as members of the company. The petitioner produced copies
of balance sheet and stated that the company was insolvent. Moreover, the
company was a chronic defaulter in complying with the provisions of the
Companies Act. Therefore, the winding-up of the respondent-company was sought
for.
Held
There can be no dispute at all that a company
can act as a trustee. In the instant case, the petitioner had not fairly
disputed the position that the company can be a trustee. But, the point that
was raised by the petitioner was that the first respondent-company, for this
purpose, had not carried on any business activity for several years from its
inception to earn income. This submission could not be accepted. Section 11(1)
deals with the case of a banking company, while section 11(2) deals with cases
other than banking companies. From these two provisions, it cannot be said that
a company must always be formed to carry on a business venture with a view to
make profit. If such interpretation is given, then the trustee companies will
have no place of existence at all in the Companies Act.
As far as section 25 of the Companies Act is
concerned, it deals with the companies formed for promoting certain charitable
objects, like, promotion of commerce, art, science, religion, charity or any
other useful object and intends to apply its profits or other income in
promoting its objects and to prohibit the payment of any dividend to its
members. But the trust- companies do come within the purview of section 25 of
the Companies Act, as section 25 deals with the companies formed to promote
charity and the provision has no application to the case of the trust-company
which is to act as a trustee. Therefore, section 25 has no application in the
case of the trust-company.
Section 11 should only be regarded
as an enabling provision and it is not exhaustive covering all cases of
companies that may be formed under the Companies Act. What is required for the
formation and incorporation of a company is that the company must be formed
with certain objects which are lawful. Section 33 deals with the registration
of memorandum and articles of association. So long as a company pursues its
main object for which it is incorporated, it cannot be stated that it is not
carrying on its objects and the trust companies are sui generis in nature.
As far as the provision of section
433(c) is concerned, it deals with the case where the company does not commence
its business within a year from its incorporation or suspends its business for
a whole year. Section 433(c) would cover a situation where a company is formed
with the object of carrying on business, but fails to commence the business
within one year from the date of incorporation or suspends the business for a
period of one year, then, it is liable to be wound up. Section 433(c) does not
cover cases where the company pursues its objects for which it was formed.
Section 11 deals with commercial
companies, the object of which is to make a gain in the business. But, the
companies falling under section 11 are not exhaustive and there may be some
companies which are not commercial companies, but still they are companies for
the purpose of the Companies Act. It is very well to remember that the objects
of the company are different from the nature of activities to be carried on by
the company. It is not necessary that the activity of the company should be
always commercial in nature. No doubt, it is incongruous to say that a company
exists to carry on one of its objects, viz., to act as a trustee, but really
earns no income from the activity. The earning of profit is not a pre-requisite
for a trustee company and if it is held that there must be an activity with a
view to earn profit in the case of trust-companies, then, most of the trust-
companies will fail. That is not the intent of the Legislature. A question may
arise as to the position of a shareholder in such a trust-company. One way of
looking at the problem is that having known that it is a trust-company and
having invested his money, the shareholder cannot complain that there are no
return on the investment. Another way of looking at is that the shareholder
will have all the rights as a shareholder except that he may not get the actual
dividend, though his right to get the dividend is not lost. The rights of the
shareholder under other provisions of the Companies Act are also kept intact.
On the date of filing the company
petition, the first respondent-company had pursued its objects for which it was
incorporated and the fact that the company had not earned profit till the date
of filing the company petition was not relevant for winding-up of the first
respondent-company.
Moreover, the word, ‘business’ in section
11(2) should be construed in a wide manner also. A company formed with the
object of acting as a trustee could also be treated as business activity and
that ‘business’ does not necessary mean or is limited only to, commercial
activity. So long as the company carries on legal and lawful objects, the
company can be said to have been formed for lawful purposes; it has already
been held that the trust-company need not always exist to make profit or to
carry on commercial activity.
The fact that the Legislature has made
distinction between sections 11 and 12 clearly shows that the company need not
have commercial objects always and it is possible for a company to have its
object to act as a trustee.
The concept of trust is a peculiar concept.
Therefore, the word, ‘business’ found in section 11(2) is to be construed to
mean any useful activity and it is not necessary to confine it to commercial
activity for profit. The charitable companies are not formed or not intended,
for commercial activities. The word, ‘business’ found in section 11(2) is not
confined only to commercial activity for profit in the case of trust-companies.
The Companies Act makes a distinction between
the commercial companies and the companies which are to function as trustees
and where there is a prohibition either under the Trusts law or under the deed
of Trust to receive remuneration by trustees, the trust-company cannot be wound
up only on the ground that it has failed to receive remuneration for acting as
a trustee. The question whether the company fails to earn income would depend
upon the nature of the company. Besides, the Court has to look into the
provisions of the Trusts Act and the trust deed and where there is a
prohibition against the receipt of any benefit by way of remuneration by the
trustee, the company cannot be said to be not pursuing its objects for which
the company has been formed. The company is merely an instrumentality and it
acts only through individuals and no doubt it exists for the benefit of its
members, and when the trustee-company carries on its activity to achieve its
objects for which it was formed, the company cannot be wound up, whether there
is a profit or not. It would be a different matter if the company has not
pursued any of its objects. On the other hand, where the company pursues its
objects by carrying on its activities, the non-receipt of remuneration is not
material and the company cannot be wound up.
Further, clause 8 of the articles of
association of the respondent-company clearly provided that no remuneration
would be paid to any director from the funds of, or money received from any
trust managed by the company if the constitution or rules of such trust
prohibited payment of remuneration to such director. The petitioner had not
produced the deed of trust to show that the deed of trust permitted the payment
of remuneration and in the absence of such material, the first respondent-
company was not entitled to get remuneration for acting as a trustee.
It is true that it will be open and
permissible for a trustee-company to pursue its objects of being a trustee by
carrying on the activities on a commercial scale, depending upon the terms of
the deed of trust or the orders of the Court, as the case may be, but the
non-receipt of remuneration or its willingness to perform the functions as a
trustee without remuneration would not detract from its essential quality of a
corporation when it pursues its activities without the receipt of remuneration.
It would all depend upon the willingness of the corporation and the terms of
the deed of trust or the orders of the trust, as the case may be. Thus, a
trust-company is a legal entity under the company law so long as it pursues its
object of acting as a trustee. The non-receipt of remuneration is not material,
and on that account, a trust-company cannot be wound up.
Further, the first respondent-company had been
formed with several objects and one of the objects was to act as a trustee and
the company had been registered with the Registrar of Companies and the company
had been pursuing its objects to act as a trustee from 1958 onwards. The first
respondent had also produced the certificates by the Registrar of Companies
acknowledging the receipts of annual returns and the first respondent had also
produced the annual returns up to the year 1998. The first respondent had
produced evidence to show that it had been conducting annual general meetings
and its accounts were audited by the Chartered Accountants and the respective
balance sheets had been approved by the shareholders for various years prior to
and subsequent to the year 1994. The first respondent had also produced the
report of the Directors. It was also seen from the auditor’s reports that the
company had been acting as a trustee not only for T Trust, but also for
A.I.E.C. Trust and the expenses regarding salary and other miscellaneous
expenditure incurred were met by the respective trusts. Hence, there was no
profit and loss account for the company and there was no excess income for the
company. It was to be held that there could be no objection for the practice
adopted by the first respondent-company in getting reimbursement of expenses
incurred from the trusts for whose benefit the services of the employees were
utilised and there could be no objection either from the accountancy point of
view or from the legal point of view in getting reimbursement of the expenses
for the services rendered by the employees from the trust itself and in that
process, the first respondent-company was carrying on its object by acting as a
trustee for the trust.
Further, section 32 of the Indian Trusts Act,
1882 also provides that the trustee is entitled to get reimbursement out of the
trust property of all expenses properly incurred in relation to the execution
of the trust property and for preservation of the trust property. Therefore, it
could not be stated that the first respondent-company was not pursuing its
object viz., to act as a trustee. The evidence produced by the first respondent
clearly showed that it acted as a trustee. As far as the remuneration by the
trustee was concerned, as already observed, unless it was provided in the trust
deed, it was not open to the trustee to claim remuneration. Therefore, the
non-receipt of remuneration was not material. As far as the benefits to members
were concerned, it was found that except the petitioner, other shareholders of
the company, names of whom were given in the petition, had not raised any
objection that they had not received any benefit from the company. Since it was
a company formed to act as a trustee, the non-receipt of remuneration was
immaterial. Further, it had already been observed that the first respondent-company
had other objects also and in future, it might expand its activity in carrying
on other objects and in such situation, it would be possible for the members to
obtain return on the investment. Further, the right of the shareholders in the
shares is not confined only to the receipt of dividend, but it varies with the
rights of shareholders and bundle of rights and so long as shareholders
exercise their rights as shareholders in the company, it cannot be stated that
the shareholders are not exercising their rights as shareholders in the
company.
The balance sheets from 31-3-1994 clearly
showed that the company had cash-in-hand and all the current liabilities, like
auditor’s fees and salaries had been met from the trust and, therefore, the
submission that the capital had got eroded was not acceptable. The balance
sheets produced by the first respondent showed that the expenses regarding
salary and miscellaneous expenditure were met by the respective trusts and,
therefore, the shareholders’ capital remained in tact and there was nothing to
show that the capital of the first respondent company was eroded by way of
expenditure. The allegations regarding diversion of the trust funds by the suit
for which the petitioner had filed a petition under section 92 of the Code of
Civil Procedure and as the matter was pending before the Supreme Court, any
opinion on the said question could not be expressed, particularly when the
Supreme Court had given a direction that the account of trust should be audited
and surplus money should be used for the benefit of the trust and not for any
other purpose. Moreover, the allegations were subject-matter of the proposed
suit and the instant Court must refrain from making any observation on the
allegations made in the company petition that the first respondent had been
nominating the second respondent and the second respondent was in control of
the trust and there had been diversion of trust funds by the second respondent.
Therefore, on the facts and circumstances of the case, any finding on the said
question could not be given.
The petitioner had failed to establish any
deadlock in the affairs of the company and in the absence of any material to
show that there was any deadlock in the affairs of the company, the company
could not be ordered to be wound up. As far as the lack of confidence of the
petitioner on the second respondent was concerned, his grievance seemed to be
more against the diversion of funds of the trust and if there was any actual
diversion, it was for the civil court to decide the question whether there was
any breach of trust committed by the second respondent. Hence, on that account,
the petition for winding up of the company was liable to be dismissed.
There were no materials at all except
allegation made by the petitioner that it was just and equitable to wind up the
first respondent-company. As observed by the Supreme Court, the company court
will have to keep in mind the position of the company as a whole and also the
interests of the shareholders and to see that they would not suffer in the
fight for power that ensured between the two groups. On the facts of the case,
except the petitioner, no other shareholders had come forward in support of the
petition filed by the petitioner. There were no supporting affidavits from
other shareholders. Further, it was seen from the returns filed by the first
respondent-company that other shareholders had consented to the carrying on of
the activities of the company and to act as a trustee. As a matter of fact, the
petitioner was shareholder of the company from the date of its incorporation in
1958 and he resigned as Director and the first respondent company had been
acting as a trustee from 1958 till the date of filing of the petition and even
thereafter. The facts prevalent in 1994 were not different from the facts that
were prevalent prior to that date. In fact, after 1994, the balance sheets of
the first respondent-company showed that the loss shown earlier had been wiped
off and the cash balance had also been increased. Though the petitioner had
raised several allegations against the second respondent, the allegations were
against the performance and functioning of the second respondent as a trustee
and not as a Managing Director or as a Director of the first respondent. Though
there were several allegations raised by the petitioner against the second
respondent and counter allegations had been made against the petitioner by the
second respondent, that would not constitute a ground to hold that it was just
and equitable to wind up the first respondent-company. As far as the allegation
that other members of the trust were only employees in the Daily Thanthi was
concerned, the explanation of the first respondent that since the first
respondent-company had to act as a trustee, the persons conversant with the
affairs of the newspaper should be in the Board was acceptable. Further, it had
already been observed that these allegations made by the petitioner against the
second respondent and vice versa were all subject- matter of the proposed suit
for which leave had been sought for by the petitioner under section 92 of the
Code of Civil Procedure and it would not be proper to consider the allegations
as well as the counter-allegations and give a finding in the company petition.
If the petitioner would come forward with the company petition after the suit
was disposed of, that would be a different matter. The view taken was that so
far as the serious allegations made by the petitioner against the second
respondent were concerned, they would still remain as allegations and evidence
was required to prove the allegations and the allegations had to be established
in the civil court. Therefore, the mere fact that there was an in-fight between
the petitioner and the second respondent was not a ground to hold that the
first respondent-company should be wound up on just and equitable ground.
Section 434(1)(c) deals with a
case where the company is unable to pay its debts. In other words, the company
has to be commercially insolvent to attract the provisions of section
434(1)(c). The petitioner referred to the averments made in the petition and
submitted that the company had become commercially insolvent. He referred to
the balance sheets of the company from the year 1986 onwards to show that the
company had become insolvent. However, the balance sheets of the first
respondent company clearly established that the loss of the company had been
wiped off and the company had current assets and cash-in-hand. It had been
explained by the first respondent that the loss had been wiped off because the
trust had been directed to meet the expenses, such as, salary to the employees
and miscellaneous expenditure. Therefore, it could not be stated that the
company was indebted.
The Kerala High Court in V.V.
Krishna Iyer Sons v. New Era Mfg. Co. Ltd. [1965] 35 Comp. Cas. 410 held that
the fact that the company makes losses over a number of years and may do so in
future does not justify a winding up order at least when the capital has not
been exhausted. Applying the test, on the facts of the case, it was clear that
the petitioner had not proved that the company had incurred losses, but, on the
other hand, it was clear from the balance sheets that the capital of the
company had not been exhausted. Further, the petitioner was not a creditor.
When there were no debts, it could not be stated that the company was
commercially insolvent.
As a matter of fact, section
434(1)(c) deals with a case where the company is unable to pay debts and the
pre-condition for maintaining a petition under section 434(1)(c) is the
existence of debt. It was not the case of the petitioner that it was a creditor
and it was also not proved that the first respondent was indebted and there was
no notice issued by the creditor and the balance sheets of the first respondent
clearly showed that there was no creditor of the company. It was, therefore,
held that section 434(1)(c) was not applicable.
Further, the question of lack of
bona fide and the option to elect one remedy, on the facts of the case, should
be considered together. The suit had been filed raising several serious
allegations against the second respondent herein, and though the prayer in the
civil suit was for framing the scheme to administer the trust, the result of
decreeing the suit, accepting the allegation against the second respondent,
might result in the removal of the second respondent from the post of trustee
in the trust and the company petition had been ostensibly filed on just and
equitable grounds and the result of admitting and allowing the company petition
would be the same, namely, the removal of the second respondent from the post
of trustee. It is, no doubt, true that the scope of a civil suit is different
as the civil suit is one under the general law and the scope of the company
petition is different. But, it will not be open to convert the proceeding in
the company court which is of summary in nature and to use the finding arrived
at in the summary proceeding, if it is favourable to the petitioner, in the
civil proceeding. It is in the sense that the proceedings under the company law
are abuse of the process of the court and it is well-settled that the
proceedings herein cannot be used for some oblique or extraneous purposes. The
matter can be looked from another angle. Suppose, the proposed suit is decreed
and the company petition is dismissed, the petitioner will not be prejudiced as
the main relief sought for would be achieved in the civil suit. Equally, if the
proposed suit is dismissed, the finding rendered by the civil court after a
full fledged inquiry, will have a greater impact on the company petition, if it
is pending. Therefore, it was impermissible for the petitioner to pursue two
remedies at the same time, and further, the dismissal of the company petition
would have no great impact on the proposed suit for which the leave had been
granted by instant court. Thus, the two remedies sought for by the petitioner
to achieve the same object was not bona fide and the petition deserved to be
dismissed on that ground also.
Having considered the submissions of the
petitioner and the respondents it was found that the petitioner had not made
out any case to admit the petition to wind up the first respondent-company.
Accordingly, petition failed and the same was to be dismissed.
Cases referred to
Gomathinayagam Pillai v. Manthramurthi High
School 76 L.W. 229, CIR v. Korean Syndicate Ltd. 12 TC 181, Goswami Shri
Girdhariji v. Shri Govardhanlalji ILR 18 Bom. 294, Tan Waing v. Bo Hein AIR
1932 Rangoon 167, Arthur Average Association for British, Foreign and Colonial
Ships [1875] 10 Ch. 542, V.S. Rula v. S. Dalmia AIR 1968 Bom. 347, Bakhatawar
Singh Balkrishan v. Union of India AIR 1983 Delhi 201, Model Town Welfare
Council v. Bhupinder Pal Singh AIR 1973 Punj. & Har. 76, Barendra Prasad
Ray v. ITO [1981] 129 ITR 295/6 Taxman 19 (SC), Bisgood v. Honderson’s
Transvell Estates Ltd. [1908] 1 Ch. 743, Kannan Adityan v. Adityan [1996] 2
L.W. 364, Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla AIR 1976 SC
565, Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp. Cas. 390
(Delhi), Survey Garden village Trust Ltd. In re [1965] 35 Comp. Cas. 864
(Ch.D.), Mani v. Kowthan Business Syndicate (P.) Ltd. 66 Comp. Cas. 305 (AP),
V.V. Krishna Iyer Sons v. New Era Mfg. Co. Ltd. [1965] 35 Comp. Cas. 410 (Ker.)
and Neg Micon v. NEPC India Ltd. [2001] 34 SCL 210 (Mad.).
C. Harikrishnan and S. Subbulakshmi for the
Petitioner. C. Murari for the Respondent.
order
1. The first
respondent is a company incorporated on 8-8-1958 as a private limited company,
limited by shares. The authorised capital of the first respondent company is
Rs. 20,000, divided into 2,000 shares of Rs. 10 each and its paid up capital is
Rs. 3,335, divided into 667 shares of Rs. 10 each, out of which only Rs. 5 has
so far been called for. The main objects of the company which are set out in
the petition are as under:—
(a) to declare, create, or establish, to manage or supervise
to endow property upon, in trust, or institutions having charitable objects;
and
(b) to act as Trustees, Managers, Secretaries, Treasurers of
any Trust or Institutions having Charitable objects.
The first respondent company has other objects
also. The petitioner referred to certain salient features of the memorandum and
articles of association of the first respondent company and from that it is
clear that no remuneration is payable to any Director from out of the funds
received from any other trust, if such payment is prohibited by the terms of
the trust deeds. It is not necessary to refer to other objects. It is stated
that the petitioner and the second respondent are the sons of one S.P. Adityan,
known as Si. Pa. Aditanar who was a Barrister-at-Law, practising at Singapore.
It is stated that Si. Pa. Aditanar returned to India in the year 1942 and started
a Tamil daily called, “Daily Thanthi” in the year 1943. It is stated that the
said daily was run as a proprietary concern and later it was converted into a
trust called, “Thanthi Trust”. It is stated that Si. Pa. Aditanar’s brother
S.T. Adityan, the petitioner and the founder were appointed as first trustees
of the said Thanthi Trust. It is not necessary to refer to the supplemental
deeds of the trust. It is stated that the main object of the Trust is
education, it is stated that one of the trustees of the Trust shall be the
Director of the publication, Daily Thanthi and the petitioner was the Director
of Daily Thanthi for few years. It is stated that on or about 8-8-1958 the
first respondent company was incorporated. The petitioner has given the details
of the signatories to the Memorandum of Association of the company. It is
stated that the petitioner resigned from the post of Director of the company on
19-5-1959 and he became the Director of Daily Thanthi. It is also stated that
the by deed of trust executed on 22-5-1959, Si. Pa. Aditanar, S.T. Adityan and
P. Ramarathinam, the second respondent herein and the company were appointed as
trustees to the Thanthi Trust. The petitioner has stated that certain
additional shares were issued in favour of certain persons and on 19-10-1961,
Si. Pa. Aditanar and his wife Govindammal resigned as Directors of the company.
It is stated that on 27-8-1962 the second respondent was appointed as a
Director of the company and three shares belonging to S.T. Adityan were transferred
in his favour and therefore the holding of S.T. Adityan was reduced to 30
shares. It is further stated that on 6-12-1963 the second respondent was
appointed as a Managing Director of the company for a period of ten years and
on the same date, 101 shares belonging to P. Ramarathinam were transferred in
favour of the wife of the second respondent. It is further stated that on
2-1-1964, S.T. Adityan resigned from the post of Director of the company. It is
stated that in or about 1967, eleven shares belonging to P.R. Adityan were
transferred in favour of the second respondent and his holding became 14
shares. It is stated that Si.Pa. Aditanar and his wife Govindammal transferred
their 101 shares each to the second respondent and thus, the holding of the
second respondent in the company became 216 shares. The petitioner also
referred to certain changes in the shareholding and directorship of the
company. It is stated that in 1978 there was some litigation on the file of
this Court when the second respondent wanted to prevent additional trustees
coming into the Trust. It is stated that the petitioner sought the removal of
the second respondent from the Trust and ultimately, the litigation was
withdrawn. It is stated that in or about that time, the second respondent
issued additional shares to his subordinates and associates in order to
safeguard his position in future. The petitioner has set out the shareholding
position. It is stated that there are only 12 shareholders. It is stated that
Amudha Adityan who is the wife of the second respondent S. Parvathinathan, T.
Balasubramanian, R. Narayanan, T.R. Bheemsingh and R. Thananjayan are all
employees in the Thanthi Trust and they are directly under the control of the
second respondent and they act in accordance with the directions and
instructions of the second respondent. The petitioner has also set out the
composition of the Board of Directors of the company.
2. The main case
of the petitioner is that the first respondent company is liable to be wound up
as the company has not carried on any business activity and the first
respondent company is in existence only to enable the second respondent to have
an absolute control in the Thanthi Trust. It is the case of the petitioner that
the corporate character of the company is retained not with any genuine object
of carrying on any commercial activity or any other activity, but as an
instrument to facilitate the second respondent to have control over the Thanthi
Trust and to advance his personal enrichment. It is stated that the company is
made to function in order to defraud the public and also to make the provisions
of the Trust Deed governing the trust meaningless and to convert the same as
the personal property of the second respondent. It is the case of the petitioner
that the company has not carried on any trading activity ever since its
incorporation. It is stated that the trust is to be managed by a body of
trustees, but this provision is being defeated by the second respondent by
making use of the company to have his position permanently on the Trust as a
sole trustee by having his associates and persons accustomed to him to act in
accordance with his directions as members of the company. The petitioner has
also produced certified copies of balance sheets and stated that the first
respondent company has not carried on any activity and the position has been
the same ever since the date of its incorporation. It is the case of the
petitioner that the second respondent is keeping the company as his personal
property. It is stated that the company is an insolvent, liable to be wound up.
It is stated that expect the petitioner and S.T. Adityan, all others in the
company are under the control of the second respondent and the sole voice of
the second respondent alone prevails in the company. It is also stated that the
first respondent company is a chronic defaulter in complying with the mandatory
requirements of the provisions of the Companies Act. The case of the petitioner
is that the company should be wound up and it is just and equitable to do so.
Hence, the petition has been filed for a direction to wind up the first
respondent company.
3. Notice of
admission was ordered and both the respondents have filed detailed counter
statements. As far as the counter statement of the first respondent is
concerned, it is stated that that the first respondent is to function as a
trust without any break as one of the trustees is administering the Trust. It
is stated that the petitioner is aware of the composition of Board of Directors
as well as the shareholding pattern. It is stated that the petition has been
filed as if the petitioner came to know about the shareholding pattern only at
or about the time when the petition was filed which is denied by the first
respondent as incorrect. It is further stated that the changes in shareholding
and in the composition of Board of Directors are matters of record and
reflected in the statutory returns filed by the company. It is stated that the
second respondent was duly appointed as Managing Director of the company on or
from 6-12-1983 and he was functioning as such till 4-8-1990 and thereafter the
company is managed by the Board of Directors of the company. The first
respondent denies averments referred to in the petition regarding the change in
the shareholding. The first respondent has stated that the appointment and
functioning of the trustees are regulated by the terms of the Trust Deed and
the first respondent was appointed as one of the trustees as early as in 1959.
It is stated that the second respondent was also appointed as a trustee under a
supplementary deed dated 22-5-1959. It is stated that the proceedings initiated
by the petitioner and others for the removal of the second respondent from the
trust were unilaterally withdrawn by them after the first respondent as well as
the second respondent filed counter statement. It is stated that in the said
proceedings the petitioner has repeated some of the allegations made in the
present proceedings that the first respondent is an insolvent and ought not to
function as a trustee of the Trust. It is stated that the petitioner has
withdrawn the proceedings without any leave of the Court. The first respondent
also denied the changes in the shareholding referred to in the petitioner as
incorrect. The first respondent also denied the allegation that the directors
of the first respondent are persons who are accustomed to act in accordance
with the instructions of the second respondent and according to the first
respondent, this inference is unwarranted and mischievous. It is stated that
the first respondent is acting as a trustee of the Trust and its duty is to
ensure that the trust property, viz., the business is managed so that it would
yield best return which has to be applied for the charitable purpose, viz.,
education. It is stated that the persons who are involved in the business are
associated with the company as Directors so as to ensure that the business is
managed to the best advantage of the trust. It is stated that the assets of the
trust have been augmented and the trust which was started with an asset base of
about Rs. 5 lakhs at the time of appointment of the second respondent, today
admittedly runs to several crores. It is stated that the assumption that the
company has not carried on any activity bringing benefit to it and hence, the
company should be wound up is untenable. It is stated that there is no
allegation that the first respondent does not discharge its functions as a
trustee. It is further denied that the first respondent is only an instrument
to facilitate the second respondent to control Thanthi Trust as incorrect. It
is stated that the administration and control of Thanthi Trust are regulated by
the terms of the Trust deed. The averment that there was personal enrichment on
the part of the second respondent is denied. The averment that the first
respondent exists for some collateral purpose is denied as without any basis.
The first respondent has denied other averments made by the petitioner on the
ground that they are vague and it is not necessary to burden the judgment with
the details stated in the counter statement, but it must be stated that the
first respondent has denied all the averments made against the first respondent
and also against the second respondent. It is stated that the company has been
complying with the statutory obligations. It is stated that the petitioner has
not made out any case to wind up the company on just and equitable grounds as
no case has been made out. It is stated that the present attempt is a part of
the attempts on the part of the petitioner to interfere in the trust for which
he has already proposed a suit by filing a petition under section 92 of the
Code of Civil Procedure. It is stated that the petition was not filed with bona
fide motive, but with the ulterior object to interfere with the administration
of the trust. It is stated that the petitioner has not made out any ground for
winding up of the first respondent company.
4. The second
respondent has also filed a separate counter statement wherein he has denied
various allegations made against him by the petitioner.
5. Mr. C.
Harikrishnan, learned senior counsel appearing for the petitioner submitted
that the first respondent company is liable to be wound up as the first
respondent company has not carried on any activity except functioning as
trustee for no remuneration and the only activity of the first respondent
company throughout from the date of incorporation is that it has been acting as
trustee. Learned senior counsel submitted that the scheme of the Companies Act
also warrants that it must carry on some commercial activity with profit motive
in mind, though it may not result in any profit actually, but however, the
motive to earn profit by undertaking commercial activity is the pre-requisite
for the existence of the company under the Companies Act. He submitted that the
first respondent has not carried on any activity for profit. Learned senior
counsel submitted that the first respondent has not only carried on any
commercial activity during the years prior to the filing of the company
petition, but its paid up capital has also been eroded, and the result is that
the company is mainly acting as trustee and actually it is a service
organisation. He also referred to section 25 of the Companies Act and submitted
that section 25 deals with charitable companies and licence from the Central
Government is necessary so that company can be formed for promoting commerce,
art, science, religion, charity or any other useful objects with no profit
motive in mind. He also referred to section 11 of the Companies Act and
submitted that in all cases, the company must carry on some trading or
commercial activity and the object of the company must be to earn income. He
also submitted that in the case of a company which is formed to act as trustee,
such company must also carry on the activity for profit and unless there is an
activity for profit, it would be of no benefit either to the company or to the
shareholders who have invested money to the company. He submitted that the
first respondent company has been acting only as trustee and though the first
respondent has several objects, it has not carried on any other activity other
than acting as a trustee and there is no gain for the members. His submission
was that the very existence of the first respondent is not sufficient and if it
is allowed to continue like this with no profit, no loss, no reserve, no
expenditure, or no income either to the company or to the shareholders, the
purpose of incorporation of the company would be defeated and the existence of
such company would be against the provisions of the Companies Act itself. In
this context, he referred to section 433 of the Companies Act and submitted
that the emphasis under the Companies Act is that the company must commence
business activity, but the first respondent has not carried any business
activity within the period of one year from the date of its incorporation and
therefore, it is liable to be wound up. He also submitted that the company has
no reserve and the company has no liability and the company merely exists in
paper. He submitted that the company exists only to nominate the second
respondent as trustee in the Thanthi Trust and the second respondent has packed
his own men and women in the Board and is controlling the affairs of the
Thanthi Trust and by that, he is getting personal advantage and therefore the
existence of the company is not in the public interest and hence, the company
is liable to be wound up. He therefore submitted that the company cannot act
for gratis when it functions as trustee and the first respondent company should
receive adequate remuneration for acting as trustee and the absence of any
return and the presence of the second respondent as a trustee in the Trust
clearly show that the corporate character of the first respondent company has
been utilised by the second respondent to meet his own ends and since the
second respondent is using the corporate character of the first respondent for
his personal advantage, the first respondent company is liable to be wound up.
He further submitted that the first respondent company exists only for the
benefit of the second respondent and not for any other purpose. He submitted
that the first respondent has not done any activity except to act as a trustee
for several years and it cannot continue for ever he also submitted that the
fact that the petitioner has approached the civil court with the proposed suit
by invoking the provisions of section 92 C.P.C. does not debar the petitioner
from filing the petition under the Companies Act to wind up the first
respondent company as the first respondent company does not carry on any
business and it exists only for the benefit of the second respondent. He
therefore submitted that there are two remedies open to the petitioner and the
remedy sought for by the petitioner in the civil court under section 92 C.P.C.
is for the removal of the second respondent as a trustee from the Thanthi Trust
and it has nothing to do with the petition for winding up of the first
respondent company and both the remedies are separate and independent and the
grant of remedy in one proceeding does not depend upon the grant of remedy in
the other proceeding. He also submitted that the second respondent has fairly
admitted that the Board of Directors of the first respondent has been packed
with the employees and his own men and hence, the continued existence of the
first respondent would only enable the second respondent to commit acts of
fraud not only against the trust, but also against the provisions of the
Companies Act. Learned senior counsel submitted that the mere delay in
approaching the court is not a relevant factor and what has to be seen is
whether the ingredients for winding up of the company are satisfied and the
petitioner has established that all the ingredients for winding up of the
company are satisfied and hence, the mere delay in approaching the court is not
relevant and fatal. He submitted that the balance sheets of the company prior
to 1994 clearly show that the first respondent company has become commercially
insolvent as its paid up capital has been seriously eroded and the later
balance sheets after the filing of the petition are all made up balance sheets
and no reliance can be placed on the balance sheets subsequent to the filing of
the company petition. His main submission is that the first respondent company
exists only to act as a service organisation for the benefit of the second
respondent and it is not a company and since the first respondent company has
not carried on any other activity and there is in-fight between the petitioner
and the second respondent and hence, the first respondent company is liable to
be wound up on just and equitable ground. He therefore submitted that the first
respondent is liable to be wound up on the ground that it has not carried on
any business activity. He has also submitted that the first respondent is
liable to be wound up on just and equitable ground. He submitted that the first
respondent is also liable to be wound up as it exists only for the personal
interest of the second respondent by nominating him continuously as
representative to act as trustee in the Trust. He submitted that the first
respondent company has become commercially insolvent and for several reasons
mentioned in the petition as well as in the arguments advanced by him, the
company is liable to be wound up.
6. Mr. Vedantham
Srinivasan, learned counsel for the respondents submitted that the first
respondent company while carrying on its objects, need not carry on any
business. He also submitted that charitable companies are not intended for any
commercial activity and it is not necessary that there must be a commercial
activity for profit. He submitted that section 11(2) of the Companies Act is an
enabling provision and it does not mean that the company registered under
sections 12 and 13 of the Companies Act should pursue always some commercial
activity and a company’s object need not be for any profit and the company can
be a trustee. He referred to the provisions of section 32 of the Trust Act
which prohibits the receipt of any personal benefit to the trustees from the
trust. He also submitted that the word, ‘business’ does not mean any commercial
activity. He submitted that ‘carrying on the trust’ is also the business of the
company. He submitted that there is no question of commercial insolvency, as
the first respondent has not borrowed money and the first respondent is not
indebted and there are no creditors and therefore the provisions of section 433
of the Companies Act do not apply. He submitted that are seven trustees in the
trust and the allegation that there is a fraud on the public is made without
any basis. He submitted that it is not open to the petitioner to settle the
score with his brother, second respondent in the company petition filed for a
collateral purpose. He also referred to the series of litigation from the year
1958 and submitted that the litigation shows that the present petition has been
filed for ulterior motive. He also submitted that when the petitioner has
already approached this Court with a proposed suit seeking leave of this Court
under section 92 C.P.C. raising same allegations in the plaint, it is not open
to the petitioner to pursue the matter under the Companies Act. He submitted
that there is no supporting affidavit from any other shareholder and when there
are no other particulars in support of the allegations made in the company
petition, and the company petition is liable to be dismissed.
7. I have carefully
considered the submissions of the learned senior counsel for the petitioner and
the learned counsel for the respondents. Learned senior counsel for the
petitioner, in his fairness, has not disputed that the company can be a
trustee. It is well settled that the company can be a trustee. The following
observation made in Halsbury’s Law of England, Volume VI, paragraph-20 clearly
shows that the company can be a trustee.
8. In Halsbury’s
Laws of England (III Edn. Volume-4), the learned author, at page 394, observed
as under:—
“As charitable
corporations exist solely for the accomplishment of charitable purposes, they
are necessarily trustees of their corporate property, whether the beneficiaries
are members of the corporation, as in the case of hospitals and colleges, or
not. Accordingly, like other trustees, charitable or otherwise, they are
subject to the jurisdiction of the Court. Though called directors and empowered
to make and amend bye-laws for the corporation, apart from any provision in the
constitution of the corporation, they have no right to remuneration and cannot
amend the byelaws to permit remuneration to be paid to themselves.”
9. In the book,
The Modern Law of Trusts by David B. Parker, the learned author has observed
that a corporation can be a trustee. In Palmer’s Company Precedents, while
dealing with the topic, ‘Trust Company’, learned author has observed that a
company can be a trustee in the following words :
“To undertake
the office of and act as trustee, executor, administrator, manager, agent or
attorney of or for any person or persons, company, corporation, government,
state, colony, province, dominion, sovereign, or authority, supreme, municipal,
local or otherwise, and generally to undertake, perform and discharge any trusts,
or trust agency business, and any office of confidence.”
In section 6 of the Banking Regulation Act,
1949, a banking company can be a trustee and it can act for the administration
of estates as an executor, trustee or otherwise and section 6 provides that the
banking company can act as a trustee in several manners as indicated in section
6(1)(j).
10. In the Indian
Trusts Act by N. Suryanarayana Iyer, learned author has observed as under:—
“Formerly the
notion was that the relationship of a trustee being one of confidence involving
a personal element, a corporation could not be a trustee as there could not be
a question of confidence being reposed in a corporation and therefore that it
could not be a trustee. This notion, however, has long ago been given up.
Corporate bodies have been held to be amenable to the jurisdiction in Chancery
and compellable to carry out the intentions of the settlor of property which
has been vested in them. . . . Under the Indian law also a corporation, whether
aggregate or sole, can be a trustee and there is ample jurisdiction in the
court to enforce the performance of its duty by such trustee.”
11. In Tannan’s
Banking Law and Practice in India, learned author has observed as under :—
“When the
National and State Banks in the United States Saw Trust Companies competing
with them in their banking business, they also decided to offer to their
customers the facilities provided by the trust companies. The same necessity
has forced itself on banks in other countries, and today, they readily
undertake the duties of trustees, executors, and administrators of estates. Of
late, some Indian joint-stock banks have also assumed these functions either by
opening separate trust or administration departments or by starting subsidiary
companies wholly owned and managed by them. The Central executor and Trustee
Company Ltd., was started by the Central Bank of India Ltd., and is doing good
business.”
12. In Equity and the
Law of Trusts by Philip H. Pettit the observation of the learned author is
relevant for the purpose of this case which reads as under:—
“The most
familiar trust corporations are large banks and insurance companies having
trustee departments, often separately incorporated, which offer their services
as professional trustees. Clearly they will not be prepared to act unless they
are remunerated, but they have no greater right to remuneration than any other
trustee, though there are special provisions where they are appointed by the
Court.
Technically,
‘trust corporation’, for the purposes of the relevant 1925 Property Acts is
defined therein as meaning the Public Trustee or a corporation either appointed
by the court in any particular case to be a trustee or entitled by rules made
under the Public Trustee Act 1906, section 4(3), to act as Custodian trustee;
it also, as a result of the Law of Property (Amendment) Act 1926, section 3,
includes the Treasury Solicitor, the Official Solicitor, and other officials
prescribed by the Lord Chancellor, a trustee in bankruptcy and a trustee under
a deed of arrangement, and in relation to charitable, ecclesiastical and public
trusts, local or public authorities and other corporations prescribed by the
Lord Chancellor.”
13. In Gomathinayagam
Pillai v. Mantharamurthi High School 76 L.W. 229, a Division Bench of this
Court, presided over by learned Chief Justice Ramachandra Iyer, held that a
company can be a trustee and laid down the law as under:—
“The rule
referred to in Stewart’s Kyd’s ‘Law of Corporations’ to which we have made
reference earlier, proceeds upon the principle that where there is a charter
with proper powers, there is no ground to come to the Court to establish the
charity as it must be left to be regulated in the manner in which the charter
has directed...... For the application of that section it makes no difference
whether the trustee is an individual or a company, nor is there any distinction
between a company in whom the office of trustee vests and one which is
specially formed for the purpose of executing the trust.”
14. There can be no
dispute at all that the company can act as a trustee. In fact, learned senior
counsel for the petitioner has not fairly disputed the position that the
company can be a trustee. But, the point that is raised by the learned senior
counsel is that the first respondent company, for this purpose, has not carried
on any business activity for several years from its inception to earn income. I
am unable to accept the submission. Section 12 of the Companies Act deals with
the mode of formation of incorporated companies and under section 12, any seven
or more persons or where the company to be formed will be a private company,
any two or more persons, associated for any lawful purpose, by subscribing
their names to a memorandum, may form an incorporated company with or without
limited liability. The company so formed may be limited by shares or limited by
guarantee. Section 13 deals with the requirements with respect to memorandum
and the company has to set out its main objects to be pursued by the company on
its incorporation and the objects incidental or ancillary to the attainment of
the main objects. Section 11(2) of the Companies Act provides that no company
or association or partnership consisting of more than twenty persons shall be
formed for the purpose of carrying on any business that has for its object the
acquisition of gain by the company, etc. unless it is registered as a company
under the Companies Act or is formed in pursuance of some other Indian Law. Section
11(1) deals with the case of a banking company, while section 11(2) deals with
cases other than banking companies. From these two provisions, it cannot be
said that a company must always be formed to carry on a business venture with a
view to make profit. If such an interpretation is given, then the trustee
companies will have no place of existence at all in the Companies Act.
15. As far as section
25 of the Companies Act is concerned, it deals with the companies formed for
promoting certain charitable objects, like, promotion of commerce, art,
science, religion, charity or any other useful object and intends to apply its
profits or other income in promoting its objects and to prohibit the payment of
any dividend to its members. But the trust companies do come within the purview
of section 25 of the Companies Act, as section 25 deals with the companies
formed to promote charity and the provision has no application to the case of
trust-company which is to act as a trustee. Therefore section 25 has no application
in the case of trust-company.
16. In my view,
section 11 of the Companies Act should only be regarded as an enabling
provision and it is not exhaustive covering all cases of companies that may be
formed under the Companies Act. What is required for the formation and
incorporation of a company is that the company must be formed with certain
objects which are lawful. Section 33 deals with the registration of memorandum
and articles of association. In my view, so long as a company pursues its main
objects for which it was incorporated, it cannot be stated that it is not
carrying on its objects and the trust-companies are sui generis in nature.
17. As far as the
provisions of section 433(c) of the Companies Act is concerned, it deals with
the case where the company does not commence its business within a year from
its incorporation or suspends its business for a whole year. Section 433(c)
would cover a situation where a company is formed with the object of carrying
on business, but fails to commence the business within one year from the date
of incorporation or suspends the business for a period of one year, then, it is
liable to be wound up. Section 433(c) does not cover cases where the company
pursues its objects for which it was formed. The decisions relied upon by the
learned senior counsel for the petitioner are all cases where the company was
formed for certain business objects and where the company has not commenced its
business and in those cases, it was held that the company was liable to be wound
up. As remarked by Lord Sterndale in C.I.R. v. Korean Syndicate Ltd. 12 T.C.
181, an individual comes into existence for many purposes or perhaps sometimes
for none, whereas a limited company comes into existence for a particular
purpose. The purposes for which the company comes into existence should be seen
from the objects of the company which are set out in the memorandum of
association and it is not necessary that the objects should always be
commercial objects. What is relevant is that a company was incorporated with
the objects that are lawful and the company was formed to attain the objects
mentioned in the memorandum of association.
18. As far as the
decision of the Privy Council in Goswami Shri Girdhariji v. Shri Govardhanlalji
ILR 18 Bom. 294 is concerned, the case is not of much help to the petitioner in
construing the term, ‘business’ as the Privy Council was considering the
express, ‘carry on business’ in clause 12 of the Letters Patent, 1865.
Therefore the decision of the Privy Council is not of much help to the
petitioner.
19. Learned senior
counsel referred to the decision of Rangoon High Court in Tan Waing v. BO Hein
AIR 1932 Rangoon 167 wherein the following observation of Sri George Jessel,
M.R. in In re, Arthur Average Association for British, Foreign and Colonial
Ships [1875] 10 Ch. 542 has been referred to :
“If you come
to the meaning of the word ‘gain’ it means acquisition. It has no other meaning
that I am aware of. Gain is something obtained or acquired. It is not limited
to pecuniary gain. We should have to add the word ‘pecuniary’ so to limit it.
And still less is it limited to commercial profits. The word used, it must be
observed, is not ‘gains’ but ‘gain’ in the singular. Commercial profits, no
doubt, are gain, but I cannot find anything limiting gain simply to a
commercial profit. I take the words as referring to a company which is formed
to acquire something or in which the individual members are to acquire
something, as distinguished from a company formed for spending something, and
in which the individual members are simply to give something away or to spend
something, and not to gain anything.” (p. 168)
After referring to the above observation of
Sir George Jessel, M.R., the learned Judge in Tan Waing’s case (supra) has laid
down the law as under:
“...Suppose
the business of money lending was carried on by the society at a loss, what
would be the result ? Clearly the members would lose the amount of their
contributions. Suppose the business was carried on at a profit, what would be
the result ? The members would receive back the contributions that they had
made for three years. Unless the business was carried on at a profit the
members would lose all the money that they had contributed for the purposes of
the society. In these circumstances it appears to me that this association was
formed, inter alia, for the purpose of carrying on a money lending business
that had for its object the acquisition of gain by individual members of the
society. If that be so, it follows that the society falls within section 4,
Companies Act, and as it is admitted that the number of its members is 124, and
that it is not registered as provided by law, the suit must fail.” (p. 168)
The above decision has no application at all
as the Rangoon High Court was dealing with the case with reference to the
provisions of the Act similar to section 11(2) of the Companies Act and the
question arose whether the company formed for the purpose of carrying on any
other business other than the banking is a company or not.
20. Learned senior
counsel also relied upon the decision of the Bombay High Court in V.V. Rula v.
S. Dalmia AIR 1968 Bom. 347 and in the said decision, the Bombay High Court was
dealing with the case of Bombay Stock Exchange and the dispute arose between
the members of the Bombay Stock Exchange and an arbitrator was appointed by the
Bombay Stock Exchange and the question arose whether the Bombay Stock Exchange
was a legal association or an illegal association. The Bombay High Court
considered the question with reference to section 11(2) of the Companies Act
and held that under section 11(2) of the Companies Act, the company must be
formed with an object of acquisition of gain. The Bombay High Court held that
the Bombay Stock Exchange was not formed for the purpose of conducting
business. The Bombay High Court held that Bombay Stock Exchange was not formed
for the purpose of carrying on any business and therefore there was no
violation of section 11(2) of the Companies Act and the contention raised by
the member that it was an illegal association was rejected. In my view, this
case has no application at all as we are concerned with the question of trust
company.
21. Section 11 of the
Companies Act deals with commercial companies, the object of which is to make a
gain in the business. But, the companies falling under section 11 of the Act
are not exhaustive and there may be some companies which are not commercial
companies, but still they are companies for the purpose of the Companies Act.
It is very well to remember that the objects of the company are different from
the nature of activities to be carried on by the company. In my view, it is not
necessary that the activity of the company should be always commercial in
nature. No doubt, it is incongruous to say that a company exists to carry on
one of its objects, viz., to act as a trustee, but really earns no income from
the activity. In my view, the earning of profit is not a pre-requisite for a
trustee company and if it is held that there must be an activity with a view to
earn profit in the case of trust companies, then, most of the trust companies
will fail. In my view, that is not the intent of the Legislature. A question
may arise as to the position of a shareholder in such a trust company. One way
of looking at the problem is that having known that it is a trust company and
invested his money, the shareholder cannot complain that there is no return in
the investment. Another way of looking at is that the shareholder will have all
the rights as a shareholder except that he may not get the actual dividend,
though his right to get the dividend is not lost. The rights of the shareholder
under other provisions of the Companies Act are also kept in tact. The question
raised by Mr. C. Harikrishnan, learned senior counsel is that how long the
company can continue in such a manner without making any profit has to be
considered with reference to the situation that prevailed on the date of filing
the company petition. I am of the view that on the date of filing the company
petition, the first respondent company has pursued its objects for which it was
incorporated and the fact that the company has not earned profit till the date
of filing the company petition is not relevant for winding up of the first
respondent company.
22. Moreover, the
word, ‘business’ in section 11(2) of the Companies Act should be construed in a
wide manner also. In Bakhtawar Singh Balkrishan v. Union of India AIR 1983
Delhi 201 the Delhi High Court was considering the expression, ‘carries on
business’ found in section 20 of the Code of Civil Procedure and held that the
expression, ‘business’ has very wide import and in generic sense, ‘business’ is
any purposeful activity, any activity, directed towards some end, an activity
engaged in as normal, logical or inevitable and usually extending over a period
of time. The Delhi High Court also held that the expression, ‘business’ has a
very wide import and would encompass almost anything which is an occupation, as
distinct from a pleasure - anything which is an occupation or duty which
requires attention is a business.
23. Almost a similar
view was expressed by the Punjab and Haryana High Court in Model Town Welfare
Council v. Bhupinder Pal Singh AIR 1973 Punj. & Har. 76 wherein the Punjab
and Haryana High Court held as under:—
“Whenever the
word ‘business’ is defined in a particular statute, it is to be given the
meaning ascribed to it in that definition. The question whether the word,
‘business’ has been used in a narrower sense or in a larger sense arises in a
case where no statutory definition of that expression has been given in the
relevant piece of legislation. It is not a word of art and whether it is used
in a narrower or wider sense depends on the context in which it occurs.” (p.
76)
24. The decisions
relied upon by the learned senior counsel for the petitioner are all cases
where the company was formed for the purpose of making gain and the
observations made in that context are not applicable to the case where the
company was formed to act only as a trustee. I therefore hold that the activity
of the company formed with the object of acting as a trustee can also be
treated as business activity and the ‘business’ does not necessary mean or
limited only to commercial activity. So long as the company carries on legal
and lawful objects, the company can be said to have been formed for lawful
purposes, I have already held that the trust company need not always exist to
make profit or to carry on commercial activity.
25. The Supreme Court
in Barendra Prasad Ray v. ITO [1981] 129 ITR 295 has held that the expression,
‘business’ does not mean any trade or manufacture and it is being used as
including within its scope professions, vocations and callings for a fairly
long time and the word ‘business’ is one of wide import and it means an
activity carried on continuously and systematically by a person by the
application of his labour and skill with a view to earning an income. Though
the Supreme Court held that there must be an activity to be carried on with a
view to earning income, the decision was rendered in the context of the
Income-tax law and in that context, it was held that that expression,
‘business’ does not mean trade or manufacture only, but it would include the
activity carried on continuously and systematically with a view to earning an
income. Therefore, the observation of the Supreme Court that there must be an
activity to be carried on with a view to earning an income was rendered with
reference to the provisions of the Income-tax law and it has no application to
the Companies Act as the question has to be considered is whether the company
was formed with any object. The fact that the Legislature has made distinction
between sections 11 and 12 clearly shows that the company need not have commercial
objects always and it is possible for a company to have its objects to act as a
trustee.
26. If the submission
of the learned senior counsel for the petitioner is accepted, the trust
companies which are formed to act as a trustee will have no place of existence
at all as there may not be any commercial or trading activity and the trust
company may not be in a position to pursue its objects. The concept of trust is
a peculiar concept. Therefore, the word, ‘business’ found in section 11(2) of
the Companies Act is to be construed to mean any useful activity and it is not
necessary to confine it to commercial activity for profit. The charitable
companies are not formed or not intended for commercial activities. I accept
the submission of the learned counsel for the respondents that the word,
‘business’ found in section 11(2) of the Companies Act is not confined only to
commercial activity for profit in the case of trust companies.
27. Learned senior counsel
for the petitioner also submitted that if the company pursues its objects, it
must result in some gain or income. Learned senior counsel also referred to
certain paragraphs which have been relied upon by the learned counsel for the
respondent in The Law Quarterly Review. He referred to the provisions of
section 8 of the Executors’ Companies Act which was referred to in the article,
Administration of Trusts by Joint Stock Companies. Section 8 of the said Act
deals with the question of remuneration and provides that the company may
charge their clients at any commission at the prescribed rates. It also
provides that the rate of remuneration is subject to the revision of the court
and liable to reduction in case of its being deemed excessive. But, a close
reading of the article, viz., Administration of Trusts by Joint Stock Companies
in The Law Quarterly Review shows that it is possible to have a trust company
and unless it is made by lawful Act, it is not possible for the trustee to get
remuneration for the services rendered. He also submitted that the company must
indulge in some activity which must result in the benefit of the company and
the object of the activity must be to earn income. He therefore submitted that
the company must carry on some business activity. I am unable to accept the
said submission as the Companies Act makes a distinction between the commercial
companies and the companies which are to function as trustees and where there
is a prohibition either under the Trusts law or under the deed of Trust to
receive remuneration by trustees, the trust companies cannot be wound up only
on the ground that it has failed to receive remuneration for acting as a
trustee. The question whether the company fails to earn income would depend
upon the nature of the company. Besides, the Court has to look into the
provisions of the Trusts Act and the trust deed and where there is a
prohibition against the receipt of any benefit by way of remuneration by the
trustee, the company cannot be said to be not pursuing its objects for which
the company has been formed. The company is merely an instrumentality and it
acts only through individuals and no doubt it exists for the benefit of its
members, and when the trustee company carries on its activity to achieve its
objects for which it was formed, the company cannot be wound up, whether there
is a profit or not. It would be a different matter if the company has not
pursued any of its objects. On the other hand, where the company pursues its
objects by carrying on its activities, the non-receipt of remuneration is not
material and the company cannot be wound up.
28. Further, clause 8
of the articles of association clearly provides that no remuneration shall be
paid to any director from the funds of, or money received from any trust
managed by the company if the constitution or rules of such trust prohibits
payment of remuneration to such director. Learned senior counsel for the
petitioner has not produced the deed of trust for the Thanthi Trust to show
that the deed of trust permits the payment of remuneration and in the absence
of such material, the first respondent company is not entitled to get
remuneration for acting as a trustee.
29. In Bisgood v.
Henderson’s Transvall Estates Ltd. [1908] 1 Ch. 743, Buckley L.J., for the
Court of Appeal, has laid down the law as under:—
“Under the
Companies Act, 1862, the incorporation of a company is effected by the
registration of a memorandum of association which is to state the ‘objects for
which the proposed company is to be established’. To my mind that means the
objects which the corporate in during its corporate life is to pursue, the
purposes by whose fulfilment it is to seek to earn profit. The definition of
the objects is the definition of what is generally called the undertaking of
the company. The modern practice is to add, but I think erroneously, an
enumeration of powers for carrying those objects into effect.”
It is, no doubt, true that the learned Judge
has held that the ‘object’ means the object which the corporation during its
corporate life is to pursue, and on fulfilment of its object, it must seek to
earn profit. The law has been laid down with reference to a commercial
corporation as the Court of Appeal was dealing with the company which was a
commercial corporation. Therefore, it cannot be stated that the said
observation would perforce apply to the case of a trust company. It is true
that it will be open and permissible for a trustee company to pursue its
objects of being a trustee by carrying on the activities on a commercial scale,
depending upon the terms of the deed of trust or the orders of the Court, as
the case may be, but the non-receipt of remuneration or its willingness to
perform the functions as a trustee without remuneration would not detract from its
essential quality of a corporation when it pursues its activities without the
receipt of remuneration. In my view it would all depend upon the willingness of
the corporation and the terms of the deed of trust or the orders of the Court,
as the case may be. I therefore hold that a trust company is a legal entity
under the company law so long as it pursues its object of acting as a trustee.
The non-receipt of remuneration is not material, and on that account, a trust
company cannot be wound up.
30. Further, the
first respondent company has been formed with several objects and one of the
objects is to act as a trustee and the company has been registered with the
Registrar of Companies and the company has been pursuing its objects to act as
a trustee from 1958 onwards. The first respondent has also produced the
certificates by the Registrar of Companies acknowledging the receipts of annual
returns and the first respondent has also produced the annual returns up to the
year 1998. The first respondent has produced evidence to show that it has been
conducting annual general meetings and its accounts are audited by the
Chartered Accountants and the respective balance sheets have been approved by
the shareholders for various years prior to and subsequent to the year 1994.
The first respondent has also produced the report of the Directors. It is also
seen from the auditor’s reports that the company has been acting as a trustee
not only for Thanthi Trust, but also for A.I.E.C. Scholorship Trust and the
expenses regarding salary and other miscellaneous expenditure incurred are met
by the respective trusts. Hence, there is no profit and loss account for the
company and there is no excess income for the company. I hold that there can be
no objection for the practice adopted by the first respondent company in
getting reimbursement of expenses incurred from the trusts for whose benefit
the services of the employees are utilised and there can be no objection either
from the accountancy point of view or from the legal point of view in getting
reimbursement of the expenses for the services rendered by the employees from
the trust itself and in that process, the first respondent company is carrying
on its object by acting as a trustee for the trust.
31. Further, section
32 of the Indian Trusts Act, 1882 also provides that the trustee is entitled to
get reimbursement out of the trust property all expenses properly incurred in
relation to the execution of the trust property and for preservation of the
trust property. Therefore it cannot be stated that the first respondent company
is not pursuing its object viz., to act as a trustee. The evidence produced by
the first respondent clearly show that it acts as a trustee. As far as the
remuneration by the trustee is concerned, as already observed, unless it is
provided in the trust deed, it is not open to the trustee to claim
remuneration. Therefore the non-receipt of remuneration is not material. As far
as the benefits to members are concerned, I find that except the petitioner,
other shareholders of the company names of whom are given in the petition have
not raised any objection that they have not received any benefit from the
company. Since it is a company formed to act as a trustee, the non-receipt of
remuneration is immaterial. Further, I have already observed that the first
respondent company has other objects also and in future, it may expand its
activity in carrying on other objects and in such situation, it will be
possible for the members to obtain return on the investment. Further, the right
of the shareholders in the shares is not confined only to the receipt of
dividend, but it varies and the rights of shareholders are bundle of rights and
so long as shareholders exercise their rights as shareholders in the company,
it cannot be stated that the shareholders are not exercising their rights as
shareholders in the company.
32. The submission of Mr. C. Harikrishnan,
learned senior counsel that the capital of the company has got eroded is also
not supported by material. He referred to the balance sheet of the company as
on 31-3-1990 and submitted that the share capital is Rs. 3,335 and the profit
and loss account shows that the capital has got eroded and therefore the
company is liable to be wound up. But, the subsequent balance sheets from
31-3-1994 clearly show that the company has cash-in-hand and all the current
liabilities, like auditor’s fees and salaries have been met from the trust and
therefore the submission that the capital has got eroded is not acceptable. He
also referred to the balance sheet as on 31-3-1994 and submitted that the
liabilities were discharged after 1994 and the balance sheets were manipulated.
He submitted that there was no income for the company and therefore, the
entries showing that there was cash-in-hand and there was no liability for the
company are all fake entries. However, the balance sheets produced by the first
respondent show that the expenses regarding salary and miscellaneous
expenditure were met by the respective trusts and therefore, the shareholders’
capital remains intact and there is nothing to show that the capital of the
first respondent company was eroded by way of expenditure.
33. The main
submission of Mr. C. Harikrishnan, learned senior counsel is that it is not a
bona fide corporate body, but it is kept for some oblique purpose. He referred
to the averments made in the petition and submitted that the first respondent
has consistently nominated the second respondent to act as a trustee for the
Thanthi Trust and the second respondent utilising his position as trustee of
the Thanthi Trust, has diverted the money of the Thanthi Trust for his private
purposes. I am unable to accept the submission of the learned senior counsel
for more than one reason. The allegations regarding diversion of the trust
funds by the second respondent are the subject matter of the suit for which the
petitioner herein has filed a petition under section 92 C.P.C. and a learned
Single Judge of this Court dismissed the petition and against the order passed
dismissing the petition for leave to institute a suit, an appeal has been
preferred and a Division Bench of this Court in Kannan Adityan v. Adityan
[1996] 2 L.W. 364 has allowed the appeal and held that the plaint cannot be
rejected. It is stated that as against the judgment rendered by the Division
Bench of this Court in Kannan Adityan’s case, the Supreme Court has, granted
special leave to appeal and the Supreme Court has also issued certain interim
directions and one of the interim directions of the Supreme Court is that the
trustees are to use the surplus income of the trust for the benefit of the
trust and not for any other purpose, and the trust was also directed to render
statement of account covering all 12 centres of publication of Daily Thanthi.
Therefore, when the Supreme Court has granted special leave to appeal, and the
matter is pending before the Supreme Court, I am unable to express any opinion
on the said question, particularly when the Supreme Court has given a direction
that the account of the trust should be audited and surplus money should be
used for the benefit of the trust and not for any other purpose. Moreover, the
allegations are subject matter of the proposed suit and I am of the view, this
Court must refrain from making any observation on the allegations made in the
company petition that the first respondent has been nominating the second
respondent and the second respondent is in control of the trust and there has
been diversion of trust funds by the second respondent. Hence, I am unable to entertain
the submission of the learned senior counsel for the petitioner that the
corporate body of the first respondent has been kept for the oblique purpose of
the second respondent. Therefore, on the facts and circumstances of the case, I
am not inclined to give any finding on the said question.
34. Learned senior
counsel for the petitioner also submitted that there is an intense fight
between the petitioner and the second respondent and therefore, it is not
possible to continue the company. Learned senior counsel submitted that it is
just and equitable that the company should be wound up.
35. In Halsbury’s Laws
of England (III Edn., Volume 6), the learned author has considered the
expression, ‘just and equitable’ and stated some of the cases in which company
can be wound up on the ‘just and equitable ground’. The learned author, at
pages 534 and 535, observed as under :
“It may be
just and equitable to wind up a company where its substratum is gone, as when
its main object is to acquire and work a mine, or patent, or concession which
cannot be obtained, or the mine is worthless or the patent is invalid, or the
concession has lapsed; or where the company is a bubble company; or where its
only business is ultra vires the company; or where it is a bank, and its paid
up capital is exhausted, and its uncalled capital can only be called up in a
winding up; or where a loss has been made on the company’s principal adventure,
such as providing seats for a procession which has taken place and the company
is about to embark on further adventures which are ultra vires or are not the
objects for which the company was formed; or where a company is fraudulent in
its inception and carries on business at a loss, without capital of its own; or
where it is carrying on business at a loss and its remaining assets are
insufficient to pay its debts; or where it desires to go into liquidation with
a view to a scheme which alone can save it from insolvency; or where the
business of the company is being carried on in its name for the sole benefit of
debenture holders who have taken possession; or where it is impossible to carry
on the business of a company owing to internal disputes which have produced a
state of deadlock; or where in the case of a private company one director treats
the business of the company as his own and does not carry on the business as
that of the company; or where the directors withhold information from
shareholders in circumstances which give rise to suspicion that they are
attempting to buy their shares at an undervalue; or where the misconduct of
directors or promoters can only be successfully investigated in a winding up by
the court.
Misconduct of directors or of liquidators, or
the fact that its business has been carried on at a heavy loss (if the company
is not insolvent), or the issue of shares at a discount, is not per se a ground
for winding up; nor is the fact that the company has acted dishonestly to
outsiders, or that a majority of shareholders insufficient to pass a special
resolution wish it.”
36. Learned senior
counsel referred to the decision of the Supreme Court in Hind Overseas (P.)
Ltd. v. Raghunath Prasad Jhunjhunwalla AIR 1976 SC 565 wherein the Supreme
Court while considering the expression, ‘just and equitable’ held as under :—
“The sixth
clause of section 433, namely ‘just and equitable’ is not to be read as being
ejusdem generis with the preceding five clauses. While the five earlier clauses
prescribe definite conditions to be fulfilled for the one or the other to be
attracted in a given case, the just and equitable clause leaves the entire
matter to the wide and wise judicial discretion of the court. The only
limitations are the force and content of the words themselves, ‘just and
equitable’. In view of sections 397, 398 and 443(2), relief under section
433(f) based on the just and equitable clause is in the nature of a last resort
when other remedies are not efficacious enough to protect the general interests
of the company.” (p. 565)
37. In this connection, it is also relevant to notice the decision of the
Delhi High Court in Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44
Comp. Cas. 390 wherein the Delhi High Court held that where the petitioner has
failed to establish any deadlock in the affairs of the company and there is no
evidence for the petitioner’s lack of confidence in the conduct and management
of its affairs or any lack of probity on the part of its directors in regard to
its affairs or towards the interest of the petitioner as a shareholder, the
company petition cannot be ordered. Here also, the petitioner has failed to
establish any deadlock in the affairs of the company and in the absence of any
material to show that there is any deadlock in the affairs of the company, the
company cannot be ordered to be wound up. As far as the lack of confidence of
the petitioner on the second respondent is concerned, his grievance seems to be
more against the diversion of funds of the trust and if there is any actual
diversion, it is for the civil court to decide the question whether there was
any breach of trust committed by the second respondent. Hence, on that account,
the petition for winding up of the company is liable to be dismissed.
38. The decision of the Chancery Division In Re Surrey Garden Village Trust
Ltd. [1965] 35 Comp. Cas. 864 has been relied upon by the learned counsel for
the respondent to show that the winding up petition for the purpose extraneous
to interests of members is not maintainable. I have already taken a view that
it is not necessary to go into the allegations of the petitioner against the
second respondent on the diversion of funds and hence, it is not necessary to
consider the said question.
39. The decision of the Andhra Pradesh High Court in Mani v. Kowtha
Business Syndicate (Pvt.) Ltd. 66 Comp. Cas. 305 is also relevant and the Court
held that to invoke the just and equitable clause, there must be material that
the petitioner was oppressed and unjustly excluded from the management of the
company. The Court also held that the conduct of the parties should also be
taken into consideration. The decision of the Andhra Pradesh High Court fully
supports the case of the first respondent. The petitioner has not produced any
material to show that he was oppressed or excluded from the management of the company
unjustly. The company, on the other hand, was holding Annual General Meetings
periodically and no complaint has been made by the petitioner at the time of
Annual General Meetings.
40. I am of the view that there are no materials at all except allegations
made by the petitioner that it is just and equitable to wind up the first
respondent company. As observed by the Supreme Court, the company court will
have to keep in mind the position of the company as a whole and also the
interests of the shareholders and to see that they would not suffer in the
fight of power that ensued between two groups. On the facts of the case, except
the petitioner, no other shareholders has come forward in support of the
petition filed by the petitioner. There are no supporting affidavits from other
shareholders. Further, it is seen from the returns filed by the first
respondent company that other shareholders have consented to the carrying on
the activities of the company and to act as a trustee. As a matter of fact, the
petitioner was a shareholder of the company from the date of its incorporation
in 1958 and he resigned as Director on 19-5-1959 and the first respondent
company has been acting as a trustee from 1958 till the date of filing of the
petition and even thereafter. The facts prevalent in 1994 are not different
from the facts that were prevalent prior to that date. In fact, after 1994, the
balance sheets of the first respondent company show that the loss shown earlier
has been wiped off and the cash balance has also been increased. Though the
petitioner has raised several allegations against the second respondent, the
allegations are against the performance and functioning of the second
respondent as a trustee and not as a Managing Director or as a Director of the
first respondent. Though there are several allegations raised by the petitioner
against the second respondent and counter allegations have been made against
the petitioner by the second respondent, that would not constitute a ground to
hold that it is just and equitable to wind up the first respondent company. As
far as the allegation that other members of the trust are only employees in the
Daily Thanthi is concerned, the explanation of the first respondent that since
the first respondent company has to act as a trustee, the persons conversant
with the affairs of the newspaper should be in the Board is acceptable.
Further, I have already observed that these allegations made by the petitioner
against the second respondent and vice versa are all subject matter of the
proposed suit for which leave has been sought for by the petitioner under
section 92 C.P.C. and it will not be proper to consider the allegations as well
as the counter allegations and give a finding in the company petition. If the
petitioner comes forward with the company petition after the suit is disposed
of, that would be a different matter. I am of the view, so far as the serious
allegations made by the petitioner against the second respondent are concerned,
they would still remain as allegations and evidence is required to prove the
allegations and the allegations have to be established in the Civil Court.
Therefore, the mere fact that there is an infight between the petitioner and
the second respondent is not a ground to hold that the first respondent company
should be wound up on just and equitable ground.
41. I am unable to accept the submission of Mr. C. Harikrishnan, learned
senior counsel for the petitioner that the company should be wound up on the
ground of its inability to pay debts. It is no doubt true that section 433(c)
deals with a case of a company which does not commence its business within a
year from its incorporation. Section 434(1)(c) deals with a case where the
company is unable to pay its debts. In other words, the company has to be
commercially insolvent to attract the provisions of section 434(1)(c) of the
Companies Act. Learned senior counsel for the petitioner referred to the
averments made in the petition and submitted that the company has become
commercially insolvent. He referred to the balance sheets of the company from
the year 1986 onwards to show that the company has become insolvent. However,
the balance sheets of the first respondent company clearly establish that the
loss of the company has been wiped off and the company has current assets and
cash-in-hand. It has been explained by the first respondent that the loss has
been wiped out because the trust has been directed to meet the expenses, such
as, salary to the employees and miscellaneous expenditure. Therefore, it cannot
be stated that the company is indebted.
42. The Kerala High Court in V.V. Krishna Iyer Sons v. New Era Mfg. Co.
Ltd. [1965] 35 Comp. Cas. 410 held that the fact that the company makes losses
over a number of years and may do so in future does not justify a winding up
order at least when the capital has not been exhausted. Applying the test, on
the facts of the case, it is clear that the petitioner has not proved that the
company had incurred losses, but, on the other hand, it is clear from the balance
sheets that the capital of the company has not been exhausted. Further, the
petitioner is not a creditor. When there are no debts, it cannot be stated that
the company is commercially insolvent.
43. As a matter of fact, section 434(1)(c) deals with a case where the
company is unable to pay debts and the pre-condition for maintaining a petition
under section 434(1)(c) is the existence of debt. It is not the case of the
petitioner that he is a creditor and it is also not proved that the first respondent
is indebted and there was no notice issued by the creditor and the balance
sheets of the first respondent clearly show that there is no creditor of the
company. The decision of this Court in Neg Micon v. NEPC India Ltd. [2001] 34
SCL 210 supports the case of the respondents that the petitioner must produce
documents to prove the debt. I therefore hold that section 434(1)(c) is not
applicable. As far as the operation of section 433(1)(c) is concerned, I have
already held that the company has been pursuing its objects from 1958.
44. I am of the view that the question of lack of bona fide and the option
to elect one remedy, on the facts of the case, should be considered together.
The suit has been filed raising several serious allegations against the second
respondent herein, and though the prayer in the civil suit is for framing the
scheme to administer the trust, the result of decreeing the suit, accepting the
allegations against the second respondent may result in the removal of the
second respondent from the post of trustee in the trust and the company
petition has been ostensibly filed on just and equitable grounds, and the
result of admitting and allowing the company petition would be the same,
namely, the removal of the second respondent from the post of trustee. It is,
no doubt, true that as contended by Mr. C. Harikrishnan, learned senior counsel
for the petitioner, the scope of the civil suit is different as the proposed
suit is one under the general law and the scope of the company petition is different.
But, it will not be open to convert the proceeding in the company court which
are of summary in nature and to use the finding arrived at in the summary
proceeding, if it is favourable to the petitioner, in the civil proceeding. It
is in the sense that the proceedings under the company law are abuse of the
process of the court and it is well-settled that the proceedings herein cannot
be used for some oblique or some extraneous purpose. The matter can be looked
from another angle. Suppose, the proposed suit is decreed and the company
petition is dismissed, the petitioner will not be prejudiced as the main relief
sought for would be achieved in the civil suit. Equally, if the proposed suit
is dismissed, the finding rendered by the civil court after a full fledged
inquiry, will have a greater impact in the company petition, if it is pending.
Therefore, I am of the view that it is impermissile for the petitioner to
pursue two remedies at the same time, and further, the dismissal of the company
petition will have no great impact on the proposed suit for which the leave has
been granted by this Court. I am of the view that two remedies sought for by
the petitioner to achieve the same object is not bona fide and the petition
deserves to be dismissed on that ground also.
45. I am unable to accept the submission of Mr. Vedantham Srinivasan,
learned counsel for the respondent that there is a unduly long delay in
approaching this court by the petitioner as the question has to be seen whether
the petitioner has made out a case for admission of the company petition on the
date of filing the petition. The fact that the petitioner has not approached
this Court earlier is not a relevant factor, if the petitioner establishes the
grounds for winding up of the company.
46. With the result, I hold that the petitioner has not made out any case
to wind up the first respondent company. Though the petitioner has referred to
certain instances that there is no recognition of devolution of interests of
one of the shareholders, that is not a ground to hold that the company has to
be wound up as the first respondent company has explained reasons for the same.
As a matter of fact, learned senior counsel has not seriously urged those
points. I have considered the submissions of the learned senior counsel for the
petitioner and the learned counsel for the respondents and I find that the
petitioner has not made out any case to admit the petition to wind up the first
respondent company. Accordingly, the petition fails and the same is dismissed.
However, in the circumstances, there will be no order as to costs.
[1956]
26 COMP. CAS. 121 (MYS.)
HIGH COURT OF
V.
Pattada Somayya
PADMANABHIAH, J.
CIVIL
REVISION PETITION NO. 176 OF 1954
SEPTEMBER
8, 1955
PADMANABHIAH, J.-This is a revision petition preferred by the
petitioner-defendant against the finding of the learned Munsiff of Virajpet,
Coorg, on issue No.1 in Original Suit No.140 of 1952, holding that the matters
involved in the suit could be agitated by way of a suit.
The facts that
have given rise to this petition are briefly as follows: The plaintiffs and
defendant are members of the same family known as "Pattada" family at
Betoli village in Coorg. A few years prior to the institution of the suit, the
members of this family, 73 in number, started for the benefit of the family
some funds known as "Grain Fund, Death Fund, Palettimakki Fund, Education
Fund and Miscellaneous Fund" and these were being managed by the members
of this family. For some reason or other, the plaintiffs did not desire to
continue as members of the said funds as at present constituted and managed.
Thereupon they
notified their said intention to the defendant and asked him to go through the
accounts and cause payment of their share in the said funds. The defendant did
not comply with their request and consequently the plaintiffs filed the present
suit in the court below for the dissolution of the funds and for accounts and
also for a declaration of their shares in the said funds and payment thereof.
They estimated the total value of the funds at Rs. 4,500 and their share at Rs.
700.
The defendant
inter alia contended that the constitution and working of the various funds
alleged in the plaint were not correct, that the suit was not maintainable and
that the court had no jurisdiction to decide matters involved in the suit.
In the
memorandum of particulars filed by the defendant on 16th February, 1953, in
answer to the information sought by the plaintiffs the defendant has pleaded
that the association of plaintiffs and defendant fell within the definition of
an unregistered company under the Indian Companies Act, that all the relative
provisions of the said Act were attracted and that the plaintiff's remedy was
only by means of an application to the concerned court for its being wound up.
On these
pleadings, two preliminary issues were framed by the learned Munsiff. The first
issue is whether the matters in issue in this suit could be agitated by way of
a suit or only by way of an application for winding up before the District
Court or the High Court. The second issue is whether the suit is within the
pecuniary jurisdiction of that court. The learned Munsiff held the first issue
that the suit was maintainable in that court and that no application for
winding up was necessary and on the second issue he held that the suit was
within the pecuniary jurisdiction of that court.
The present
revision petition is filed against the finding of the learned Munsiff on the
former part of the first issue holding that the matters involved in the suit
could be agitated in that court. It is unnecessary for the purpose of disposing
of this petition to go into the question whether the finding of the learned
Munsiff that the plaintiffs could also file an application for winding up at
their option is correct or not.
The main point
that arises for consideration is whether the court below was competent to deal
with the matters involved in the suit or, in other words, whether the suit was
maintainable.
It appears to
me that the finding of the learned Munsiff cannot be sustained. The learned
Munsiff has observed in paragraph 1 of his judgment, relying on the words
"any unregistered company may be wound up", appearing in section
271(1) of the Indian Companies Act, that it is left to the option of the
aggrieved party to seek his remedy either by way of a suit or a petition for
winding up.
The
interpretation placed by the learned Munsiff on the words referred to above
does not appear to be correct. Section 271 deals with winding up of
unregistered companies. There is nothing in that section or in the words
"any unregistered company may be wound up", relied on by the learned
Munsiff to indicate that such matters could also be agitated in a civil court.
Therefore I am of opinion that the words "any unregistered company may be
wound up" appearing in section 271 of the Indian Companies Act, do not
give rise to any inference that the aggrieved party can also institute a suit.
The contention
urged on the side of the petitioner-defendant is that the association of the
plaintiffs and defendant consists of more than twenty members, that it is not
registered, that the matter in issue cannot be agitated in a civil court and
that the suit is therefore not maintainable. There appears to be considerable
force in this contention. It was urged on the side of the
respondents-plaintiffs that the point referred to above is a new point raised
in this court, that they have been taken by surprise and that the defendant
should not be allowed to question the jurisdiction of the court below to deal
with the matters involved in this suit. I am of opinion that this contention is
ill-founded.
In paragraph 6
of the statement filed on 28th January, 1953, the defendant has taken a stand
that the suit is not maintainable. This is further clarified in paragraph 2 of
the memorandum of particulars furnished by the defendant on 16th February,
1953. Therein he has given reasons why the suit is not maintainable, they being
that the association of the plaintiffs and defendant falls within the
definition of an unregistered company as defined in the Companies Act and that
all the relevant provisions of the said Act are attracted.
I think that
the averments made in the written statement and the memorandum of particulars
furnished were sufficient to indicate as to what the stand of the defendant
was. The former part of the first issue as framed by the court, whether the
matters in issue could be agitated by way of suit, also goes to indicate that
the plea urged by the defendant was understood in the way as urged on his side.
Therefore it cannot be argued that the plaintiffs have been taken by surprise.
Section 4(2)
of the Indian Companies Act runs thus:
"No
company, association or partnership consisting of more than twenty persons
shall be formed for the purpose of carrying on any other business that has for
its object the acquisition of gain by the company, association or partnership,
or by the individual members thereof, unless it is registered as a company
under this Act, or is formed in pursuance of an Act of Parliament of the United
Kingdom or some other Indian law or of Royal Charter or Letters Patent."
Section 4(3)
of the Act runs as follows:
"This
section (section 4) shall not apply to a joint family carrying on joint family
trade or business and where two or more such joint families form a partnership,
in computing the number of persons for the purposes of this section, minor
members of such families shall be excluded."
We are not
concerned with sub-section (3) of section 4 inasmuch as it is not the case for
the plaintiffs that they and the defendant form members of an undivided family
or that they are carrying on a joint family trade or business. Admittedly the
plaintiffs and defendants are members of a divided Hindu family. To attract the
provisions of section 4(2) of the Act, three ingredients are to be present, and
they are (1) an association of more than twenty persons, (2) which carries on
business and (3) that business should be for the acquisition of gain. It
appears to me that all these ingredients exist in the case on hand.
It is admitted
that this is an association formed by voluntary act of parties consisting of 73
members and that it is unregistered. It was contended by the learned counsel
for the plaintiffs that the association is not carrying on any business and
that it has not for its object the acquisition of gain. I do not see any force
or substance in this contention.
The
association deals with five funds. From a reading of the allegations contained
in the plaint, it is seen that every member constituting this association
contributes money, grains and lands, makes profit by lending the same to the
members of the family or association and others in some cases and utilises it
for the benefit of the members.
The
transactions carried on by this association do not consist of a single act but
a series of acts giving rise to mutual rights and liabilities. The word ‘gain’
means ‘acquisition’ and is not limited to mere pecuniary gain. The word is to
be taken as referring to a company which is formed to acquire something or in
which the individual members are to acquire something.
In the present
case, the contributions made by each member are utilised for the acquisition of
further gains which are meant to be distributed among the members of the
association. Therefore the transactions carried on by the association of the
plaintiffs and the defendant is, in my opinion, a business having for its
object the acquisition of gain as contemplated under-section 4(2) of the Indian
Companies Act.
All the
conditions required to be fulfilled under that sub- section have been complied
with in the present case. Any association or company formed in contravention of
section 4(2) of the Companies Act, must be held to be illegal, and no court
should entertain a suit brought in relations to such a company or association.
The consensus of opinion of the several High Courts in the Indian Union is in
support of the proposition laid down above.
The first case
I should like to refer is the one reported in Mewa Ram v. Ramgopal. Therein it
is held that under no circumstance can a member of an illegal association sue
for partition of assets or ask for accounts. Again in the decision reported in
Mewa Ram v. Ramgopal it is held by a majority that section 4 is a bar to the
maintainability of such a suit. The Calcutta High Court has held in the case
reported in Nibaran Chandra v. Lalit Mohan, that an association, the members of
which exceed twenty, is an illegal one by reason of non-registration and that a
suit at the instance of one of the members of such an association is not
maintainable.
Coming to our
own High Court, there is a decision reported in Abdul Wahed Saheb v. Badrudin
Khan Sahib, in which it is laid down that a suit to recover sums of money
advanced by a member of an unregistered company against another member is not
maintainable inasmuch as the company was not registered. I am of opinion that
the finding of the learned Munsiff that the suit was maintainable in that court
cannot be supported.
In the result,
the finding of the learned Munsiff on the former part of the first issue is set
aside and this revision petition is allowed.
revision allowed.
[1933] 3 COMP. CAS. 112 (RANGOON)
HIGH COURT OF
v.
Bo Hein
PAGE, C.J.
JUNE 9, 1932
P.B. Sen, for the appellant.
R.P. Pandit, for the respondent.
Page, C.J.—This appeal must be allowed. The suit is a
representative suit brought by the President of the Sun Main Society, Tavoy,
for the recovery of Rs. 1,568, money lent to the defendant. In the original
plaint the plaintiff is described as the Sun Main Society, a Chinese firm
carrying on money-lending business, by their President, Bo Hein. An objection
having been taken to the maintainability of the suit the plaint was amended. In
the amended plaint the plaintiff was described as Bo Hein, President of the Sun
Main Society, on behalf of himself and all the other members of the Society,
Zayit Quarter, Tavoy. The learned Sub-Divisional Judge of Tavoy dismissed the
suit upon the ground that if fell within the ambit of s. 4, Companies Act, and
that the Society being unregistered the suit could not be maintained. On appeal
the learned District Judge reversed the decision of the Sub Divisional Court,
and remanded the case to be heard and determined on the merits holding that the
Society did not fall within the ambit of s. 4, Companies Act. 'The question is
whether the Society offends against s.
4, sub-s. (2) which runs as follows:
"No company, association or
partnership consisting of more than twenty persons shall be formed for the
purpose of carrying on any other business (that is, other than banking) that
has for its object the acquisition of gain by the company, association or
partnership, or by the individual members thereof unless it is registered as a
company under this Act, or is formed in pursuance of an Act of Parliament or
some other Act of the Governor-General in Council or of Royal Charter or
Letters Patent."
The objects of the Society were
set out in an application by the plaintiff for leave to sue under O. I, r. 8,
Civil Procedure Code. Paragraphs 1 to 3 of the application run as follows:
"That at Tavoy, on 1st
January, 1925, a society named Sun Main Society was formed with the object of
providing a shelter for Chinese new arrivals until they secure some work,
rendering assistance to them in time of privation and arranging funerals of any
that die destitute. (2) That every earning member is required to pay Re. 1 as
monthly subscription. (3) That on 29th April, 1928, at a general meeting of the
Society it was resolved that members should pay one or more annas per day, and
form a fund out of which any Chinese person whether member or not, could get a
loan at 2 per cent, per mensem in time of his difficulty that such contribution
should continue for three years, that at the end of three years, the amount
contributed should be returned to the members and the interest accrued thereon
by lending in the above manner should be spent in charity."
Now, Sir George Jessel, M.R., in
In re Arthur Average Association for British, Foreign and Colonial Ships
observed, at page 546:
"If you come to the meaning
of the word " gain " it means acquisition. It has no other meaning
that I am aware of. Gain is something obtained or acquired. It is not limited
to pecuniary gain. We should have to add the word "pecuniary" so to
limit it. And still less is it limited to commercial profits. The word used, it
must be observed, is not "gains" but "gain," in the
singular. Commercial profits, no doubt, are gain, but I cannot find anything
limiting gain simply to a commercial profit. I take the words as referring to
a' company which is formed to acquire something, or in which the
individual members are to acquire something, as distinguished from a company
formed for spending something, and in which the individual members are simply
to give something away or to spend something, and not to gain anything."
Now, there is no doubt that the primary object of this Society is not to
confer any benefit upon the association as a body or its individual members,
the Society having been formed for the purpose of aiding the Chinese who are
indigent or in temporary financial embarrassments. On the other hand there is
no doubt that the Society carries on a money-lending business and there is no
doubt that the object of carrying on this business is the acquisition of gain.
The question is: Is the object the acquisition of gain by the company,
association or partnership or by the individual members thereof? I do not think
that the object of the Society in carrying on its money-lending business was
the acquisition of gain by the company, because the company as such gained no
benefit over which it had any disposing power at all. But was the money-lending
business carried on with the object of the acquisition of gain by the
individual members or some of the individual members of the Society? I am bound
to say that I think it was. In W.H. Kraal v. H. Whymber the individual
subscribers to the company never were entitled, however great the reserve fund
in the possession of the Society might be, to recover back the subscriptions
paid by them. The members of the Society as such would not receive any part of
the funds in the possession of the company.
In the present case however the facts are different. The members of the
Society under the resolution of 25th April, 1928, became under an obligation to
pay one or more annas a day as a permanent contribution to the funds of the
Society for three years. It was with the proceeds of these contributions that
the Society carried on its business of money-lending. What was the object for
which the gains resulting from the money-lending business were acquired? In my
opinion partly to recoup the sums which the members had contributed to the
Society for three years, and partly in order that the Society should be in a
position to expend the surplus of the gains from the business" of
money-lending upon charitable projects. Suppose the business of money-lending
was carried on by the Society at a loss,
what would be the result? Clearly the members would lose the amount of their
contributions. Suppose the business was carried on at a profit, what would be
the result? The members would receive back the contributions that they had made
for three years. Unless the business was carried on at a profit the members
would lose all the money that they had contributed for the purpose of the
Society. In these circumstances it appears to me that this association was
formed inter alia for the purpose of carrying on a money-lending business that
had for its object the acquisition of gain by individual members of the
society. If that be so, it follows that the Society falls within s. 4,
Companies Act, and as it is admitted that the number of its members is 124, and
that it is not registered as provided by law, the suit must fail.
The result is that the appeal is
allowed, the decree of the District Court set aside, and the decree of the
Sub-Divisional Court restored. No order for costs.
[1959]
29 COMP. CAS. 229 (SC)
v.
SYED
JAFER IMAM, S K DAS AND KAPUR, JJ.
CIVIL
APPEAL NO. 125 OF 1955
DECEMBER
9, 1958
S. K.
Das M, J. - This is an appeal on a certificate granted by the erstwhile
Judicial Commissioner of Vindhya Pradesh, which is now part of the State of
Madhya Pradesh. On behalf of respondent No. 1, Nagar Mal, who was defendant No.
1 in the suit, preliminary objection has been taken to the effect that the suit
was not maintainable by reason of the provisions of sections 4 of the Rewa
State Companies Act, 1935, and the appeal filed by the plaintiffs must,
therefore, be dismissed. As this preliminary objection was not taken in any of
the two courts below, learned counsel for the appellants wanted time to
consider the point. Accordingly, on October 28, 1958, we adjourned the hearing
of the appeal for about a month. The appeal was then heard on November 27,
1958.
As we are of
the opinion that the preliminary objection must succeed, it is necessary to
state the facts only in so far as they have a bearing on it. When cloth control
came into force in Rewa State, the cloth dealers of Budhar, a town in that
State, formed themselves into as association to collect the quota of cloth to
be allotted to them and sell it on profit wholesale and retail. The association
at Budhar consisted of 25 members who made contributions to the initial capital
of the association which was one lac of rupees. No formal articles of
association were written; nor was it registered. The association functioned
through a president and a pioneer worker; they kept accounts and distributed
the profits. Respondent No. 1, Nagar Mal, was the president of the said association
from January, 1946, to June 26, 1946. Before that, Seth Badri Prasad, one of
the plaintiffs-appellants before us, was the president. Nagar Mal ceased to be
president after June 26, 1946, and Seth Badri Prasad again became president.
The association worked till February, 1948; the cloth was decontrolled and the
work of the association came to an end. On June 25, 1949, thirteen members of
the association out of the twenty-five brought a suit, and in the plaint they
alleged that respondent No. 1, who was president of the association from
January, 1946, to June, 1946, had given an account of income and expenditure
for the months of January, February and March, 1946, but had given no accounts
for the months of April, May and June, 1946. They, therefore, prayed :
(a) that defendant No. 1
(Nagar Mal) be ordered to give the accounts of the Cloth Association, Budhar,
from the beginning of the month of April, 1946, to June 26, 1946;
(b) that defendant No. 1 be
ordered to pay the amount, whatever is found due to the plaintiffs on account
being done, along with interest at the rate of annas 12 per cent. per month;
and
(c) that interest for the period of the suit
and till the realisation of the dues be allowed.
Besides Nagar
Mal the other eleven businessmen, who were members of the association, were
joined as pro forma defendants, some of whom later filed an application to be
joined as plaintiffs. Though the plaint did not mention any particular
transaction of the association during the period when Nagar Mal was its
president, the judgments of the courts below show that the real dispute between
the parties related to the sale of cloth of consignment known as the Gwalior
consignment. It appears that in April, 1946, a consignment of 666 bales of
cloth had come from Gwalior and an order was passed by the Cloth Control
Officer that the consignment would be allotted to Nagar Mal who would give the
association an option of taking over the consignment; if the association did
not exercise the option, the consignment would be taken over by Nagar Mal. It
appears that there was some dispute as to whether the other members of the
association were willing to take over the consignment of Gwalior cloth. We are
not concerned now with the details of that dispute because we are not deciding
the appeal on merits. It is enough if we say that ultimately there was an order
to the effect that only 390 bales should be allotted to the association out of
which Nagar Mal had given the association benefit of the sales of 106 bales,
and the dispute related to the share of profits made on the remaining 284
bales.
Respondent No.
1, Nagar Mal, raised various points by way of defence, his main defence being
that none of the members of the association were entitled to any share in the
profits on the sales of Gwalior cloth.
The learned
District Judge, who dealt with the suit in the first instance, passed a
preliminary decree in favour of the plaintiff-appellants. The decree directed
Nagar Mal to render accounts of the Cloth Association at Budhar from April 1,
1946, to June 26, 1946, and it further directed that leaving out 106 bales of
Gwalior cloth which Nagar Mal gave to the association, an account should be
rendered of the rest of the 390 bales and the profits on the sale thereof shall
be according to the capital shares of the members of the association. Nagar Mal
preferred an appeal to the learned Judicial Commissioner of Vindhya Pradesh,
who reversed the finding of the learned District Judge and came to the
conclusion that the other members of the association were not entitled to
participate in the profits made on the sale of 284 bales of the Gwalior cloth
and inasmuch as Nagar Mal had rendered accounts with regard to all other
transactions, the suit for accounts must fail. He accordingly allowed the
appeal and dismissed the suit.
The
preliminary point taken before us is founded on the provisions of section 4 of
the Rewa State Companies Act, 1935. Sub-section (1) of section 4 relates to
banking business. We are concerned with sub-section (2) of section 4 which is
in these terms :
"4(2) No
company, association or partnership consisting of more than twenty persons
shall be formed for the purpose of carrying on any other business that has for
its object the acquisition of gain by the company, association or partnership,
or by the individual members thereof, unless it is registered as a company
under this Act, or is formed in pursuance of a Charter from the Durbar."
Mr. Sardar
Bahadur, who has appeared on behalf of the appellants and who took time to
consider the point, has now conceded before us that the aforesaid provision was
in force in the Rewa State at the relevant time when the association was formed
at Budhar and he has further conceded that the said provision was in force till
the Indian Companies Act came into force in the said area in 1950. We must,
therefore, decide the preliminary point on the basis of the provision in
section 4(2) of the Rewa State Companies Act, 1935.
Now, the
preliminary point taken on behalf of respondent No. 1 is this. It is contended
that by reason of section 4(2) aforesaid, the Cloth Association at Budhar was
not a legal association, because it was formed for the purpose of carrying on a
business which had for its object the acquisition of gain by the individual
members thereof and further because it was not registered as a company under
the Raw State Companies Act, 1935; nor was it formed in pursuance of a charter
from the Durbar. It has been contended before us on behalf of respondent No. 1
that by reason of the illegality in the contractor partnerships the members of
the partnership have no remedy against each other for contribution or
apportionment in respect of the partnership dealings and transactions.
Therefore, no suit for accounts lay at the instance of the
plaintiffs-appellants, who were also members of the said illegal association.
We consider
that this contention is sound and must be upheld. On behalf of the appellants,
Mr. Sardar Bahadur has urged the following points in answer to the preliminary
objection : firstly, he has contended that we should not allow the preliminary
objection to be raised at this last stage; secondly, he has contended that even
though the association was in contravention of section 4(2) of the Rewa State
Companies Act, 1935, the purpose of the association was not illegal and a suit
was maintainable for recovery of the contributions made by the appellants and
also for accounts; thirdly, he has contended that on the analogy of section 69(3)(a)
of the Indian Partnership Act, 1932, it should be held that the appellants had
a right to bring a suit for accounts of the association which was dissolved in
February, 1948.
We proceed now
to consider these contentions of learned counsel for the appellants. The first
contention that respondent No. 1 should not be allowed to raise an objection of
the kind which he has now raised at this late stage can be disposed of very
easily. The objection taken rests on the provisions of a public statute which no
court can exclude from its consideration. The question is a pure question of
law and does not require the investigation of any facts. Admittedly, more than
twenty persons formed the association in question and it is not disputed that
it was formed in contravention of section 4(2) of the Rewa State Companies Act,
1935. A similar question arose for consideration in Surajmull Nargoremull v.
Triton Insurance Company Ltd. In that case sub-section (1) of section 7 of the
Indian Stamp Act (II of 1899) was pleaded as a bar before their Lordships of
the Privy Council, the section not having been pleaded earlier and having
passed unnoticed in the judgments of the courts below. At page 128 of the
report LORD SUMNER said :
"The
suggestion may be at once dismissed that it is too late now to raise the
section as an answer to the claim. No court can enforce as valid, that which
competent enactments have declared shall not be valid, nor is obedience to such
an enactment a thing from which a court can be dispensed by the consent of the
parties, or by a failure to plead or to argue the point at the outset : Nixon
v. Albion marine Insurance Co. The enactment is prohibitory. It is not confined
to affording a party a protection, of which he may avail himself or not as he
pleases."
In Shiba
Prasad Singh v. Maharaja Srish Chandra Nandi the provisions of section 72 of
the Indian Contract Act were overlooked by the High Court; the section was only
mentioned in passing by the Subordinate Judge nad it appears that the bar of
section 72 of the Indian contract Act was not argued or only faintly argued
before the surbordinate judge in the High Court. In these circumstances, their
Lordships of the Privy Council held that they were unable to exclude from their
consideration the provisions of a public statute. In our view, the same
principle applies in the present case and section 4(2) of the Rewa State
Companies Act, 1935, being prohibitory in nature cannot be excluded from
consideration even though the bare of that provision has been raised at this
late stage.
On his second
contention learned counsel for the appellants has relied on U Sein Po v. U
Phyu. That was a case in which three members of an association formed for
carrying on a rice business claimed a decree (i) declaring the respective
shares of the subscribers to that association, and (ii) directing that the
plaintiffs be repaid their shares after reconverting the property of the
association into cash and after payment of all debts and liabilities. The
association, it was found, consisted of twenty-seven members; it was not
registered and it formation was in contravention of sub-section (2) of section
4 of the Indian Companies Act. The lower court granted the decree asked for and
this was affirmed in appeal by the High Court. The learned Judges referred to
the decision in Sheppard v. Oxenford and Butt v. Monteaux, and rested their
decision on the following passage of Lindley on Partnership (the learned Judges
quoted the passage at p. 145 of the 9th edition but the same passage will be found
at pp. 148-149 of the 11th edition) :
"Although,
therefore, the subscribers to an illegal company have not a right to an account
of the dealings and transactions of the company and of the profits made
thereby, they have a right to have their subscriptions returned; and the
necessary account taken; and even though the moneys subscribed have been laid
out in the purchase of land and other things for the purposes of the company
the subscribers are entitled to have that land and those things reconverted into
money, and to have it applied as far as it will go in payment of the debts and
liabilities of the concern, and then in repayment of the subscriptions. In such
cases no illegal contract is sought to be enforced; on the contrary, the
continuous of what is illegal is ought to be prevented."
We do not
think that the decision aforesaid, be it correct or otherwise, is of any help
to the appellants in the present case. The appellants herein have not asked for
a return or refund of their subscriptions; on the contrary, they have asked for
a rendition of accounts in enforcement of an illegal contract of partnership.
The reliefs they have asked for necessarily imply a recognition by the court
that an association exists of which accounts ought to be taken. When the
association is itself illegal, a court cannot assist the plaintiffs in getting
accounts made so that they may have their full share of the profits made by the
illegal association. The principle which must apply in the present case are
those referred to in the following passage at page 145 of Lindley on
Partnership (11th edition) :
"The most
important consequence, however, of illegality in a contract of partnership is
that the members of the partnership have no remedy against each other for
contribution or apportionment in respect of the partnership dealings and
transactions. However ungracious and morally reprehensible it may be for a
person who has been engaged with another in various dealings and transactions
to set up their illegality as a defence to a claim by that other for an account
payment of his share of the profits made thereby, such a Defence must be
allowed to prevail in a court of justice. Were it not so, those who - ex
hypothesis - have been guilty of a breach of the law, would obtain the aid of
the law in enforcing demands arising out of that very breach; and not only
would all laws be infringed with impunity, but, what is worse, their very
infringement would become a ground for obtaining relief from those whose
business it is to enforce them. For these reasons, therefore, and not from any
greater favour to one party to an illegal transaction than to his companions,
if proceedings are instituted by one member of illegal partnership against
another in respect of the partnership transactions, it is competent to the
defendant to resist the proceedings on the ground of illegality."
It is true
that in order that illegality may be a defence, it must affect the contract on
which the plaintiff is compelled to rely so as to make out his right to what he
asks. It by no means follows that whenever money has been obtained in breach of
some law, the person in possession of such money is entitled to keep it in his
pocket. If money is paid by A to B to be applied by him for some illegal
purpose, it is competent for A to require B to hand back the money if Bhas not
already parted with it and the illegal purpose has not been carried out : see
Greenberg v. Cooperstein. The case before us stands on a different footing. It
is a claim by some members of an illegal association against another member on
the footing that the association should be treated as legal in order to give
rise to a liability to render accounts in respect of the transactions of the
association. Such a claim is clearly untenable. Where a plaintiff comes to
court on allegations which on the face of them show that the contract of
partnership on which he sues is illegal, the only course for the courts to
pursue is to say that he is not entitled to any relief on the allegations made
as the courts cannot adjudicate in respect of contracts which the law declares
to be illegal (Senaji Kapurchand v. Pannaji Devichand). The same view, which we
think is correct, was expressed in Kumaraswami v. Chinnathambi.
As to the last
contention of learned counsel for the appellants, based on the analogy of
section 69(3)(a) of the Partnership Act, it is enough to point out that under
the Indian Partnership Act, 1932, an unregistered firm is not illegal; there is
no direct compulsion that a partnership firm must be registered, though the
disabilities consequent on non-registration may be extremely inconvenient.
Moreover, the suit before us was not one for accounts of a dissolved firm, but
for accounts of an illegal association which was in existence at the relevant
period for which accounts were asked. We do not think that the argument by
analogy is of any help to the appellants; in our opinion, the analogy does not
really apply.
For the
reasons given above, we hold that the preliminary objection succeeds. The
appeal is accordingly dismissed. As the preliminary objection was taken at very
late stage, we direct that the parties must bear their own costs of the hearing
in this court.
Appeal
dismissed.
[1950] 20 COMP CAS 286 (MAD.)
HIGH COURT OF
v.
RAJAMANNAR, C.J.
AND BALAKRISHNA
AYYAR, J.
APRIL 14, 1950
K. Bhashyam for T.V. Ramanatha Aiyar, for the appellants.
S. Amudachari and M.R. Narayanaswami for S. Ramaswami Aiyangar, for the respondents.
Rajamannar, C.J.—This second appeal has been posted before a Bench because Govinda Menon, J., considered that the points raised in it are of sufficient importance to be heard by a Bench.
The facts which led up to the suit filed by the appellants are stated clearly and fully in the judgment of the District Munsif, Tiruchirapalli, who disposed of the case in the first instance. It is sufficient to mention only the material facts necessary for a discussion of the points of law which arise in this appeal. There were two partnership businesses carried on under the name and style of Sri Krishna & Co. (Boiler) and Krishna & Co. (Rice Mill). The former was started on 25th June, 1923, with 60 persons owning the business in 40 shares with a share capital of Rs. 600 per share. The latter was started on 6th September, 1923, and consisted of 37 persons owning 20 shares with a share capital of Rs. 600 per share. Some of the persons had shares in both the partnerships. There were changes in the partners from time to time. Though the two concerns were distinct, it is common ground that the profits of both the businesses were pooled together and divided among the total number of shareholders. The first plaintiff and his paternal grand-uncle Narayanan Chettiar were members of an undivided Hindu family which contributed a total capital of Rs. 1,800 to the two businesses and owned three shares therein. The total number of shares was 59 out of which the joint family owned three. At a partition between the first plaintiff and his grand-uncle, the first plaintiff got 1½ shares and his grand uncle got 1½ shares. The grand uncle Narayanan Chetty died in 1935 leaving behind him three daughters, plaintiffs 2 to 4, who became entitled to his shares. The plaintiffs' suit is based upon the ownership of three out of 59 shares in the two businesses. In 1929 one of the shareholders filed a suit for dissolution of the partnerships and for an account, but it was dismissed on the 28th October, 1930, on the ground that the partnership was an illegal association and that the suit was not maintainable. Nevertheless, the business continued to be carried on till 1941 when on account of certain misunderstandings between the first plaintiff and the persons who were in management of the business, the first plaintiff filed a complaint on 26th February, 1941, under Section 4, clause (5), of the Indian Companies Act. Though the complaint was filed in February, 1941, the case was eventually taken up by the Magistrate and the trial commenced only on 14th October, 1941. Meanwhile, on nth October, 1941, the shareholders resolved at a meeting to dissolve the two concerns. Simultaneously a private limited company was formed under the name and style of the Manachanallur Sri Krishna Rice Mills Ltd. (the fourth defendant in the case) with a share capital of Rs. 5,000 divided into 200 shares of Rs. 25 each with the object of acquiring and taking over as a going concern the two businesses. The company was duly incorporated on 16th October, 1941. It was resolved at the meeting of the partners of the two businesses held on nth October, 1941, that the properties of the partnerships shall be sold to the company which was being formed for a total consideration of Rs. 5,000 and two persons V.P. Marudayya Chettiar and P.M. Kumaraswami Chettiar were empowered to carry out the transaction. It was further resolved that the sale amount shall be divided among the partners according to their respective proportionate shares. There is evidence that 191 shares in the new company were actually allotted and some of the partners of the two dissolved partnerships took up shares in the new company while some others were paid the sums due to them for their capital. Some who were not members of the old partnership also took up shares in the new company. The criminal prosecution ended in a nominal sentence of a fine of one rupee or in default simple imprisonment for two days (vide order Ex. P 21 dated 2nd December, 1941). There is also evidence of purchase by the new company of the machinery and superstructures of the old businesses from Marudayya and Kumaraswami abovementioned (Exs. D. 38, D. 39, D. 40 and D. 41). The sales were in October and December, 1941. On 18th June, 1942, the plaintiffs filed a suit out of which this second appeal arises against the new limited company as the fourth defendant and against the first defendant, one P.K. Narayanan Chetti, and defendants 2 and 3 as the legal representatives of one Muthuveeran Chetti on the ground that the first defendant and Muthuveeran Chetti were the persons who managed the businesses from 1935 onwards. Pending the suit, the first defendant died and defendants 5 to 8 were added as his legal representatives. The suit was for the following reliefs:—
"(1) A declaration that the plaintiffs are entitled to three out of fiftynine shares in the assets and properties of Sri Krishna & Co. (Boiler) and the Krishna & Co. (Rice Mill) now vesting in the fourth defendant and are entitled to a proportionate allotment of shares in the fourth defendant company.
(2) A permanent
injunction directing the fourth defendant company to issue shares in favour of
the plaintiffs in respect of 3/59 of its assets and account for the dividends
accrued or accruing on such shares and if that be not possible directing
payment on the market value of the 3/59ths share on the assets with interest
thereon.
(3) A direction to
defendants 2, 3 and 5 to 8, as legal representatives of Muthuveeran Chettiar,
to account for the plaintiff's share in the company now incorporated as the
fourth defendant company."
The suit was dismissed against all the defendants by both the District Munsif of Triruchirapalli and on appeal by the Subordinate Judge of Tiruchirapalli on the ground that the plaintiffs could have no remedy against the members of the old partnerships which were illegal under Section 4 of the Indian Companies Act and the plaintiffs had no cause of action against the fourth defendant company. The District Munsif further held that the claim against defendants 2 and 3, and 5 to 8 was barred by limitation. The plaintiffs are the appellants.
It was conceded by Mr. K. Bhashyam Aiyangar who appeared for the appellants that the two partnerships started in 1923 fell within the mischief of Section 4, sub-section (2), of the Indian Companies Act which runs thus:—
"No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of an Act of Parliament or some other Indian Law or of Royal Charter or Letters Patent."
Sub-section (5) of the same section provides that any person who is a member of such a partnership formed in contravention of this section shall be punishable with fine not exceeding Rs. 1,000. It must therefore follow that the two partnerships were illegal. It was also conceded by the learned counsel that a member of an illegal partnership cannot sue for its dissolution or for the taking of its accounts. As the partnership is illegal ab initio there could be strictly speaking no question of its dissolution or taking of accounts. The court will not assist a person who claims to be a partner of an illegal association to obtain a direction to have the accounts of the business taken so that he may have his share of its profits. One of the consequences of the illegality of a partnership is that its members cannot maintain an action in respect of any contract made by it, e.g., a partnership for selling smuggled goods cannot recover the price of such goods which it may have sold. An illegal loan society could not recover money which it had lent.
It is well established that the consequence of the illegality of a partnership is that its members have no remedy against each other for contribution or apportionment in respect of partnership dealings and transactions. Lindley explains the reason of the rule thus (vide page 137 of the 10th edition):—
"However ungracious and morally reprehensible it may be for a person who has been engaged with another in various dealings and transactions to set up their illegality as a defence to a claim by that other for an account and payment of his share of the profits made thereby, such a defence must be allowed to prevail in a court of justice; were it not so, those who ex hypothesi have been guilty of a breach of the law, would obtain the aid of the law in enforcing demands arising out of that very breach; and not only would all laws be infringed with impunity, but what is worse, their very infringement would become a ground for obtaining relief from those whose business it is to enforce them. For these reasons, therefore, and not from any greater favour to one party to an illegal transaction than to his companions, if proceedings are instituted by one member of an illegal partnership against another in respect of the partnership transactions, it is competent to the defendant to resist the proceedings on the ground of illegality. "
It was however contended by Mr. Bhashyam Aiyangar, that in spite of this well established rule, one of the partners can ask for a partition or similar relief in respect of the assets of such an illegal partnership. Of course, in obtaining that relief obviously there should be an account of the assets and liabilities of the partnership and it is only the net assets left after discharging all liabilities which could be partitioned. We see no real difference between the relief of dissolution and an account taking on such dissolution of a partnership and partition of the properties of a partnership left after discharging all its liabilities. It is a salutary legal principle that the court will not permit what cannot be lawfully done directly to be done indirectly.
This argument of Mr. Bhashyam Aiyangar rests on the theory that though the partnership as such may be illegal and cannot be recognised by a court, the property acquired by such a partnership belongs to the partners according to their shares and they have a beneficial co-ownership in such property. He relied on the decision in The Queen v. Tankard, in support of his argument. In that case a member of an association called the Bowling Feast Club was charged under 31 and 32 Viet., c. 116, Section 1, with having embezzled certain money belonging to the club. The club was an illegal association within Section 4 of the Companies Act, 1862, corresponding to Section 4 of the Indian Companies Act. The plea in defence was that as the club was an unregistered association of more than twenty persons, and therefore illegal, there could not be a conviction. The section enacted that " If any person, being a member of any co-partnership, or being one of two or more beneficial owners of any money..........shall steal or embezzle such money.............every such person shall be liable to be...........tried, convicted, and punished for the same."
This plea was overruled and the accused was convicted. Lord Coleridge, C.J., observed: "It would almost seem as if the enactment was for the very purpose of sweeping away such an objection as has been taken here. There are a number of persons who join themselves together, not for any criminal purpose, but their joining together is not legalized. It is true that they have no legal existence as a company, association or co-partnership; but they are none the less beneficial owners of property. It does not follow that, because the club had no legal existence as a company, association, or co-partnership, the members had no legal existence as beneficial owners of property. It is untrue to say that they are not beneficial owners in fact.........It would be a very strong thing to hold that an association not expressly sanctioned by law, yet not criminal, is incapable of holding any property at all." Mathew, J., was also of the same opinion that the members of the club were clearly beneficial owners within the meaning of the section.
There is another case which belongs to the same category as The Queen v. Tankard, though this case was not cited to us by Mr. Bhashyam Aiyangar, viz., Reg. v. Stained, in which it was held that a person could be convicted of stealing property belonging to an association in the nature of a trade union which was not legalised. These cases can take Mr. Bhashyam Aiyangar very little distance. It may be in this case if any one had committed a theft of the machinery or furniture belonging to the partnerships, he could have been convicted of theft. The question, however, remains whether the beneficial ownership which the partners of an illegal partnership may have in the properties of the partnership is such that it can form the basis of an action for partition or other similar relief. No case was cited to us in which such relief was granted on that "basis. Prosecutions for offences stand on an entirely different footing.
Mr. Bhashyam Aiyangar also relied upon certain decisions of English Courts which deal altogether with a different aspect of the matter. It is well established that a person who pays money to another to be used for an illegal purpose can recover the money before it has been actually used for such illegal purpose. This principle may be extended to a case where a person subscribes for a share in an illegal partnership and sues to recover it before the illegal objects are carried out. In Creenberg v. Coperstein, plaintiffs were three members of a club called the Pelham Club which was rendered illegal, as being an unregistered association of more than twenty persons. They sued for an administration of the assets of the club and an account of the moneys received by the defendants (who were the Treasurer and Secretary of the club) from members of the club, an enquiry as to any property of the club in the defendants' custody available for the benefit of the members of the club and payment of the amount so ascertained. After coming to the conclusion that the club was an illegal association. Tomlin. J., considered what relief could be given in a case of that sort. He said:— "I do not myself believe that the law is so powerless that when money is in the hands of persons who have received it for application for an illegal purpose it cannot protect the contributors or enable them to recover it before it has been applied for this illegal purpose." Distinguishing cases where it was held that an illegal association could not recover money lent by it, he observed: "It is a different case where those who have subscribed money for an illegal purpose come requiring the agents in whose hands it is and who were to apply it for that purpose and have not done so to return it to them. I am happy to think that the law is not so feeble that it cannot protect the subscribers by ordering an account."
The learned Judge was, however, not certain what relief could be actually given to the plaintiffs after the account had been taken. He guarded himself by saying that he expressed no opinion as to what will take place thereafter and by what means, if any, the defendants might discharge themselves of the money they had received.
The following remarks of Vice-Chancellor Wood in Butt v. Monteaux carry us no further: "...it would be very difficult to persuade me that the members of such an association (unregistered), although they could not do more, or stir a step further without registration, were not sufficiently qualified to be called a company, to have back their money.........and the land and other things acquired with that money, and to have an account from the promoters, whose duty it was to register, on the footing as between them and the promoters of its being in truth a company, and upon the principle that a man could not aver any wrong or omission of his own as an answer to a bill seeking such relief."
Actually in the case before him the shareholders only prayed for a direction to have the partnership property properly secured. The law on this point is summed up thus in Halsbury's Laws of England, Second Edition, Vol. 5, at page 843:—
"Persons subscribing to the formation of a company, the agreement to form which is illegal, may, however, recover the money before it is actually applied to the illegal purpose, and the court will order any persons who have received the money subscribed to render an account but the question, even now, seems open whether the courts will assist members of illegal companies to recover their subscriptions from the persons who have been the recipients of them, and, if so, by what means."
In U Sein Po v. U Phyu, such a right was recognised. In that case an association consisting of more than twenty members was formed for the purpose of carrying on a rice business, but it was not registered. The partnership bought lands, built and equipped a rice mill and was carrying on business. In 1926 three of the partners filed a suit to recover from the defendant, whom they described "as the promoter" of the partnership and its manager, the shares which they contributed to the partnership or so much as they might be entitled to recover in respect of those shares after converting the assets of the partnership into money and paying the debts incurred by the partnership. The learned Judges held that though the partners could not sue for an account of the dealings and transactions of the partnership and of its profits, they had a right to sue for the return of their subscriptions and if these had been converted into land or other things for the purpose of the company they can be re-converted into money for payment of the debts and liabilities of the concern and then for repayment of the subscribers. The learned Judges reviewed the English authorities and found that there was no decided case exactly on all fours, but they thought that the observation in Butt v. Monteaux was sufficient authority for their decision. They also relied on the following passage from Lindley on Partnership, 10th edition, page 141:—
"Although, therefore, the subscribers to an illegal company have not a right to an account of the dealings and transactions of the company and of the profits made thereby, they have a right to have their subscriptions returned and the necessary account taken; and even though the moneys subscribed have been laid out in the purchase of land and other things for the purpose of the company the subscribers are entitled to have that land and these things reconverted into money, and to have it applied as far as it will go in payment of the debts and liabilities of the concern, and then in repayment of the subscriptions. In such cases no illegal contract is sought to be enforced; on the contrary the continuance of what is illegal is sought to be prevented."
In Mewa Ram v. Ram Gopal, the suit was in respect of a partnership concerned with the ginning factories. There were more than twenty partners and therefore the partnership was illegal. The plaintiff claiming an eighth share in the partnership brought a suit for a declaration that the partnership was invalid and prayed for a refund of the plaintiff's subscription out of the proceeds realised by an auction sale of the factories or in some other proper way or in the alternative for a division of the properties of the factories and, if proper, for an auction sale of the property and an award to the plaintiff of a one-eighth share in their sale proceeds. The case came up first before a Divison Bench consisting of Sulaiman, J., (as he then was) and Mukherji, J. The learned Judges differed. Sulaiman, J., held that the prayer for a refund of the original subscription could not be granted because the plaintiff had been participating in the profits of the partnership for several years and it was no longer open to him to claim a refund of his original subscription after having received considerable sums of money from the partnership. But he held that the plaintiff was entitled to a partition of the properties of the factories and if a division of the property was not feasible he directed a sale of the properties and distribution of the proceeds. Mukherji, J., on the other hand held that the plaintiff was not entitled to any relief, because the partition would involve realisation of the assets of the company, payment of its just debts, sale of property and distribution among the members the very things which would be done in a suit for dissolution of partnership or winding up a company. The case was thereupon referred to Walsh, J., who agreed with Mukherji, J., that a decree for partition would be in substance a direction for winding up or a decree for dissolution and account. He added that when such a precedent was once established, there was nothing to prevent the formation of an unlimited number of such associations consisting of more than twenty persons carrying on trade for the purpose of gain, any one of the members of which could come to the court and ask for relief in a suit in the nature of a winding up of the assets of the association. The result would be to give such associations under another guise the cloak of legality although the statute has forbidden it. In accordance with the opinion of the majority, the suit was dismissed as being barred by Section 4 of the Companies Act.
In the case before us there is firstly no prayer for a refund of the subscriptions, if any, paid by the plaintiffs or their predecessors. Secondly, even if there had been such an averment and proof of it, there would still be the circumstance that the partnerships had carried on the business for several years with the help of that money and the plaintiffs and their predecessors had had the benefit of the profits from the business. This is not a case of an illegal purpose not having been carried out. Finally, the claim would be hopelessly barred by limitation. In U Sein Po v. U Phyu, the claim was well within the time though time began to run from the inception of the partnership. We agree with the decision in Ram Kumar v. Nem Chand that the starting point for computing limitation in a suit for the return of the share money contributed by a person to an unregistered association of more than twenty members would be the date on which the money was paid and there would be no recurring cause of action. As already mentioned, both the businesses were started in 1923 and the suit was brought in 1942. Treated as a suit for refund of share money, the suit was hopelessly barred.
There is no basis on which the claim of the plaintiffs to any of the reliefs which they prayed for can be sustained. Defendants 2, 3 and 5 to 8 are sought to be made liable as the persons in management of the two businesses. But it is not alleged that they are in possession of any of the assets of the partnership. From the evidence it is clear that there had been a transfer of all the machinery and superstructure belonging to the partnerships to the fourth defendant. The sum realised was Rs. 5,000 and the District Munsif held that the valuation of the assets was not sham or nominal; nor was it low or inadequate. If at all, the plaintiffs could only have asked for their proportionate share of this amount from the persons in whose hands it could be traced. The suit is not framed as one for recovery of the plaintiffs share in the proceeds. A decree for account the plaintiffs undoubtedly cannot be entitled to.
We agree with the courts below that the plaintiffs have no cause of action against the fourth defendant. It was an entirely different entity and the learned Subordinate Judge was not quite accurate in stating the first point for decision thus: "whether the partnership evidenced by the fourth defendant company is simply a continuation of the prior partnership businesses which were admittedly an unlawful association, or whether it was an independent concern. It is not correct to say that a private limited company is a partnership. There could therefore be no legal foundation for any claim against the fourth defendant between whom and the plaintiffs there is no privity whatever. The plaintiffs cannot say that the assets belonging to the old partnerships are in the possession of the fourth defendant, unless they affirm the validity of the sale by and on behalf of the old concerns. If the plaintiffs do affirm that transaction, then their only remedy can be in respect of the sale proceeds, namely, Rs. 5,000. But if the plaintiffs say that the assets have not been properly conveyed to the fourth defendant, then, it inevitably follows that the plaintiffs can have no cause of action against the fourth defendant.
The courts below were right in dismissing the suit. The second appeal is dismissed with costs. Two sets, one set to respondents 1 and 2 another to respondent 3.
[1988] 63 COMP. CAS. 733
(KAR)
HIGH COURT OF KARNATAKA
v.
Madras Sapper Ex-Servicemen's
Rehabilitation Association
P.P. BOPANNA, J.
COMPANY PETITION NO. 3 OF 1986.
AUGUST 8, 1986
Udaya
Holla for the Petitioner.
G.B.
Chandregowda and K. Lakshminarayana Rao for the Respondent.
G.S.
Rao for the Opposing Creditor.
A
preliminary objection has been taken by learned counsel for the respondents,
namely, that the winding-up petition is not maintainable under the provisions
of section 583 of the Companies Act, 1956 (in short "the Act"), on
the ground that the respondent society is not an association within the meaning
of section 582(b) of the Act
Section
582 of the Act comes under Part X of the Act which provides for winding-up of
unregistered companies. The relevant provisions of section 582 read as under:
"582.
For the purposes of this Part, the expression 'unregistered company'—
(a) shall
not include—...
(b) save as aforesaid, shall include any
partnership, association or company consisting of more than seven members at
the time when the petition for winding-up the partnership, association or
company, as the case may be, is presented before the court."
The
case of the petitioners is that it is an association registered under the
Societies Registration Act and consists of more than 20 members. Thus, it has
claimed the reliefs under the provisions of Part X of the Act, which deals with
the winding-up of unregistered companies.
Learned
counsel for the petitioners maintained that this society is not a charitable
society but it was incorporated with the object of carrying on trade, business
and manufacturing activities through the saw mills acquired by it. It is also
registered as a medium and small-scale industry with the Department of
Industries. The fact that the petitioner's society is registered under the
Societies Registration Act is not disputed, but learned counsel for the
respondents contended that under section 11 of the Act, no company, association
or partnership consisting of more than 20 persons shall be formed for the
purpose of carrying on any business that has as its object the acquisition of
gain by the company, association or partnership, or by the individual members
thereof, unless it is registered as a company under this Act, or is formed in
pursuance of some other Indian law.
But
section 11 comes under Part II of the Act, which deals with incorporation of
companies and matters incidental thereto. The matters incidental thereto are
that every company should have a memorandum of association and an articles of
association. This Chapter also provides for certain other matters, namely,
alteration of the memorandum of association or articles of association, the
effect of failure to register such alterations, provisions with respect to
names of companies, for change of registered
office of companies, general provisions with respect to memorandum and
articles, membership of companies, for reduction of number of members below
legal minimum, provision for contracts and deeds, investments, seal, etc.
Therefore, the provisions of section 11 must be understood in the context of
Chapter II which deals with incorporation of companies and matters incidental
thereto. Consequently, the prohibitions contained therein cannot be imported
into Chapter X of the Act, which is a special chapter for the purpose of
winding-up of unregistered companies. That is the reason the opening words of
section 582 make it clear that "for the purpose of Part X", the
expression "unregistered company" shall include any partnership,
association or company consisting of more than seven members at the time when
the petition for winding-up was presented before the court. Therefore, the word
"association" has to be understood in its general sense and not with
reference to the provisions contained in section 11 of the Act, prohibiting
partnerships or associations consisting of more than 20 members from carrying
on any business in matters more particularly mentioned in section 11(2) of the
Act. Thus construed, there could be no bar to maintain this petition for
winding-up against an association like the respondents-association duly
registered under the Societies Registration Act, as an unregistered company.
Accordingly, the preliminary objection is overruled.
Petition is admitted.
In view of the fact that
the liability to the petitioner-society is not disputed by the respondents,
petitioners will take out advertisement of the petition in one issue of Deccan
Herald on or before August 21, 1986, fixing the date of hearing on September
11, 1986.
Section 12
Mode
of forming incorporated company
[1932] 2 COMP CAS
99 (CA)
COURT OF APPEAL
v.
Registrar of Joint Stock Companies
SCRUTTON, L.J.,
GREER, L.J., SLESSER, L.J.
APRIL 20, 1931
Beyfus, C.H. Duveen for the appellant.
Sir William
Jowitt, K.C. and Wilfrid Lewis, for the respondent.
Scrutton,
L.J.—This seems to me, with deference to
counsel's argument an extremely plain and short case. The Lotteries Act of 1823
(4 Geo. 4, c. 60), which is still in force, has to be interpreted, and the
relevant words of section 41 are these: 'If any person...........shall sell any
ticket or tickets...........in any lottery or lotteries...............except
such as are or shall be authorized by this or some other Act of Parliament to
be sold,............such person or persons shall, for every such offence,
forfeit and pay the sum of fifty pounds,..........'. Two persons apparently
desired to sell tickets in an Irish lottery. For some reason they do not
propose to do it themselves; they propose to form a private company to do it,
namely, the
The only Act
which can possibly be supposed to authorise the sale in
Greer, L.J.—I agree. The question involved in this appeal is whether the persons who are proposing to register this company are persons associated for a lawful purpose, and that question involves an interpretation of section 41 of the Lotteries Act, 1823. At one time I thought there might be something to be said for the argument for the appellant, because before I closely examined the words of the section, I was inclined to treat it as prohibiting sales of tickets in lotteries that were not authorised by Act of Parliament; whereas, when it is looked at more closely, it prohibits the sales of tickets when the sales are not authorised by an Act of Parliament. The Act of 1823 was passed at a time when there was one Parliament for England and for Ireland, and when it is dealing with the sale of tickets, it is dealing with the sale of tickets either in Great Britain or in Ireland, and, unless that sale was a sale authorised by an Act of Parliament, it was illegal within the meaning of section 41. Nearly 100 years afterwards an Act of Parliament was passed setting up a body in Ireland that had the powers of a Parliament for Ireland delegated to them by the Imperial Parliament, but the delegation is a delegation to pass Acts of Parliament within the jurisdiction of the body so created; that is to say, to bind people who are living in Ireland and it relates to transactions carried out in Ireland; but no power is given to the Irish Parliament to pass Acts of Parliament authorising transactions which had been made illegal by the British Parliament either before or after the date of the union. The words of section 41 merely relate to prohibiting the sale of tickets in any lottery unless it can be established that that sale is authorised by an Act of Parliament. Counsel's argument, notwithstanding its length and the many researches into which it has gone, has not satisfied me that there is anything to put an interpretation on the section in question other than that which is apparent by reason of its words. I agree that this appeal should be dismissed with costs.
Slesser, L.J.—I agree. The interpretation which has been placed upon the
Companies Act shows that companies cannot be formed for any purpose the
carrying out of which necessarily involves an offence against the general law. That matter has been discussed in the case of R. v. Registrar of
Joint Stock Companies; Bowen, Ex-parte, and in
Bowman v. Secular Society. In
the present case counsel, on behalf of his clients, seeks to obtain a rule of
mandamus requiring the Registrar to register a company which it is said will,
if it is formed, necessitate the carrying out of something which is contrary to
law, because by section 41 of the Lotteries Act of 1823, which repeats a
section which appears to have found its way into earlier Lottery Acts, it is
made illegal for any person to sell any ticket or tickets or share or shares in
any lottery "except such as are or shall be authorised by this or some
other Act of Parliament." It is not suggested that the lottery which is
now being promoted in the
At one time I thought he was arguing that the Irish Act of Parliament was itself an Act of Parliament within the meaning of the Act of 1823. If that has been his contention, I am clearly of opinion that it is wrong, and, in so far as sometime has been taken up in the discussion of this matter, I think it is convenient to say a few words about that position. It appears that by a statute of 6 Geo. 1, c. 5, it was enacted by the British House of Parliament that the Kingdom of Ireland was subordinate to Great Britain, and that the King and Parliament of Great Britain may make laws to bind Ireland. That position, however, was altered in 1783 by an Act of 23 Geo. 3, c. 28, which provides, amongst other things: "That the said right claimed by the people of Ireland to be bound only by laws enacted by his Majesty and the Parliament of that Kingdom, in all cases whatever, and to have all actions and suits at law or in equity, which may be instituted in that Kingdom, decided in His Majesty's Courts therein finally, and without appeal from thence, shall be, and it is hereby declared to be established and ascertained for ever, and shall, at no time hereafter, be questioned or questionable"; that is to say, that after 1783 the Irish Parliament had power to pass Irish Acts of Parliament which were not to be questioned. In 1800, however, by the Act of Union of Great Britain and Ireland, the two Houses of Parliament in Great Britain and Ireland respectively were brought into one, and thereafter the phrase "Act of Parliament" means the Act of Parliament of the United Kingdom. Now, therefore, looking at the Act of 1823, s. 41, it is clear to my mind that the words "Act of Parliament" there mean the Act of Parliament of the United Kingdom, and although it is true that in 1922 an Act of Parliament of the United Kingdom set up a Legislature under the Irish Free State Constitution Act in Ireland, yet it did nothing to alter the meaning of the words "Act of Parliament" contained in the Act of 1823, s. 41. I think, therefore, it is impossible to argue that the Irish Act of Parliament is an Act of Parliament within the meaning of that section and it therefore follows that no Act of Parliament within the meaning of that section has ever been passed authorising the sale of lottery tickets, and as I have already pointed out, as the permission to sell such tickets in Ireland is in terms limited by the Irish Act to Ireland, it follows that the sale in England is as illegal to-day as it was before the passing of the Irish Free State Act.
For these reasons, I agree that this appeal must be dismissed, inasmuch as what the parties here have sought to do is to set up a limited company for a purpose which would necessarily be illegal.
[1960]
30 COMP. CAS. 437 (AP)
V.
CHANDRA
REDDY, C.J.
JAGANMOHAN
REDDY, J.
WRIT
PETITION NOS. 476, 539,511 AND 616 OF 1959
JULY
29, 1959
CHANDRA
REDDY, C.J.- Writ Petitions Nos.
476, 539 and 616 of 1959 are for the issue of a writ of scire facias to rescind
the certificate issued by the Registrar of Companies to Andhra Prabha Private
limited, Vijayawada, while writ petition No. 511 of 1959 is for the issuance of
a writ of certiorari to quash the authentication of declaration by one of the
respondents for the printing and publication of "Indian Express" from
Vijayawada. All the petitioners were either working journalists or workers
employed in the Express Newspapers Private Limited and their petitions follow
the same pattern and raise common questions of law and fact and could,
therefore, be disposed of in one judgment.
A few facts,
which are material for appreciating the issues involved in these petitions, may
be briefly set out. Express Newspapers Private Limited, otherwise termed as the
Express Group, has been publishing several dailies and weeklies amongst them
being the Indian Express, Dinamani , Andhra Prabha and Andhra Prabha
Illustrated Weekly. We are now concerned only with Andhra Prabha and Andhra
Prabha Illustrated Weekly. The Express Group is supposed to be the biggest
chain in the newspaper world. This concern had in its employment a number of
working journalists, proof readers, members of the staff and workers. Some of
the newspapers published by this concern have a wide circulation and, according
to the petitioners, it was a very flourishing industry earning enormous
profits, while the respondents have it that the company was incurring huge
losses for some years. There are several other newspapers similarly situated in
India.
For some years
past working journalists were agitating for the creation of a machinery to have
their salaries, allowances etc., enquired into by some agency, which would be
empowered to fix reasonable terms and conditions of services for them as a
whole. Isolated attempts were made by the various States to appoint Committees
to enquire into conditions of the employees of the newspaper industry. But the
problem could not be tackled on an All-India basis. Following on the
declaration of the policy by the prime Minister in that behalf in the year
1951, the Press (Objectionable Matter) Act, 1952, was passed by the parliament.
In September,
1952, the Press Commission was appointed to report, among other things on the
method of recruitment, training, scales of remuneration. benefits and other
conditions of employment for working journalists, the settlement of disputes
affecting them and the factors which influenced the establishment and
maintenance of high professional standards. After the Press Commission made its
report, the Working Journalists (Conditions of Service and Miscellaneous
provisions) Act (XLV of 1955) was passed which received the assent of the
President in December, 1955, to have better conditions of service established
for those working in the newspaper industry. Section 8 of the Act authorised
the Central Government to constitute a Wage Board for fixing the rates of wages
in respect of working journalists.
In exercise of
that power, the Union Government created a Wage Board for fixing and
determining the rates of wages in accordance with the provisions of the Act.
This Board gave its decision classifying newspaper establishments into several
groups according to their gross earnings and fixing scales of wages of the
various grades of working journalists. As a result of the proposals of the
Board, there was an increase in the emoluments of the employees working in this
industry with the result that the wage bill went up very high. This threw an
additional burden on the industry, the Express Newspapers being one such. The
Express Newspapers Private limited and several other newspaper establishments
invoked the jurisdiction of the Supreme Court under article 32 of the
Constitution questioning the vires of the Act and challenging the decision of
the Board contending, inter alia, that the implementation of the decisions
would be beyond the capacity of the industry and would lead to their utter
ruin.
While
upholding the constitutionally of the Act, except in regard to one or two
provisions, the Supreme Court set aside the decision of the Wage Board as
illegal and void. One of the reasons adduced in support of the conclusion of
their Lordships was that the Wage Board, in fixing the rates of wages, had not
taken into account the capacity of the industry to pay. After this, the
Government made an Ordinance, subsequently replaced by Act XXIX of 1958, which
was in substance on the same lines as Act XLV of 1955 and which made no
departure in regard to the main policy embodied in the earlier Act. By virtue
of the authority conferred by Act XXIX of 1958, the Government of India
constituted a Wage Committee in June, 1958, to fix the rates of wages etc. This
Committee made tentative proposals in December, 1958, which were circulated to
all newspaper proprietors including those of the Express Group. The Committee
also classified the newspaper industry into various Classes A to E according to
their gross receipt. In this classification, the Andhra prabha Limited, which
was treated as a unit, was assigned place in Group C. As a result of the
recommendations of this Committee, the Express Newspapers Limited had to pay a
sum of about two lakhs of rupees a month by way of additional wages to working
journalists and the members of the staff.
Early in
November, 1958, there was a dispute between Express Newspapers Limited and its
employees and it was settled through the mediation of open of the Ministers of
Madras. However this did not result in the establishment of peace between the
employers and the employees. The management was contemplating either to
transfer and sell its publication or to do some other thing in order to relieve
itself of the difficulties in carrying on business and further losses. This
appears from the resolution passed by the shareholders of the company at an
extraordinary general body meeting on the 11th February, 1959, which reads as
follows :
"
Considering the difficulties experienced by the company in carrying on its
business, this company should cease to do business as proprietors and
publishers of newspapers, dailies, weeklies and magazines and that the company
should transfer and sell its publications to other parties and also sell or
hire out otherwise dispose of its printing plant and machinery and equipment
and also lease out its premises at various places."
It is claimed
on behalf of the respondents that it was in pursuance of this resolution that
the board of directors sold to the Andhra Prabha private Limited, Vijayawada,
as a going concern the proprietary rights of printing and publishing the Andhra
prabha and the Andhra Prabha Illustrated Weekly, which was registered in April,
1959. Thereafter, correspondence ensued between the employers and the employees
in the course of which the latter were informed,among other things that the
Andhra Prabha Private Limited had agreed to take into their service all staff
and workers that are connected with the aforesaid business purchased by them at
Vijayawada without any interruption of service on the existing terms and
conditions of service and with the obligation to pay to all of them in the
event of retrenchment, compensation on the basis that their services have been
continuous and have not been interrupted by such transfer. This did not satisfy
the employees and they wrote to the management impeaching the transaction of
sale as a sham and not a real or genuine one, resorted to to defraud them. The
assurances of the management to the contrary did not have the desired effect
and the employees of the Union decided to go on strike if the following fresh
demands formulated by them were not complied with forthwith :
" I.
Payment of gratuity at the rate of one month's wages for every completed year
of service or part thereof in excess of six months to every employee of Express
Newspaper who was retired subsequent to November I, 1958.
2.
Reinstatement of the nine women clerks whose services were terminated as a
measure of punishment following their participation in the protest
demonstration conducted by the Union in October-November last.
3. Payment of
three months wages as bonus for the financial year 1957-58."
It is said
there being no prospect of resumption of work, the Express Newspapers Private
Limited decided to close the publication of all the dailies and periodicals at
Madras and notice of this was given to the workers and the working journalists
individually as well as by publication in other newspapers.
Thereupon,
some of the persons working in the Andhra Prabha and the Andhra Prabha
Illustrated Weekly section have filed these petitions for the prayers mentioned
above, questioning the bona fides of the promoters of Andhra Prabha Private
limited, Vijayawada, and imputing a motive to them to circumvent the
recommendations of the Wage Committee and to defeat the lawful claims of the
employees. These allegations are refuted by the respondents, who assert that
there was nothing sinister in the formation of the Andhra prabha Private
limited, Vijayawada, that it was for a perfectly legitimate purpose that the
company in question was started that the creation of the company had not in any
way affected prejudicially the interests of the erstwhile workers and working
journalists and that such of them who were working in the particular department
could not be absorbed, into the new concern on the same conditions of service
obtaining in the Express Group.
Before we
embark upon a discussion on the several problems that present themselves in
this enquiry, it is useful to understand the meaning and scope of a writ of
scire facias. This is Latin phrase meaning " that you cause to know
". In Wharton's Law Lexicon, this is described as a judicial writ, founded
upon some record, and requiring the persons against whom it is brought to show
cause why the party bringing it should not have advantage of such record.
Osborn in his Concise Law Dictionary says that it is a writ founded upon some
record, such as a judgment or letters patent etc., directing the sheriff to
make known to the person against whom it is brought to show cause why the
person bringing it should not have advantage of the record etc. or where it is
used to repeal letters patent etc., why the record should not be annulled.
This writ is
of two kinds. One is satisfaction of a decree in execution. This has become
obsolete. The other is issued for the purpose of rescinding Crown grants,
charters or franchises. In England, the Crown used to issue charters
authorising companies to do business, the most famous example of such charters
being the one issued to the East India Company, to make grants or franchises,
such as the right to levy tolls at a particular place or to ply a ferry or the
sole right to the benefits of fisheries etc. When such charters or franchises
were granted, there was an implied condition under the doctrine of common law
that they could be repealed or rescinded if it appeared that they were obtained
by misrepresentation or by fraud. In other words, this was the means adopted
for getting rid of the incorporation of a company or franchise or grant on a
misrepresentation. Though it is not abolished, it is now out of the use even in
England except in Crown practice of the Revenue side of the King's Bench
Division for recovery of Crown debts and also for rescinding Crown grants and
charters.
We will now
consider the limits of the operation of this peculiar type of writ, which is
rarely heard of in this country. On this topic, it is useful to refer to a
passage in Halsbury's Laws of England, Vol. 11 3rd Edition, page 153 :
" Scire
facias on the Crown side of the Queen's Bench Division is a proceeding for the
purpose of rescinding or repealing Crown grants, charters and franchises. It
must be distinguished from the obsolete writ of scire facias used in aid of
executions and from scire facias on the Revenue side of the Queen's Bench
Division which was abolished by the Crown Proceedings Act, 1947. Scire facias
on the Crown side is still available."
This passage
indicates that it is available only for the purpose of cancelling or revoking
the incorporation of a company created under a charter.
The statement
of law contained in Halsbury's Laws of England, Vol.9 (Simonds Edition), page
99, is also apposite in this context.
" A
corporation may be dissolved on proceedings on a scire facias instituted on the
Crown side of the Queen's Bench Division and to every Crown grant there is
annexed by the common law an implied condition that it may be repealed by scire
facias by the Crown.
Proceedings on
a scire facias may be taken if the charter has been obtained by fraud or
misrepresentation; or if the Crown has granted a charter under a mistake as to
facts, or under a misapprehension as to the construction or effect of the
charter; or if the Crown has exceeded its powers ; or if the corporation has
done something which is prohibited or is not authorised by its charter. A
subject whose rights are affected by a franchise or charter granted to a
corporation may, as of right, procure the cancellation or forfeiture of the
charter by scire facias; for the prerogative of the Crown is the privilege of,
and may be used by, the subject on the flat of the Attorney-General."
It is open to
serious doubt whether this could be applied to a company incorporated under the
Indian Companies Act or under some special enactment. In Princess of Reuss v.
Bos (I) (1871) L.R. 5 H.L. 176. the House of Lords were not prepared to extend
this writ to companies created under a statute. There a company was in
corporated under the companies Act, 1862. Some persons, who were foreigners, formed
a company with the aim of raising money in England and for investing it in
Germany. For this purpose, they issued two kinds of shares (i) nominative
shares and (ii) shares which could be passed from hand to hand, the latter of
which was opposed to the principle underlying the Companies Act. On the issue
of a certificate by the Registrar, the company was incorporated. After some
time, it fell into difficulties with the result that winding up proceedings
were started. The objection of one of the shareholders was that the
incorporation itself being invalid the winding up proceedings were not
permissible.
This
contention was overruled and the incorporation was held to be valid
notwithstanding that the memorandum of association was extraordinary and unusual,
that the real object was to attract (sic.) the company and that the creation of
shares that were to pass from hand to hand was contrary to the spirit of the
Act of 1862. According to the learned Law Lords, when once a company was born,
the only method by which it could be got rid of was be getting it extinguished
through the effect of the Act of Parliament which provides for the winding up
and not by disincorporation. The speech of the Lord Chancellor (Lord HATHERLEY)
brings out the scope of this writ :
" The
question is, therefore, simply whether it has been created. If created, there
is no power given in this Act of Parliament, nor in any other Act of Parliament
that I am aware of, by which through any result of a formal application, like
an application by scire facias, to repeal a charter, the company can be got rid
of, unless it can be got rid of by being extinguished through the effect of the
Act of Parliament which provides for the winding up of companies when they
ought, from any circumstances whatsoever, to be wound up."
This doctrine
was to some extent modified by the House of Lords in Bowman v. Secular Society
ltd. (I) [1917] A.C. 406. LORD PARKER observed that the section did preclude
all His Majesty lieges from going behind the certificate or from alleging that
the society was not a corporate body with the status and capacity conferred by
the Acts, that such a certificate of registration could not bind the Crown and
that the Attorney-General on behalf of the Crown could institute proceedings by
way of certiorari to cancel registration, which the Registrar had improperly or
erroneously allowed. the effect of the pronouncement is that either the
Attorney-General can initiate proceedings for the cancellation of the
certificate or a subject, who is adversely affected by the franchise, could
invoke such a writ with the fiat of the Attorney-General.
Dealing with
the dictum of LORD PARKER on the subject, Holdsworth in Volume IX of A History
of English Law offers this comment :
" It is
true that dicta of great weight asset that the Crown might institute
proceedings to attack the validity of its creation, because the Crown is not
bound, as the subject is bound, by section 17 of the Companies (Consolidation)
Act, 1908, which makes the certificate of the Registrar absolutely conclusive
as to the fact of incorporation. But as yet there has been no direct decision
on the question whether the Crown possesses even this modified power."
Bowman v.
Secular Society ltd. (I) [1917] A.C. 406, does not render much assistance to
the petitioners, who strongly relied upon it, since the fiat of the
Attorney-General or of the Advocate-General is absent in this case.
Queen v.
Prosser (2) (1848) 50 E.R. 834. and Eastern Archipelago Company v. The Queen
(3)(18530 118 E.R. 988 called in aid by the counsel for the petitioners for the
proposition that any subject could apply for a writ of scire facias do not
really carry them anywhere. On the other hand, they tend to negative their
contention. In Queen v. Prosser (I) (1848) 50 E.R. 834 the Master of the Rolls
(LORD LANGDALE) remarked :
" The
action of scire facias to repeal letters patent is a proceeding of the Crown
for the benefit of the public adopted and authorised upon information that the
letters patent are void and of no force or effect in law for some such reason
as that the conditions upon which the grant was made were not performed or that
the grant was improperly made; or in effect, that a monopoly supposed to have
been granted legally has in fact been granted illegally and to the prejudice of
the public or of her Majesty's subjects.
It has been
said that the writ issues of course, the fiat of the Attorney- General for
issuing it being granted as of course. I think that this ought not to be the
case; and I would hope, that there is some error or exaggeration in the notion
upon that subject which seems to prevail, as it appears to me, that the
Attorney-General, when applied to for his fiat, without which the writ cannot
issue, has as important duty to perform."
To a like
effect is the dictum in the second one. it is to be borne in mind that these
two cases are cases of either a charter or a patent. it is apparent from these
two rulings that the fiat of the Attorney-General is an essential ingredient of
the issue of this type of writ at the instance of a subject. Thus, these two
decisions do not lay down anything inconsistent with our view. On the other
hand, the rule stated therein accords, with the conception indicated by us
above.
In view of
this, it is still a moot question whether the writ of scire facias could be
called in aid to get rid of an incorporation effected under the provisions of
an enactment and not by virtue of a charter.
Assuming that
this form of writ survives, could the registration of the company be impugned
on any of the grounds, which are urged in these cases, namely, that it was
incompetent for the Registrar of Companies to issue the certificate having
regard to the aims and objects of the company. This contention has to be
answered with reference to the powers and duties of the Registrar of Companies.
They are defined in section 33. Before registration of the memorandum and
articles could be effected, certain requirements are to be fulfilled by virtue
of that section.
It is
convenient at this stage to refer to the terms of section 33:
" (I)
There shall be presented for registration to the Registrar of the State in
which the registered office of the company is stated by the memorandum to be
situate - (a) the memorandum of the company; (b) its articles if any; and (c)
the agreement, if any, which the company proposes to enter into with any
individual, firm or body corporate to be appointed as its managing agent, or
with any firm or body corporate to be appointed as its secretaries and
treasurers.
(2) A
declaration by an advocate of the Supreme Court or of a High Court, an attorney
or a pleader entitled to appear before a High Court, or a chartered accountant
practising in India, who is engaged in the formation of a company, or by a
person named in the articles as a director, managing agent, secretaries and
treasurers, manager or secretary of the company, that all the requirements of
this Act and the rules thereunder have been complied with in respect of
registration and matters precedent and incidental thereto, shall be filed with
the Registrar; and the Registrar may accept such a declaration as sufficient
evidence of such compliance.
(3) If the
Registrar is satisfied that all the requirements aforesaid have been complied
with by the company and that it is authorised to be registered under this Act,
he shall retain and register the memorandum, the articles, if any, and the
agreement referred to in clause (c) of sub-section (I),if any."
It is manifest
that once the conditions envisaged in paragraphs I and 2 are satisfied, the
Registrar has no option but to register it. It is not competent for him to
refuse registration on any extraneous considerations or for any reason other
than non-compliance with the provisions of sub-sections (I) or (2) of section 33.
The only duty cast on the Registrar before he could register it is to see that
the requirements prescribed by sub-sections (I) or (2) are complied with. It is
not within his province to make enquiries into matters, which are unconnected
with the conditions enumerated in sub-sections (I) or (2) or into collateral
matters to probe into the motives of the promoters.
Indisputably,
the provisions of sub-sections (I) or (2) have been satisfied here. Yet the
point presented for the petitioners is that the condition precedent to
registration of a company is the existence of a validly incorporated company
and if the purpose for which a company is floated is illegal or opposed to
public policy, no recognition could be given to it by the Registrar. The
admissibility of this argument depends upon the interpretation to be put upon
section 12 of the Indian Companies Act.
Section 12, so
far as is relevant for this enquiry, runs thus :
“(I) Any seven
or more persons, or where the company to be formed will be a private company,
any two or more persons, associated for any lawful purpose may, by subscribing
their names to a memorandum of association and otherwise complying with the
requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability."
Thus the
essence of a validly incorporated company is that it should consist of a
particular number of persons and that it should be associated for a lawful
purpose. It is not the petitioner's case that the promoters of the company fell
short of the number needed for the purpose of this section. The only point
debated is that this was not started for any lawful purpose. We find it
difficult to assent to the proposition that the purpose for which the company
was formed is anyway unlawful or opposed to any public policy.
We may now
examine the relevant clause of the memorandum of association of the Andhra
Prabha private limited. Clause III, so far as it is relevant for this enquiry,
recites the objects of the company to be,
1. To carry on
business as proprietors and publishers of any newspaper, journals, magazines,
books and other literary works and undertakings.
2. To acquire
and take over and carry on the business of publishing of the Madras edition of
the Telugu newspaper known was Andhra Prabha and the madras edition of the
Telugu weekly known as Andhra prabha Illustrated Weekly, being newspaper and
weekly now being published by the Express Newspapers Private Limited and for
this purpose to enter into one or more agreements with the Express Newspapers
Private Limited on such conditions and on such terms as may be deemed fit.
We are unable
to find anything in the objects, which could be regarded as objectionable or
unlawful or opposed to public policy. There is nothing illegal in the
publishing of a newspaper. Unless the purpose appears to be unlawful ex facie
or is transparently illegal or prohibited by any statute it could not be
regarded as an unlawful purpose. The question of the motive that induced the
founders of a company is unrelated to the scope of section 12 as it is not a
field of enquiry which the section recognises as legitimate. The problem has to
be solved quite apart from the motive or the conduct of the individuals forming
the association. The only consideration that is material is whether it is
permitted by law.
A right is
given to every citizen to form a limited concern and so long as there is
nothing unlawful or illegal in the objects of the association, that right
cannot be denied to him. The fact that this company is calculated to affect the
future interests of its workers would not nullify it. It is not suggested that
any attempts are being made to carry on the business by illegal methods. So the
objectives and the means are good. Even if this tends to jeopardise the
interest of the petitioners, it cannot enter the determination of the character
of the object of the association since it is a collateral consequence.
The view of
ours gathers support from a judgment of the House of Lords in Salomon v. Salomon
and Co. (1) [1897] A.C. 22 what happened there was this. One Salomon carried on
business as a leather merchant in a very satisfactory way for some time.
Encouraged by this, he conceived the idea of starting a limited company with a
nominal capital of 40,000 shares of 1 pounds each. the issued shares were only
20,000. He sold all his assets to a limited company which consisted of himself,
his wife, daughter and four sons, who each subscribed for one share, the sale
being known and approved by the shareholders. In considerations of the transfer
of his assets to the company, Salomon took all the shares for himself except
those allotted to his wife and children, one each.
In part
payment of the purchase money, debentures forming floating security were issued
to Salomon and these shares gave him the power of voting and all the
requirements of the Companies Act were observed. The business was conducted for
a while. Then, bad times came and the company had to be wound up. After
satisfying the debentures there was not sufficient money to pay the ordinary
creditors. In the course of the winding up, the Court of Appeal, in agreement
with the judgment of VAUGHAN WILLIAMS J. held that the company was merely an
instrument of Salomon, that it was devised to enable him to carry on business
in the name of the company with limited liability contrary to the trade intent
of the Companies Act of 1862 and to get preference over other creditors of the
company by procuring a first charge on the assets by means of such debentures
and that the creditors were unaffected by other arrangements.
On appeal, the
House of Lords reversed that judgment. The learned Law Lords could not
subscribe to the rule stated by the Court of Appeal " that the Act
contemplated the incorporation of seven independent bona fide members, who had
a mind and a will of their own, and were not of the mere puppets of an
individual who, adopting the machinery of the Act, carried on his old business
in the same way as before, when he was a sole trader." it was remarked by
Lord Chancellor (LORD HALSBURY) that the words " seven independent bona
fide members with a mind and will of their own, and not the puppets of an
individual," which were not there are by construction to be read into the
Act.
According to
the learned Lord Chancellor, it would be possible to go behind the certificate
of incorporation by proceedings in the nature of scire facias by showing that
fraud had been committed upon the officer entrusted with the duty of giving the
certificate. But when once the company was legally incorporated, it should be
treated like any other independent person and the motives of those who took
part in floating the company were quite irrelevant in discussing what those
rights and liabilities are.
We cannot also
see our way to accede to the theory that the Registrar before functioning under
section 33 of the Act should enquire into the circumstances under which the
company was proposed to be formed. In our considered judgment, not only is such
an obligation not laid on him but he would be exceeding his jurisdiction if he
should undertake any such thing. It is not within his duty to call upon the
parties to lead evidence for this purpose.
In this
connection we may advert to the pronouncement of the Judicial Committee in Moosa
Goolam Ariff v. Ebrahim Goolam Ariff (1) (1912) I.L.R. 40 Cal. I. There, the
memorandum of association of a proposed company was signed by two adult persons
and by a guardian of the other five members, who were minors at that time, the
guardian making a separate signature for each of the minors. Thereupon, the
Registrar issued a certificate of incorporation. The question arose in a suit
for certain reliefs whether the company was properly constituted, the
memorandum of association not having been signed by the required number of
subscribers, five of them being minors not competent to contract. The privy
Council, in disagreement with the Chief Court of Lower Burma, held that the
certificate of incorporation was conclusive for all purposes and not merely a prima
facie answer to such an objection and that courts would not question the
validity of the certificate, even assuming that the condition of registration
were not fulfilled.
The same
concept underlines section 35 of the (Indian) Companies Act. This section gives
legislative recognition to the dicta of the judicial Committee in Moosa Goolam
Ariff v. Ebrahim Goolam Ariff (1) (19120 I.L.R. 40 Cal. I extending the
conclusiveness of the certificate to matters precedent and incidental thereto.
Thus position
is firmly established that if a company is born, the only method to get it
extinguished is not not by assailing its incorporation, since courts could not
go behind it, but by resorting to the provisions of enactments which provide
for the winding up of companies. It is essential that the objects of
association should be considered apart from the motives of the conduct of the
individual corporators, that the company is only an artificial creation and
that the distinction should be well marked between its legal entity and its
actions. That being the case the only course open to any one who is aggrieved
by the constitution of a company is to get rid of it by resorting to winding up
proceedings. It is not as if such persons are without remedy.
Ample
provision is made in the Indian Companies Act in this respect in the shape of
sections 234, 235, 237 and 243. The scheme of these provisions is that the
Central Government can suo motu initiate an enquiry into the formation of a
company, cause an investigation to be made into its affairs and if it is not
satisfied apply to the court to wind up the business. Under section 234, even
the Registrar of Companies could, on perusing the documents which a company is
required to submit to him under the Act, call for any information that might be
necessary and bring it to the notice of the Central Government if they reveal
an unsatisfactory state of affairs. It is not necessary for us to examine in
detail the various provisions of these sections in this behalf. So, the workers
and the working journalists could approach the authorities concerned for
redress by invoking these provisions, if the affairs of the company are
conducted to their detriment.
On the
assumption that it is competent for a court to scrutinise the objects of a company,
we will proceed to consider the intent and the purpose of the formation of the
company as both sides have requested us to express our opinion on this topic. A
fraudulent desire to evade responsibility thrown by the recommendations of the
Wages Committee as accepted by the Government by the creation of a dummy
company's is ascribed by the petitioners to the promoters of Andhra Prabha
private Limited, Vijayawada. We are invited to infer such an intention from two
circumstances (i) a going concern, which was worth very much more than ten
lakhs, was sold for only about seven lakhs of rupees which indicates in the
view of the petitioners that it was not financial consideration that was
responsible for the transaction now attacked as fraudulent but an anxiety to
avoid paying the workers according to the wages structure embodied in the
proposals of the Wage Committee, and (ii) that the Express Newspapers Limited
reserved the right of advertisement and that the new company would have nothing
to do with advertisement revenue. According to the petitioners, this device was
adopted with a view to show a reduced income since the mainstay of any
newspaper is advertisement revenue. Without that the profits of a newspaper
industry would be considerably low, which would deprive the workers and working
journalists of a decent bonus.
On the other
hand it is stated for the respondents that the creation of the company in
dispute was quite a bona fide act and that there were very weighty reasons for
its formation with its registered office at Vijayawada. Sri Viswanatha Sastri,
learned counsel for respondents 2 to 4 urges that in starting this company to
publish a Telugu daily and weekly at Vijayawada, the founders were in a way
meeting the past demands of the workers and were also giving effect to the
recommendations of the Press Commission. It is pointed out that the workers and
the working journalists were agitating for the separation of different units
run by Express Newspapers so that the profit or loss of each of the periodicals
might be separately accounted for and that it was their grievance that profits
accruing from some of the prosperous dailies were absorbed by the units which
were run at a great loss. In fact one of the complaints made in the affidavits
itself is that the clubbing together of the several papers was prejudicial to
the interest and prospects of working journalists. Further,. it is said that
the Press Commission itself in paragraph 1207 of its report recommended as
follows :
" We
would like, if it were possible, that every paper should be constituted as
separate unit so that its profits and losses are definitely ascertainable and
both the proprietor and the employees know where they stand. In the case of
multiple editions, each unit should be separated from the others in the matter
of accounts."
It is to carry
out the recommendations of the Press Commission and to modify the agitators in
that behalf that the step now challenged was taken. The further case of the
respondents is that endless trouble was created by the workers and the working
journalists and so it was felt that the Express Newspapers Limited could not
afford to carry on the business of publishing newspapers without incurring
further loss and for that purpose the directors of Express Newspapers Limited
thought of selling their publications to the new company. We are told and it is
not disputed that the machinery that was sold to the new concern was pledged to
the United Commercial Bank and that it was released on payment of 3 lakhs of
rupees by the Andhra Prabha (Private) Ltd. Another reason offered in this
behalf is that after the formation of the State of Andhra Pradesh, Madras was
not the place for the production of a Telugu paper, since only a 1000 copies
out of 55,000 copies of Andhra Prabha were sold in Madras and that Vijayawada
would be a convenience centre for publishing telugu papers as a separate and
distinct unit.
It is said on
behalf of the respondents that the incorporation of the new company is not
calculated in any way to prejudice the interests of the workers and the working
journalists as their conditions of service would be the same in the new concern
and that the place assigned to Andhra Prabha in the classification would not be
disturbed in the new set up also.
Taking up the
first ground of attack, we feel that it is unsubstantial. We cannot appreciate
how such a move on the part of those controlling the destinies of the Express
Group of papers could minimise the responsibility of the establishment to pay
higher wages or adversely affect the position of the workers and the working
journalists. As a result of the under-valuation, the net profits to be earned
by this paper would be considerably swelled for the reason that the interest to
be deducted would be very much less. On this account the under valuation, far
from being harmful to the workers, places them in a position of vantage in
regard to bonus etc., and it is hardly beneficial to the employers.
If really the
persons responsible for the promotion of this company had in contemplation the
enrichment of themselves at the expense of the workers and the working
journalists, they would have inflated the value they have paid to the going
concern, so that a good part of the profits might be consumed by the interest
payable on the capital. For these reasons, we are not persuaded that cheap
price was conceived to defraud the employees of their legitimate claims.
As regards the
reservation of the right of advertisement, it is denied in the
counter-affidavit. It is stated that the right of publication of a paper
carries with it the right of advertisement as being one of the component parts
of the publication of a paper. The rights of printing and publishing the Telugu
daily and weekly were unreservedly sold to Andhra Prabha Private Limited, and
there is no warrant for the complaint that the advertisement rights were not
conveyed to the new company.
Our attention
was also drawn to the agreement dated April 2, 1959, entered into between the
Andhra Prabha Private Limited, and the Express Newspapers Private Limited,
wherein it was stipulated that all the proprietary rights in those papers
together with all pending contracts including rights and obligations under such
contracts with the newspaper selling agents, subscribers to the journals and
advertisers and advertising agencies in the aforesaid journals were conveyed to
the new company. That apart, we are unable to see how Express Newspapers
Limited could keep to themselves this right or what advantage they would gain
by such a step. Surely, unless paid for, advertisements cannot be inserted in
these papers and such revenues as are derived from this source have to be
treated as the income of this unit. It follows that much weight cannot be
attached to these complaints.
Coming now to
the case of the respondents, there is much substance in the first reason. That
there is a recommendation of the Press Commission favouring the constitution of
the Telugu paper as a separate unit is not open to doubt. Next the affidavit as
also the counter-affidavit seem to support the theory that the workers and the
working journalists also were making such a demand.
It is
unnecessary for us to ascertain the truth or otherwise of the other reasons
adduced in support of the formation of the company. But one thing stands out
prominently, namely, that the step now impugned cannot in any way affect the
position of the petitioners in regard to their conditions of service, having
regard to the agreement and the stipulations between the Express Newspapers
Private Ltd. and the Andhra Prabha Private Limited which we have set out in the
above narration. Under those contracts, the new company is under an obligation
to take into their service all the employees connected with these two Telugu
papers on the same conditions of service and without any interruption. The
purchasers were also bound to pay these persons, in the event of retrenchment,
compensation on the basis that their services have been continuous and have not
been interrupted.
It is alleged
in the counter-affidavit and it is not traversed in the reply affidavit that
dues by way of retrenchment compensation, gratuity etc., amounting to Rs.
7,09,480 had been paid to the employees of the Express Group of papers. We
cannot, therefore, understand what grievance the petitioners could have by the
publication of these Telugu papers from Vijayawada. In these circumstances, we
are not convinced that there is much foundation for the complaint that the
founders or the promoters of the company had any evil designs or were actuated
by the fraudulent object of defeating the rights and privileges of the workers
and working journalists connected with these two papers. At any rate, the
objectives attributed, to the promoters are not apparent to us. However, it
does not preclude the petitioners from availing themselves of such remedies as
might be open to them as and when necessity arises. In our opinion, the
petitioners misconceived their remedy in approaching this court.
For the above
reasons, we dismiss these writ petitions with costs of the 2nd respondent in
W.P. No. 616 of 1959. Advocate's fee is fixed at Rs. 250.
Petitions
dismissed.
Section 13
Requirement
with respect to memorandum
[1958] 28 COMP. CAS. 122 (
Bhutoria Brothers (Private) Ltd.,
In Re
P. B. MUKHARJI J.
MAY 21, 1957
MUKHARJI J.
- This is an application by
Bhutoria Brothers (Private) Ltd., for alterations in the objects of the company
as proposed by the special resolution of the extraordinary general meeting of
the company held on the 25th day of March, 1957, and passed unanimously. The
application is dated the 2nd April, 1957, and is made under section 17 of the
Companies Act, 1956.
The main
object of the company was to purchase, store, sell, manufacture and otherwise
deal in agricultural, mineral and animal products and live-stock, and in the
bye-products and the waste-products of their manufacture including jute.
Extensive alterations were proposed in the objects by the special resolution
which tried to include the business in optical, photographical, chemical and
surgical goods on the one hand and watches, clocks and musical instruments on
the other, as also other kinds of machinery. Due notice of the application was
given to the Registrar of Joint Stock Companies, It was, however, discovered
later that there was a very large sum claimed by the Income-tax authorities for
more than Rs. 7 lakhs and notice thereafter was, therefore, given to the
Revenue authorities.
The Registrar
of Joint Stock Companies has opposed this application. In fact, much of the proposed
alterations of the objects has now been abandoned by the applicant which has
been duly minute. This means that most of the objections of the Registrar of
Joint Stock Companies have been accepted by the applicant. The three main
changes that now are pressed for alteration are found in clauses 21, 22 and 23
in Exhibit A to the petition which the company now wants to be added to the
existing objects of the company. These three clauses in substance seek
permission to (1) work in jute, cotton and woollen mills and (2) to carry on at
the said mills the business of spinners, weavers, balers and pressers of jute
etc., and (3) particularly to start, erect, purchase and continue cold storage
and ice plants to carry on the business thereof and to manufacture refrigeration
machinery and to sell and install the same for others. In fact, it is said that
the main part of the business of the company has been for a number of years
dealing in cold storage and ice plant. The company does not appear to be very
affluent but its main revenue and income are derived from this cold storage and
ice main revenue and income are derived from this cold storage and ice plant.
Although no objects in the memorandum permitted this business, apparently this
company has gone on carrying on that business until now when it feels that
there should be a formal permission stated in the proposed objects clauses of
the memorandum.
The burden of
the argument of company’s counsel was unlimited freedom in altering the
company’s objects in the memorandum. The question was argued largely as a
question of law. I shall deal with the law on this point which is frequently
misapplied and misunderstood. Section 17 of the Companies Act makes, inter
alia, the following provisions in respect of alteration of objects :
“(1)A company may, be special resolution, alter the provisions of its
memorandum .... with respect to the company so far as may be required to enable
it -
(a) to carry on its business more
economically or more efficiently ;
(b) to attain its main purpose by new or
improved means ;
(c) to enlarge or change the local area of
its operations ;
(d) to carry on some
business which under existing circumstances may conveniently or advantageously
be combined with the business of the company;
(e) to restrict or abandon any of the objects
specified in the memorandum ;
(f) to sell or dispose of
the whole, or any part, of the undertaking, or of any of the undertakings, of
the company ; or
(g) to amalgamate with any other company or
body of persons.
(2) The alteration shall
not take effect until, and except in so far as, it is confirmed by the court on
petition.”
So far as the
alterations of the objects in respect of work in jute, cotton and woollen mills
are concerned, they are proposed in clauses 21 and 22. I think, they can be
permitted clearly under section 17(1)(a) of the companies Act which allows the
object clause to be amended to carry on business more economically and more
efficiently and also under section 17(1)(d) which permits alteration of objects
with a view to carry on some business which under existing circumstances may
conveniently or advantageously be combined with the existing memorandum. I
certainly think that so far as these two clauses are concerned, business in
them can be conveniently or advantageously combined with the existing business
of the company.
With regard to
cold storage and ice plants, there was good deal of controversy. It obviously
is a business which does not come under the present clauses of the existing memorandum.
Section 17(1)(d) of the Companies Act permits alteration of the provisions of
this memorandum with respect to the objects of the company to enable it “to
carry on some business which under existing circumstances may conveniently or
advantageously be combined with the business of the company.” Therefore, it is
clear from the language of the section that some business which is not already
there under the existing memorandum may be introduced by alteration of the
memorandum provided such business can be conveniently or advantageously
combined with the business of the company under existing circumstances. The
important conditions to bear in mind in interpreting section 17(1)(d) of the
Companies Act are (1) that “existing circumstances” of the company should be
considered and (2) that the nature of the proposed new business must be such
that either on the ground of convenience or of advantage the new business can
be combined with the existing business of the company. In considering what can
either be “conveniently” or “advantageously” combined with the existing
business of the company, foremost regard should be given to the views of the
shareholders which in this case have been expressed by their unanimous
resolution. There is still a residuary power and duty of the court to see that
this expression of view by the shareholders is a sensible one and the
introduction of the proposed new business is obviously not something which
cannot with reason be conveniently or advantageously combined with the existing
business. Most of the original proposals contained in the special resolution
were in respect of business which could not by any stretch of language or
imagination or business principles or commercial possibilities be regarded as
business which could conveniently or advantageously be combined with the
business of the company in the existing circumstances. For instance, business
in clocks, musical instruments and in surgical goods would be a very strange
new-comer into a business in agricultural, mineral and animal products and
live-stock. In fact, in the original provisions contained in the special
resolution it would be seen that the company wanted to carry on every
conceivable business under the sum and for that purpose the company might have
avoided all that circumlocution and adopted only one clause in the memorandum
saying that all kinds of business could be carried on by the company. This is
exactly the practice that was condemned by NEVILLE J. in In re John Brown &
Co. : In re Tredegar Iron & Coal Co. Ltd. There, the new clauses as
proposed were numerous and lengthy and included almost every kind of business,
and some of the clauses only amplified the existing objects. An interpretation
clause was introduced among the clause. It was held that the alterations in
number and simplified, and the interpretation clause had been deleted and that
a further clause was inserted disabling the directors from treating any of the
new objects as principal objects without the consent of a special resolution of
the company. NEVILLE J. at page 234 of the report observed :
“I have been
thinking this matter over a great deal. The legislature may pass a law which
will prevent companies trading except within the limits of their memorandum :
but, if you have got a memorandum which is co-extensive with the business of
the whole world, you get behind the ambit of the legislation.
I think this
would meet the case where it is desired (I think unwisely) to have these
enormously extended memorandums .... The point is that the directors could
abandon the main business and take up an entirely new business without
consulting the shareholders. I would not sanction them except upon evidence
that there was a really present desire on the part of the company to extend its
business in the directions indicated.”
The learned
Judge’s subsequent observation on the same page of the report are equally
cogent and relevant on the point under consideration :
“That is one
of the anomalies of the company law.
What I really
feel is that if the court takes up the lien of least resistance, some day the
court may wake up and find that shareholders have lost their money through
directors embarking on speculative business.
I am rather
inclined to think that it would be better if the applications were limited (even
as to ancillary powers) to those the directors desire to carry out, not
immediately, but in the near future, rather than to put in ancillary powers
which you thought might at some future time be desired to be carried out. I
don’t want you to come once for all and ask for an extended memorandum covering
every conceivable alteration in the business of the company .... “
In fact
NEVILLE J. had observed earlier at the same page of the report :
“If the
circumstances of the company change, they can always come and ask reasonably to
enlarge their memorandum.”
This decision
was given in the year 1914.
The other
decision required to be noticed is In re Parent Type Co. Ltd. which appears to
be an authority for the proposition that the additional business which a
company, by an alteration of its objects is enable to carry on, may be a
business wholly different from, and bearing no relation to, the then existing
business wholly different from, and bearing no relation to , the then existing
business of the company and yet be capable being conveniently or advantageously
combined with it,. provided such new business is not destructive of or
inconsistent with the existing business. Whether the proposed new business is
one which may be conveniently or advantageously combined with the then existing
business of the company is primarily question for the determination by the
company’s managers and shareholders. In that case of Parent Type Co. Ltd.,
however, the business that was sought to be introduced was one of bankers and
financiers in the existing business of the company which consisted in the
holding and management of large investments in two other companies. That
alteration was not so astonishing and amazing as the alteration proposed
originally by the special resolution in this case before me. LAWRANCE J. at
page 228 of the report in construing section 9(1)(d) of the Companies
(Consolidation) Act, 1908, observes :
“I have come
to the conclusion that, although the businesses there described are, in my
opinion, a new departure, in the sense that they do not fall within the
memorandum as at present drawn and are businesses which have no definite
relation to the present business of the company, yet, in my judgment, this fact
is not fatal to the introduction of the additional objects enumerated in the
special resolution. The question whether any given additional business is one
which may conveniently or advantageously be combined with the business of the
company carried on the time when the special resolution is passed must, in my
judgment, be determined by the persons engaged in the business of the company.
It is essentially a business proposition, whether an additional business can or
cannot be conveniently or advantageously carried on under existing
circumstances with the business of the company. The additional business, of
course, must not be destructive of or inconsistent with the existing business :
it must leave the existing business substantially what it was before .”
I arrive at a
similar conclusion from a construction and interpretation of the language of
section 17(1)(d) of the Companies Act, 1956. That provision says that the
memorandum may be altered with respect to the objects of the company to enable
it to carry on “Some business”. The word “some business” in that clause
apparently must include business other than the business which is already being
carried on under the existing memorandum. Therefore, the addition of “some
business” may be the addition of a business which is entirely a new departure
from the business already carried on. The only requirement of the statute law
in
The next
English decision is In re Bolsom Bros. (1928) Ltd. That decision is an
authority for the proposition that new business of retail trades and of
universal stores were allowed by the English court to be added to the existing
objects of the company of selling footwear and clothing by alteration of the
memorandum. The extension in that case was approved by the company in general
meeting without opposition but the petition was opposed by certain preference
shareholders. I n the court of the first instance it was held by EVE J. that
there was no evidence that the proposed alterations were necessary or proper to
enable the company’s business to be carried on more efficiently, and as the
traders it was proposed to take power to work were entirely outside the
original objects of the company, the court would refuse to sanction the
petition. There was an appeal and on appeal additional evidence was adduced to
show that a large number of the traders to which it was sought to extend the
company’s objects were already being carried on by the company, and that to
this extent the object of the petition was to regularise the position. The
Court of Appeal came to the conclusion that in view of the further evidence the
alterations in the objects, when limited so as to give power to carry on only
those trades which were already being carried on by the company should be
sanctioned. In the present case before me it may be noted here that the
business in ice plant and cold storage had already been carried on for some years.
It is interesting, however, to note that Lord Justice MAUGHAM at page 425 and
426 of the report went on to say :
“I only wish
to add that I do not in the least take the view that the learned Judge was
wrong in dismissing the petition on the materials before him. The matter was
brought before him under conditions which were exceedingly unsatisfactory. An
order was asked for, which involved the company being allowed to extend its
memorandum so as to include a large number of businesses which obviously the
company did not really decide or hope to carry on at any rate at the present
time. For those reasons and for the reasons which EVE J. gave, I think he was
right, if I may express the opinion, in dismissing the petition ; and, in
taking the course which the Court of Appeal is taking now, I also think it is
true to say that we are not in any way throwing doubt upon the decision of
NEVILLE J. and the statements he made in the will known case of In re John
Brown & Co. Ltd., a case which people who are intending to launch a
petition for the court’s approval of an alteration of their memorandum would be
wise to bear in mind.”
The principles
of law regulating the formation of objects in the memorandum of a company and
their alteration require clear enunciation and restatement in the present age
of industrial growth and development of joint stock enterprise in
Apparently,
the Companies Act, 1956, in
On behalf of
the Income-tax authorities an affidavit has been filed, but the Revenue
authorities as creditors have not objected to the alterations of the memorandum.
I, therefore,
disallow the alterations except clauses 21, 22 and 23 as proposed by the
special resolution and appearing in Exhibit A to the petition. These three
clauses 21, 22 and 23 are allowed to be added to the existing memorandum of
association of the company.
The Registrar
of Joint Stock Companies will have his costs from the company. There will be no
further order as to costs either in favour of the Revenue authorities or in
respect of the company who will, therefore, bear their own costs.
Order
accordingly.
[1931] 1 COMP CAS 285 (PC)
PRIVY COUNCIL
Egyptian Salt and Soda Co. Ltd.
v.
Port Said Salt Association
Ltd.
LORD HANWORTH, LORD MACMILLAN AND SIR LANCELOT SANDERSON
APRIL 21, 1931
W. Green, K.C, and R.T.J. Gibson, for the Appellants.
Lionel Cohen, K.C, and Gordon
Brown, for the Respondents.
Lord Macmillan—The
sole question at issue in this appeal is whether it is permissible for the
appellant company, having regard to the terms of its memorandum of association,
to engage in the business of exporting salt from Egypt. The respondent company
is a shareholder of the appellant company and as such asks, and has obtained
from His Britannic Majesty's Supreme Court for Egypt, an injunction restraining
the appellant from engaging in this branch of business. The present appeal is
against the order so obtained.
To place the controversy in its due setting it is necessary
to refer to the agreed documents in the case. From these the essential facts
may be briefly extracted. It appears that by decree of August 26, 1886, the
Khedive established a monopoly in Egypt of the extraction, manufacture and sale
of salt and natron or native sodium carbonate. In 1887, an Egyptian limited company, The Societe
Anonyme des Soudes Naturelles d' Egypte, which
it will be convenient to call 'the Egyptian Soda Company,' was formed to
operate a concession obtained by it from the Egyptian Government. This
concession conferred on the Egyptian Soda Company the exclusive right to
exploit the minerals and mineral products in the lands or lakes of a domain
known as Wadi-Natron, which is situated to the west of the Nile in Lower Egypt,
and in particular to manufacture and export soda. The concession expressly
stipulated that the Egyptian Soda Company should on no account sell or export
salt, this being a monopoly of the State. Thereafter, an English syndicate,
known as the Egyptian Syndicate Limited, acquired the undertaking of the
Egyptian Soda Company including its Wadi-Natron concession, and shortly
afterwards, entered into an agreement with the Egyptian Government whereby the
latter ratified the transfer to the Syndicate of the Egyptian Soda Company's
Wadi-Natron concession and further conferred on the Syndicate the Government's
monopoly right of manufacturing and selling salt in Egypt, the two concessions
to be merged into one in the hands of the Syndicate. The salt was to be
obtained by the Syndicate exclusively from the salines or salt deposits of Mex
in the western part of Lake Mariout, and the sole right to export the salt so
obtained was conferred on the Syndicate. In this agreement with the Syndicate
the Egyptian Government expressly reserved the right on six months' notice to
abolish the salt monopoly, in which case, however, the Syndicate was to
continue to have the right of exploiting the salines of Mex and the Wadi-Natron
concession was to remain in full force. The Syndicate thus came to hold both
the Wadi-Natron concession with the right to manufacture and export soda and
the Mex concession with the right to exercise the Government's monopoly of
selling salt in Egypt and for export.
The Syndicate next proceeded to promote the appellant
company and an agreement between the Syndicate and the company about to be
formed was prepared, being the agreement referred to in Head 3(A) of the
appellant company's memorandum of association quoted below. The appellant
company was duly incorporated under the English Companies Acts on October 27, 1899,
and the agreement was executed three days later on October 30, 1899. It
provided for the purchase by the appellant company from the Syndicate of (i)
the undertaking of the Egyptian Soda Company and its Wadi-Natron concession,
and (ii) the rights of the Syndicate under the Mex concession "but with
the reservation that the company shall not do any export trade in salt, such
right of export, being reserved by the Syndicate from the sale to the company.
The Syndicate in exercise of such reserved rights of export of salt being bound
by all the conditions imposed by the Government upon the export of salt under
the terms of the said concession." Consequently, while the appellant
company acquired the Syndicate's right to manufacture and sell salt in Egypt it
did not acquire its right to export salt from Egypt, and was disabled from
engaging in the exportation of salt so long at least as the Government monopoly
continued in force. The monopoly right of exporting salt which the Syndicate
had obtained from the Government and which it excluded from the sale to the appellant company
was, however, subject to the Government's expressly reserved right to terminate
the salt monopoly. This reserved right the Government subsequently exercised
and from January 1, 1906, the salt monopoly was entirely abolished, whereupon
the reservation of the right of export in the agreement between the Syndicate
and the appellant company ceased to operate as a restriction disabling the
appellant company from engaging in the export of salt except in so far as it
had any contractual effect.
It is now necessary to set out at
some length the material parts of the memorandum of association of the
appellant company on the construction of which the determination of the
question at issue depends. Head 3 declares " the objects for which the
company is established" to be inter alia as follows:—
(A) To acquire and take over as a going concern and work the undertaking
of La Societe Anonyme des Soudes Naturelles d' Egypte, a corporation
constituted in Egypt under the local laws, and all or any of the assets of that
company, and to enter into, with or without modification, the agreement
mentioned in Article 3 of the articles of association of the company filed with
this memorandum, and to do all acts in relation to the working in Egypt and its
dependencies of saline and of natron deposits, and selling and importing salt
and natron, and otherwise, and to enter into any further agreements in relation
to the same matters, or any of them or to the manufacture of oil soap and other
oleaginous or similar substances or products.
(B) To obtain from the Government of Egypt, and any other governments,
authorities, and powers, concessions, rights, powers, authorities and
privileges to carry on any trade, manufacture, business or monopoly.
(D) To carry on the business of miners, quarriers, explorers,
prospectors, manufacturers of and dealers in salt and soda in its various
forms, iodine and other products, chemists, druggists, drysalters, importers
and exporters of and dealers in produce of wells, mines and quarries, smelters,
glass manufacturers, reducers of minerals and metals, mineral and metal merchants and agents, engineers, general
storekeepers, carriers and merchants, agents for the acquisition, sale,
disposal of, and management of mines or other property, or any business which
may be conducive to or assist in carrying out the objects of the company or
developing any property acquired by the company.
In subsequent paragraphs further objects of the company are
denned, including under (E) the working of deposits of salt or natron in any
part of the world and the extraction and rendering marketable of salt or natron
and other produce, whether obtained by the company or others ; under (J) the
undertaking and carrying into effect of all such commercial, trading or other
operations or businesses in connection with the object of the company as the
company might think fit, and under (T) the making of agreements with any
company, firm or person in connection with the production, manufacture, sale or
other dealings in salt, natron or other products. The last paragraph of Head 3
is as follows:—
(U) To carry out the
above objects or any of them either on account of the company alone or in
conjunction with any other company, association, firm, person or persons, and
in any part of the world and generally to do all such acts and things as are
incidental or conducive to the attainment of all or any of the above objects.
It will be observed that the memorandum of association
nowhere in terms prohibits the appellant company from exporting salt from
Egypt, but the learned Judge in the Court below has held as the result of a
carefully reasoned judgment that the export of salt is inferentially excluded
from the contemplated or permitted objects of the company. This inference is
drawn from a consideration of the language of the memorandum, the terms of the
agreement referred to in clause (A) and the surrounding circumstances at the
time when the memorandum was framed. The learned Judge says that "the
memorandum is to be construed strictly. " If, by this he meant merely that
the memorandum must be construed in accordance with the accepted principles
applicable to the interpretation of all legal documents, no exception need be
taken to his statement, but if he meant that a specially rigid canon of
construction is to be applied to the memoranda of association of limited
companies, their Lordships do not agree. A memorandum of association like any
other document, must be read fairly and its import derived from a reasonable
interpretation of the language which it employs.
As regards the aid to interpretation to be derived from
surrounding circumstances, the learned Judge has, in their Lordships' view,
taken too wide a scope. It must be borne in mind that the purpose of the
memorandum is to enable share holders, creditors and those who deal with the
company to know what is its permitted range of enterprise, and for this
information they are entitled to rely on the constituent documents of the
company. They have not access to other sources of information such as the
antecedent transactions which the learned Judge invokes and have no means of
knowing, for example, "that the intention of the promoters that the
company should not export salt was known to the defendant company," a
circumstance which the learned Judge adduces. The intention of the framers of
the memorandum must be gathered from the language in which they have chosen to
express it.
Turning then to the memorandum, their Lordships recognise
that one of the objects placed in the forefront of Head 3 is to enter into the
agreement mentioned is clause (A) and that that agreement when examined is
found to contain an express exclusion of the right to export salt. But the
question to be decided is not one as to the contractual relations between the
parties to the agreement. As between the company and the vendors to it the
restriction may have imposed a limitation on the company's activities, but it
is another matter to infer that the company intended for all time to exclude
itself from the export trade in salt even should it otherwise become
permissible for it to engage in this business. The language of the agreement
itself in reserving to the vendors the right of exporting salt assumes the
existence of their monopoly right and the monopoly was terminable at any time.
It is unlikely that the appellant company should have intended to disable
itself from exporting salt even if the monopoly should be abolished, as it has,
in fact, been. Moreover, the agreement was subject to modification or even
cancellation by the parties to it and the reservation, as between them, of the
right to export salt might at any time have been abrogated.
While it is true that the "original first object"
of the appellant company, to quote the words of
The respondents' argument was supported by references to
passages in the memorendum where mention is expressly made of the importing of
salt and the exporting of other produce and the omission of any mention of the exporting of salt was
thus said to be significant of an intention to exclude it from the company's
objects. But once it is conceded that it is permissible for the company to
export salt from countries other than Egypt, this argument fails. In any case,
it involves the attribution to the draftsman of a degree of precision in the
use of language which other parts of the document do not warrant and to the
reader of it a refinement of perception not usually possessed by those to whom
such documents are addressed.
The company, as its name denotes,
is a trading and commercial company dealing in salt and soda. Prima facie, one
would expect it to have among its permitted objects all the ordinary
transactions of trade, domestic and foreign, in the commodities in which it is
established to deal. In their Lordships' view no ordinary reader of the
memorandum would infer from it that the company was under a special prohibition
not to engage in the export of salt from Egypt. The learned Judge below after
finding that there was an agreed intention to form a company which should not
do any export trade in salt, goes on to say : "The obvious way to carry
out that agreement was to phrase the memorandum of the company to be formed in
such a way that the company should not have the right to export salt" and
states, very properly, that the "point for decision" is "whether
the obvious method was adopted and the intention was effectively carried out by
the memorandum." He then finds by inference from the intention of the promoters,
which was known to the company, and from the fact that one of the company's
main objects was to enter into the agreement in which the restriction was set
forth, that the memorandum must be read as if it contained the express words
"but not exporting from Egypt. "
Their Lordships cannot accept
this interpretation. In their view, the "obvious method" was not
adopted and the memorandum does not effectively carry out the intention, if
intention there was, to exclude from the permitted objects of the company the
export of salt from Egypt. Their Lordships will therefore humbly advise His
Majesty that the appeal should be allowed and injunction granted by the Court
below dissolved.
The appellant company will have
their costs here and below.
[1944] 14 COMP.
CAS. 69 (BOM.)
v.
The Scindia Steam Navigation Co., Ltd.
STONE, C.J.
AND KANIA, J.
OCTOBER 13, 1943
P.B. Vachha, with N.V. Desai and P.H. Vasvada, for the Appellant.
Sir Jamshed Ji Kanga, with Sir Chimanlal
Setalvad, F.J. Coltman, B.J. Desai, V.F. Taraporewala, M.C. Setalvad, K.M.
Munshi and K.A. Somjee for the Respondents.
Stone, C.J.—This is an appeal from the
judgment of Mr. Justice Chagla dated January 29, 1943, whereby he dismissed with
costs the appellant's suit for a declaration and certain ancillary relief.
The appellant is a shareholder in the respondent company,
and sues, on behalf of himself and other shareholders of the company, not only
the company but the nine personal defendants who are its directors. The
appellant's complaint arises out of a transaction effected at the time of the
collapse of France in May 1940 whereby the respondent-company laid out twenty
five lacs of rupees in the purchase of bullion and deposited it at a bank. The
appellant says that such a transaction was ultra vires the respondent-company,
and accordingly it becomes necessary to examine not only the memorandum of
association of the respondent-company but also the nature of the transaction
itself.
The company was incorporated on March 27, 1919, under the
Indian Companies Act, 1913; it is a substantial concern, and, as its name
denotes, it is concerned with shipping. Cause 3 of the memorandum of
association is the objects clause. Sub-clause (a) is: "To purchase or
otherwise acquire the steamship 'Loyalty'……." Sub-clause (b) is: "To
purchase, charter, hire, build or otherwise acquire, steam and other ships or
vessels, with all equipments…….etc." Sub-clause (c) is as follows:—
"(c) To buy, sell, prepare for market, and deal in
coal, timber-live stock, meat, and other merchandise and produce."
Sub-clause (d) is concerned with the carrying on of certain
business and sub-clause (e) with insurance, while sub-clause (f) makes
provision for the carrying on of certain ancillary businesses, and then comes
the sub-clauses (g) and (h) on both of which the respondents rely. They are as
follows:—
"(g) To acquire and deal with the property following:—
(1) The business property
and liabilities of any company, firm, or person carrying on any business within
the objects of this company.
(2) Lands, buildings, easements and other
interests in real estate.
(3) Plant, machinery, personal estate and
effects.
(4) Patents, patent rights, inventions, or
designs.
(5) Shares or stock or securities in or of any
company or undertaking the acquisition of which may promote or advance the
interest of this company."
"(h) To perform or do all or any of the following
operations, acts, or things:—
(1) To pay all the
costs charges and expenses of the promotion and establishment of the company.
(2) To sell, let,
dispose of, or grant rights over all or any property of the company.
(3) To erect
buildings, plant and machinery for the purposes of the company.
(4) To manufacture plant, machinery, tools,
goods and things for any of the purposes of the business of the company.
(5) To draw accept
and negotiate bills of exchange, promissory notes, and other negotiable
instruments.
(6) To borrow money or to receive money on
deposit either without security or secured by debentures, debenture stock
(perpetual or terminable), mortgage or other security charged on the
undertaking or all or any of the assets of the company including uncalled
capital.
(7) To lend money,
with or without security, and to invest money of the company in such manner
(other than in the shares of this company) as the directors think fit."
The remaining clauses are not material.
Those being the objects, it is necessary to examine what the
company did, which, it is alleged, is ultra vires those objects.
The facts sufficiently appear from paragraphs 6 and 8 of
the written statement of the respondents at page 12 of the record. At the end
of paragraph 6 appears this sentence:
"The defendants say that the said investment was made
purely out of consideration of safety and that the directors acted bona fide
and considered the said investment to be in the best interests of the first
defendant company."
In clause (8) the following is stated:
"The defendants say that the said purchases were
neither speculative nor were they made with a view to make profits but they
were made purely out of consideration of safety."
It may well have been that the purchase of this bullion was
a wise and prudent thing to do. There is a charge of gross negligence contained
in the plaint, but there is no evidence to support it and there appears to be
no ground for any suggestion that the directors acted otherwise than in a
manner which was in the best interests of the company. The question is: Was
what was done ultra vires the company or not?
Before Mr. Justice Chagla the only sub-clause to which the
Judge's attention appears to have been directed, was sub-clause (3)(h)(7), and it:
was urged by the appellant that what the respondent company had done did not
come within the words "to invest money of the company in such manner……. as
the directors think fit." The learned Judge in his judgment at the foot of
page 14 of the record says this:
"Whether the 1st defendant company had the power to
invest its funds in the purchase of gold and silver would depend upon its
memorandum of association. Clause 3(h)(7) of the memorandum provides that one
of the objects for which the 1st defendant company is formed is to lend money,
with or without security, and to invest moneys of the company in such manner
(other than in the shares of this Company) as the directors may think fit. Mr.
Vasvada on behalf of the plaintiff has contended that the power to invest
moneys must be construed to mean to invest moneys in shares and securities. I
do not find any warrant for such a construction to be placed on the word
'invest'. "Invest" is not a legal expression and one must consider
what its ordinary natural meaning is. Murray's Oxford Dictionary defines
'invest' to mean: "to employ (money) in the purchase of anything from
which interest or profit is expected; now, especially in. the purchase of
property, stocks, shares, etc., in order to hold these for the sake of the
interest, dividends or profits accruing from them." Mr. Vasvada contends
that you only invest moneys when you buy shares and securities, lock them up
end take the dividends or interest which you realize from these shares and
securities. Such a construction is quite contrary to the meaning of the word as
given in the Oxford Dictionary. If a person buys commodities with the hope of
making profit's by sale of these commodities at a later stage, it would be as
much an investment as investing moneys in shares and securities merely for the
purpose of earning dividends or interest."
In this Court Mr. Vachha has referred us to the definition
of "invest" in Wharton's "Law Lexicon", which is as
follows: "Invest, to give possession: to lay out money." He has also
referred us to the case of In re Wragg: Wragg v. Palmer. In that
case Mr. Justice P.O. Lawrence, as he then was, had to construe the investment
clause in a will, which authorized the trustees to invest any moneys forming
part of the trust estate in or upon such stocks funds shares securities or
other investments of whatsoever nature and wheresoever as the trustees should
in their absolute and uncontrolled discretion think fit, and the learned Judge
states (page 64):
"I can hardly conceive that any language could have
been used which would have given a wider meaning to the word 'investments' than
the language which the testator has used in this clause. Moreover I think that
the words 'and wheresover' were rightly relied upon as at least supporting the
contention that the clause contemplated that the investments might consist of
immovables (such as real estate) having definite locality. Without attempting
to give an exhaustive definition of the words 'invest' and 'investment' I think
that the verb 'to invest' when used in an investment clause may safely be said
to include as one of its meanings 'to apply money in the purchase of some
property from which interest or profit is expected and which property is
purchased in order to be held for the sake of the income which it will yield';
whilst the noun 'investment' when used in such a clause may safely be said to
include as one of its meanings 'the property in the purchase of which the money
has been so applied.' No doubt in many cases the context in which the word
'investments' occurs requires that this word should be confined to investments
consisting of stocks shares and securities, but where the word 'investments' is
used without any such context, or where, as in this case, the instrument in
which it occurs expressly provides that the word is not to have any such
restricted meaning, I think that it includes real estate purchased as an
investment."
The definition there given is not exhaustive. We were also
referred to the decision of Mr. Justice Eve in In re Sudlow Smith v. Sudlow. In the will
then before the Court the learned Judge had to construe an investment clause
which contained the words "any moneys liable to be invested under this my
will, may remain invested as at my death," and the question was whether a
sum of £2.900 on deposit with the firm of wholesale druggists in whose
employment the testator had been, and which sum on deposit produced five per
cent, interest per annum, free of income-tax, and could be withdrawn on notice
varying from seven days to one month, according to the amount of deposit at the
time, was an investment which the trustees were entitled to retain. The learned
Judge was of opinion that the testator used the word "invested" in
its primary and true meaning, and could not treat this money on deposit with
the firm as money "invested" at the time of the death of the
testator. In the case of In re Price: Price v. Newton Mr. Justice
Farwell, as he then was, had to consider the meaning of the expression
"pecuniary investments" in a will, and the learned Judge says this
(page 58):
"I think that no one in ordinary parlance speaking of
money which he puts on deposit account at his bankers at a short call like
this—ten days—taking the usual banker's interest, which is 1 per cent. below
bank rate, would treat himself as making an investment, or as investing in a
mode which could be intended by him as an investment to be continued after his
death by his trustees "in its present state of investment" within the
meaning of those words. It is a little difficult to dogmatise about matters of
this sort, and I quite feel the force of the observation that people do use the
words 'invest' and 'investment' nowadays in very odd collocations."
On the other hand. Sir Jamshedji Kanga relied on the case
of In re Lewis' Will Trusts: 0'Sullivan v. Robbins, in which
Mr. Justice Bennett, also construing a will, held in effect that money on
deposit may be an investment. In re Price was cited in
argument, but neither in the argument of counsel nor in the judgment was any
reference made to Mr, Justice Eve's decision in In re Sudlow. The
learned Judge pointed out (page 120):—
"There is no express authority which binds me to
decide that money on deposit is not an investment. The case of In re Price:
Price v.
"Upon the language of this particular will I have no
hesitation in holding that the moneys deposited at the Bank and at the Army and
Navy Stores, Ltd., were investments at the date of the testator's death
representing the Mortgage Debenture Redeemable Stock and that those moneys on
deposit pass under the bequest."
In my opinion, it is difficult to reconcile the decisions
in In re Sudlow
and In re Lewis' Will Trusts.' But there is a further authority in the House of Lords in
the case of Perpetual Executors and Trustees Association of Australia v. Swan, where
dealing with the Victoria Companies Act, 1890, the Judicial Committee of the
Privy Council held that the appellant-company was not authorised thereunder, or
under a special Act, to invest trust moneys on deposit at interest with banks.
Delivering the judgment of the Board, Lord Macnaghten points out the difference
between depositing moneys with a bank and investing moneys on securities.
Sir Jamshedji Kanga also relied on the recent decision of
the House of Lords in Perrin v. Morgan, and I think
in substance that case, which deals with the construction which is to be put on
the word "money" in a will, was put forward as showing that the rules
of construction had been in some way relaxed in favour of giving to words a
more colloquial meaning. I do not understand the House of Lords to have done
any such thing. Indeed the judgment of Lord Russell of Killowen disclaims any
such intention. No doubt the words "invest" and
"investment" are sometimes used in a loose sense or, as Lord Justice
Farwell puts it, "in odd collocations". But we have to construe a
business document prepared by lawyers, and although no doubt the document is
one which is laid before the public and which the public must understand, I do
not think that any loose meaning is to be given to any of its terms.
In times of war if a man deposits his family jewels at a
bank for safe custody, he cannot be said to be using them, and when at such
times a company converts a part of its resources into gold and silver with the
avowed intention of depositing the bullion for safe custody at its bank, it,
seems to me, it cannot be said to be investing its money. In both cases the
object is to withdraw from hazard. The jewels and the gold are deliberately
frozen into static stability, at the cost, in the one case, of deprivation of
enjoyment by display, and in the other, of profit: so that when the risks of
defeat are passed, the asset may be returned to use or employment in the domain
of daily life. I cannot see that in a case in which safe deposit is the main
spring of what was done, there is any room for that degree of activity,
continuity and risk which are I think some of the characteristics of making an
investment. It does not seem to me that a company can be said to make an
investment or to have invested its money, when what the company has done is to
charge its surplus money into a commodity which it locks up in safe custody,
which produces no dividend or income, and in respect of which the company hopes
and intends that it will remain unscathed by the fortunes of war and the
fluctuations of the market, so that at some future date the money which it
represents may be profitably laid out in some form of enterprise Such
circumstances seem to me to negative the idea of making an investment in the
same way as if the company had liquidated some of its assets and placed the
resultant cash in its safe. It follows that in my judgment what was done in May
of 1940 was not permitted by sub-clause (3)(h)(7) of the objects clause, and if
the matter had rested there, I should have been of the opinion that this appeal
ought to be allowed. I have come to this conclusion with reluctance, not only
because I am differing from the learned Judge in the Court below, but also
because, having had the advantage of reading the judgment which my learned
brother Kania is about to deliver, I am on this joint differing from him also.
But in this Court Sir Jamshedji Kanga has argued that even
if what has been done was not an investment under sub-clause 3(h)(7), it was an
acquisition and dealing with personal estate. The relevant sub-clause is
sub-clause (3)(g), which is as follows: "To acquire and deal with the
property following:", and sub-head (3) is: "Plant, machinery,
personal estate and effects." Neither this sub head nor its immediate
predecessor, which deals with land, is qualified by such words as "within
the objects of the company" or "for the purposes of the company"
which are attached to some of the other sub-heads; and, in my opinion,
sub-clause 3(g) is very wide indeed. Sir Jamshedji Kanga pointed out that, in
spite of the strictures of Lord Wrenbury in Colman v. Brougham, the
objects clause in a memorandum of association was held in that case by the
House of Lords to be unimpeachable once the certificate of registration had
been given by the Registrar under the relevent section of the Companies Act, which
in this case is Section 24 of the Indian Companies Act, 1913. Turning again to
sub-clause (3)(g), unquestionably the company had acquired the bullion. It
dealt with it, in the first instance, by depositing it for safe custody at its
bank, and recently the war situation having changed, the company has sold it.
Bullion is, in my opinion, personal estate within the meaning of sub-head (3)
of sub-clause (3)(g). I cannot see that the expression "personal estate
and effects" is to be restrained or narrowed by the context from having
the widest meaning; nor, in my judgment, can these words be read ejusdem
generis with plant and machinery. The words appear to be comprehensive words
imported for the very purpose of making the previous catalogue unrestricted. In
the result, the appeal fails, and must be dismissed.
But the respondents in my
judgment succeed on grounds which were not raised, or argued, in the Court
below. We sent for the Judge's notes in the Court below, and it appears that
counsel for the respondents was not called upon to argue, though, no doubt,
observations of an interlocutory character were interposed during the course of
the appellant's argument. Mr. Vachha has suggested that we ought to exercise
our discretion in these circumstances with regard to the costs of this appeal.
But it is to be observed that this litigation was framed by the appellant along
hostile lines, since, as I have already mentioned, the directors are charged
with gross negligence. The parties were, therefore, at arm's length, and I do
not think it was incumbent upon the respondents to draw the attention of their
opponents to the clause in the memorandum, which, in my opinion, is the
relevant one. Further, it was open to the appellant, if all he had desired was
the determination of the construction of the objects clause in this memorandum,
to have proceeded by originating summons. In these circumstances, in any
opinion, the usual order as to costs must follow, and the appellant must pay
the costs of this appeal.
Kania, J.—The plaintiff is a shareholder
of the first defendant company. Defendants Nos, 2 to 10 are the directors of
that company. Early in 1940 the capital of the first defendant company was
increased and in May 1940 the first defendant company had a large amount in cash
on hand. They further anticipated cash receipts soon thereafter. In the latter
part of May 1940, Germany had overrun Holland and the Low Countries and the fall of France was apprehended.
Therefore in Bombay, amongst other parts of the world, there prevailed
considerable apprehension about the safety of capital. The first defendant
company, by its directors, therefore, thought of buying gold and silver.
Between May 22 and 28 they bought gold worth Rs. 17,00,000 and silver worth Rs.
8,00,000 and kept the same with the Imperial Bank of India, for safe custody.
The plaintiff having come to know of this action of the directors wrote to them
a letter of protest on September 26. By their reply dated October 3 the
directors informed the plaintiff's attorneys that the financial and
international situation looked extremely uncertain and therefore the company
had invested a part of the cash on hand in gold and silver. The alleged that
they had power to effect such an investment. They denied the plaintiff's
allegation that the purchase was of a speculative nature. Not being satisfied
with this reply the plaintiff on behalf of himself and the other shareholders
of the company filed this suit. He contended in the plaint that the action of
the directors in purchasing speculative commodities like gold and silver was
unjustified, that the directors were guilty of gross negligence and had
committed a breach of trust and that the transactin was ultra vires the
company. The prayers are for a declaration that the aforesaid purchase of gold
and silver was ultra vires the company for an account of the loss sustained by
reason of such investment and for an injunction. The defendants filed a written
statement in which they denied that the transaction was of a speculative
nature. They pointed out the uncertainty prevailing when the purchase was made
and denied that the same was of speculative commodities. They also denied that
the purchase was made with a view to make profits. According to them the
purchase was made purely out of consideration of safety and denied that the
purchase was ultra vires the company. In the plaint clause (3) of the
memorandum of association was set out in extenso and reference was made to
article 115 of the articles of association. The defendants also relied on
article 114.
It appears that when the suit reached hearing before
Chagla, J, it was pointed out that the gold had silver had already been sold
and had resulted in a profit which was duly credited in the company's books.
The plaintiff dots not appear to have pressed his charges of negligence or
breach of trust and only one issue was raised which contained the contention
that the transaction was ultra vires the company. From the record it appears
that the plaintiff's counsel relied on clause 3(h)(7) for his contention that
the transaction was ultra vires. The learned Judge held otherwise and dismissed
the suit. It does not appear from the record that counsel for the defendants
was called upon to argue, in any event for any length of time.
It was first argued before us
that if the clause in the memorandum of association was ambiguous, articles of
association could be referred to, and in support of that counsel relied on The
Anderson's Case. In my
opinion there is no question of ambiguity in this case and therefore no
occasion to refer to the articles of association arises. It may be pointed out
that if articles 114 and 115 only were relied upon, they did not alter the
position.
It was next contended that if
powers which are not objects of the company are included in the memorandum they
do not become objects. In support of that contention observations of Lord
Wrenbury in Cotman v. Brougham were relied
upon. In that case the different clauses in the memorandum themselves were
sufficiently wide to cover almost all kinds of transactions and the objects
clause concluded with a declaration that every sub-clause should be construed
as a substantive clause and not limited or restricted by reference to any other
sub-clauses or by the name of the company and that none of such sub-clauses or
the objects specified therein should be deemed subsidiary or auxiliary merely
to the objects mentioned in the first sub-clause. Finlay, L.C., in delivering
the judgment, criticised the provisions of the objects mentioned in the
memorandum. Lord Wrenbury after pointing out that the object of a memorandum
was to delimit and identify the objects in such a plain and unambiguous manner
as that the reader could identify the field of industry within which the
corporate activities were to be confined, observed that the object was
two-fold: firstly, the intending corporator who contemplated the investment of
his capital should know within what field it was to put at risk; and, secondly,
that anyone who should deal with the company should know without reasonable
doubt whether the contractual relation into which he contemplated entering with
the company was one relating to a matter within its corporate objects. Lord
Wrenbury then observed as follows (p. 523).
"There has grown up a
pernicious practice of registering memoranda of association which, in the
clause relating to objects, contain paragraph after paragraph not specifying or
delimiting the proposed trade or purpose, but confusing power with purpose and
indicating every class of act which the corporation is to have power to do. The
practice is not one of recent growth. It was in active operation when I was a
junior at the Bar. After a vain struggle I had to yield to it, contrary to my
own convictions."
These observations may be useful
to remember when a company has to be registered, but, as observed by all the
Law Lords in the same case, for the purpose of construing whether a transaction
was ultra vires or not, as the company was registered, the Court, was bound to
admit that it was a valid instrument. That is the effect of Section 24 of the
Indian Companies Act also. The criticism therefore against the wide scope of
the objects clause in the memorandum of association is not helpful to the
plaintiff.
The question is not one of
ambiguity of the meaning of the word "investment" in clause (3)(h)(7)
of the memorandum of association. The question is what is the ordinary meaning
of that word in documents of this kind. In Palmer's Company Precedents, Vol. I
(15th Ed.) at p. 440, it is stated:
"it was formerly not unusual
to state the objects in the memorandum with utmost conciseness, and then to
elaborate them in the articles;….According to present practice, the reverse of
this plan is adopted. [It is now common to insert as objects powers of the
company.] No doubt in the result the objects clause of the memorandum, as now
framed is in many cases unnecessarily long, and states not only What may be
called the leading or primary objects, but expressly empowers the company to do
a great many things which, if not expressed, would or might be implied as
reasonably incidental to the leading objects, or which may never be required.
But, after all, it must be borne in mind that the objects clause of a
memorandum is intended to be read and understood, and acted on not merely by
lawyers, but ordinary businessmen; and such men like to see the powers of the
company expressed with fullness and in considerable detail, instead of resting
in implication".
These observations indicate that
in construing the objects clause of the memorandum of association there need be
no rigidity as well as laxity but a reasonable construction is proper. In this
connection it may be useful to remember the observations of the House of Lords
in the recent case of Perrin v. Morgan. The
question in that case was in respect of the construction of a will. The bequest
was of "All monies of which I die possessed". For years past, as is
well-known, judicial opinion differed on the question of the true meaning of
the word "money" in such eases, and particularly where it covered
deposits in banks or investments in shares and securities; Lord Simon, L.C.,
emphasized the universally recognised rule that the duty of the Court was to
find out what was the intention of the testator in using the expression found
in the will, having regard to the words used by him. Lord Simon further
observed that the duty of the Court, in the case of an ordinary English word,
which has several quite usual meanings, which differ from one another is not to
assume that one out of several meanings holds the field as the correct meaning
until it is ousted by some other meaning regarded as "nor, legal",
but to ascertain without prejudice as betwnen various usual meanings which is
the correct interpretation in the particular document, in dealing with the word
before him he further observed as follows (p. 412): —
"...As I have already said
the word 'money' has more than one meaning, and it if, in my opinion, a mistake
to pick out one interpretation of the word and to call it the 'legal' meaning
or the 'strict legal' meaning as if it had some superior right to prevail over
another equally usual and not illegitimate meaning. The context in which the
word is used is, of course, a main guide to its interpretation, but it is one
thing to say that the word must be treated as having one particular meaning
unless the context overrules that interpretation in favour of another, and
another thing to say that 'money', since it is a word of several possible
meanings, must be construed in a will in accordance with what appears to be its
meaning in that document without any presumption that it bears one meaning
rather than another."
Bearing in mind these
observations I shall now proceed to consider the construction of clause (3)(h)
(7) which was discussed in the first instance at the bar and was relied upon at
the trial. The verb "invest" is stated in Wharton's Law Lexicon to
mean "to lay out money." A similar meaning is found also in Webster's
English Dictionary. In Murray's Oxford Dictionary several meanings are given in
respect of this word. One of them is "to employ (money) in the purchase of
anything from which interest or profit is expected; now especially, in the
purchase of property, stocks, shares etc. in order to hold these for the sake
of interest, dividend, or profits accruing from them".
In the trial Court the learned
Judge held that if a person bought commodities with the hope of making profits,
by sale of those commodities at a later stage, it would be as much an
investment as investing money in shares and securities merely for the purpose
of earning dividends or interest. It was strongly urged before us that this
view of the learned Judge cannot be supported in view of what was stated by the
defendants in their written statement. It was pointed out that the defendants
themselves had repudiated the suggestion that gold and silver was purchased
with a view to make profits. It was therefore argued that even according to
this definition, which was accepted by the trial Court, the defendants'
contention must fail.
In the various illustrations
given in Murray's Dictionary, after the abovequoted meaning of the word, one is
in these terms: "to invest capital means to turn circulating into fixed
capital or less durable into more durable capital". Moreover in addition
to the above-quoted meaning the following meaning is also given to the word;
"to make an investment; to invest capital
(collq.) to lay out money, to make a purchase". That meaning of the word
corresponds to what is found in Wharton and Webster. On behalf of the plaintiff
it was argued that the idea of investment must carry with it the capacity to
produce interest, profit or dividend, and in that connection Wragg, In re:
Wragg v. Palmer
was relied upon. That was a case of construction of a will. By clause 10 the
trustees were authorised to invest any money forming part of the trust estate
in such stocks, funds, shares and securities or other investments of whatsoever
nature and wheresoever as his trustees in their absolute and uncontrolled
discretion thought fit with the like power of varying such investments to the
intent that his trustees should have the same full and unrestricted powers of
investment and transposing investments as though they were absolutely entitled
thereto beneficially. The question before the Court was whether under this
clause the trustees had power to invest in the purchase of real estate. In
discussing the effect of the clause Lawrence, J., as he then was, observed as
follows (page 64):—
"….Without attempting to give an exhaustive definition
of the words "invest" and "investment" I think that the
verb 'to invest' when used in an investment clause may safely be said to
include as one of its meanings "to apply money in the purchase of some
property from which interest or profit is expected and which property is
purchased in order to be held for the sake of the income which it will
yield"; whilst the noun "investment" when used in such a clause
may safely be said to include as one of its meanings 'the property in the
purchase of which the money has been so applied'..."
The learned Judge then proceed to discuss the contingencies
in which the word "investment" may be limited by context to
investment in stocks, shares and securities. But he observed that when no
reason was given for such restricted meaning, it included real estate as an
investment. 1 do not think these observations help the plaintiff because in
that case the Court had to consider whether the words "investment" or
"invest" excluded the purchase of real property, and the Court was
not concerned with the question whether purchase of something which did not
yield interest or dividend or profit was an investment at all. It must be
pointed out that the attempt was to give an inclusive definition and not an
exhaustive one.
It was contended that if money was kept with a banker, it
was not an investment as ordinarily understood. For this the plaintiff relied
on the statement in Halsbury's Laws of England (Hailsham Edition), Vol. XXXIV,
page 250. In the note three cases are cited, viz., Perpetual Executors and
Trustees Association of Australia v. Swan; Price, In
re: Price v.
Turning next to the clause in
question I must observe that I am not concerned with any general interpretation
of the objects of this company. My observations in this case are limited to the
question whether the individual transaction challenged in the plaint and
effected under the circumstances mentioned in the written statement, and which
do not appear to be disputed on the record, was ultra vires or not. The clause
empowers the surplus money of the company to be lent with or without security.
It also authorises the investment of the money of the company "in such
manner (other than in the purchase of the shares of this company) as the
directors think fit". On a plain reading of this clause, it is therefore
clear that it does not restrict the power of the company to utilise money, as
indicated therein, for any limited period. In other words there is no limit of
time put on the way the company's money may be kept by the directors. It also
does not in terms mention interest or profits. In my opinion, the word
"invest" used therein is not necessarily to be read with any
restricted meaning. It is capable of being read, as stated in Wharton, viz., to
lay out money. It is one of the meanings given in
Murray also. Under the circumstances, to quote the words of Lord Simon it is
wrong to call one meaning as legitimate and another illegitimate. I have already pointed
out that although this is a document which may be assumed to be prepared by
lawyers it has to be referred to and used by businessmen who will have occasion
to deal with the company. If the words are deliberately used in a general way,
a. businessman will be entitled to assume that there was no limitation to the
meaning of that word and would be entitled to act on that assumption. As
pointed out in Palmer that is a legitimate use which a businessman may make of
the memorandum, and if that is a. reasonably proper view to take, it is
improper for the Court when reviewing the transaction already effected by a
company to hold that it has a restricted meaning, which it does not necessarily
import. In my opinion in the context in which it is used the word
"invest" is wide enought to cover the transaction impugned in this
case. The directors have stated that their only idea was to keep the money of
the company safe. I do not think that the word "invest" necessarily
means "conversion of money into something which must yield a return".
That would permit a company to buy shares of a worthless company which has
never paid any dividend and which has no prospect of paying one, in preference
to converting the money into something which is considered certain to
appreciate in capital value in any event. The illustration given in Murray's
Dictionary in my opinion very appropriately shows the meaning to be attached to
the word "invest". "Money" as ordinarily understood would
be currency notes or coins. If deposited in a bank in a current or fixed
deposit account, in law, the transaction would be a loan. It still remains
money, i.e., the value is not likely to fluctuate When it is returned, it is
again similar currency notes or coins of the same value. The illustration shows
that "invest" means the loss of the fluid character of money by the
substituted thing possessing a fixity or durable character, while it lasts.
Form that point of view conversion of money into Government Promissory Notes,
treasury bonds, shares, or immoveable property will be investment, because the
converted thing ceases to be money which can pass from hand to hand without
changing its value. The value thereof must very according to the law of supply
and demand. It has ceased to be fluid and has acquired a fixed or durable
nature, while it retains the character of such property. The expressions investment
in land, or investment in jewellery are common in India. If that is the correct
view, the purchase of bullion is equally covered in the same way, and so long
as gold and/or silver remain as such, they have a value in terms of money which is varying. When sold it will again acquire the
character of money. Till it remains in the shape of bullion it is invested. On
these grounds, therefore, in my opinion, the transaction under the
circumstances is covered by clause (3)(h)(7). There appears some force in the
plaintiff's contention that, having regard to the admission of the defendants
in their written statement, the consideration that bullion was purchased with a
view to make a profit must be excluded. If, however, the purchase was made to
prevent depreciation it may be considered as made to prevent loss of capital.
Even if a different view is taken, the defendants can rely
on the other sub-clauses of clause 3, and in particular on sub-clause (g). It
permits the company to 'acquire and deal' with……. "(3) plant, machinery,
personal estate and effects." The preceding sub-clause (2) permits the
acquisition of and dealing with lands, buildings, etc. These two sub-clauses
give power to the company to acquire all property, because they cover all kinds
of moveable and immoveable property. The last sub-clause of clause (g) deals
with shares and stocks of particular companies only. It was argued that this
clause does not permit a purchase and sale, and clause 3(c) deals with that
case. That clause provides "to buy, sell, prepare for market and deal in
coal, timber, live stock, meat….." In my opinion, clause (c) is not
applicable in this particular case. If it was contended that the company wanted
"to deal in" bullion, this clause may have to be considered. The
words "deal in" suggest a repetition of transactions and not a stray
transaction. In this case the defendants do not contend that the company has
thought of doing business in bullion and therefore that contingency need not be
considered. An individual stray transaction of acquisition is covered by
sub-clause (g) and the words personal estate and effects, in my opinion, are
wide enough to cover bullion. It is well-known that in the personal effects of
a man dying in India gold and/or silver is generally found to be his personal
property and therefore gold and/or silver is legitimately included in the words
"personal estate and effects." When the suit was filed the Company
had only purchased gold and silver. It had therefore only acquired bullion at
the time. The sale was afterwards. Even if the sale was made before the suit
was filed, the words "deal with" are appropriate to cover the sale in
a particular stray transaction. I therefore think that, in any event, clause
(3)(g)(3) defeats the plaintiff's contention that the transaction in question,
effected under the circumstances of the case, was ultra vires, The appeal must
therefore fail.
It was argued on behalf of the plaintiff that in the trial
Court the learned Judge took a view which is not upheld and the defendants did
not rely on clause (3)(g)(3) in support of their contention, and therefore they
should get some relief for costs. I do not think that argument can prevail in
this case. Although the plaintiff filed this as a representative suit it is not
shown that any other shareholders support the plaintiff's contention. The
plaintiff also did not come merely for the construction of a particular clause
of the memorandum but he charged the directors with negligence and breach of
trust. If the plaintiff's intention was merely to obtain from the Court opinion
about the construction of a doubtful clause, it was open to him to file a
friendly suit, and it was not necessary for him to make such charges. By making
these charges he converted the suit into a hostile, litigation, and if he
fails, he must pay the usual penalty of failure in a litigation. The contention
that the defendants had not relied on clause (3)(g)(3) has no substance because
the plaintiff had come to Court to challenge the transaction and the defendants
were entitled to rely on any clause in the memorandum. If in the trial Court
the learned Judge rejected the plaintiff's contention on the only clause on
which he challenged the transaction, it does not mean that the defendants had
not relied on the other sub-clauses, particularly when the plaintiff himself
had quoted the whole clause in the plaint. In my opinion, therefore, the
plaintiff having failed in his contention, the appeal must be dismissed with
costs.
[1972] 42 COMP. CAS. 197 (BOM)
HIGH COURT OF
v.
British Burma Petroleum Co. Ltd.
NAIN, J.
JUNE 30, 1971
P.M.
Mukhi, M.P. Laud, S.J. Sorabjee and V.R. Chatrapati for the Petitioners.
Porus
A. Mehta, M.R. Parpia and R.J. Bhatt for the Respondents.
ORDER
Nain,
J.—This is a
petition by three of the shareholders of the British Burma Petroleum Co. Ltd.
(hereinafter referred to as “the company”) for winding up the company. There
three shareholders hold between them about 14shares of the company of the fa
value of about Rs. 300. They are however supported by 210 other shareholders
who hold shares of the value of over one lakh of rupees. The petition is
opposed by the company and 1,682 shareholders holding shares of the value of
about 30 lakhs of rupees. The petition has come up before me for admission, but
has been argued in great detail and as if it were fixed for final hearing.
Most
of the facts relevant to this petition are not in controversy and may be
briefly stated. The company was incorporated in England on 31 August, 1910. It
has a place of business and its head office in Bombay. Its authorised capital
is 200 lakhs shares of the nominal value of 1 s. 6 d. each. Its issued and paid
up capital is 37,50,000 shares, and 95 per cent, its shareholders are in India.
The
main and dominant object for which the company appears to have been started is
set out in clause 3(1) of its memorandum and is prospecting for, refining,
production of and dealing in petroleum and other mineral oils and in particular
to acquire three existing Indian companies carrying on that business in Burma,
viz., Aungaban Oil Co. Ltd., Rangoon Refinery Co. Ltd. and Rangoon Oil Co. Ltd.
There were prior to 8th December, 19, in the memorandum other object clauses
some of which were ancillary to the main object, some were powers to enable the
company to achieve the main object, many were such as would in any case be
implied and some were inflated objects which it has become customary for
draftsmen to insert, which were never needed by the company. Draftsmen resort
to this device to avoid the cumbersome procedure of subsequently amending the
object clauses. I shall consider some of the object clauses a little later.
There was no clause
providing that the various clauses were to be construed as independent main
object clauses or that the construction would not be limited by the name of the
company. I shall for the sake of brevity refer to such clauses as “independent
construction clause”.
The
company carried on the business of prospecting for, refining, producing and
dealing in petroleum and other mineral oils in Burma from its inception in 1910
to 1942. In the beginning of March, 1942, the British pulled out of Burma and
the Japanese occupied it. Before pulling out the British army blew up and
destroyed the installations of the company as a part of its scorched earth
policy. The company claimed compensation for the loss from the British
Government. The legal proceedings for recovery of compensation ended up before
the Judicial Committee of the House of Lords, the company succeeding.
Thereafter, the British Parliament passed the War Damage Act, 1965, abolishing
the right to compensation. This put an end to all the hopes of the company of
getting any compensation for the destruction of its property in Burma. Between
1942 and 1965 the company carried on no business. It only devoted itself to the
efforts for recovering compensation.
The
fourth annual general meeting of the company was held at Bombay on 13th
December, 1965, whereat the directors stated that the company carried on no
business, it held no assets other than its capital resources and there was no
hope of recovery of compensation. They proposed that the company be voluntarily
wound up. At this time one Jagdish J. Kapadia was a director of the company
holding about 100 shares. He appears to have collected a number of proxies. It
was therefore not possible to pass a special resolution for winding up with the
requisite majority. The chairman therefore adjourned the general meeting.
By
the end of March, 1966, the company had cash assets of about R. 70 lakhs mostly
invested in fed deposits with Indian companies. After 13 December, 19, Jagdish
J. Kapadia and his associates started acquiring more shares of the company. On
5th April, 1966, the then directors of the company except the said Jagdish
Kapadia resigned and, in their place, B.L. Kapadia, T.L. Shah and M.C. Kapadia
were appointed as directors under article 106 of the articles of association of
the company. On that day, the newly appointed directors did not hold
qualification shares, viz., 2,500 shares each. They did not acquire the
qualification shares within two months from the date of their appointment.
They, however, acquired the qualification shares after the said period of two
months. They however continued to function as directors and appeared to have
got themselves re-elected from time to time not as newly proposed directors
after a proper notice that they would be so proposed, but without any notice as
if they were validly elected directors who had retired and were eligible for
re-election. The appointment of these three
newly elected directors has been challenged by the petitioners in this petition
as well as in Suit No. 862 of 19, which is pending in this court.
The petitioners allege that
after taking control of the company on 5th April, 1966, Jagdish Kapadia, B.L.
Kapadia, T.L. Shah and M.C. Kapadia began to utilise the funds of the company
for granting badli loans to shareholders of various other companies against the
pledge of shares and in purchase of shares of other limited companies. It is
alleged that they made these investments not only with the funds of the company
but also by borrowing about Rs. 10 lakhs. With the funds of the company these
directors have acquired the shares of National Rayon Corporation Ltd. and
Killick Industries Ltd. and have acquired the control of these two companies.
The Killick Industries Ltd., in turn, were the managing agents of about 7 other
companies and had 7 more companies as subsidiaries. The petitioners allege that
Jagdish Kapadia and his group have acquired the control of these companies by
means of ultra vires business carried on by the company. It is alleged that
this has been done for self-aggrandizement and to gain personal advantage for
Jagdish Kapadia and his group. I may perhaps mention that the facts contained
in these allegations are not denied. It is only the contentions based on the
facts, which are in controversy. The petitioners also allege that Jagdish
Kapadia and his group have “bled the company by taking excessive fees,
remuneration and administrative expenses and dissipated its funds”.
On 22nd May, 1970, the
petitioners filed the present petition for winding up mainly on the following
two grounds (a) that the company has ceased to carry on business and (b) that
it is just and equitable that the company should be wound up, as its substratum
is gone and there is no practical possibility of the company carrying on
business under the main or dominant object for which it was formed.
This petition came up for
admisson before my brother, Vimadalal J., on 12th October, 1970,and was heard
on 13th, 14th and 15th October, 1970. The company then applied for adjournment
of the peition for two months on the ground that the shareholders desired to
call an extraordinary general meeting to consider and, if necessary, to amend
the objects clauses. The adjournment was refused. The company appealed against
the said order. The said appeal was allowed by consent. Thereafter, at the
extraordinary general meeting of the company on 8th December, 1970, a special
resolution was passed altering the memorandum of association of the company by
deleting the dominant and main objects clauses and introducing a number of
other objects clauses which would enable the company not only to carry on the
prospecting for, producing, refining and dealing in petroleum but also to carry
on other manufacturing businesses and the business of import and export and
dealing in shares. The company also introduced the usual “independent
construction clause” and provided that the several objects clauses shall be
deemed to be substantive and independent main objects clauses and that their
construction will not be restricted by the name of the company. We shall
consider the effect of these alterations a little later. It must, however, be
mentioned that the company being a British company under section 5 of the
English Companies Act, 1948, the resolution of alteration was not required to be
confirmed by court and came into effect without such confirmation. Thereafter,
on 30th November, 1970, some of the shareholders of the company other than the
petitioners filed a suit in this court being Suit No. 862 of 1970, inter alia,
for declarations: (a) that the alteration of memorandum of association at the
meeting of 8th December, 1970, was void, and (b) that Jagdish Kapadia, M.C.
Kapadia, B.L. Kapadia and S.N. Kapadia were not validly elected directors. The
plaintiffs also sought the necessary injunctions in the suit. . The said suit
is pending.
I shall first deal with a
preliminary objection as to the jurisdiction of this court taken by the
company. The company contends that it is a foreign company registered in the
United Kingdom and has its office in London and, therefore, this court has no
jurisdiction to entertain the petition. Under section 2(7) of the Companies
Act, 1956 (hereinafter referred to as “the Companies Act”), a “body corporate”
or a “corporation” includes a company incorporated outside India. The company
is, therefore, undoubtedly a “body corporate” and a “corporation”. Part X of
the Companies Act pertains to winding-up of unregistered companies. Section 582
of the Companies Act provides that, for the purposes of Part X, the expression
“unregistered company” shall not include a company registered under the
existing or previous Indian law but shall include any other association or
company consisting of more than 7 members at the time when a petition for
winding up is presented. The company not being registered under Indian law and
undoubtedly being an association of persons consisting of more than 7 members
falls within the meaning of “unregistered company” in section 582. Section 583
contains provision for winding up of unregistered companies. Section 584
provides that where a body corporate incorporated outside India which has been
carrying on business in India ceases to carry on business in India, it may be
wound up as an unregistered company under Part X. The company is a body corporate
incorporated outside India. Even prior to 1942 it had a place of business and
its head office in Bombay. It has therefore been carrying on business in Bombay
and has ceased to carry on its business in India. It does not matter that the
oil installations of the company were in Burma, nonetheless it was carrying on
business in India. It is, therefore, liable to be wound up as an unregistered
company under the provisions of section 583. I
find no substance in the contention that this court has no jurisdiction to wind
up the. company. I reject the said contention.
Now, I come to the
principal contention of the petitioners that the company has ceased to carry on
business and is therefore liable to be wound up under the provisions of section
583(4)(a) of the Companies Act. From its inception in 1910 to 1942 the company
carried on the business of prospecting for, producing, refining and dealing in
petroleum and other mineral oils. In 1942 due to exigencies of war and
destruction of the company’s properties in Burma that business came to an end.
From 1942 to 1965 the company carried on no business. It was engaged in
litigation and other efforts for recovery of compensation for destruction of
its property. This was a necessary and useful activity and would have been a
good ground for not winding up the company during that period. But, in my
opinion, this was not a business falling within the objects clauses of the
company. It can, therefore, be said that from 1942 to 1965 the company did not
carry on any business. After 1965 up to 1967 the company admittedly carried on
badli business of advancing money on security of shares of other companies.
From 1967 to 1970 the company has invested its capital principally in the
shares of National Rayon Corporation Ltd. and Killick Industries Ltd. We have
to consider whether badli business and the business of investing in shares of
other companies was intra vires the company or ultra vires the company If the
said business was intra vires, it cannot be said that the company has ceased to
carry on business. If on the other hand the said business was ultra vires, it
was not business within the meaning of the objects clauses in the memorandum of
the company and it will mean that the company had not carried on business
during that period and perhaps what is worse that it had carried on ultra vires
business. This requires construction of the objects clauses of the company.
As I have stated
hereinabove, the first objects clause of the company as it stood prior to 8th
December, 1970, was to prospect for, refine, produce and deal in petroleum and
other mineral oils and for this it owned the undertakings of three companies in
Burma mentioned in its first objects clause. The name of the company itself
suggests that it was formed for carrying on petroleum business. From 1910 to
1942 the company carried on no other business than that provided for in its
first objects clause. The memorandum of the company did not contain the usual
“independent construction clause” providing that each objects clause was to be
construed as the main or dominant objects clause and was not to be restricted
by the name of the company. For all these reasons I have no hesitation in
coming to the conclusion that the main and dominant object of the company was contained in its first
sub-clause and was that of prospecting for, refining, producing and dealing in
petroleum and other mineral oils. On behalf of the company reliance has been
placed on sub-clauses (3), (5), (6), (12), (14), (19) and (22) of clause 3.
Clause 3 permits a variety of businesses including the business of running
railways and other transport, construction business, engineering, foundries,
running hotels, breweries, churches, chapels. This clause would permit the
company to “fly balloons from the earth to the moon” as the cynical English
judge remarked in the Crown Bank case,
referred to later. Clause 5 permits the company to carry on any trade, business
or manufacture. Clause 6 permits the company to manufacture all kinds of
articles, but this is qualified by the provision that the articles must be
required for the purposes of the business of the company which would, in my
opinion, be the business specified in the first sub-clause. Clause 12 gives
power to the company to lend money on shares or otherwise, but this sub-clause
is also qualified by the condition that it must be directly or indirectly for
furtherance of the objects of the company. Clause 14 also permits investments
in shares but is qualified by the condition that it must be for carrying out
the objects of the company. Clause 19 permits investment of moneys of the
company not immediately required for its general purposes. This contemplates
the existence of its principal business and obviously a power for investment of
surplus funds and not an objects clause enabling the company to invest its
entire funds in other companies with a view to control them. Clause 22 is an
ancillary clause providing for doing all things incidental to the objects of
the company.
In
order to avoid the cumbersome procedure for subsequent alteration of the
objects of companies, it has become customary for companies to inflate the
objects clause by adding to their principal objects a large number of objects many
of which would in any case be implied and many of which are never needed by the
company. Added to this catalogue of possible or conceivable objects is normally
a sub-clause which provides that each of the objects specified in the clause
would be regarded as independent objects, and shall not be limited or
restricted either by reference to any other objects clause or the name of the
company. Such an independent clause does not, however, exist in the memorandum
of the company. The practice of inserting inflated objects has been criticised
by the House of Lords in the case of Cotman v. Brougham.
However, as in that case there was an independent construction clause their Lordships
held that effect would have to be given to it and the independent construction
clause excluded the “main objects” rule of construction. The “main objects”
rule of construction is a special rule of construction and is applied where the
objects of a company are expressed in a series of paragraphs and one paragraph,
commonly the first, appears to embody the main
or dominant object of the company. In such a case, all the other paragraphs are
to be treated as merely ancillary to the main object and as limited and
controlled thereby.
The “main objects” rule was
expressed by Lindley L. J. in In re German Date Coffee Company as
follows:
“In
construing........any........memorandum of association in which there are general words, care must be taken to construe
those general words so as not to make them a
trap for unwary people. General words........must be taken in connection with what are shewn by the context
to be the dominant or main objects (of the company). It will not do under
general words to turn a company for manufacturing one thing into a company for
importing something else, however general the words are.”
In the above case the
memorandum of association of the company stated that it was formed for working
a German patent which had been or would be granted for manufacturing coffee
from dates, and also for obtaining other patents for improvements and
extensions of the said inventions or any modifications thereof or incidental
thereto, and to acquire or purchase any other inventions for similar purposes,
and to import and export all descriptions of produce for the purpose of food,
and to acquire or lease buildings either in connection with the abovementioned
purposes or otherwise, for the purposes of the company. The intended German
patent was never granted, but the Company purchased a Swedish patent, and also
established works in Hamburg, where they made and sold coffee made from dates
without a patent. Many of the shareholders withdrew from the company on
ascertaining that the German patent could not be obtained, but the large
majority of those who remained desired to continue the company which was in
solvent circumstances. It was held that the substratum of the company had
failed and it was impossible to carry out the objects for which it was formed
and therefore that it was just and equitable that the company should be wound
up although the petition was presented within a year of its incorporation.
In In re Haven Gold Mining
Company
the company was established for working a gold mine in
In In re Crown Bank the
company was registered under the name of Mid-Northsamptonshire Bank Ltd. In
addition to wide and general objects, the memorandum of association stated
particularly numerous objects of diverse character in fifteen paragraphs. The
first three paragraphs related to, banking, discounting, and money-lending and
borrowing, respectively others referred to purchasing and developing land,
investing and dealing in shares and securities, and promoting companies. The
company commenced business as a country bank in Northamptonshire, with an
office in London. After a short time its name was changed to the Crown Bank
Ltd. It gave up its country offices, ceased to do banking business, and carried
on in London, in addition to some land speculation, business of investing in
shares and securities. On a petition by a shareholder to wind up the company on
the ground that its main objects had failed, it was held that the name of a
company is important in construing the objects defined in the memorandum of
association and that the company was not carrying on business authorised by the
memorandum of association and it was just and equitable that it should be wound
up.
The “main objects” rule of
construction has been followed in India in numerous cases where independent
construction clause has not appeared in the memorandum. In this state of law, I
have no hesitation in holding that the main and dominant object of the company
as ascertained from its name, the first objects clause, the business actually
done by the company from 1910 to 1942 was to prospect for, refine, produce and
deal in petroleum and mineral oils. I am further of the view that badli
business of advancing money on shares carried on by the company from 1965 to
1967 and the business of investing money in shares of National Rayon
Corporation Ltd. and Killick Industries Ltd. was ultra vires the objects of the
company. It was, therefore, no business at all. What the company did was
perhaps worse than ceasing to carry on business.
On behalf of the company,
my attention was invited to the case of In re Kitson and Co. Ltd. In
this case the main and paramount object of the company was to carry on an
engineering business of a general nature. It had disposed of one engineering
business and before and order on winding-up petition could be made, it had
shown the intention of carrying on another engineering business. The court
refused to make a winding-up order. In my opinion, this case has no
application. The company has not shown that it has acquired other oil
installations with which it could continue the business for which the company
was started.
Another
case cited was In re Taldua Rubber Co. Ltd In
that case the court found that the paramount object of the company was to carry
on the business of rubber estates and that it was not limited to the business
of carrying on the particular estate. The memorandum also contained the
independent construction clause. The company had disposed of a particular
estate and showed an intention to carry on business by acquiring another
estate. Although the company had no concrete scheme before the court for
dealing with the proceeds of the sale of the first estate, the court refused to
make a winding-up order. In the case of In re Eastern Telegraph Co. Ltd the
company was formed for acquiring the undertakings of telegraph lines. In 1929
its telegraph lines were acquired by a Government owned corporation. The
company, however, had power to and had thereafter continued to carry on one of
the main forms of the business authorised by its memorandum. Although not
operating a telegraph or cable business itself, it had participated through the
medium of its shareholding, in the proceeds of operation of the business
carried on by another similar company, the court refused to make a winding-up
order. In my opinion, none of the above three cases has any application to the
facts of the present case. The present case is governed by the decisions in In
re German Date Coffee Co., In
re Haven Gold Mining Co and
In re Crown Bank.
Now,
I come to the alteration of the objects clause on 8th December, 1970, during
the pendency of this petition. This enables the company to carry on a variety
of businesses and also introduces the independent construction clause. This
petition was partly argued before the vacation in April last. The arguments
have been continued on the reopening of courts in June. The company has filed
an affidavit stating that during the vacation it has entered into three
transactions for purchases or sales of mineral oils. I am not at all impressed
with the bona fides of the new business and propose to ignore the same for the
purpose of this petition. Apart from the new business purporting to have been
done under the altered clause, the alteration of the object clauses in the memorandum
was itself effected during the pendency of this petition and its validity is
under challenge in a pending suit.
In
In
It
would, therefore, appear that this rule of construction based on independent
construction clause is not free from doubt. I must also mention that this
alteration is being challenged as invalid in Suit No. 862 of 1970. Such a suit
is maintainable under the very provisions of section 5(9) of the English
Companies Act, 1948. I do not think, therefore, that because of the subsequent
alteration this petition should be summarily dismissed without further inquiry
at the regular hearing.
Now,
I come to the allegation that the directors of the company are not properly
appointed. This contention is the subject-matter of Suit No. 862 of 1970 in
which a declaration to that effect is sought. There being other remedies
available to the petitioners I would not wind up the company on this ground
alone. However, as I have come to the conclusion that the business carried on
by the company between 1965 and 1970 is ultra vires its memorandum, the fact
that such business is carried on by directors improperly appointed becomes relevant
for the purpose of coming to the conclusion
whether it is just and equitable that the company should be wound up apart from
the fact that its substratum is gone. The three directors other than Jagdish
Kapadia were appointed on 5th April, 1966. At the date of appointment they
admittedly did not ‘have qualification shares nor did they acquire such
qualification within two months. In my opinion, their offices fell vacant on
5th June, 1966. Thereafter, these three persons functioned without being validly
appointed director. The qualification of directors is prescribed by article 88.
It is the owning of 2,500 shares of the company. Article 89 provides that the
office of a director shall be vacated if a director does not obtain his
qualification within two months after his appointment. It is alleged by the
petitioners that in the register of directors, the directors falsely showed
that they held qualification shares. This allegation is not denied. Article 105
provides that no person other than a director retiring at the meeting shall,
unless recommended by the directors for election, be eligible for the office of
a director at any general meeting unless not less than seven nor more than
forty-two clear days before the day appointed for the meeting, a notice in
writing is given by a qualified member of his intention to propose such person.
This previous notice does not apply to a retiring director who is eligible for
re-election. It appears that at all subsequent general meetings, the three
directors other than Jagdish Kapadia have been elected without any notice given
under article 105 on the footing that at the date of the general meeting, they
were retiring directors. In view of the fact that I have come to the conclusion
that these persons ceased to be directors on 5th June, 1966, and were not
directors at any subsequent general meeting, they were, in my opinion, not
retiring directors and were not entitled to be elected without a previous
notice in writing prescribed by article 105. Prima facie it appears to me that
directors other than Jagdish Kapadia were invalidly elected from time to time.
The only validly elected director was Jagdish Kapadia and he alone could not
function as the board of directors. It would, therefore, appear that he could
function only under article 111 for the purpose of summoning general meetings
of the company, but not for any other purpose. His acts other than those of
calling general meeting would therefore be invalid. This may affect the
question of the validity of the resolution altering the memorandum on 8th
December, 1970. This will have to be considered at the hearing of the petition.
During the hearing of the
petition, the shareholders supporting the company offered to purchase the
shares of the petitioners either at the rate of Rs. 3 per share or at the rate
of their own purchase or at the rate of break-up value of shares to be fixed by
any chartered accountant appointed by the court. They also offered to purchase
the shares of other dissentient shareholders at the rate of break-up value of
the shares to be fixed by any chartered accountant appointed by the court. The
petitioners and their supporters in turn offered to buy at these prices the
shares of the present directors and the shareholders supporting them. It is
true that the shareholders supporting the petitioners are very few and that the
majority of the shareholders support the company. The offers and counter-offers
were made to show that the other party was not acting bona fide Reference was
made on behalf of the company to the cases of George v. Athimattam Rubber Co. Ltd and
A.P. Pothen v. Hindustan Trading Corporation Ltd. and
it was argued that the petition was mala fide
because if the petitioners were interested in retrieving their money and not
wrecking the company, they could sell their shares at fair rate and get out. I
am, however, not impressed by the fact that the petitioners are minority
shareholders. If the business carried on by the company is ultra vires its
memorandum and the said business is carried on by meddlers who are not validly
elected directors, the petitioners, though in minority, are entitled to say that
they would have the company wound up. In In re Haven Gold Mining Co.’s case the
winding-up order was made at the instance of the minority shareholders.
During his arguments, Mr.
Parpia, on behalf of the shareholders supporting the company, applied for
adjournment of the petition to enable his clients to put the offer of his
clients to buy up the minority before a general meeting to be convened for the
purpose. I refused this adjournment. The application was made at a late stage.
Besides, after the petition is admitted and advertised, all the shareholders
would be before the court. It will be open to them to consider the offer at the
final hearing.
The petitioners alleged
that the acquisition of shares of National Rayon Corporation Ltd. and/or
Killick Industries Ltd. by Kapadia group is for ulterior purposes. In my
opinion, an act of a company within the scope of powers expressed in its
memorandum is not ultra vires, because its directors had a foreign purpose in
mind when on the company’s behalf they performed the act in question. This has
been held in Charterbridge Corporation v. Lloyds Bank Ltd. In
view of the fact that I have taken the view that the business carried on by the
company from 1965 to 1970 was ultra vires, the question of ulterior purpose in
carrying on such business is also a matter that will have to be inquired into
at the final hearing of the petition.
It appears to me prima
facie that the company has ceased to carry on business, its substratum is gone,
it has carried on ultra vires business and that the said business has been
carried on by meddlers and that it will be just and equitable that the company
should be wound up. These are, however, prima facie views. I do not think that
this is a petition which should be summarily dismissed without further inquiry into the
allegations. It must be admitted. I am prima facie satisfied that the matter is
fit to be inquired into. At the stage of admission normally only contentions of
a preliminary nature ought to be considered. I have, however, heard the matter
for several days and come to the above conclusion.
On
behalf of the company it was contended that the admission and advertisement
will affect the business of the company. Apart from the alleged 3 transactions
in oil entered into by the company a few days back, which do not appear to be
bona fide, the company carries on no business. Its capital is invested in
shares of National Rayon Corporation Ltd. and Killick Industries Ltd. which are
both controlled by the company. There will, therefore, be no adverse effect on
any business of the company.
In
the result, I admit the petition. The company will pay to the petitioners the
costs of the petition up to the stage of admission. Counsel certified. The
petition will be advertised in the Maharashtra Government Gazette, The Times of
India and The Maharashtra Times. The petition will not be advertised for a
period of one week from today. The petition shall be heard on 2nd August, 1971.
[1961] 31 COMP. CAS. 38 (QB)
v.
Green
SALMON, J.
JULY 19, 20, 1960
SALMON, J. - The
plaintiff company in this action claims damages for conspiracy and breach of
contract against the defendants. It appears from statement of claim that in the
spring of 1959 the company engaged the first defendant, who is an architect,
and the second defendants, a firm of estate agents , to assist the company upon
certain agreed terms to obtain from the Merton and Morden Urban District
Council the building lease of a valuable site in a key position in the Morden
Shopping Centre. The statement of claim alleges, in effect, that thereafter the
defendants, with intent to defraud the company, conspired together to assist a
competitor of the company to obtain the building lease to which I have
referred. The company alleges that, by reason of the defendants’ conspiracy and
breach, of contract, the building lease went to a competitor of the company,
and the company the building lease went to a competitor of the company , and
the company lost the large profit which it would otherwise have made out of the
development of the site in question.
The
defendants, by their amended defence, deny the alleged conspiracy and breach of
contract, but also take the point that the acquisition of the building lease
which I have mentioned would have been ultra vires the plaintiff company . It
has been ordered that this point shall be tried as a preliminary issue, and it
is that issue which I not have to decide.
The defendants
rely on what is sometimes referred to as the “ main objects” rules of
construction, namely, that where a memorandum of association expresses the
objects of the company in a series of paragraphs, and one paragraph, or the
first two or three paragraphs, appear to embody the “ main object” of the
company, all the other paragraphs are treated as merely ancillary to this “
main object.” and as limited or controlled thereby. The principal purpose of
this rule is for the protection of shareholders, so that they may know how the
money they invest is to be used. The defendants as champions of this rule have
cast themselves in a novel and perhaps not overwhelmingly attractive role. They
say, in effect, “ Even if we have caused the plaintiff company, and accordingly
their shareholders, serious damage by conspiracy to defraud them, yet we can
escape all liability by reason of this very rule designed for the protection of
the shareholders.” Nevertheless, whatever the merits may be, if the “ main
objects” rule does in law apply in this case, then the piece of business in
respect of which the plaintiff company purported to engage the defendants was
ultra vires the company, and the defendants would in law clearly be entitled to
succeed in the action.
The objects
for which the plaintiff company was established are to be found in clause 3 of
its memorandum of association . The following are the opening words of the
clause : “ The object for which the company is established are : “ the are set
out a number of paragraphs from (A) to (S). Paragraphs (A) and (B) of this
clause make it plain that the company’s main object was to act as exporters and
importers of a wide variety of goods. It is plain that the business of property
development per se cannot be regarded as ancillary to this “ main object.”
Accordingly, the paragraphs of clause 3 relied on by Mr. Settle as being wide
enough, if looked at alone , to empower the company to engage in the business
of property development, cannot so empower the company if the “main objects”
rule is to be applied to them , that is to say, if these paragraphs are merely
ancillary to , and limited by, paragraphs (A) and (B) . Mr. Settle , however ,
relies on the concluding words of clause 3 as excluding the application of the
“main objects “ rule . I will read those words : “ the intention is that the
objects specified in any paragraphs of this clause shall, except where
otherwise otherwise expressed in such paragraphs be in nowise limited or
restricted by reference to or inference form the terms of any other paragraph
of the name of the company.”
Mr. Folks , on
the other hand, contends that in Stephens v. Mysore Reefs (Kangundy) Mining Co.
Ltd. [1902] 1 Ch. 745; 18 T.L.R. 327 Swinfen Eady J. considered this very form
of words , and held that it did not exclude the “main objects” rule. Mr. Settle
replies that Stephen’s case (supra) must be regarded as overruled by the
decision of the House of Lords in Cotman v. Brougham but that, even if he is
wrong as in this, the Stephens v. Mysore Reefs case ought not to be followed.
If Mr. Settle suggests , Swinfen Eady, J. decided the Stephen’s case (supra) on
the basis that no clause could effectively enact that each paragraphs of the
object clause was to be read in insulation , then clearly Cotman v. Brougham
overrules this decision . If on the other hand, he was merely construing the
words before him, Coman v. Brougham leaves his decision standing.
The textbooks
support the argument that argument that Stephens v. Mysore Reefs (kangundy)
Mining Co. Ltd., is no longer law ; see, for example, Palimer’s Company Law ,
16th ed. (1938) , p. 59 [20th ed. (1959), p. 89 ] , and Halsbury’s Laws of
England , 3rd ed., vol. 6 (1954), p. 414 [note (k)]. I must confess that In
find it difficult to ascertain precisely the basis on which Swinfen Eady J. did
decide the Stephens v. Mysore Reefs case. I incline to the view that he was
merely deciding that the form of words before him (which is precisely the same
as that before me ) was not apt to exclude the “main objects” rule. I doubt
whether he intended to convey that no form of words could exclude the rule. If
this be so, Cotman v. Brougham leaves the decisions untouched, since the House
of Lords was considering a different from of words, which I will read. The
words before the House of Lords read as follows : “ ‘ the objects set froth in
any sub-clause of this clause shall not , except when the context expressly so
requires , be in any wise limited or restricted by reference to or infernos
from the terms of any other sub-clause , or by the name of the company . None
of such sub- clause of the objects therein specified or the powers thereby
conferred shall be deemed subsidiary or auxiliary merely to the objects
mentioned in the first sub-clause of this clause, but the company shall have
full power to exercise all or any of the power conferred by any part of this
clause in any part of the world, and notwithstanding that the business ,
undertaking , property or acts proposed to be transacted, acquired , dealt with
or performed do not fall within the objects of the first sub-clause of this
clause.’“ . In that case the House of Lords held that those words were
sufficient to exclude the “main objects” rule ; whereas in the Stephens v.
Mysore Reefs case Swinfen Eady J. had
held that the words before him were not sufficient to excluded the “main
objects” rule. Had it been the intention of the House of Lords to overrule the
Stephines v. Mysore Reefs case , it is strange that it did not expressly do so.
It appears to me that the House of Lords considered it unnecessary to express
any opinion about the correctness of the decision of Swinfen Eady J., and,
accordingly , it was not referred to in any of the speeches saves that of the
Lord Parker of Waddingtion who, expressed no concluded view upon it.
If the words
in this case and in the Stephens v. Mysore Reefs case do not mean that each
paragraph of the objects clause is to be read in isolation , and is not to be
limited or restricted by any other paragraphs, I do not know what they do mean.
Nor is nay other meaning suggested by Swinfen Eady. J. Any decision of this
judge, of course carries the greatest weight, and he speaks with especial authority
on this branch of the law. Nevertheless, for the last 42 years , his decision
in Stephens v. Mysore Reefs (Kangundy) Mining Co. Ltd. has been generally
regard as no longer law. Even if that case is not overruled by the House of
Lords in Cotman v. Brougham. I do not think I should regard it as preventing me
from giving effect to what , in my view, is the plain in Cotman v.
Brougham was merely an amplification of
the form of words used here and in the Stephens v. Mysore Reefs case. I hold
that these words do exclude the “main objects “ rule.
The principal
arguments has centered round the points with which I have already health. Mr.
Folk has, however, also argued , with his usual skill, that , even if the “main
objects” rule is excluded , yet no paragraph in clause 3 in sufficiently wide
to empower the company to carry on the business of property development . Mr.
Settle relies princely on paragraph (E,) the material words of which read as
follows : “ To ....... acquire any concession, contract, writes, and to perform
and fulfil the terms and conditions thereof, and to carry the same into effect,
operate there under, develop and turn to account, maintain and sell dispose of
and deal with the same.” In my judgment, these words are wide enough to cover
the project upon which the plaintiff company engaged the defendants.
I accordingly
hold that this project was not ultra vires the company, and I decide the issue
before me against the defendants.
Judgment
accordingly ; the costs of the issue to be the plaintiffs’ in any event
[1934] 4 COMP. CAS. 411 (LAHORE)
HIGH COURT OF
v.
Kanhaya Lal Gauba
DALIP SINGH AND SALE, JJ.
JULY 17, 1934
Badri Das and R.P. Khosla, for the
Appellant.
JUDGMENT
Sale, J.—The plaintiff-respondent in this case, Mr. Kanhaya Lal Gauba, is a shareholder, policyholder and director of the Bharat Insurance Company. Among other objects of the company, as stated in the memorandum of association, is the object embodied in Clause 3 (d) of the memorandum of association, the correct construction of which forms the main subject of this action. This clause runs as follows:—
"To advance money at interest on the security of land, houses, machinery and other property situated in India and to invest money not immediately required upon such securities and Bank Deposits as may be from time to time determined."
The Board of Directors of this company consists of Lala Harkishen Lal, Chairman, Mr. Shiv Dyal, Lala Duni Chand and the plaintiff-respondent himself. Mr. Gauba alleges that a considerable portion of the assets of the company in the shape of the life insurance fund are invested in the business undertakings controlled by the Chairman. He complains that several of these investments have been made by the Directors without adequate security contrary to the provisions of Clause (d) of Article 3 of the memorandum of association, and he brought this action for a declaration that the defendant company is entitled to make investments only against securities specified in this clause and not against merely personal securities of the borrower, and also for a perpetual injunction against the defendant company restraining it from granting any loans to or making any investments in certain specified concerns except on proper security and with the concurrence of a valid quorum of the Board of Directors.
The learned Subordinate Judge, who heard and decided the case ex parte against the company, granted the plaintiff the declaration prayed for, but, as regards the second relief, he granted a perpetual injunction against the Directors of the defendant company only, restraining them from infringing the provisions relating to quorum in the articles of association. From this ex parte decision the defendant company has instituted this appeal.
Before dealing with the main point in this appeal, which is the correct interpretation of Clause (d) of Article 3 of the memorandum of association, it is necessary to notice the contention urged by Mr. Badri Das at the outset that the cause of action disclosed in the plaint is not maintainable against the company and that Mr. Gauba, if dissatisfied with the proceedings of the Directors, should have raised the question before the general body of shareholders. The broad rule in such cases is no doubt that in all matters of internal management of a company, the company itself is the best judge of its affairs and the Court should not interfere. But here the main point involved is the interpretation of a certain clause in the memorandum of association relating to the application of the assets of the company. Such a question is not a matter of mere internal management. It is alleged that certain Directors whose good faith has not been questioned have misunderstood the clause in question and are in consequence acting ultra vires in their application of the funds of the company.
Under these circumstances I have no doubt that a single member of the company can maintain a suit for a declaration as to the true construction of the article in question. I would refer in this connection to the observations by Brice on Ultra Vires on pp. 714, 726 and 745 of the 3rd edition, which deal with the circumstances under which a single member can maintain an action against the company for acts alleged to be ultra vires.
As regards the proper persons to be cited as defendants, it seems that the company itself must in any case be joined. At p. 721 of Brice, para 294, the learned author observes: "There does not appear to be any case where the necessity of the corporation being a party has been expressly decided; but with respect to the first class of actions (that is to say, actions to prevent ultra vires proceedings), the question can admit of no doubt: the relief therein claimed is claimed against the corporation itself", and the learned author lays it down that the corporation itself must be a party. No doubt, there have been cases quoted on p. 721 where the absence of the corporation has been excused. In the present case, however, I am of opinion that this is essentially a case where the relief claimed in respect of the declaration must lie against the company, and I see no reason why the company could or should have been excused from being impleaded in the present action.
As regards the injunction, however, it will be noted that, while the relief claimed in the plaint is against the company, the lower Court has granted the injunction against the Directors only, who have not been made parties to the suit. On p. 744 of Brice on Ultra Vires (para 301-A), it is laid down that "among the defendants must appear personally or by representation all the parties concerned in objecting to the suit. Consequently, there must be joined in the first place, the corporation itself; secondly, the governing body, or at least those of them who are implicated in the objectionable proceedings," the reason assigned being that the later are the persons who would be affected by the decree in the first instance.
In this case it is clear that the Directors as the governing body are the persons mainly affected by the injunction, if issued, and as the Directors have not been personally impleaded it is doubtful whether the injunction in the form granted by the lower Court can be maintained. In any case it is to be noted that the plaintiff has not asked the Court to pronounce upon the validity of the past acts of the Directors. He asked only that for the future the Directors should be restrained by injunction from disregarding the provisions of the memorandum of association regarding quorum and security. Whatever the Directors may have done in the past, it is not right to assume that the Directors will not in future conduct the affairs of the company with due order and regularity and in accordance with the interpretation placed by the Court, on Clause (d) of Article 3 of the memorandum of association; and I see no reason, as regards the future conduct of the Directors in this respect, to depart from the ordinary principle that the Court will not interfere in the management of a company's internal affairs. For this reason I would accept the appeal to the extent of setting aside the order of injunction against the Directors.
Turning now to the main point urged in this appeal, the interpretation of Clause (d) of Article 3 of the memorandum of association, it is necessary in the first place to repeat that the plaintiff does not ask us to pronounce on the validity of the past actions of the Directors but to give an authoritative interpretation of Clause (d) for the future guidance of the company. The lower Court has taken the view that this article "forbids the directors to invest money and advance loans on personal securities." This finding is apparently based on the view that the words "such securities" occurring in the second portion of Clause (d) must be interpreted according to the ejusdem generis rule, to denote the same form of securities as are required for advancing money at interest under the first portion of the clause, viz., the security of "land, houses and other property situated in India." In appeal Mr. Gauba does not support the application of the ejusdem generis rule to the interpretation of the word "securities" in this connection. His contention is that the advancing of money at interest is a transaction essentially different from that of investing money. He concedes that the securities that may be required in connection with the investing of money may be of a different kind from the securities required for advancing money at interest but he urges that if the grant of a loan is to be included in the phrase "invest money" according to the alleged present interpretation of this clause, the first portion of Clause (d) would be redundant. Mr. Badri Das for the company concedes that there is a distinction between a loan and an investment and that the two portions of Clause (d) are not redundant. He urges, however, that the real distinction between the two portions of this clause is that the first part of the clause relates to long term investments while the second part of the clause is confined to short term investments. His view, therefore, is that while long term investments or advances can only be made on the security of land, houses, machinery and other property situated in India, it is open to the Directors to make short term advances under the second part of Clause (d) upon such securities as they think fit.; in other words, that there is nothing to prevent the Directors from making short term advances on personal security.
It is clear that the two portions of Clause (d) must be read independently and without qualification of each other. If the Directors intend to advance money at interest, in other words, to grant a loan, the first portion of the clause requires the security of land, houses, machinery and other property situated in India. If, however, the Directors intend to invest money in the sense ordinarily understood by men of business, they are at liberty to do so upon such securities as they think fit. I do not agree with Mr. Badri Das that the point of difference between these two clauses should be confined to the length of time for which the money is to be tied up, whether advanced on loans or otherwise invested. If that were the true construction of the clause there would be no reason for the distinction clearly drawn in the clause between advancing money at interest and investing money. As Mr. Badri Das concedes, a loan is not the same thing as an investment and I am not prepared to interpret the clause as though the two terms were interchangeable. The question must be determined by the real nature of the transaction into which the Directors propose to enter. If the intention of the Directors is to make a "temporary loan" (the expression used in p. 2 relating to one of the past transactions of the Directors) it is in my view clear that the transaction would fall under the head of advancing money at interest as mentioned in the first portion of Clause (d) and would not be an investment. Such loans can only be made on the security of land, houses, machinery and other property, situated in India. If, however, the Directors intend to invest money, e. g., in Government securities or other stock, the Directors have full liberty to decide whether the nature of the security for the investment is or is not adequate, without reference to the kind of security required for loans covered by the first portion of the clause.
I would, therefore, hold that the plaintiff is, on this interpretation, entitled to a declaration that advances of money in the nature of loans shall only be made on the security of land, houses, machinery and other property situated in India, but that, so far as the investment of money not immediately required is concerned, the Directors have complete discretion in the matter of approving the kind of security offered. To this extent I would modify the order of the lower Court as to the form of the declaration. So far as the claim for injunction is concerned I would accept the appeal and direct that the suit be dismissed. I would leave the parties to bear their own costs, throughout.
Dalip Singh, J.—I agree.
[1982] 52 COMP.
CAS. 293 (CAL)
HIGH COURT OF
v.
Shibendra Nath Mukherjee
P.
K. BANERJEE, J.
MAY
12, 1981
Dipankar Gupta, Saktinath
Mukherjee and Amit Roy for the Appellants.
Mukul Prokash Banerjee and S.K. Seal Ranadeb
Chaudhuri and B.K. Rej for other Respondents.
P.K. Banerjee, J.—In the second appeal the defendant is the appellant. The
plaintiffs along with the pro forma defendant No. 3 are the directors of M/s.
Ahmedpur Rice Mills (Private) Ltd., which is a registered company being
governed by the rules and regulations embodied in the memorandum and articles
of association and the provisions of the Companies Act, 1956. In order to face
the financial crisis of the company it was decided in a meeting of the board of
directors on 19th October, 1974, to lease out the mill for a few years which
was followed by a resolution passed by the shareholders on October 28, 1974,
authorising plaintiff No. 2, the managing director, to finalise the negotiation
of the lease with the principal defendants and that the said plaintiff No. 2
and another director of the company would sign and execute the deed consisting
of 22 terms with an affixation of the common seal of the company. It is alleged
that as per the said terms, the lease would remain in force for two years with
an option of renewal for another two years. It appears, however, according to
the plaintiffs, that due to mistakes on the part of the plaintiffs, plaintiff
No. 2 for the first time came to know that the new term, being item No. 23, had
been fraudulently and surreptitiously included by the defendants, and in
collusion with the scribe during a temporary absence of plaintiff No. 2 from
the Sub-Registry Office; in the said term, it had been provided that the lease
would be extended for another 20 years if the lessee makes improvement by
modernising the mill, the other conditions remaining the same. It is alleged
that no such modernisation of the mill was made by the defendant. Hence the
suit filed by the directors to avoid the lease.
Defendants Nos. 1 and 2
filed: written statements denying the material allegations. It is further
contended that the defendants represented about the poor financial condition of
the company due to the urgent financial necessity and an extraordinary general
meeting of the shareholders was held on October 28, 1974, and it was resolved
in the said meeting that the managing director would sign and execute the deed
of lease containing 23 clauses on behalf of the company and an attested copy of
the said resolution was made over to the defendants when there was no whisper
of the alleged meeting of October 19, 1974. The court of first instance
dismissed the suit. On an appeal, however, the suit was decreed. Hence the
second appeal by the defendants.
Before I deal with the
points raised by the parties in the second appeal it is convenient for me to
state that the alleged mistake or misrepresentation or fraudulent insertion of
term No. 23 into the deed has not been believed by both the courts and,
therefore, the finding regarding clause 23 cannot be challenged in the second
appeal.
Mr. Dipankar Gupta on
behalf of the appellant contended that the common seal of the company is not
necessary for the validity of the document. Assuming that it is required, then
according to Mr. Gupta, the affixation of the seal is directory and not
mandatory. The seal, according to him, is a method of identification of the
person concerned or the company when it is not disputed that it was registered
by the proper authority and it cannot invalidate the transaction for not
affixing the common seal. Mr. Gupta relied upon the cases reported in AIR 1930
Cal 782 (Probodh Chandra Mitra v. Road Oils (India) Ltd. and Dehra
Dun-Mussoorie Electric Tramway Co. Ltd. v. Jagmandar Das, AIR 1932 All 141 ;
[1931] 1 Comp Cas 227. Mr. Gupta further contended that the scope of the second
appeal is limited. The plea is that it was not embossed by the common seal. It
was never raised and now it cannot be raised for the first time. It is argued
by Mr. Gupta that neither s. 48 of the Companies Act nor art. 42 of the
articles of association required the seal of the company.
Mr. Gupta on behalf of the
appellant contended that the court of appeal below held that the lease is void
because the seal and the signature of the two directors were not in the deed of
lease. It is argued that the affixation of seal is not necessary. Assuming
there is no such seal, the document is still binding as it was executed on the
basis of the authorisation by the extraordinary general meeting dated October
28, 1974.
Mr. Gupta contended that
under s. 54 of the Companies Act a document or proceeding requiring
authentication by a company may be signed by a director, the manager, the secretary
or other authorised officer of the company and it need not be under its common
seal. It is argued by Mr. Gupta that s. 48 makes it clear that only in a case
where a power-of-attorney is being given to execute a deed by the company to
any person, then and then only the common seal is required and not otherwise.
Mr. Chowdhury on behalf of
the respondent contended that the affixation of the seal is a must in order to
bind the company. Under Table A, regln. 84, of the Companies Act, 1956, it has
been provided that the seal is to remain in the safe custody of the company and
shall not be affixed to any instrument except by the authority of a resolution
of the board and except in the presence of at least two directors and of the
secretary or such other person as the board may appoint for the purpose.
Mr. Gupta in reply
contended that there was an extraordinary general meeting of the shareholders
by which the managing director of the company was directed to execute the lease
and he on the basis thereof executed the lease. Therefore, in the premises, in
my opinion, Mr. Gupta is not correct. It is clear from the resolution on which
Mr. Gupta relied that the common seal must be affixed in place of two directors
as contained in art. 42 of the articles of association and one director may
sign. But the question is whether, after the board of directors is appointed in
accordance with law, the shareholders or, for that matter, the general meeting
of the shareholders has no say in the articles of association. The board of
directors once appointed or elected in accordance with the articles of
association and in accordance with the Companies Act has all the powers of the
company and can act on behalf of the company but in so acting they must follow
the articles of association. In the articles of association, art. 42 for the
purpose of signing or executing a document (to be) binding on the company, two
directors along with the common seal must sign the document, and, in my
opinion, the directors of the company are bound in executing any document in
accordance with art. 42 of the articles of association. It is argued by Mr.
Chowdhury that if the general meeting's resolution is contrary to the articles
of association, then such resolution cannot bind the director of the company.
Mr. Chowdhury relied upon
the case reported in [1948] 1 All ER 21 at 29 ; [1948] 18 Comp Cas 236, 248
(CA) (Grundt v. Great Boulder Proprietary Gold Mines Ltd.). Their Lordships of
the Court of Appeal held, inter alia, that "even a resolution of a numerical
majority at a general meeting of the company cannot impose its will upon the
directors when the articles have confided to them the control of the company's
affairs. The directors are not servants to obey directions given by the
shareholders as individuals, they are not agents appointed and bound to serve
the shareholders as their principals. They are persons who may by the
regulations be entrusted with the control of the business, and if so entrusted,
they can be dispossessed from that control only by the statutory majority which
can alter the articles. Directors are not, I think, bound to comply with the
directions even of all the corporators acting as individuals." I entirely
agree with the observation made by Cohen L.J. in the judgment at p. 29. It is to
be noted that the observation as quoted is also to be found in the case
reported in [1908] 2 KB 89, 105, 106 (CA) (Gramophone and Typewriters Ltd. v.
Stanley) and in Buckley on The Companies Acts, 11th Edn., p. 723.
It appears that the English
Companies Act of 1948, Table A, art. 113 more or less is in similar terms with
our Companies Act, 1956, Sch. I, Table A, para. 84. In his commentary on
Company Law it has been stated as follows : "If the seal is affixed
without authority, the act is not that of the corporation and the corporation
is not bound unless it be by estoppel. A document bearing a genuine impression
of the company's seal but affixed without authority is a forged
instrument." In the present case, it has already been held by the appellate
court that the seal was not there and two directors did not sign. In Palmer's
Company Law, 21st Edn., at p. 53, on which Mr. Chowdhury relied, it has been
said that the articles of association is a public document and any person who
has a dealing with a registered company must be taken to have notice of the
same. At p. 243 also, the learned author has stated that the powers of a
company are limited to those derived expressly or impliedly from its memorandum
of association. By the operation of the doctrine of constructive notice every
person dealing with the company is treated as having actual or constructive
knowledge of the contents of the memorandum. A company, it has been held by the
learned author, being an artificial person, can act only through agents. A person
dealing with the company should, therefore, in addition to examining the powers
of the company, ensure that the necessary powers have been given by the company
to its agents. The agents will normally be the directors or executive employees
of the company. At p. 244 it has been held by the learned author that while an
act which is ultra vires the company is incapable of ratification, an act which
is intra vires the company but outside the authority of the directors may be
ratified by the company in proper form. In the present case, I think, Mr.
Chowdhury rightly argued that the execution of the document by the managing
directors, without the common seal, is an ultra vires act and a subsequent
resolution cannot ratify it.
Mr. Gupta, however, relied
upon Ghosh's Company Law and argued that the document of lease is a contract
and further argued that under s. 46 of the Companies Act, on the basis of the
Division Bench judgment reported in AIR 1952 Cal 915 (Dinendro Mullick v. Union
of India) the manner of execution is only directory. Mr. Gupta relied on the
commentary of the learned author at p. 218, art. 340. It has been said that
except in special cases where a seal is required by the provisions of the Act
or the company's articles to be affixed to an instrument executed by the
company, a contract or other instrument may be executed on behalf of the
company without the seal in the manner stated. In art. 341 it has been stated
that if there is a provision for the affixation of seal in the articles of
association, it is a must. I have already stated that under art. 42 of the
articles of association the seal must be embossed in order to bind the company.
In that view of the matter, in my opinion, as the deed was executed in
violation of art. 42 of the articles of association it cannot prima facie bind
the company.
But it appears that the
suit was not filed by the company but the two directors of the company. One of
them gave his signature on the lease on their behalf and, under the articles of
association of the company, the company is a juristic person and must sue and
be sued in the name of the company. A director of the board of directors or a
managing director cannot file a suit, unless it is by the company, in order to
avoid any deed which admittedly was executed by one of the directors and
admittedly also the company accepted the rent for the whole of the period of
lease, that is, four years, but only a particular term of the lease was sought
to be challenged on the ground that the said term 23 was fraudulently inserted.
The case as made out in the plaint was not made by the company but by some of
the directors of the company and the company is not even a plaintiff. If the
company is aggrieved, it is the company which is to file the suit and not the
directors. In the present case, as I have already said, the company has not
come forward as the plaintiff to file the suit but only the two directors have
come forward to challenge the lease. As the company is a distinct legal
personality, as distinguished from its shareholders and/or directors, the
company, if aggrieved by some wrong done to the company, must sue or be sued in
the name of the company. In the case reported in [1902] AC 83 at 93 (PC)
(Burland v. Earl) it has been held that it is clear law that in order to
redress a wrong done to the company, the action should be brought by the
company. There are exceptions to the general rule. However, in this case, the
exception does not apply, more so when both the courts held as a fact that
there was no fraud. In that view, I agree with Mr. Gupta.
In the result, the suit as
framed is not maintainable and the appeal is allowed. The suit is dismissed
without costs.
The oral prayer for stay of
operation of the order is rejected.
[1951] 21 Comp Cas 326
(PUNJ.)
High Court of
v.
KApUR, J.
March 9, 1951
K.L. Gossain and A.N. Khanna for the Petitioner.
R.L. Anand and H.R. Sawhney for the Respondents.
This judgment will dispose of two Miscellaneous Applications Nos. 89 of 1951 & 98 of 1951. In the former counsel moves that Suit No. 56 of 1951 "Kirpa Ram v. Shriyans Prasad & Others" pending in the Court of Mr. Y.L. Taneja, Subordinate Judge, Delhi, be transferred to this Court and in the latter he moves that temporary injunction be issued against the defendants not to proceed with the scheme which is the subject-matter of the suit pending the decision of the suit. Rule was issued on both these applications by me.
On 2nd March, 1951, the Deputy Registrar of the Court mentioned to me that Mr. Ram Lal Anand, Advocate, had on behalf of the defendants got into touch with him and had requested that he wanted to move for the discharge of the ad interim injunction and that I should sit on Saturday and hear the case. As I had to be away from Simla I allowed the Advocate to move me at Ludhiana. After hearing arguments I did not feel inclined to discharge the injunction, but as I was informed that the matter was of great importance, as indeed it was, I fixed the hearing of the case here on the 7th during the vacation, and the case was heard on the 7th and 8th.
Kirpa Ram claiming to be a resident of Qarol Bagh, New Delhi, has brought this suit for perpetual injunction. He is living in Siliguri in Darjeeling District of West Bengal. The suit has been filed on his behalf by his duly constituted attorney Harbhagwan who also happens to be his brother. The plaintiff is the owner of 20 fully paid up preference shares of Rs. 100 each of the Bharat Bank Limited which is defendant No. 6. In the plaint it is alleged that Mr. Yodh Raj, defendant No. 8, General Manager and Chairman of the Punjab National Bank, defendant 7, had arranged to transfer "the bulk of his shares and those of his group" in the Punjab National Bank to defendant 9, Seth Ramkrishen Dalmia, for a very large sum of money, and in order to keep the transaction secret the transfer forms have not yet been sent for registration to the defendant bank. As a result of this, it is so alleged, defendant 9, Seth Ramkrishen Dalmia, really controls the Punjab National Bank also through defendant 8 who is only an ostensible owner of the shares. This is, according to the plaintiff a well-planned conspiracy between Mr. Yodh Raj, defendant 8 and Seth Ramkrishen Dalmia, defendant 9, and the object is "to hoodwink" the shareholders and depositors of defendant 7 bank, because if the true nature of the transaction is disclosed it will adversely affect defendant 7, the Punjab National Bank. It is then alleged that in order to get a better control of the Punjab National Bank and in furtherance of the conspiracy mentioned above defendant 9, Seth Ramkrishen Dalmia has "planned to get transferred to defendant 7 bank all such assets of defendant 6 bank (Bharat Bank) which are really good and more or less in a liquid form, far below their real value, together with the entire banking business of the latter, leaving with the said defendant 6 bank (Bharat Bank) only such assets as are bad and doubtful or at any rate difficult to realise."
Seth Ramkrishen Dalmia has also managed to have a convenient Board of Directors in the Bharat Bank consisting of his friends and relations, and through the instrumentality of this Board he is intending "to effectuate the fraudulent scheme above-mentioned and to get the necessary resolutions passed." They have not taken the straightforward course of resorting to Sections 153 and 153A of the Indian Companies Act and Section 44A of the Banking Companies Act, but have in order to deprive the dissenting minority of shareholders of their rights illegally, fraudulently and oppressively acted in disregard of the interests of the minority shareholders, regardless of the fiduciary position which they as directors of the Bharat Bank hold. If the said frauduleni arrangement, it is alleged, is allowed to be completed there would be a fraud on the minority of shareholders and not only will the Bharat Bank come to an end but the shareholders of the bank are "likely to lose almost their entire investments as the assets left over after the proposed fraudulent arrangement" would consist of advances to tottering concerns like Dalmia Jain & others.
In para 7 of the plaint it is stated that defendants Nos. 1 to 4 and the nominees of defendant 9 control an overwhelming majority of shares in the Bharat Bank and it is therefore not possible to challenge their "misdeeds" in the domestic forum where no relief to the plaintiff or the minority shareholders is available.
In para 8 the plaintiff alleges that defendants Nos. 1 to 5 who are the directors of the Bharat Bank have voluntarily but informally handed over the management of the Bharat Bank to the nominees of the Punjab National Bank, the object being to facilitate the effectuating of the fraud which is the arrangement sought to be entered into between the two defendant banks.
The plaintiff has prayed for a decree for a permanent injunction against all the defendants.
This suit was brought under Order I, Rule 8, Civil Procedure Code and by an application the plaintiff asked for notices to be given by advertisement in some paper having circulation throughout India. Notices were issued to the defendants for 11th April, 1951.
The plaintiff on 20th February, 1951, filed an application in the subordinate Judge's Court under Order XXXIX, Rule 2, Civil Procedure Code asking for a temporary injunction. On the 21st February the Bharat Bank and the Punjab National Bank filed their reply and in support of this reply Mr. Ramnath Goenka, M.P., a director of the Bharat Bank made an affidavit in which inter alia he said that the intended scheme of transfer of certain assets and liabilities had been communicated to the Reserve Bank of India by the Chairman of the Bharat Bank and the Reserve Bank of India had given tacit approval to the same, and that this scheme was the only means by which the interests of shareholders and depositors could be protected. On the same day an order was passed by the Subordinate Judge giving certain directions to the Bharat Bank, one of which was that the Bharat Bank was not to act upon the scheme till a week after the scheme had been received from the Reserve Bank.
On 24th February, 1951, the Bharat Bank made an application under Order XXXIX, Rule 4, Civil Procedure Code praying that the two defendant banks be allowed to give immediate effect to the scheme. It is not necessary to deal with the contents of this application at this stage.
On 27th February, 1951, I issued a rule on a petition made by the plaintiff for the transfer of the case to this Court and I also ordered the proceedings in the Subordinate Judge's Court to be stayed. On 1st March, 1951, I was again moved by the plaintiff for a temporary injunction restraining the Bharat Bank and the Punjab National Bank from acting on the proposed scheme till the matter had been finally decided by this Court. On the same day I issued an ad interim injunction, and as I have said before, the Bharat Bank moved me at Ludhiana for an early decision of the case and considering the importance of the matter as given in their application dated 3rd March, 1951, I heard the arguments on the 7th and 8th during the vacation.
In his application for transfer to this Court, the plaintiff petitioner has again stated the nature of the fraud which is being perpetrated on the shareholders and which boils down to this that Seth Ramkrishen Dalmia defendant 9 has in conspiracy with Mr. Yodh Raj defendant 8 acquired the control of defendant 7, the Punjab National Bank, by purchasing a "bulk of shares" of that bank and not getting them registered and allowing them to remain ostensibly in the name of the vendors, that by purchasing these shares Seth Ramkrishen Dalmia has got control of the affairs of the Punjab National Bank which he is exercising through his benamidar Mr. Yodh Raj defendant 8 and that the general public has been duped into believing that Seth Ramkrishen Dalmia has nothing to do with the Punjab National Bank. The petition and the affidavit in support of it then go on to say that defendant 9 Seth Ramkrishen Dalmia "with the help and active connivance of other defendants intends to effectuate a fraud on the minority of the shareholders of the Bharat Bank with intent to really wash away their investments in the said bank by rendering them of little or of no value," and this he is doing in order to benefit himself and the Punjab National Bank. In paragraph 7 it is stated that the intended scheme consists of a proposal to transfer "all goods and liquid assets of defendant 6 together with the entire business of defendant 6 on far below their real value to defendant 7, leaving with the said defendant 6 bank only such assets as are bad and doubtful or at any rate difficult to realize. The said assets, the applicant believes, are invested in the various tottering concerns of Dalmia, Jain, which defendant 9 also virtually controls."
The allegation is also made that Mr. Yodh Raj, defendant 8, has been given financial help by defendant 6, the Bharat Bank, by purchasing debentures of one of the concerns of Mr. Yodh Raj, defendant 8—it was later on disclosed to me by an affidavit that this concern is Hall & Anderson Ltd. of Calcutta. In paragraph 8 again, it is again emphasised that this arrangement is illegal, fraudulent and oppressive and is being rushed through in utter disregard of the interests of defendant 6 and particularly of its minority shareholders which would be the plaintiff and such other persons who think like him. This petition is supported by an affidavit of Harbhagwan, the attorney.
The application for transfer which was moved on 1st March, 1951, is supported by an affidavit of Shadi Lal who is a brother of Kirpa Ram. This Shadi Lal was at one time in the service of the Bharat Bank and was Personal Assistant of its Chairman. It is in dispute between the parties whether he resigned of his own accord or was made to resign but this much is clear that three months before the date of this suit he was in the employment of the Bharat Bank and is now carrying on business as a contractor somewhere in West Bangal. He was present in Court at the time of the hearing on the 7th and 8th. As a matter of fact, on the 8th he was the only person who was present on behalf of the plaintiff besides his advocate.
At this stage it may perhaps be necessary to give the history of the scheme, which is the subject-matter of dispute between the plaintiff and the defendants, and what the scheme is, and reference may now be made to an affidavit of Mr. Ramnath Goenka, M.P., a Director of the Bharat Bank, filed in this Court on 3rd March, 1951, and the many documents which were filed in the Court of the Subordinate Judge, along with the affidavit which was filed there.
(i) As a result of partition of the country in August, 1947, the Bharat Bank had to close all its branches in what is now known as Pakistan which caused considerable diminution in its business. The Award of the All India Industrial Tribunal (Bank Disputes) increased the cost of working of the bank by Rs. 35,000 a month. There was also depreciation of Government securities and all this affected the finances of the bank. On 4th January, 1951, the Chief Accountant of the Bharat Bank submitted a note to the "Chairman which inter alia showed that the loss suffered by the bank in the year 1950 was 10.41 lacs and that the estimated loss by the end of December, 1951, would be another 8.36 lacs, in addition to any further loss which may accrue by depreciation of the value of Government securities and the other business losses- The note submitted by the Chief Accountant to the Chairman is attached to the affidavit of Mr. Goenka filed in the Subordinate Judge's Court and has been marked by me as 'A'.
(ii)On getting this report the Chairman discussed this matter with his fellow directors and then had several interviews with the Governor of the Reserve Bank of India between the period 4th January, 1951, and 29th January, 1951. On 29th January, he sent a letter to the Governor of the Reserve Bank and submitted for his consideration a proposal that the Bharat Bank should transfer to the Punjab National Bank all its deposits and liabilities, current, fixed and savings, and "to cover these liabilities the Bharat Bank Limited will hand over to the Punjab National Bank all Government paper, cash, I.B.P's such advances as may be acceptable to the Punjab National Bank and such other assets as may be mutually agreed." After this the payment of the deposits will be the responsibility of the Punjab National Bank, and it will open such other branches or continue such branches of the Bharat Bank as it thinks fit and other branches and pay offices of the Bharat Bank will then be closed. This letter is also in the file of the Subordinate Judge's Court and was filed with the affidavit of Mr. Goenka, and I have marked it as 'B'.
(iii)On 2nd February, 1951, the Chairman of the Bharat Bank and the Punjab National Bank had an interview with the Governor of the Reserve Bank of India and they apprised him of the details of the proposed scheme which, the affidavit, put in before me, states was "blessed" by the Governor of the Reserve Bank of India. On 7th February, 1951, the Reserve Bank wrote to the Chairman of the Bharat Bank that he should get in contact with Mr. K.C. Mitra, Deputy Chief officer, Department of Banking Operations of the Reserve Bank of India, and he should keep him posted with all the developments in regard to this arrangement. This letter is marked 'C’ by me.
(iv)On the same day, the Chairman of the
Bharat Bank drew up a note for the benefit of his co-directors in which he
mentioned the various steps that he had taken so far. He also mentioned that
the total assets of the Bharat Bank were Rs. 12,65,96,000 which consisted of
cash, G.I. Notes, investments, loans and I.B.P's, banking properties,
stationery, safes, furniture and fittings. He went on to say that if there was
liquidation there would be a great deal of loss to the bank and the entire
staff would also be discharged. Besides, the expenses of liquidation would be
enormous. But if there was arrangement with the Punjab National Bank
stationery, safes, furniture, fittings and banking properties would be taken
over at book value, about seven hundred employees would be taken over by the
transferee bank, the Bharat Bank would not be required to keep any branches,
and the realization work would be done by the Punjab National Bank at a nominal
charge. If there was a scheme of amalgamation the value of the assets would
have to be considerably scaled down—a scheme which would not be accepted by the
shareholders—and continuation of the bank under the present circumstances would
mean heavy recurring losses, and therefore he was of the opinion that the only
"feasible proposition was to enter into an arrangement with the Punjab
National Bank." He also mentioned in this note, which I have marked 'D’
and which is on the file of the Subordinate Judge's Court that he had consulted
the Advocate-General of Bombay who had advised that it was a perfectly legal
scheme which he was proposing.
(v)The Board of the Bharat Bank gave its unanimous assent to the scheme proposed and on 16th February, 1951, Mr. Yodh Raj, Chairman of the Punjab National Bank, wrote to the Deputy Chief Officer of the Reserve Bank of India, a letter which I have marked 'E' and is attached to the file of the Subordinate Judge's Court along with the affidavit of Mr. Goenka. In this he mentioned the scheme in the following words:—
"We beg to advise that it has been mutually agreed between our bank and the Bharat Bank Limited that we assume responsibility of paying their deposits as on 19th January, 1951, in consideration whereof they will transfer to us their assets consisting of cash, Government Securities, realisable loans, etc., of equivalent value. . . As a consequence of this arrangement, the branches of the Bharat Bank Limited will be taken over by us. Most of them will be merged with our existing offices at those stations. At 45 places where they have offices we have none. In order to pay the depositors and realise their loans it will be necessary for us to carry on business at these places in our own name. At seven other places we find that the combined business of the two banks cannot be carried on by our existing offices owing to lack of space in our present premises and therefore, we wish to continue these offices as our own. . . We shall thank you to please accord your sanction to open our new offices at these places. . . It would be in the interest of the public and both the institutions concerned to effect and complete the transfer with as much speed as possible. We. therefore, request you to grant us the necessary licence at an early date."
(vi)The Deputy Chief Officer by letter dated 21st February, 1951, and marked 'F' by me, gave permission to the Punjab National Bank to open branches in various places which are mentioned in that letter and which would be necessary if the Punjab National Bank is to take over the deposits of the Bharat Bank. By a letter dated 23rd February, 1951, marked 'G' their Chairman of the Bharat Bank wrote to the Reserve Bank of India enclosing the report of their Chief Accountant and the note which the Chairman had sent to his co-directors and also a resolution of the Board of the Bharat Bank in regard to this scheme. This resolution of the Board of the Bharat Bank is marked 'H' by me. On 23rd February, 1951, by a letter marked T by me, the Reserve Bank of India wrote to the Chairman and said :—
"The Reserve Bank of India is aware of the proposed
transfer of deposit liabilities of the Bharat Bank Ltd. to the Punjab National
Bank Ltd."
In the affidavit which Mr. Ramnath Goenka has filed before me he has stated that Kirpa Ram is a brother of Shadi Lal who is an ex-employee of the Bharat Bank, that the present suit and another suit by Des Raj, an employee of the Bharat Bank, have both been instituted at the instance of the employees of the bank with the object of ruining the bank "out of sheer spite and a spirit of revenge." He has also stated that the employees of the bank have issued a most scurrilous pamphlet against the bank and as a result of that pamphlet and the institution of the present suit the depositors have begun to withdraw their deposits from the bank and a very large amount of money has already been paid off. In an affidavit filed before me on 8th March, 1951, by the Chairman of the Bharat Bank I was informed that since the filing of this suit a sum of Rs. 1,36,00,000 has been withdrawn from the bank. It was also stated in Mr. Goenka's affidavit that the suit was mala fide and that if the scheme was not put into immediate effect withdrawals will continue and the bank will have to close its doors which will cause a serious and irreparable consequence both to the creditors and the shareholders of the bank.
The chief complaint of the plaintiff is that defendant 9, Seth Ramkrishen Dalmia, has managed to get control of defendant 7, the Punjab National Bank, by means of purchasing "a bulk" of its shares from defendant 8 and his friends and has thus got control of the Pun. jab National Bank, and that by the transfer of all the good assets of the Bharat Bank to the Punjab National Bank he was benefiting himself and his friends and was causing loss to a minority of the shareholders. In order to determine whether as a matter of fact defendant 9 has purchased any shares and as a result of that some loss is going to be caused to the plaintiff in a fraudulent manner, I have got affidavits of various parties put in before me.
In two affidavits dated 5th March, 1951, both Seth Ramkrishen Dalmia and Mr. Yodh Raj have stated that Seth Dalmia has not acquired the control of the Punjab National Bank and that Mr. Yodh Raj is not an ostensible owner of shares of which the real ownership vests in Seth Ramkrishen Dalmia. The language of these affidavits was not satisfactory and therefore I asked further affidavits to be put in. On 8th March, 1951, Kamta Parshad who is a legal adviser of Seth Ramkrishen Dalmia made an affidavit in which he says in paragraph 3:—
"That neither Shri R.
Dalmia nor anybody else on his behalf holds or owns shares of the Punjab
National Bank Limited with blank transfer deeds or in any other manner
whatsoever."
Mr. Yodh Raj has put in an affidavit dated 8th March, 1951, in which he has definitely stated that he had at no time sold any shares of the Punjab National Bank to Seth Ramkrishen Dalmia, that to the best of his knowledge and information the Seth does not hold any shares in the Punjab National Bank and he has no interest directly or indirectly in that bank, and that Mr. Ramnath Goenka had lodged transfer certificates for the transfer of 250 shares of Rs. 100 each in his name and these were transferred in the form of one thousand shares of Rs. 25 each. These are more or less definite statements against the affidavit of Harbhagwan for the plaintiff who has no doubt, in his affidavit, stated that shares of the Punjab National Bank have been acquired by Seth Ramkrishen Dalmia and that Mr. Yodh Raj is only an ostensible owner, but he has not told us the source of his information. It is therefore not proved to my satisfaction that Seth Ramkrishen Dalmia has, as a matter of fact, got control of the Punjab National Bank by getting by purchase a majority of its shares transferred in his name or in the names of his friends and relations or his nominees and has lent a colour to the present arrangement which is continuing, and that Mr. Yodh Raj and the other present directors of the Punjab National Bank are mere benamidars for Seth Ramkrishen Dalmia.
The next ground for proving fraud is the allegation that the Punjab National Bank is taking over all the assets which are realisable and is leaving for the shareholders nothing but unrealisable assets and is thus depriving all the shareholders including the minority represented by the plaintiff of their rights. In the note which was sent by the Chairman of the Bharat Bank and which I have marked 'D' the total assets are about twelve crores which include cash, G.P. Notes, investments, etc. Whatever might or might not have been their intention originally, it is quite clear now from the affidavit of Shriyans Prasad, Chairman of the Bharat Bank, dated 8th March, 1951, filed in this Court that the Punjab National Bank will take over the responsibility to pay off the depositors and the creditors of the Bharat Bank in full, and the Bharat Bank will transfer to the Punjab National Bank assets of equivalent value which will consist of (1) cash, (2) G.P. Notes at their market value, (3) stationery, safes, furniture, fittings and fixtures at their book values, and (4) loans and I.B.P's also at their book value, and also it is categorically stated that the assets mentioned in Nos. (3) and (4) will not be transferred at anything less than their book value. In this affidavit it is also stated that the cash, G.P. Notes and stationery, safes, furniture and fittings to be transferred are approximately of the value of six and a half crores, and for the balance of the liabilities of the Bharat Bank, the Punjab National Bank will take over certain loans and I.B.P.'s, leaving the rest of the loans and I.B.P.'s and other assets with the Bharat Bank, some of which will be easily realisable and the rest will be realised in due time and will be available for the benefit of the shareholders. It is further stated in this affidavit that the Bharat Bank has purchased debentures of Hall & Anderson Limited in order to invest money in a concern yielding good return and that this company is not a concern of Mr. Yodh Raj. In the plaint the plaintiff set out to allege that the defendant Dalmia was transferring the assets of the bank at a value far below the actual value. This allegation is repeated in Harbhagwan's affidavit in support of his petition for transfer. But it remains a mere allegation without his giving any details of how much less the value is going to be or how he, apparently an outsider, has come to know of this. In his affidavit dated 7th March, 1951, Harbhagwan has stated that the assets of the Bharat Bank are quite enough to meet all liabilities and it is expected that after payment of deposits a large surplus will be left for the shareholders of the bank. But if the proposed scheme goes through all the good assets will be transferred to the Punjab National Bank and only unrealisable debts will remain for the shareholders. It is indeed difficult for me to understand the position taken up by the plaintiff. If the assets of the Bharat Bank are quite sufficient to meet the liabilities and the Punjab National Bank is going to take over, as has now been proved, assets equivalent to the liabilities which they take over, I cannot see how the shareholders are going to be put to any loss. The position taken up by the plaintiff in this respect seems to me to be contradictory. From the affidavits which have been put in this Court I am satisfied that the defendants are not acting in any fraudulent manner either to benefit themselves or to cause any loss to the plaintiff.
Even if the allegation were to be held to be proved that Ramkrishen Dalmia has managed to get control of the Punjab National Bank and is wanting to have deposits transferred to that Bank as also equivalent amount of assets that will not constitute fraud unless it is shown and proved that there is going to be any personal benefit to him. On the other hand, I have the affidavit of Mr. Goenka, M.P., that the object of the intended arrangements is to save the depositors of the Bharat Bank from certain liquidation. There is no reason why Goenka's statement on this point should not be accepted. None has even been suggested beyond the vague assertion that the bank is solvent. The rush on the bank and the withdrawals have not even been denied.
The plaintiff's affidavit in this Court dated 7th March, 1951, again repeats that if all the good assets are taken by the Punjab National Bank and unrealizable debts remain then the shareholders will lose. If, however, the Punjab National Bank takes assets equal to the liabilities and accepts book value of assets, the plaintiffs should have no grievance.
The depositors' claims have to be met by the Bharat Bank before the shareholders' and if this claim and equivalent amount of assets are taken over the balance must be sufficient for the shareholders on his (the plaintiff's) own showing.
The plaintiff petitioner bases his case on the ground that the proposed scheme is a fraud and in the arguments he also submits that the scheme is ultra vires of the company as it is not allowed by the memorandum of association or the articles of association. He particularly relies on Clause 3(r) of the memorandum of association, Article 135(19) of the articles of association and Section 86H of the Indian Companies Act. In Clause 3 of the memorandum of association the objects of the company are given as follows:—
"The objects for which the company is established are :—
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(o) To sell, improve, manage, develop, exchange, lease, mortgage, dispose of or turn to account or otherwise deal with all or any part of the property and rights of the company.
(r) To acquire and undertake the whole or any part of the business of any person or company carrying on business which this company is authorised to carry on or to amalgamate the company's business with that of any such person or company."
Article 135 provides:—
"Without prejudice to the general powers conferred by the last preceding clause, and the other powers conferred by these presents but subject however to the provisions of Sections 86E, 86F of the Indian Companies Act, it is hereby expressly declared that the directors shall have the following powers; that is to say, power :
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(19) With the consent of the company in general meeting to sell or dispose of the undertaking of the company or to remit any debt due by a director."
Section 86H of the Indian Companies Act provides:—
"The directors of a public company or of a subsidiary company of a public company shall not, except with the consent of the company concerned in general meeting.
(a) sell
or dispose of the undertaking of the company ;
(b) remit
any debt due by a director."
I cannot see how Article 3(r) of the memorandum of association applies to the facts of the present case. As far as I can see the arrangement that the defendants wish to enter into and the scheme which they wish to push through are not ultra vires of the company. Section 86H puts a restriction on the powers of directors in regard to disposing of the undertaking of a company, but it does not say that such a thing cannot be done. All it says is that it must be done with the consent of the company, i.e., the shareholders. Article 135(19) gives the same powers to the company as are given by Section 86H of the Indian Companies Act. In my opinion, the transaction which the defendants intend to enter into is not one which is ultra vires of the company. Even if it was held that the directors of the company cannot enter into these transactions without the assent of the company, a point on which I give no final opinion—it is a matter which can be sanctioned or ratified by the shareholders. In other words it can be approved of by the shareholders or is capable of being approved. In either case the question of ultra vires will not arise.
This has the support of Lord Macnaghten who delivered the judgment of the Privy Council in Dominion Cotton Mills Co., Ltd. v. George E. Amyot. There the Dominion Cotton Mills demised to its co-defendants the Dominion Textile Company all properties then in possession of the Cotton Company for a period of twenty one years and a resolution was passed by the Cotton Company in a general meeting approving of that lease. A suit was brought by two shareholders to set aside the lease of the company and also the resolution of the company approving of the same and it was held that it was incumbent upon the plaintiffs to show that the majority of the shareholders had either acted ultra vires or so abused their powers as to deprive the minority of their rights. At page 551 Lord Macnaghten observed as follows :—
"It is difficult to see what legitimate advantage the plaintiffs could hope to obtain from the only relief they claimed. The lease if not ultra vires, even though annulled by the Court, was capable of being ratified by the majority, who were of course interested in supporting it……In order to succeed it is incumbent on the minority either to show that the action of the majority is ultra vires or to prove that the majority have, abused their powers and are depriving the minority Of their rights.”
The words used there are rather important. His Lordship said that if the lease was not ultra vires it was capable of being ratified by a majority who were of course interested in supporting it. The observations of Lord Davey in Burland v. Earle were quoted with approval. In this latter case the principal question in appeal was whether the majority of the shareholders have a right to retain the balance of profit and loss available for dividend. Lord Davey said at pages 93 and 94 :—
"It is an elementary principle of the law relating to joint stock companies that the Court will not interfere with the internal management of companies acting within their powers, and in fact has no jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company the action should prima facie be brought by the company itself. These cardinal principles are laid down in the well-known cases of Foss v. Harbottle and Mozley v. Alston and in numerous later cases which it is unnecessary to cite. But an exception is made to the second rule, where the persons against whom the relief is sought themselves hold and control the majority of the shares in the company, and will not permit an action to the brought in the name of the company. In that case the Courts allow the shareholders complaining to bring an action in their own names. This, however, is mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress and it is obvious that in such an action the plaintiffs cannot have a larger right to relief than the company itself would have if it were plaintiff and cannot complain of acts which are valid if done with the approval of the majority of the shareholders, or are capable of being confirmed by the majority. The cases in which the minority can maintain such an action are, therefore, confined to those in which the acts complained of are of a fraudulent character or beyond the powers of the company. A familiar example is where the majority are endeavouring directly or indirectly to appropriate to themselves money, property, or advantages which belong to the company, or in which the other shareholders are entitled to participate, as was alleged in the case of Menier v. Hooper's Telegraph Works. It should be added that no mere informality or irregularity which can be remedied by the majority will entitle the minority to sue, if the act when done regularly would be within the powers of the company and the intention of the majority of the shareholders is clear. This may be illustrated by the judgment of Mellish, L.J., in MacDougall v. Gardiner."
In this case also it was held that a minority can maintain an action where the act complained of is fraudulent or beyond the powers of a company and that no mere informality or irregularity which can be remedied by the majority will entitle the minority to sue, if the act done would be within the powers of the company.
In an older case In re Patent File Co., James, L.J., observed at Page 87 : "I can find nothing in the memorandum or articles to prevent the directors from making the best terms they can with a creditor of the company by selling or pledging part of the property of the company. No doubt, a disposition of the property by the directors might be void in equity if it were contrary to the objects of the company ; the directors would then be restrained from doing the act, as being an abuse of their fiduciary position. But in the present case there is nothing to prevent the company from making such an agreement as this with a creditor, nor is there anything to prevent the directors from doing so.” Mellish, L.J., in the same judgment observed: "It was next urged that this security was void, because it was a pledging the entire property of the company in such a way that, if done by an individual, it would have been an act of bankruptcy. The answer to this is twofold. First, that there is no provision in the Companies Act that every transaction which in the case of an individual would be an act of bankruptcy shall be void as against creditors; and the legislature appears designedly to have omitted any enactment of that kind. Secondly, this is not a mortgage of the whole property of the company, for the shares were not fully paid up."
In MacDougall v. Gardiner, James, L.J., said at page 21 :—
"that is to say, that nothing connected with internal disputes between the shareholders is to be made the subject of a bill by some one shareholder on behalf of himself and others, unless there be some thing illegal, oppressive, or fraudulent—unless there is something ultra vires on the part of the company qau company or on the part of the majority of the company, so that they are not fit persons to deter mine it………"
In In re Kingsbury Collieries Ltd. & Moore's Contract, in the case of a colliery company which had the power of purchasing or taking upon lease and working of certain coal mines, the selling of coal and other products, carrying on generally of the business of colliers, but there was no express powers of sale of real estate, it was held that the company had the power to sell land which it had acquired, a power to sell real estate being impliedly warranted by the constitution of the company.
Recently the Banking Companies Act (Act X of 1949) has been enacted. Section 6 of this Act provides :—
"(1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:
(1) selling, improving, managing, developing, exchanging leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company."
Clause 3(q) of the memorandum of association seems to be almost identical with this provision. In my opinion, therefore, it is not ultra vires of the company to enter into the transaction which is proposed.
These cases therefore show that if an act is not ultra vires of the company and it is capable of being ratified or being approved of by the company it is not open to a minority of shareholders to object to any transaction unless it is a fraud or, as Lord Macnaghten put it, the majority have abused their powers and are depriving the minority of their rights.
In the present case it is quite clear from the affidavits that the plaintiff is in a minority. As a matter of fact, so far nobody has come forward to support the plaintiff and his plaint as well as the affidavits filed in this Court show that he is in a minority and up till now of only one. He has not shown, as I have said above, that the transaction which is intended to be gone through is fraudulent or the majority are abusing their powers to the detriment of the plaintiff. I, therefore, am of the opinion that there is no substance in this part of the plaintiff's case.
It was then submitted by the Advocate for the defendants that this is really a part of the internal management and therefore a Court has no jurisdiction to interfere in this matter. Reliance is placed on Burland v. Earle, In that case a suit had been brought by some shareholders to compel the directors to distribute the amount which they wished to put in the Reserve Fund in the form of dividends. At page 83 Lord Davey said that the Court would not interfere with the internal management of companies acting within their powers and would in fact have no jurisdiction to do so.
In MacDougall v. Gardiner, at page 23 James, L.J., observed : "The whole question comes back to a question of internal management ; that is to say, whether the meeting ought or ought not to be held in a particular way, whether the directors ought or ought not to have sanctioned certain proceedings which they are about to sanction, whether one director ought or ought not to be removed, and whether another director ought or ought not to have been appointed."
Without finally giving my opinion on this point I cannot see how the entering into the intended scheme is a matter of mere internal arrangement and therefore is screened from the control of this Court.
It was next submitted by the defendants that in his plaint the plaintiff has not shown by distinct averment the illegality of the act and reliance was placed Mills v. Northern Railway of Buenos Ayres Co. I do not think that at this stage of the case this argument should be allowed to prevail.
It may now be appropriate to mention an argument which the plaintiff raised before me that no final decision could be given unless the scheme in its final form was placed before me. The answer to this is twofold. First that the plaintiff himself in his plaint has tried to give the main features of the scheme and his whole case is based on the existence of that scheme and he has asked for injunction on that basis.
No doubt his allegation that that is the scheme is not correct. The affidavits of Mr. Ram Nath Goenka, M.P., and of the Chairman of the Bharat Bank and the various documents that I have referred to show what the two defendant banks intend to do. And what I understand the intended scheme to be I have mentioned at another place.
Second if the plaintiff does not know what the scheme is he can have no cause of complaint and he cannot get an injuction unless he shows how he is going to be affected and on this ground alone he must fail.
Then it was submitted by the defendants that the plaintiff is not a bona fide litigant. As I have said before, the plaintiff is carrying on his business in Siliguri in the District of Darjeeling in Bengal. He is the owner of only twenty fully paid up preference shares which are valued at two thousand rupees and the litigation is being conducted by his attorney Harbhagwan. But a great deal of interest is being taken by another brother of his, Shadi Lal, who was at one time an employee of the Bharat Bank. He has come all the way to Simla from West Bengal where he is carrying on his contract-business to look after the litigation. The plaintiff throuh Harbhagwan has also started winding-up proceedings against Bharat Bank : he may succeed or not but a liquidation application will certainly injure the bank and shake its credit. He seems to have no particular concern with or interest in the present litigation as all he has done is to give a power of attorney and his brothers are doing the rest. And this gives support to the submission of the defendants that the litigation is being carried on in the interests of the Employees' Association. Even if this last allegation were not correct, I do not see why an only and single shareholder carrying on business in West Bengal should have come all the way to Simla to have his rights litigated. In Robson v. Dodds, it was said by Malins, V.C, at page 306 : "The doors of this Court are open, and ought at all times to be open, for bona fide litigants………" This Court cannot allow litigation to be fought out to wreak out feelings of personal vengeance and anger. The fact that an ex-employee of the company has come all the way from West Bengal to fight this litigation against his ex-employers and the litigation is in the name of his brother is in my opinion sufficient to disentitle the plaintiff from getting an ad interim injunction.
A point which was troubling my mind was the rights of the depositors who have not like the shareholders invested their extra money for the purpose of making profit but have deposited their money with the bank which the depositors are entitled to get in accordance with the rules of the bank at any time that they like. If the relationship between the banker and the customer is of a fiduciary kind, can one bank pass on the deposits to another bank? The relationship between a banker and a customer is not of a fiduciary character, nor does it bear any analogy to the relation between principal and agent. The legal relation between the two in their ordinary dealing in money is simply that of debtor and creditor. See Grant's Law of Banking, Edition, 7, pages 2 and 4. Once the money of a depositor is in the bank the banker can do whatever he likes with it because the money is his. His obligation is to pay in accordance with the rules of the different forms of deposits. If he can do that, it is no concern of the depositor as to what he does with his money. In Grant on Banking at page 2 the matter has been put in the following words: "So money paid into a bank ceases altogether to be money of the person paying it in. It is the money of the banker who is bound to return an equivalent by paying a sum equal to that deposited with him when he is asked for it. To all intents it is the money of the banker to do with as he may please;……"
The liability of the banker is his implied promise to repay at the branch where the money was deposited. A banker can also borrow. See Bank of Australasia v. Breillat and Grant on Banking page 593, where it is said : "A power to borrow is of course essential to the conduct of a banker's business." If the Bharat Bank can borrow money it can surely borrow it on the security of its assets. It can equally well give that security to the Punjab National Bank on the condition that the Punjab National Bank will pay the depositors of the Bharat Bank. Of course it is open to such a depositor to refuse to go to the Punjab National Bank and to insist on the Bharat Bank paying him, but that, is a matter of detail and is not a concern of the plaintiff.
Relaying on the various cases which have been cited before me I am of the following opinion : (1) The intended scheme which has been mentioned in the note of the Chairman of the Bharat Bank and has been further clarified in the affidavit which has been filed before me that the Punjab National Bank will undertake to pay the deposits of the Bharat Bank and against this the Bharat Bank will hand over to the Punjab National Bank assets which are mentioned in the affidavit of Shriyans Prasad, defendant No. 1, which was filed before me on the 8th March is not ultra vires of the company and is not illegal. (2) Even if the power to do this is not vested in the directors it is an act which is capable of being ratified and approved and, therefore, no objection can be taken to this. (3) Under the Banking Companies Act and under clause (3)(q) of the memorandum of association, the company can dispose of or turn to account or otherwise deal with all or any part of the property and rights of the company. (4) The plaintiff according to his own showing is a representative of a minority. According to the articles of association, Article 135(19), the company at any rate can enter into the arrangement proposed. There the majority required seems to be a simple majority only, and on his own showing the plaintiff is in a minority. It is, therefore, not open to him to challenge the proposed arrangement (5) A minority can succeed in a suit only if it shows that the act proposed is ultra vires or is one which is being carried through by the majority for its own benefit or the act is fraudulent. It has not been shown that the act is fraudulent. Even if the allegations of the plaintiff are correct that Seth Ramkrishen Dalmia has now got control of the Punjab National Bank it is not shown how he or those who think like him are going to benefit by this transaction. (6) The plaintiff set out to prove that the Punjab National Bank was taking the assets of the Bharat Bank at an undervalue. That he has not proved even by the affidavits of Harbhagwan, who is a brother of his, and there is no other proof before me. On the other hand, it has been proved by affidavits that the Punjab National Bank is taking over the assets of the company at its book value. (7) The litigation which the plaintiff is carrying on is not a bona fide one and, therefore, he is not entitled to move this Court in its equitable jurisdiction. (8) The Bharat Bank is not a trustee nor its depositors. The relationship is one of debtor and creditor, and it will not harm the depositors if the scheme goes through. On the other hand in this case it may benefit them. (9) According to the affidavit of Mr. Ramnath Goenka, M.P., the Bharat Bank is suffering loss every year even on its ordinary working and after the filing of the suit by the plaintiff there is a rush on the bank and if a scheme of this kind is not allowed to be proceeded with the bank will have to close its doors which will be calamitous for the depositors as well as for the shareholders and everybody else. (10) Under the present circumstances this is the best solution of the difficulties in which the bank finds itself. (11) The continuance of the temporary injuction will do more injury to both parties and particularly the bank and the balance of convenience is in favour of discharge.
I am, therefore, of the opinion that the intended scheme should be allowed to go through and the injuction which I have issued should be discharged, but I would impose the following conditions : (1) The scheme which is finally prepared by the Punjab National Bank and the Bharat Bank must contain the provisions which have been stated above and which are contained in the affidavits which I have referred to. This scheme shall be sent to the Reserve Bank for such action as they may like to take under Section 36(1) of the Banking Companies Act. I have been told that the whole of the intended scheme has been put before the Reserve Bank. The Reserve Bank can under Section 36(1)(a) prohibit such a transaction going through. The affidavits and the documents which have been filed before me or in the Subordinate Judge's Court show that the Reserve Bank does not prohibit this transaction. On the other hand, it has "blessed" it. So it was put in the affidavits. If and when the prohibition of the Reserve Bank is received, naturally these schemes will automatically cease to be operative. (2) The scheme must be placed before the shareholders at the earliest possible opportunity after giving notice as required by law and if the shareholders of the Bharat Bank or of the Panjab National Bank do not approve of the scheme, the scheme shall be abandoned and the status quo ante restored. (3) I direct that in case the scheme is not approved by the shareholders of either of the two banks the Punjab National Bank shall return all the assets which it gets under the scheme minus the amounts paid by it to the depositors of the Bharat Bank. Mr. Ram Lal Anand has stated at the bar that he has the authority of the Punjab National Bank to agree to this condition. (4) The depositors of the Bharat Bank shall be invited by the Punjab National Bank to take their deposits and if they so like they will be entitled to receive the deposits in accordance with the rules of the Bharat Bank. No depositor shall be coerced into agreeing to anything which he does not like to do. Should a depositor for a fixed term like to get back his money he will be entitled to get it minus the interest which he must forego or pay as the case may be. (5) If the shareholders of the two banks at meetings properly called want to vary the scheme in any manner they will be entitled to do so, The discharge of the injunction will be subject to these conditions. The opposite party will have their costs of these proceedings in this Court.
As to the application for transfer of the case to this Court, both parties agree that this is one of those cases which should be so transferred, with which I agree. I, therefore, order that this case (Suit No. 57 of 1951) pending in the Court of Mr. Y.L. Taneja, Subordinate Judge 1st Class, Delhi, be transferred for trial to this Court. The record is already here and it need not therefore go back. It shall be put up for hearing in due course before such Judge as is appointed by my Lord the Chief Justice.
[1957] 27 COMP. CAS. 223 (BOM.)
V.
Bank Of Baroda Ltd.
DESAI,
J.
AUGUST
2, 1955
DESAI, J. - The plaintiffs sue for a declaration that
a first English mortgage on its properties and assets, created by defendant No.
2 company (the mills company) on August 31, 1953, in favour of defendant No. 1
bank, to secure repayment of a sum of Rs. 25,00,000 advanced to the mills
company by defendant No. 1 bank, after a scheme of reorganisation of the mills
company was sanctioned by this court under section 153 of the Indian Companies
Act, 1913, is ultra vires and of no effect. They also seek the consequential
reliefs that defendant No. 1 bank may be ordered to deliver up the mortgage to
be cancelled and for a permanent injunction restraining defendant No. 1 bank
from taking any action under the mortgage or any steps to enforce and realise
the mortgage. Plaintiffs Nos. 1 and 2 are shareholders of the mills company,
which is public limited company. Defendants Nos. 3 to 5 and 11 to 20 are
shareholders of the mills company. Defendants Nos. 3 to 10 are directors of the
company. All the shareholders support plaintiffs Nos. 1 and 2 in this suit.
Plaintiffs Nos. 3 and 4 are unsecured creditors of the mills company.
As most of the
facts are not in dispute or really disputable, I shall first succinctly state
the facts and history of the case and then summarise the contentions raised in
the pleadings.
In January,
1953, the financial position of the mills company was far from satisfactory.
Several creditors had filed petitions in this court for compulsory winding up
of the mills company and for appointment of a liquidator. The company's
liabilities were approximately Rs. 1,00,15,000. The Bank of India Ltd., to whom
about Rs. 32,00,000 were payable were secured creditors holding an equitable
mortgage on the properties and assets of the mills company. There were fixed
deposits of about Rs. 23,00,000. : about Rs. 35,00,000 were due to large
creditors and about Rs. 11,00,000 were due to small creditors (whose claims
were less than a lakh of rupees). As against these liabilities the liquid
assets of the mills company including outstandings were of the value of
approximately Rs. 25,00,000 and the value of the fixed assets was said to be
approximately Rs. 65,00,000. The directors of the company wanted to reorganise
the business of the mills company with a view to retaining the fixed assets
intact and paying off the liabilities in course of five years and propounded a
scheme of reorganisation. The Bank of India had to be paid off in full before
there could be any resuscitation of the mills company and a financial
arrangement had been reached between the mills company and Bachhraj & Co.
Ltd. whereby the latter had agreed to finance the mills company on certain
terms mentioned, in an agreement dated April 30,1953.
Clause 1 of
the scheme was as under :
"1. Bank
of India Ltd. The company proposes to pay off the balance of the amount of the
secured loan to the Bank of India Ltd. by 15th June, 1953, by arranging for the
amount of Rs. 30,00,000 through Messrs. Bachhraj & Co., Ltd., Bombay, by
creating first mortgage of the company's property, movable and immovable, on
the terms and conditions contained in the draft agreements already approved by
the company and Messrs. Bachhraj & Co. Ltd., Bombay. Copies of the said
draft agreements are hereto annexed and marked exhibit A. The balance of the
bank's claim amounting to about Rs. 200,000 has been arranged for and is lying
with the solicitors of the company."
Clauses 1, 8
and 10 of the financing agreement were as under :
"1. The
lenders shall lend and advance to the company a sum of Rs. 30,00,000(rupees
thirty lakhs) with interest thereon at the rate of 6 1/2 (six and a half) per
cent. per annum on the company issuing to the lenders or their nominees or
nominee first mortgage debentures of Rs. 30,00,000 (Rupees thirty lakhs). In
the first alternative the lenders shall themselves lend and advance a sum of
Rs. 30,00,000. (Rupees thirty lakhs) on the first English mortgage of the
properties comprised in this agreement at the rate of 6 1/2 per cent. per annum
for interest. In the second alternative the lenders may arrange for a loan of
the same amount guaranteed by them or their nominee or otherwise to be advanced
by any bank, or firm, or association, or person or persons or any company on
such first English mortgage or charge or security of the said properties at the
same rate of interest and the company doth hereby authorise the lenders to
negotiate for such loan. In the third alternative the lenders may arrange with
the Bank of India Ltd. to extend for a further period the equitable mortgage
now held by them for about Rs. 32,00,000 (Rupees thirty-two lakhs) advanced by
them to the company. In the event of the second or third alternative being
adopted the terms and conditions of redemption small be as mentioned in clause
8 hereof and the lenders shall be entitled to receive and the company shall pay
to the lenders the difference in interest, if any, between 6 1/2 per cent. and
such lower interest, if any, payable under any English mortgage to any firm,
association, bank, or person or persons, or any company under the continuation
of the equitable mortgage in favour of the Bank of India Ltd.
8. The company
shall redeem 20 per cent. of the debentures or shall repay 20 per cent. of the
amount of first English mortgage as the case may be every year on or before
31st March provided always that the lenders shall not be entitled to call for
or demand redemption of 20 per cent. of the debentures or repayment of 20 per
cent. of the amount of the first English mortgage as the case may be. The
company, however, will be at liberty to pay off at any time after three years
all the said first debentures then outstanding after giving three months notice
in writing to the debenture holders.
10. The
debenture trust or deed of first English mortgage as the case may be shall
contain all such terms and conditions as the lenders' solicitors shall think
fit and their opinion shall be final and binding on the parties."
One of the
three alternative methods of financing envisaged by the financing agreement
(under clause 1) was that Bachhraj & Co. Ltd. would arrange for a loan of
Rs. 30,00,000 to the mills company on the mills company executing the first
legal mortgage on its land, building and machinery. The amount of Rs.
30,00,000. to be advanced by the mortgagee was to be repaid by equal
instalments in five years. The mortgages were not to demand repayment of 20 per
cent. of the mortgage amount for the first two years unless the mills should
have earned sufficient net profits to discharge certain obligations.
By another
agreement with the company several of its creditors agreed to reduce their
claims and to take second mortgage debentures for the reduced amount on their
respective claims. The mills company agreed to execute a mortgage debenture
trust deed for the aggregate amount of Rs. 32,55,000 in favour of the trustees
named in the agreement o the security of its land, building and machinery and
on terms and conditions set out in that agreement. Both these agreements were
annexed to the scheme.
After the
requisite meetings of creditors and members had considered and approved of the
scheme of reorganisation an order was made by this court on May 13,1953, on the
petition of defendant No. 2 company sanctioning the scheme of reorganisation.
The financing
arrangement actually made by Bachhraj & Co. Ltd. after the scheme was
sanctioned was not in all respects identical with the financing agreement which
was annexed to the scheme. Under the arrangement actually put through by them
the mills company took an advance of Rs. 25,00,000 from defendant No. 1 Bank
upon the terms and conditions set out in the indenture of mortgage dated August
31,1953, on the lands, buildings and machinery of the mills company. They
further arranged a cash credit account for the mills company with defendant No.
1 bank up to a limit of Rs. 25,00,000 and the mills company including up to Rs.
5,00,000 against stocks in process, chemicals and stores with a stated margin.
Both the loans of Rs. 25,00,000 advanced on the security of the mortgage and
the cash credit account were guaranteed by Bachhraj & Co. Ltd. Pursuant to
this arrangement defendant No. 1 bank paid to the Bank of India Ltd. a sum of
Rs. 6,49,707-7-2 out of tthe cash credit account and a further sum of Rs.
25,00,000. The two amounts were paid to the Bank of India Ltd. by defendant No.
1 bank by two cheques in full satisfaction of the claim of the Bank of India
Ltd. against the mills company. This was the arrangement as to the quantum of
the loan. The indenture of mortgage executed by the mills company in favour of
defendant No. I bank did not, however, provide for repayment of the loan in yearly
instalments nor did it provide that the first two yearly instalments were to be
paid only in the circumstances specified in the agreement between Bachhraj
& Co., and the mills company. What the indenture of mortgage actually
stated was as under :
"Now this
Indenture Withnesseth that pursuance of the said agreement and in consideration
of the sum of Rs. 25,00,000 at or before the execution of these presents paid
by the mortgagees to the Bank of India Ltd., at the request of the mortgagors
and of the said Messrs. Bachhraj & Co. Ltd., (the receipt whereof the
morgagors do hereby acknowledge and of and from the same do hereby release and
discharge the mortgagees) they the mortgagors do hereby covenant with the
mortgagees that they the mortgagors on 31st day of August, 1954 said
(hereinafter called the due date) pay to the mortgagees in Bombay the said sum
of Rs. 25,00,000 with interest for the same in the meantime at the rate of 2
per cent over bank rate with a minimum of 5.1/2 per cent per annum from the date
of these presents by equal half-yearly payments the first of such payments to
be made on the 28th day of February, 1954, and will also pay after the due date
so long as the said sum of Rs. 25,00,000 or any part thereof shall remain
unpaid to the mortgagees interest for the same at the rate and in the manner
aforesaid."
There was also
inserted in the indenture of mortgage an acceleration clause the effect of
which was to entitle defendant No. I bank to immediately enforce the mortgage
in certain circumstances or eventualities. That clause was as under :
"Provided
always and it is hereby agreed and declared that in the event of any damage
happening to any of the mortgaged property by fire, tempest, earthquake,
lightning, rain or otherwise howsoever at any time or times after the execution
hereof or if any event shall happen so as in tthe opinion of the mortgagees
(which shall be final and conclusive) materially to impair or diminish the
value of the security hereby created or if an order is made or a resolution is
passed for the winding up of the mortgagors or if the receiver by appointed of
the undertaking or any property of the mortgagors or if the mortgagors shall
create or purport attempt to create any charge or mortgage ranking or which by
any means may be made to rank on the mortgaged property hereby morttgaged pari
passu with or in priority to the security hereby constituted or if the
mortgagors cease to carry on business for any reason whatsoever other than
strikes, lock-outs, riots operate provided the bank took any action under the
mortgage without any reference to the court. By the order of the appeal court
the court receiver was directed to hand over possession of the mortgaged
property to the bank and the bank was permitted to go into possession on their
undertaking to carry out certain terms relating to payment of insurance, taxes,
and employment of necessary staff and to keep the mills in working order and in
a proper state of repairs. It is not dispute that the bank has been in
possession of the mortgaged properties of the mills company since September,
1954.
The mills
company was taken into liquidation by an order passed by this court on December
17, 1954. The plaintiffs in the suit before me have been permitted to continue
this suit against the mills company in liquidation.
In their
plaint the plaintiffs have relied on terms and conditions relating to the
repayment of the amount under the indenture of mortgage create by the mills
company in favour of defendant No. I bank and averred that these were material
and important terms which contravened the scheme as sanctioned by the court and
were at variance with the terms and conditions in this behalf contained in the
previous agreement between the mills company and Messrs. Bachhraj & Co. Ltd.
They have also alleged that this departure in the indenture of mortgage from
the terms on which the mortgage was to be executed was extremely prejudicial
both to the shareholders and to the unsecured creditors of the mills company.
They have alleged that by taking a loan of Rs. 25,00,000 only instead of Rs.
30,00,000 on the first mortgage of the properties of the mills company the
mills company deprived itself of recourse to the extent of Rs. 5,00,000 which
would otherwise have been utilised by it to carry on its business. The
plaintiffs have also alleged that by not providing for the repayment of the
loan in the course of five years and by not making a provision that the lenders
would not be entitled to demand the first two instalments if the mills company did
not make sufficient net profits the mills company put itself at the mercy of
defendant No. I bank. Another allegation contained in the plaint is that the
challenged provisions were such as would render the scheme nugatory and make it
impossible for defendant No. 2 company to carry out the scheme. Relying on
these allegations the plaintiffs have submitted in the plaint that the
indenture of mortgage executed in favour of defendant No. I bank is ultra
vires, void, imoperative and of no effect.
Defendant No.
I bank by its written statement has relied on the fact that the loan actually
given exceeded Rs. 30,00,000. The bank has denied that the provisions relating
to repayment of the loan challenged by the plaintiffs are in contravention of
the scheme or the agreement between the mills company and Bachhraj & Co.
Ltd. The bank has further contended that in any event the provisions of the
scheme and the agreement have been substantially complied with. As to the
acceleration clause, objection to which was taken by the plaintiffs by amending
their plaint after the suit reached bearing, defendant No. I bank by a
supplemental written statement has relied on clause 10 of the agreement between
the mills company and Bachhraj * Co. (which I have already set out above) and
pleaded that the insertion of such acceleration clause was usual in the case of
English mortgages executed in Bombay.
An alternative
contention pleaded by defendant No. I bank is that even if it be held that the
mortgage in its favour was ultra vires, the bank having paid off in full the
amount of the mortgage debt due by defendant No. 2 company to the Bank of India
Ltd., it is subrogated to all the rights of the Bank of India Ltd., against
defendant No. 2 company and the properties which were the subject-matter of the
equitable mortgage in favour of the Bank of India Ltd. Defendant No. I bank has
further averred that the right of subrogation had been given to it by the
express terms of the indenture of mortgage created in its favour and in this
connection the bank has relied on the following clause of the indenture of
mortgage :
"And it
is hereby agreed and declared that the sum of Rs. 25,00,000 (Rupees twenty-five
lakhs) (due by the mortgagors to the Bank of India Ltd. and satisfies by
payment by the mortgagees as herein-above provided) and the interest to accrue
due in respect thereof and of every part thereof shall not merge in the equity
of redemption of the said land, hereditaments and premises but shall be
considered and kept on foot as a subsisting charge on the said premises for the
benefit of the mortgagees and be vested in the mortgagees in trust for
themselves and so as to protect them against all mesne incumbrances, charges
and estates if any."
A further
alternative plea raised by defendant No. I bank in its written statement is
that even if the mortgage in its favour is held to be ultra vires, the security
given to it enures for its benefit for the sum paid to the Bank of India Ltd.
and it is entitled to enforce the contract in terms of the scheme. This plea is
sought to be based on principles of equity.
Defendant No.
I bank in its written statement has also raised certain legal contentions as to
the maintainability of the suit by the plaintiffs and a number of issues were
raised in respect of the same. It will be convenient to examine those
contentions at this stage. The issue as to multifariousness was abandoned. It
was pleaded that the suit related to the internal management of the mills
company and, therefore, did not lie. But the contention was not pressed before
me. Nor was the contention that Bachhraj & Co. Ltd. were necessary parties
to the suit pressed before me by the learned Solicitor-General, appearing for
defendant No. I bank. In its written statement defendant No. I bank alleged that
plaintiff No. I was described as a minor in the form filed by the mills company
and plaintiff No. 2's name did not appear as a shareholder at all in that form
and, therefore, plaintiffs Nos. I and 2 were not entitled to maintain the suit.
Some formal evidence was led before me to show that plaintiff No. I had
attained majority prior to the date of the filing of the suit and also to show
that in the register of shareholders maintained by the mills company both
plaintiffs Nos. I and 2 were shown as shareholders. On the evidence led before
me I am satisfied that plaintiffs Nos. I and 2 at all material times were and
are now shareholders of the mills company. It was also contended that
plaintiffs Nos. 3 and 4 who were suing on behalf of all other unsecured creditors
of defendant No. 2 company has no locus standi in this suit as they were not
parties to the scheme. This contention also was not seriously pressed before
me. There is no substance in it and it must be negatived. Another contention
urged on behalf of defendant No. I bank was that the suit was not maintainable
inasmuch as there was no averment in the plaint that it was impossible for the
mills company to impeach the mortgage in favour of defendant No. I bank.
Reliance was placed on the following observations in a decision of the Privy
Council in Vernon Lloyd-Owen v. Alfred E. Bull 1:
"But even
in the case of a growing company a minority shareholder is not entitled to
proceed in a representative action if he is unable to show when challenged that
he has exhausted every effort to secure the joinder of the company as plaintiff
and has failed."
The position
of plaintiffs Nos. I and 2 before me is, however, quite different. They do not
allege any oppression by a majority of the shareholders. All the shareholders
have been made parties to the suit and are supporting the plaintiffs in the
suit. Plaintiffs Nos. I and 2 are also relying on the letter dated May 8, 1054,
whereby three days prior to the filing of this suit they called upon the mills
company to take immediate steps to restrain defendant No. I bank from enforcing
the mortgage or taking any action under the mortgage. There is to may mind
little substance in the present contention of defendant No. I bank and it must
be negatived. It was next urged that the mills company has been ordered to be
wound up by this court and the plaintiffs are, therefore, not entitled to
continue the suit. The plaintiffs have obtained the leave of this court to
continue the suit against the liquidator. This contention of defendant No. I
bank must also be negatived.
The
plaintiff's case is based first and foremost are in contravention of that the
provisions of the indenture of mortgage are in contravention of three material
and important terms of the financing agreement annexed to the scheme. It was
said that a loan of Rs. 30,00,000 was to be taken on the first mortgage of the
properties of the mills company whereas only Rs. 25,00,000 were advance under
the indenture of mortgage challenged in the suit. It was also said that the mills
company was under the financing agreement not to be under any obligation to pay
the first two instalments of the mortgage amount if the mills company did not
make sufficient net profits. It was also said that the mortgage amount was to
be paid in the course of five years whereas under the indenture of mortgage
actually executed i n favour of defendant No. I bank the mortgage amount was
payable after one year. The plaintiffs have also relied on the clause relating
to payment of interest as contained in the financing agreement and the one
contained in the indenture of mortgage executed in favour of defendant No. I
bank. The plaintiffs have also relied on the acceleration clause contained in
the indenture of mortage executed in favour of defendant No. I bank.
Evidence was
led before me on behalf of defendant No. I bank to show that the acceleration
clause had been inserted in the indenture of mortgage in favour of defendant
No. I bank at the instance of the solicitors of Messrs. Bachhraj & Co. Ltd.
and that this was done in pursuance of the provision in that behalf made in
clause 10 of the financing agreement annexed to the scheme. I accept that
evidence. Mr. S.K.Pardiwalla, an attorney of this court, was examined before me
in order to show that the various conditions contained in the acceleration
clause to which objection has been taken by the plaintiffs were usually
inserted in English mortgage executed in Bombay in case of a running business.
I accept the evidence of Mr. Pardiwalla. He is an attorney of this court and
has been in practice for the last 34 years. He is a partner in the firm of
Messrs. Kanga & Co., attorneys of this court, and has very considerable
experience of conveyancing and is familiar with the practice of conveyancing in
Bombay including preparation of English mortgages to secure loans.
The crucial
argument pressed by Sir Nusserwanji Engineer on behalf of the plaintiffs is
that the effect of the clauses in the mortgage challenged by the plaintiffs and
particularly those relating to the quantum of the loan secured by the mortgage
and the time for repayment of the loan being after one year and not spread out
over five years was to render the mortgage a nullity. It was strongly urged
that there was a distinct departure in material respects from provisions of the
scheme as sanctioned by the court. The scheme it was said, only authorised the
company to secure a loan of rupees thirty lakhs on certain terms and to those
terms a go-bye was given by the mills company at the instance of defendtant No.
I bank who had full knowledge of the scheme and the terms of the financing
agreement annexed to the scheme. The argument ran that the whole borrowing
became unauthorised and was ultra vires the company. It was further argued that
the scheme when sanctioned by the court became something quite different from a
mere agreement signed by the parties; it became a statutory scheme. Reliance
was placed on certain observations to that effect in a decision reported in
Garner's Motors, Ltd., In re 1. I agree that the scheme before me must be
regarded as a statutory scheme. Reliance was also placed on the following
statement of law in Halsbury's Laws of England, Vol. VI, third edition,
paragraph 888, at page 458 :
"If a
company borrows money in circumstances which render the borrowing ultra vires
no debt arises either at low or in equity, and the lender cannot recover the
money in an action for money had and received or in any other action in
peronsam........If the loan has been applied in payment of the debts or liabilities
of the company duly incurred (whether accuring before or after the date of the
loan) the lender although he knew the borrowing was unauthorised is entitled to
recover the amount so paid and to that extent may hold any securities given to
himself, but he is not subrogated to any securities or priorities or rights as
to the interest of any creditor paid off with his money."
Sir
Nusserwanji Engineer also relied on a decision of the Privy Council in Premila
Devi v. Peoples Bank of Northern India Limited 1. It was there held that the
scheme of arrangement drawn up in respect of a company and sanctioned by the
court under section 153 of the Indian Companies Act, 1913, becomes binding upon
the company, its creditors and it shareholders, and its terms can be varied
only by an order of the court when the terms of the proposed variation have
been approved at meetings of creditors and shareholders. Accordingly, if a
company or its directors or shareholders purport to alter the dates either by
resolution or ratification by which dates, under a scheme as sanctioned by the
court, certain calls in respect of shares are to be paid, that alteration is
invalid in the absence of sanction of the court, and any foreiture of the
shares by the company for non-payment of the calls on the substituted dates is
ultra vires the company, and inoperative to prevent the holders of these shares
from being included in the list of contributories in the event of the
subsequent winding up of the company. The argument proceeded that even the
court could not have altered the scheme after it was sanctioned without the
requisite meetings of the shareholders and creditors of the company. Nor had
the company a power to modity or vary the scheme. The borrowing on different
terms from those contained i the financing agreement was not the borrowing
sanctioned by the court and the whole transaction of mortgage was ultra vires
and rendered a nullity. It was further argued that the terms of the indenture
of mortgage relating to the quantum of the loan and the period of repayment
were extremely prejudicial to the shareholders and to the unsecured creditors
of defendant No. 2 company. By taking a loan of Rs. 25,00,000 only instead of
Rs. 30,00,000 on the first mortgage of its properties the mills company
deprived itself of recourse to the extent of Rs. 5,00,000 which would otherwise
have been utilised by it to carry on its business. By not providing for
repayment of the loan in the course of five years and by not making the
provisions that the lender would not be entitled to demand the first two
instalments if the mills company did not make sufficient net profits, the mills
company put itself at the mercy of defendant No. I bank if at any time after
one year defendant No. I bank decided to enforce its rights under the mortgage,
by exercising the powers of sale reserved to it under the mortgage.
On behalf of
defendant No. I bank the learned Solicitor-General argued that there was
substantial compliance on the part of the mills company of the scheme as sanctioned
by the court and the financial agreement annexed to the same. It was said that
instead of one agreement there were in fact two agreements. There was a
mortgage of Rs. 25,00,000 on the properties of the mills company and the cash
credit account the limit of which was Rs. 25,00,000. It was also argued that
there was no departure in any material respects from the scheme as sanctioned
and the financing agreement annexed to the same . It was said that the term
relating to the period of five years and the preventing enforcement or
repayment of any instalments in the first two years was not a necessary
condition nor a sine qua non of the transaction of mortgage. It was also said
that in fact the mortgagee bank had taken a lesser security by giving cash credit
facility to the mills company. Then it was said that if the bank had filed a
suit to enforce the mortgage the court would have at the highest declined to
enforce the mortgage in any other manner than in accordance with the terms of
the scheme and the financing agreement, but the court would not have stated
that the bank had no security whatever. As to the acceleration clause reliance
was placed on clause 10 of the financing agreement and the evidence led for the
purpose of upholding that clause.
Reliance was
placed by the learned Solicitor-General on a decision given by the Court of
Appeal in England in Johnston Foreign Patents Co. Ltd. In re 1. In that case
three companies each of which had power to borrow money on security of
debentures, issued joint debentures, by which the companies jointly and
severally agreed to pay to the holders the amount advanced by them, with
interest thereon; and the three companies thereby respectively charged with
such payments their several undertakings and all their present and future
properties and assets. Each of the companies received a part of the proceeds of
the debentures.BYRNE J. before who the action was tried held that the
debentures were entirely void and ultra vires the companies. The Court of
Appeal reversed that decision holding that, though it was ultra vires for any
of the companies to charge its assets with moneys advanced to another company,
yet, to the extent to which the moneys advanced had come to the hands of each
company the debentures constituted a charge upon the assets of that company. At
page 247 of the report VAUGHAN WILLIAMS L. J. cited the following observations
from an old case :
"I do
exceedingly commend the judges that are curious and almost subtle, astute, to
invent reason and means to make acts according to the just intent of the
parties, and to avoid wrong and injury which by rigid rules might be wrought
out of the act."
The learned
Lord Justice after citing these observations of LORD HOBART went on to observe
(page 248) :
"So I
think here that, although the machinery was wrong-it was in part beyond the
powers of the companies-yet we ought to prevent injustice by holding that the
security is good in so far as the moneys of the debenture holders have come
into the coffers of each company for intra vires purposes and have been so
employed."
The absolute
proposition pressed for my acceptance by Sir Nusserwanji Engineer, learned
counsel for the plaintiffs, was that where borrowing and creation of a security
for the same by a company is under a scheme of arrangement or compromise
sanctioned by the court and the terms of the borrowing are mentioned in the
scheme or in the agreement annexed to the scheme, any deviation from any of
those terms would render the entire transaction ultra vires the company as
being unauthorised by the scheme. It was argued that absolute compliance in
respect of every material term would in such a case be insisted upon and any
departure from the same would have the result of rendering the whole
transaction a nullity. The structure of the proposition so advanced requires
testing. If correct, strange results would follow. In the course of his
argument I put it to learned counsel whether the proposition would apply where
under a scheme of arrangement a company was authorised to effect a lease of one
of its properties for 20 years and a lease for 25 years was in fact effected by
the company and the consideration was wholly executed by the lessee who had
been put in and remained in possession as lessee for some year. It was said
that the transaction would be altogether a nullity and the lessee in an action
by the company would n not be entitled to say that the lease should be treated
as binding for 20 years and bad as to the rest of the period of the lease. It
was said that in such a case the court would at the instance of the company
compel the lessee to deliver back the possession of the property to the
company. I have no doubt that this would not be the result. Instances could
readily be multiplied for the purposes of testing the soundness of the
proposition so broadly formulated. In support of the proposition reliance was
placed on a decision of the Privy Council in Premila Devi v. Peoples Bank of
Noethern India Limited 1, to which I have already made some reference. I have
carefully considered the case and I can find therein no justification for the
absolute proposition which learned counsel sought to found upon it. The company
under the terms of the scheme sanctioned by the court was empowered to make
certain calls on certain dates. In contravention of the scheme the company made
a call for the whole amount sanctioned by the scheme and made it payable on a
particular day. The case turned on principles relating to forfeiture of shares
by a company for non-payment of calls made on dates other than those sanctioned
by the court in any such case is ultra vires the company and inoperative to
prevent the shareholders of those shares from being included in the list of
contributories in the event of subsequent winding up of the company.
Accordingly, in my opinion, the proposition pressed for my acceptance is not
established by this authority which was vouched in support. Apart from
authority I see no reason for assenting to the proposition.
Now, the
general principle indubitably is that authority must be properly pursued.
Therefore, if the act of borrowing is altogether outside the powers of a
company, it would be clearly ultra vires. Distinction must, however, be drawn
between total absence of authority and execution of authority in excess of
limitations or extent of that authority. It sometimes happens that a power to
borrow exits but is restricted to a stated amount. In such a case if by a
single transaction an amount in excess is borrowed only the excess borrowing
would be ultra vires and not the whole transaction. It is not difficult to
conceive of cases where in execution of the commandment given to it or its
authority a company instead of punctiliously pursuing the same does more than
the commandment or authority. This may be done ex abundanti or by mistake or
without due and proper regard to the limitations on the execution of authority.
I am not aware of any principle or authority why in such a case where there is
complete execution of authority the act should not be held to be good to the
extent of the mandate or authority and the excess only as bad. In such a case,
if severable, you may reject the bad part and retain the good.
I disclaim any
intention to minimise or close my eyes to the scope of a doctrine established
in a stringent form by Acts of the Legislature and decisions of great
authority. But the application of the doctrine of ultra vires is not as
imperious and as embracing as submitted by learned counsel for the plaintiffs.
That submission seems to me to require the law to function with unmitigated
rigour and to have destructive effects not necessitated by any sound principle
underlying the doctrine. The main feature and the main facet of the doctrine of
ultra vires is that a company having corporate persona should not be mulcted
for its own act or an act of its agent if it is beyond its own powers or
privileges. The company can have no agent to do that which is beyond the
purpose of its creation or to do an act which the company itself was expressly
or by necessary implication prohibited from doing. The doctrine seems to me,
therefore, to be conformable to the rule that cases of total absence of
authority are distinguishable from cases where the authority to do the act in
question exists but the actual exercise of it is irregular, because the mode or
manner of the performance of the act is in some respect different from that
directed by the authorisation. The present case illustrates the distinction.
Where there is complete execution of the authority but the company has done
more than the commandment or authority, the act is good to the extent of the
mandate or authority and bad only as to the excess. Of course, there are
exceptions to this rule. Where there is not a complete execution of the authority
by the company or where the boundaries between the excess and the rightful
execution are not distinguishable, the whole transaction would be affected by
the doctrine of ultra vires. The rule applicable to such cases must be founded
not upon any doctrinaire technicality, but upon a broader ground which has
regard to the substance of the matter and more to the general nature or scope
of the commandment of the authority than the limitations on the same placed
only for the purpose of detailed execution of the same. I am disinclined to
have resort to equity when I have to determine the nature and effect of
directions given by scheme sanctioned by the court and relating to compromise
or arrangement by a company and the application of the doctrine of ultra vires
to any transaction effected in pursuance of the scheme. Yet it does seem to me
that the rule I have endeavoured to formulate can further be justified as being
ex equo et bono.
To turn to the
facts. Both under its constitution and under the scheme sanctioned by the court
the company had the power to borrow and impledge its assets. The mortgage in
favour of defendant No. I bank is not illusory nor a colourable devise but a
real and honest bargain. The loan actually given was not less than the amount sanctioned
by the scheme and the liability of the mills company to the Bank of India was
fully discharged. That was an express purpose of the transaction of mortgage
sanctioned by the scheme. That purpose was effectuated. The indebtedness of the
mills company was not increased by this loan. The various conditions and
eventualities mentioned in the acceleration clause were, according to the
evidence of Mr. Pardiwalla, which I accept, such as are usually inserted in the
case of an English mortgage executed in Bombay in case of a running business.
In respect of the purpose of the loan, utilising the amount of the loan and in
other material respects the authority was substantially pursued. This, of
course, cannot be said of the clause relation to the time and mode of repayment
of the loan. The main objection and the one strenuously pressed before me by
learned counsel for the plaintiffs was that the clause for repayment of the
loan was prejudicial to the shareholders and unsecured creditors of the company
as it gave a go-by to the stipulations relating to the period of five years and
of repayment by instalments contained in the financing agreement. In my
judgment it is undisputable that in this particular respect the commandment or
authority was not properly pursued. This, however, amounted to excess in
exercise of its commandment or authority by the company. It did not affect the
purpose of the incorporation of the company. Nor did it affect the very factum
or creation of the contract as sanctioned by the court but related to the mode
or manner of performance or discharge of the contract and to that extent
rendered the transaction irregular. It cannot be said that the authority was
not distinctly pursued. The excess to my mind was not inextricably mixed up
with the rest of the transaction and the boundaries between the excess and the
rightful execution are distinguishable. Therefore, it can be said that although
the mode or manner or machinery of repayment actually stipulated by the company
was in part beyond the powers of the company, the security is good in so far as
the transaction is not in excess of the limitations sanctioned by the scheme.
For all these reasons I have reached the conclusion that the transaction of
mortgage although defective in some respects cannot be regarded as ultra vires
the company, and a nullity. It would be strange and mercurial to eliminate the
liability in a case of the nature before me on some doctrinaire technicality
which is not founded on principle nor vouched by authority.
I now turn to
examine two other defences pleaded in the alternative by defendant No. I bank.
The first of these was that even if it be established that the transaction of
mortgage in its favour was ultra vires the mills company, defendant No. I bank
having paid off in full the amount of the mortgage debt due by the mills
company to the Bank of India Ltd., was entitled to be subrogated to the rights
of the Bank of India Ltd., whose mortgage had been redeemed and that there was
in fact an agreement for subrogation contained in the registered instrument of
mortgage executed by the mills company in favour of defendant No. I bank. The
clause in the mortgage deed relied on by defendant No.I bank has been set out
by me when summarising the pleadings of defendant No. I bank. It may be
convenient here to dispose of one of the arguments advance on behalf of the
plaintiffs on this aspect of the case. It was said that the clause in question
did not amount to an agreement of subrogation and that it was only incorporated
to protect defendant No. I bank against mesne incumbrances. No doubt the clause
does say that defendant No. I bank was entitled to protection against all mesne
incumbrances., But it does not stop there and in terms states that the security
that had been created in favour of the Bank of India Ltd., by the mortgagros,
after payment by defendant No. I bank to the Bank of India Ltd., "shall be
kept on the footing of a subsisting charge on the said premises for the benefit
of the mortgagees." The contention, therefore, that there was no clause in
the agreement which would amount to an agreement of subrogation must fail.
The law
relating to subrogation is to be found in section 92 of the Transfer of
Property Act. Paragraph 3 of that section is as under :
"A person
who has advanced to a mortgagor money with which tthe mortgage has been
redeemed shall be subrogated to the rights of the mortgagee whose mortgage has
been redeemed, if the mortgagor has by a registered instrument agreed that such
person shall be so subrogated,"
The law
relating to subrogation to securities in case of ultra vires transactions of
borrowing may be taken as laid down by the Court of Appeal in England in
Wrexham, Mold and Connah's Quay Railway, In re 1. It was held in that case that
where a company borrows money ultra vires, the lender, so far as the money is
applied in the discharge of legal debts and liabilities of the company, is
entitled to have the loan treated as valid, but he is not subrogated to any
securities or priorities of the creditors who are paid by the means of his
moneys. In that case a bank having advanced moneys for payment of interest on
debentures issued by the railway company claimed priority as the assignee of
the debenture holders, by invoking the doctrine of subrogation. In rejecting
this claim RIGBY L J. stated (page 455) :
"I think
that the great preponderance of authority shews that the doctrine of
subrogation has very little, if anything at all, to do with the equity really
enforced in the cases, and that there is, at any rate, no authority for any
subrogation to the securities or priorities of the creditors paid off. Dealing
with this case independently of the authorities, I see no reason why the
parties to an illegal lending should have anything more than bare justice dealt
out to them; and this they get if they are allowed, as they have hitherto been
allowed, to have that portion of the advance actually expended in payment of
debts of the company treated as a valid advance. If the advance had been within
the borrowing powers of the company, the bank could have had no right to the
securities or priorities of the creditors that a fiction should be invented for
the purpose of making an invalid loan more valuable than a valid one."
Our law of
subrogation enacted in section 92 quoted above requires a loan by a person to a
mortgagor and an agreement in writing and registered to the effect that the
lender shall be subrogated to the rights of the mortgagee. There must be a loan
and there must be an agreement to subrogate. This presupposes that on the part
of the mortgagor there must be the capacity to borrow and the capacity to enter
into the agreement. But if the transaction itself is ultra vires, no debt is
created and the loan is entirely void. It is extremely difficult to see how in
such a case the quasi-lender can claim to exercise the rights of the mortgagee
by enforcement of the security created in favour of the mortgagee. If permitted
that would in some cases have the effect of placing the quasi-lender in a
better position than he would have been if the transaction were valid. The
learned Solicitor-General did not seriously attempt to support the bank's
alternative case sought to be founded on the doctrine of subrogation. The
correctness of the proposition stated above was not questioned before me and it
is not necessary for me to discuss the matter in any further detail.
Finally I turn
to the interesting question which was much dwelt on in the course of the
arguments before me. It arises on the alternative plea raised by defendant No.
I bank that even if the mortgage in its favour is held to be ultra vires, the
security given to it enures for its benefit for the sum paid to the Bank of
India Ltd., and it is entitled to enforce the contract in terms of the scheme.
The plea was sought to be based on the general principle of equity, that those
who pay legitimate demands which they are bound to meet, and have had the
benefit of other people's moneys advanced to them for that purpose, shall not
retain the benefit so as, in substance, to make those other people pay their
debts. It was said on behalf of the bank that on the facts of this case the
reliefs asked for by the plaintiffs should not be granted to them even if the
transaction between the bank and the mills company is held to be ultra vires
the mills company. Moneys were given by the bank and were applied in the full
discharge of the liability of the company to the Bank of India Ltd., and the
bank held a security on the properties and assets of the company. The bank was
further entitled to go into possession of the property mortgaged to it at any
time in case of certain eventualities. This it tried to do but was restrained
by an order and injunction passed by the court. The court of appeal, however,
passed an order in favour of the bank and the bank has in fact entered into and
continues to be in possession. This, it was said, was in any event in the
purported exercise of its right to hold the mortgage property as security. It
was further stated that although this possession was acquired by the bank after
the filing of the suit by the plaintiffs, this is one of those cases where the
court should not refuse to take into consideration facts and events occurring
after the filing of the suit. Finally it was urged that the bank being in fact
in possession claiming to be mortgagees, there has arisen an equity in its
favour which entitles it to resist the plaintiffs' suit. Learned counsel for
the bank very strongly relied on a decision of the Court of Appeal in England,
Blackburn Building Society v. Cunliffe, Brooks, & Co.1. The facts of that
case relevant for the present purpose were that a benefit building society,
which had no power to borrow money, were permitted by their bankers to overdraw
their account to a large amount. Certain deeds of the borrowing members of the
society which had been deposited with the bankers to overdraw their account to
a large amount. Certain deeds of the borrowing members of the society which had
been deposited with the bankers were deposited not only for safe custody but as
a security for the balance from time to time due to the bankers. An order for
the winding up of the society was made. It was held that the overdrawing of the
bankers' account was ultra vires being borrowing unauthorised either by the rules
or the objects of the society and, therefore, the bankers had no security on
the deeds under the agreement with the society but they were held entitled to
hold on to the deeds as a security for such part of the moneys advanced by them
as had been applied in payment of the debts and liabilities of the society. In
an action brought by the official liquidators claiming a declaration that the
deed deposited with the bankers were the property of the society and were not
subject to any security in favour of the bankers and asking that the deeds
might be delivered up to the plaintiffs,the Vice-Chancellor before whom the
action was tried gave judgment for the liquidators and ordered the bankers to
deliver up the deeds to the plaintiffs. An appeal against the decision of the
Vice-Chancellor was heard by LORD SELBOURNE L.C., JESSEL M.R..and COTTON
L.J.,who reversed that part of the decision of the court of the first instance.
In delivering the judgment of the Court of Appeal the Lord Chancellor observed
(page 70-71):
"Now, in
this case there is no borrowing power,nor can it be said that a borrowing power
generally can be necessary for the purposes of the business of the society;
therefore it is not upon the footing of an incidental or expressed power to
borrow, that anything can be allowed in this case. When tthe documents are
looked at, in which the agreements between this society and their bankers, the
appellants, are embodied,it is perfectly apparent, that a course of dealing was
contemplated and agreed upon between the bankers and the society,which was not
authorised by the rules of the society; and,consequently,that any benefit of
the securities which were in the hands of the bankers at the time of the
winding up,to which they may be legitimately entitled, is not founded upon
those agreements,or upon that course of dealing; that, so far as it depends
upon the agreements and the course of dealing which was regulated by the
agreements, the bankers are wrong,and the burden of showing that they are
entitled to anything lies upon them, and not upon the other side. But there is
an equitable principle,consistent with the law of which I have spoken,sound in
itself,and also sufficiently established by authority, which may entitle them,
nevertheless,to some benefit from their securities; and if the facts of the
case give them the benefit of that suitable principle, it is consistent with
justice and with authority to say that irregularity of either the form or the
substance of their course of dealing shall not stand in way of the justice due
to them......... The test is: has the transaction really added to the
liabilities of the company? If the amount of company's liabilities remains in
substance unchanged, but there is, merely for the convenience of payment, a
change of the creditor, there is no substantial borrowing in the result, so far
as relates to the position of the company. Regarded in that light, it is
consistent with the general principle of equity, that those who pay legitimate
demands which they are bound in some way or other to meet, and have had the
benefit of other people's money advanced to them for that purpose, shall not
retain that benefit so as, in substance, to make those other people pay their
debts. I take that to be a principle sufficiently sound in equate; and if the
result is that by the transaction which assumes the shapes of an advance or
loan nothing is really added to the liabilities of the company,there has been
no real transgression of the principle on which they are prohibited from
borrowing. Well,applying that in the present case we think,that, as far as it
can be made out that the money which were advanced by the bankers simply went
to pay the legitimate debts and liabilities of the society, the bankers ought
to have the benefit of their security;.........."
The case was
carried to the House of Lords. That decision is reported in Brooks &
Co.v.Blackburn Benefit Society 1, but on this point there was no appeal by the
liquidators and the House of Lords did not express any opinion on this part of
the decision of the Court of Appeal. The learned Solicitor-General has,
however,relied on the following passage from the speech of LORD BLACKBURN (page
866):
"The
Court of Appeal, in the present case,held that though there was nothing that
amounted to an assignment to the bankers of the claims of those who were paid
off by the money advanced,yet if it could be shown that such claims were in
fact paid off thereby, there was an equity in substance to give them, the
bankers,the same benefit as if there had been such an assignment. This is an
important decision. It seems to be justice;whether it is technical equity is a
question which, I think, is not now before this House."
Sir
Nusserwanji Engineer,learned counsel for the plaintiffs, has argued that this
equitable principle recognised and applied by the Court of Appeal in England in
the Building Society's case 2 is not applicable in India. Reliance was placed
on the well-known principle that where there is a statutory provision,the
courts should follow the statutory provision and they are not entitled to
extend that provision by having recourse to any rules equity. The argument
proceeded that the whole law of subrogation in India was to be found in section
92 of the Transfer of Property Act. I agree that where there is a statutory
provision, the court cannot extend the scope of that provision by incorporating
in its decision any doctrine or principle of equity. I also agree that the law
of subrogation in India is to be gathered from section 92 of the Transfer of Property
Act. The proposition,however,pressed before me by the learned Solicitor-General
cannot be regarded as an extension of the doctrine of subrogation. There is no
question here of the quasi-lender claiming to step into the shoes of the
original mortgagee of the property of the mortgagor,nor of his seeking to avail
of tthe security created in favour of the mortgage. What the quasi-lender seeks
to do is to rely on the equity that the company shall not enrich itself with
moneys not belonging to it when the moneys were advanced to it by the lender
for the very purpose of,and in fact directly utilised in,paying off a
pre-existing liability of the company. What the bank contends is that in this
state of facts it would be inequitable and against all conscience for the
company to benefit by the moneys of the bank and especially when the bank holds
a security and is in actual possession of the property on which that security
was created. I do not think that the present contention of defendant No.1 bank
is founded on any extended application of the doctrine of subrogation.
The
authorities treat as well-established,the broad principle,that if a company
borrows money and creates a security on its property when it has no power to do
so on debt arises,either at law or in equity,and the lender cannot recover the
money in an action in personam, nor can he enforce the security. The
position,however,is different and requires to be distinguished where although
the borrowing being unauthorised is ultra vires,the money so borrowed is
applied in the discharge of legal debts and liabilities of the company. In such
a case although the security cannot be enforced as such, the quasi- lender may
say,not without justification,that the liabilities of the company having
remained in substance unchanged he should on general unchanged he should on
general principle of equity not be deprived altogether of the benefit of the
security and should in any event be permitted to hold on to what was in fact
given to him. There is little doubt that this does seem to be justice. The only
question is whether it is equity. It is clear that a claim of this nature was
recognised in the decision of the Court of Appeal in England in the Building
Society's case 1 relied on by the learned Solicitor-General.
The proposition
that in such a case the quasi-lender should be permitted to hold on to his
security is to some extent justified by that equity which,while not prepared to
condone any illegality,requires the court, as far as possible,to restore the
parties to their original position even in cases of transactions ultra vires
the company. Restitution in such cases is generally viewed with favour when it
can be done without destroying other priorities and without affecting the
rights of innocent third parties. Although restitution is by itself a distinct
relief, it is not dissociated from cases where substantial relied is claimed by
a company on the ground of ultra vires. The extent to which restitution may be
granted must of necessity depend on the facts of each particular case. It is
true that in the appeal that was carried to the House of Lords in the case of
the Blackburn Building Society 1 the House of Lords was not called upon to, and
therefore,did not,express any opinion on this vexed but interesting question.
LORD DUNEDIN in this very interesting judgment in another case, Sinclair v.
Brougham 1,very cautiously referred to the effect of the decision of the Court
of Appeal in the Blackburn Building Society's case 2 and observed that the case
dealt with the question of retention of the securities alone and not "the
fate of a claim at the instance of the bank". It is also true that once
the contract goes on the ground of ultra vires,the security also would go, for
to hold it and enforce it would be to hold it against all the world that is
against all the creditors and shareholders of the company. The question whether
in such a case the security would be enforced in an action brought by the
quasi-lender is beset with some doubt and difficulty. I am not, however,called
upon to decide that question in the present case. Here defendant No.1 bank is
not seeking any relief from the court. It is relying on the property of the
mills company. It relies on that possession and says that it is in any event
entitled to retain the same. Moreover,it relies on that possession as a shield
and not as a sword. Therefore,the crucial question that arises for my
determination is whether a quasi- lender,whose money has been applied in
discharging a previous equitable mortgage on its property created by a company
and who in his turn is in possession of the property of the company given to
him in the purported performance of a contract to create security,which
contract to create security,which contract is a nullity as being ultra vires
the company,can claim to retain that property on equitable grounds and say that
he cannot be compelled to part with it without due restitution? The answer to
this must largest depend on the facts of each particular case. In the case
before me it cannot be said-no such suggestion was made by learned counsel for
the plaintiffs-that to recognise that right of retention would affect other
just priorities or rights of innocent third parties. Nor can it be said with
any justification that to recognise that right of retention would make an
invalid loan more valuable than a valid one. For all these reasons I have
reached the comforting conclusion that even if I were to take the view that the
whole transaction of mortgage in favour of defendant No.1 bank was ultra vires
and a nullity, I would yet hold that there is an equity arising in favour of
tthe bank which entitles it to retain possession of the property given to it in
the purported performance of the contract between the parties and to claim
restitution before it can be compelled to part with possession of that
property. Therefore,in that view of the matter also the plaintiffs are not
entitled to the reliefs they seek in this suit. I must in fairness add that the
case of defendant No.1 bank was in the course of the arguments not confined to
this limited aspect of the matter but principally was that in any event it was
entitled to hold the security and enforce the same in terms of the contract
annexed to the scheme sanctioned by the court.
Then there is
one more point with which I must very briefly deal. The suit is for a
declaration and a permanent injunction. These are discretionary reliefs.
Therefore,even if I had reached the conclusion that the transaction of mortage
in favour of defendant No.1 bank was ultra vires the mills company,I would in
view of my decision that there is an equity which entitled the bank to retain
the property and claim restitution,have had to consider whether any declaration
of nullity should be given to the plaintiffs. No doubt a strong case of inexpediency
is required before the discretion for refusing a declaratory relied is
exercised where it is shown that the right to sue exists and the ultra vires
nature of the transaction is established. But on the facts of the present case
and in the view I take of the equity arising in favour of defendant No.1 bank,
I would have in exercise of that discretion declined to grant any of these two
reliefs to the plaintiffs.
In the result
the suit will be dismissed.
I have heard
learned counsel on the question of costs. Sir Nusservanji Engineer has argued
that although defendant No.1 bank has succeeded before me it had raised a
number of contentions and issues some of which have been decided against the
bank. Therefore,defendant No.1 bank should be ordered to pay to the plaintiffs
costs relating to those issues. A fair order for costs of the suit and of the
issue decided in favour of defendant No.1 bank,but defendant No.1 bank should
pay tthe plaintiffs the costs of the issues decided against No.1 bank.
Mr.Buch,learned
counsel for the official liquidator of the mills company,has argued that the
plaintiffs should be ordered to pay the costs of the mills company which is
represented by the liquidator. It is stated that the liquidator has not
incurred any costs by filing the written statement and the attitude taken up by
the liquidator is not contentious and he has submitted to the orders of the
court. In my opinion the plaintiffs must also pay the costs of defendant No.2
company.
As regards
defendants Nos.11 to 20, who are the shareholders of the company supporting the
plaintiffs, Mr.Nariman,their learned counsel,has rightly stated that the proper
order for costs,so far as they are concerned should be that they should bear
their own costs. Therefore,there will be no order as to the costs of defendants
Nos.11 to 20.
Suit
dismissed.
[1934] 4 COMP CAS 256 (MAD)
Universal Mutual
Aid & Poor Houses Association Ltd., In re
STONE, J.
DECEMBER 19, 1933
S. Parthasarathy,
Tiruvenkata-chari, and Sivaprasad, Appeared
for the various Parties.
Stone, J.—This is a
summons which raises questions of interest and importance in the matter of the
winding up of the Universal Mutual Aid and Poor Houses Association Ltd.
To understand the nature of the questions it is necessary
to have in mind certain facts.
The above mentioned Company by its memorandum of
association had as its primary objects the following: (1) to take over the
assets and liabilities of the All-India Mutual Aid and Poor Houses Association
Ltd., Mysore; (2) to establish charitable institutions; (3) to raise two funds,
(a) the General Donation Fund and (b)the Special Donation Fund; (4) to utilise 78 per cent,
of 70 per cent, of the income arising from investment of the special donation
fund in granting loans and bonuses to certain classes of persons; (5) to use a
25 per cent, of 70 per cent, of the said income and all other income save as
hereafter mentioned for working expenses and the payment of dividends; (6) to
invest the special and general donation fund and as to 30 per cent, at least of
the special donation fund, utilise the income not as income of the company
falling under (5) but wholly for charity; (7) to act as trustees for any
charitable Institution or Fund and do everything incidental and conducive to
the promotion of the objects of the donors etc.
Shorn of everything but the
essential, it is thus seen that the company is primarily concerned with the
business of raising two funds and of these two funds the one is to be wholly,
both as to capital and income, and the other, as to 30 per cent, at least of
the capital invested, partly, set aside for charity.
The two funds are in the
memorandum distinguished otherwise than by name only by the size of the
donations. The general donation fund is to be fed by donations of less than Rs.
50 each; the special donation fund is to be fed by donations of Rs. 50 or
multiples thereof.
Pursuant to these primary objects
the company published advertisements and circulars and a booklet which has been
called a prospectus, but as it is not inviting persons to subscribe for shares
but to subscribe to these funds, I think it preferable to call it a booklet.
The booklet invites the public to worship God by doing charity and offers to
those who aid this charitable object two advantages:—(a) the socio-religious
advantage of being charitable, (b) the chance of getting financial advantage. I
will avoid the cynicism of saying that of the two the second is developed in
the more heavily leaded type, because it may be that many who subscribed
actually did chiefly desire to benefit charity. There can however, be little
doubt in my opinion that the financial advantages offered materially
contributed to the very great success, this scheme, during its short life
enjoyed.
So far as regards publicity, I
next come to the machinery developed. All over the country, agents were
appointed and these agents were responsible for the sale of certain numbers of
Donation Certificates and donation Bonds. These are shown in the
records of the company as underwritten by the agents and have been included in
the drawings I shall hereafter describe. The business of these agents was to
sell to the public these Donation Certificates or Donation Bonds and purchasers
became donors entitled to the advantages above described, save that they only
took part in the financial advantage if they were successful in the lottery
hereafter described.
The Donation Certificate was issued in two forms: the full
certificate (Rs. 100) and the half certificate (Rs. 50.) The Donation Bond
likewise took two forms: for Rs. 10 and Rs. 5 respectively. The business of
issuing Donation Certificates is detailed in the Articles of Association. I
find very little apart from Article 16 about Donation Bonds in the articles.
The matter is complicated, but in ways that I do not think
are relevant to this summons, by the fact that there were very frequent changes
made in the articles and several alterations made in the Certificates and
Bonds.
The Bond scheme is to be found by looking at the Donation
Bonds. It will be seen that the sums subscribed are to be deposited and/or
invested and the interest utilised in paying money to the subscribers. These
money payments are called bonuses and all subscribers do not get a payment. In
order to determine who shall be paid, the bonds are numbered, a lottery is held
and the winning numbers get the various prizes, ranging from Rs. 5,000 to Rs.
20. Needless to say the bonuses do not by any means exhaust the subscriptions.
In the case put in the bond before me it will be found if the figures are
worked out that the subscriptions amount to rather over 63 lakhs (each bond
represents Rs. 10) while the bonuses given amount to Rs. 74,220. The Bond is
silent as to what happens to the balance. Charity is only expressly mentioned
in Clause 8 when the "Bonds amount" of rupees one crore is to be paid
to the Special Donation Fund "after all the Bonds are drawn for
Bonuses." Whether that happy event would ever arise is of course, a matter
of conjecture. As the association have expressed in the Bond the intention to
issue a crore of bonds, it will be seen that what is paid (sic) if and when it
is paid, into the special (not the general) Donation Fund, nothing is said
about deductions for expenses or for bonuses paid out; nothing on the other
hand is said about the interest flowing from the inconsiderable figure of 10
crores of rupees invested, a part from the payment of bonuses there out. When,
however, the "Bond amount", i. e., 10 crores of rupees, has been paid
into the Special Donation Fund then the interest goes to further swell that
Fund. The earlier interest presumably goes to pay bonuses, to pay expenses and
to pay dividends. As there is nothing to prevent the company seriously delaying
the whole crore being taken up (it would only be necessary for instance for the
Company's activities to be practically abandoned when that goal was just out of
sight) it might well be that under this scheme the Company would be left with
enormous investments, the subscribers with insignificant bonuses, and charity
with nothing, and this might have continued, if not for ever, at any rate for
very many years. It should be noted that the scheme as thus developed does not
purport to feed the General but only the Special Donation Fund. The memorandum
on the other hand only allows of subscriptions of rupees fifty or over being
paid to the Special Donation Fund. These Bond subscriptions are of less than
Rs. 50 and should have gone to the general fund. The payment of the "Bond
amount" cannot be regarded as a subscription but as a payment over of
capital made up of subscriptions of Rs. 5 and Rs. 10 and these subscriptions
should go not to the special but to the general fund.
The Donation Certificate scheme is in a somewhat different
case. Provision is here made for the investment of the sums collected in two
ways: (1) 30 per cent, in Government securities; (2) 70 per cent, in other
ways. The interest on the 30 per cent, is devoted wholly to charity. Finally
"after all the certificate holders or their heirs in a serious are
benefited one way or the other, the other 70 per cent, also will be invested in
the Government and the interest accruable on the whole amount will be utilized
for the maintenance of the charitable institutions." The 70 per cent, or
rather 75 per cent, of the 70 per cent, is in the meantime devoted to giving a
variety of benefits to those who draw the lucky numbers; interest free loans,
bonuses and what rather look like life insurance benefits are to be paid.
I now come to the central fact. The machinery for
determining who of the many shall receive the bonus, loan or other benefit was
frankly the machinery of a lottery save as regards certain benefits. It is made
clear by the conditions printed over the Bonds and on the certificate that the
lucky ones are to be determined by a drawing.
The question is what is now to be done with the money? Are
the subscribers to have it returned or can the company keep it and if so what
directions should be given as to the disposal of the fund ; does it go wholly
to charity or wholly to the contributories or partly to one and partly to the
other ?
Before I examine the legal position that emerges it is
necessary to mention a few dates :
On 28th May, 1931 a petition for winding up was presented.
On 14th October an interim injunction restraining the holding of any lottery
was granted. On 1st February, 1932, the company was ordered to be wound up and
by relation the winding up commenced on 28th May, 1931. Even after the interim
injunction was ordered donations have been received but as to most of the
subscribers they subscribed before drawings were made. That is to say, most of
the subscribers have participated in a drawing and some few have, of course,
been successful. A certain number of the subscribers have subscribed after the
last drawing was held and these, of course, have never participated in a
drawing.
As no less a sum than 5 lakhs is said to be at stake (I
doubt whether when the accounts are further examined it will be found that this
sum, which is partly accounted for by the under written issues above referred
to, will be available) I considered it desirable in the interests of the
charity to give notice to the Advocate-General, because, although this summons
asks only for the return of the money and does not raise the question what is
to happen if it is not returned, still it does clearly imperil the interests of
the charities which have been established or are contemplated by the scheme. I
have as a consequence had the case very fully argued and I am obliged for the
help thus afforded me.
Before discussing in detail the legal position which is by
no means easy, I think it desirable to clear the ground by stating some
well-established propositions; for it is here said that the contracts under
which the various persons claiming made payments to the compay are either ultra vires or illegal
and those persons being in pari delicto cannot recover.
The doctrine of ultra vires has
as one of its most luminous exponent the Earl of Cairns in Ashbury Railway
Carriage Co. v. Riche (L.R. 7 H.L. 653). It is there made clear that if a
contract made by a company, is beyond the objects of the company, it is wholly
null, it has no legal existence and cannot be ratified. Its complete nullity is
seen by a consideration of Sinclair v. Brougham (1914 A.C. 398), where the
House of Lords considered what claim a person who had deposited money in a
bank, the carrying on of which was ultra vires had. The claim was in part laid
as for money had and received but it was pointed out that that form of action
quasi ex contractu was a development by way of case of the old action of
assumpsit and technically and historically was founded in debt, i e., in a
contractual relationship. Bat as the doctrine of ultra vires applied, there
could be no question of any such relationship ; for whatever attempt there had
been to bring about the contractual bond failed completely, the whole being
void. As the result of a very illuminating discussion a remedy in such a case
emerged and was found by applying the rule in Re Hallett's Estate (13 Ch. D.
696). That rule, too well-known to require re-statement here, is essentially a
rule of equity and attracts equitable defences. Sinclair v. Brougham and the
line of cases of which that is the foremost is expressed in proposition 170 of
Street on Ultra Vires as follows: "Funds contributed to an ultra vires
transaction may in winding up be recovered so far as traceable, and by any
equitable apportionment, if shown to be somewhere represented by assets in the
hands of the corporation."
It will be seen from the
foregoing that a supposed contract that is held to be ultra vires cannot be in
any sense described as an illegal contract for it is not a contract at all. The
transaction, as distinct from contract may, of course, be an illegal
transaction but no part of the Contract Act concerned solely with contracts has
in such a connection any application. It is not, as Lord Cairns points out, a
case of avoiding a contract, or agreement, for illegality; it is a case of,
thorough lack of ability on the part of one party, there being no agreement or
contract at any time made as distinct from attempted to be made.
In order to determine whether either the contracts attempt-
ed to be made under what I will call the Donation Certificate Scheme or the
Donation Bond Scheme were ultra vires it is only necessary to consider the
memorandum and see whether those contracts were beyond the powers so conferred
on the company.
The company was clearly empowered to raise a Special
Donation Fund (neither group of contracts had anything to do with the General
Donation Fund). That fund is expressed as "comprising donation amounts of
Rs. 50 and multiples of Rs. 50 each." It was empowered to utilize the
interest thereon in the manner already described. It appears to me that such a
company can take all reasonable business steps to raise that fund. It is not limited
to getting in subscription. It could, for example, run a charity fair: it could
attract subscriptions by offering inducements. It could for example, as part of
the business of raising the Fund, advertise, distribute hand bills, employ
canvassers, and do anything else that could be held to be a part of carrying on
the business of raising the Fund. When it has raised that Fund it has to deal
with it in a precisely expressed way.
So far as the Bond Scheme is concerned it is practically
all inducement and the Fund only comes into it at a remote date of a nature
possibly like the Greek kalends and when the charity film is removed all that
is seen is a lottery to which people subscribe in order to get money prizes.
But it must be remembered that these prizes are to be paid out of interest.
Clause 2 provides for the capital to be invested and Clause 8 provides that
" after all the Bonds are drawn for Bonuses the Bonds amount of rupees one
crore" will be handed over to the Special Donation Fund. In other words
these contracts had as the ultimate goal the enrichment of the Fund, but
arrived there by offering personal inducements. But the memorandum defines with
particularity how that Fund is to be formed. It is to be made up of
subscriptions of Rs. 50 or a multiple of Rs. 50. The Bond scheme does not fall
within this part of the memorandum but belongs to the part that relates to the
general Fund. But the Bond amounts do not go to the general Fund in any event.
I am accordingly of the opinion that the Bond scheme was ultra vires.
As regards the Donation Certificate Scheme there
can be very little doubt that the scheme is within the powers of the company
resuming the question as to that part of it that relates to life benefits.
It is next necessary to consider
whether these contracts were illegal.
The illegality relied upon is
this: The prizes are to be determined by a drawing; the scheme therefore
involves a lottery and Section 294-A of the Indian Penal Code makes it an
offence to keep a lottery office or to publish any proposal of this nature.
Section 23 of the Contract Act makes the "consideration or object" of
an agreement unlawful if either is of such a nature that "if permitted it
would defeat the provisions of any law" or "the Court regards it as
opposed to public policy." The section is very unhappily worded. One does
not usually speak of the consideration for an agreement but the consideration
for a promise. It is difficult to see what is meant by " defeat the
provisions" of a law. What is declared unlawful is not the agreement, or
contract, but the object or consideration. But I think the section must be
construed so that where it would be impossible to carry out the contract
without violating the provisions of a law or committing a crime, then in such
case the object must be deemed unlawful and the contract void.
Now, here it is said it was not
impossible to carry out this contract without committing crime, for even
assuming the essential drawings involved a lottery, still Section 294-A only
strikes at lotteries not authorised by Government and for all that appears this
lottery might have been authorised by Government and one should assume that it
was, for there is a presumption that things are lawful until the contrary is
proved. I am of the opinion however, that once it appears that the scheme
involves a lottery that scheme is unlawful within Section 23 unless it is shown
that Government authority had been given.
Next it is said, assuming these
contracts are void under Section 23, the money can be recovered back under
Section 65. In my opinion, that involves a mental confusion. Section 65 is
dealing with the substantive law, it is giving a right. But the obstacle in the
way of getting the money back is not created by the absence of the right but by
the impossibility of effectively litigating that right, i. e., it is a
difficulty created by the adjective law. The
obstacle is the maxim ex turpi causa non oritur. actio.
If the plaintiff is in pari delicto which the defendant he
cannot recover not because he has no ground of claim but because the Courts
will not allow a person so situated to use the machinery of the law. I have
examined this aspect of the case in C.S. 540 of 1932 and have nothing to add to
what I said there.
It remains to consider whether these persons were in pari
delicto. This appears to me to be a case on all fours (apart from an important
difference which I shall later examine) with Barclay v. Pearson (1893) 2 Ch.
154. There persons subscribed to a scheme held to be a lottery, the money was
held pending drawing and distribution by one Pearson (who later I believe
became Sir Arthur Pearson) and after drawing but before distribution a
competitor claimed on behalf of himself and all other prizewinners and
contributors, the money back. It was held following an observation by Fry, L.
J., in Kearly v. Thomson (24 Q. B.D. 742, 745) and of Lord Mansfield, L. C. J.,
in Browning v. Morris (2 Cowp. 790, 792) (which went off in a contrary
direction because it appeared that both plaintiff and defendant were lottery house
keepers) that competitors are a class which statutes striking at lotteries are
designed to protect and are not in pari delicto.
The difference between that case and this is, however, that
there Pearson was a stakeholder and the action was brought before he had parted
with the money. Now here the company has parted with such of the money as was
drawn for prizes and has granted loans pursuant to the scheme and has invested
the rest pursuant to the scheme and the observation of Littledale, J., in
Hastelow v. Jackson (8 B. & C. 226) must not be overlooked. He there said:
"If two parties enter into an illegal contract, and money is paid upon it
by one to the other, that may be recovered back before the execution of the
contract, but not afterwards."
The case of Barclay v. Pearson was relied upon by Tomlin,
J., (as he then was) in (1926) 1 Ch. at 665 as deciding that the competitors in
an illegal competition could obtain the return of their contributions but this,
of course, is subject to the rule that if the illegal event has occurred and
following upon it the prizes distributed, the contract being executed, the
plaintiff is debarred from recovery, the reason being, I imagine, that the
plaintiff has become by that time in pari delicto having stood by.
I proceed, therefore, according to the following
conclusions:
1. The Bond scheme was ultra vires.
2. The contributors to both schemes were not in
pari delicto.
It will be observed from the
preliminary statement of facts that this is not a simple case where the sums
contributed are held by a stakeholder and a claim is made before that
stakeholder has parted with the fund; nor is it a simple case of a depositor
having deposited with a company a sum of money in pursuance of an ultra vires
transaction. The following complications exist:—
(a) Some of these funds are taken over
from the old Mysore Company.
(b) Some of these funds represent book entries against agents
who would appear (the position has not been made clear) to have guaranteed the disposal
of the Donation Certificates or' Donation Bonds to subscribers. These agents
are not claiming.
(c) Drawings have taken place and pursuant to those drawing
sums have been paid over, but such sums do not to an appreciable extent exhaust
the capital. As to this it is to be observed—
(i) That as regards to the Bond Scheme only interest was to be or
was distributed.
(ii) As regards the Donation Scheme only 75 per cent, of 70 per cent,
was allocated to prizes and those prizes were mainly loans.
(d) (A fact not hitherto mentioned). Many persons primarily
dealt with this Company as borrowers seeking a loan on the security of a
mortgage. The mode of doing business was that the persons applied for a loan;
if a loan was granted, well; if not, they were entitled to have back the
donation amount which they were required to forward to qualify them to become applicants. The amount of the donation they required
to subscribe was 1/lOth of the mortgage amount. This 1/10th was treated as a
part re-payment of the loan. They participate in the drawing as subscribers if
their subscription is received but if so received, whatever may be the result
of the lottery, they get their loan.
(e) Practically
the whole of the moneys subscribed have been pursuant to the scheme, invested
and a very large part has been invested by granting loans on the security of
immovable properties.
(f) Many
of these loans have been as part of the business of winding up and under orders
of Court called in on favourable terms which involve some loss to the Company's
assets but were sanctioned as the only practical way of winding up this company
in any reasonable space of time.
One is not thus investigating a simple position such as
stakeholder holding money; nor is one able very easily and fairly to dispose of
the matter along tracing order lines.
I confess to rarely having met a case that has caused me
more difficulty not in determining what the law is but in applying the law to
the facts.
In such cases I find it of advantage to proceed by steps.
As regards those who contributed to the old Mysore Company it appears to me
that the rule laid down in Hastelow v. Jackson (supra) applies. They are not
entitled to recover anything. They have stood by far too long whether one
regards them as innocent contributories to an illegal or to an ultra vires
scheme. In the former case by standing by they have become in pati delicto and
in the latter case by acquiescence they are debarred from their equitable
remedy of tracing.
As regards those who have won and received prizes they are
for like reasons a fortiori debarred. This was conceded by the claimants.
As regards those who were in truth applicants for loans and
who applied after the last drawing they are, in my opinion, clearly entitled to
get their money back unless they received their loans. This also was conceded
by the claimants.
As regards Certificate-holders and Bond-holders it does
not, in my opinion, in view of the conclusion arrived at that they are not in
pari delicto, make any difference whether they applied before or after the last
drawing. It is reasonably clear from the cases that although a. drawing has
taken place, while the money is still with the stakeholder there is a locus
panitentia and the contributory can recover.
Where however, as here, the claim is made at a later stage
then it depends upon whether the money has been parted with; if it has, and to
the extent it has, it cannot be recovered.
Both schemes (Certificate and Bond) relate to the Special
Donation Fund. Under the terms of the Memorandum (which terms the public are
supposed to have constructive notice of) the special donation subscriptions
immediately they were received had to be invested as to 30 per cent, for the
benefit of charity. That was in fact done and it must be taken that the subscribers
impliedly consented to its being done.
As regards the certificate-holders their claim is in form
for money had and received under an illegal contract to which they were parties
but not in pari delicto. Their claim is under Section 65 and at the most they
can only reclaim the advantage the company has received. It was no part of the
scheme that the company would benefit as to 30 per cent. Their right is
therefore to the return of 70 per cent, of the subscriptions less the amounts
paid out and the expenses incurred. As to the expenses this was conceded by the
claimant.
As regards the Bond-holders, their claim is for a tracing
order. It is an equitable claim. I have had very considerable doubt whether,
bearing in mind that their remedy is equitable, they (save such of them as
subscribed after the last drawing) should be allowed, in all the circumstances
and particularly in view of their acquiescence, any equitable remedy. Giving
however, the best consideration I can to it, recalling that, had the contract
been intra vires they would have been in the same position as the
certificate-holders and that the fact that it was ultra vires should not,
unless equitable principles compel it, be in a worse position and thinking as I
do that in all the circumstances they should not be shut out, I conclude,
though without much confidence, that they too are entitled to a return of 70
per cent., less amounts paid out and charged and subject to the exclusion of
those who contributed to the old Mysore Company and to those who have drawn in
the lottery. Any other conclusion would leave the company with tb.2 undisposed
of sums, for I find it difficult to see on what basis I could direct that the
whole of these ultra vires collections should go to charity. Once it is held that
the scheme was ultra vires all the contractual terms go and the only ground on
which, granted the subscribers can be allowed in equity to claim at all, they
can have 30 per cent, deducted is that the whole transaction re-lated to a
scheme under which, in accordance with the memorandum of which they had
constructive notice, 30 per cent, were to go, in any event and at once to
charity. That they must assumed to have assented to when they subscribed and on
the scheme being shown to be ultra vires they have their equitable remedy only
on the terms that the part of the scheme that relates to charity be carried
out.
This has nothing to do in my opinion with such cases as In
re British Red Cross Balkan Fund [1914 2 Ch. 419] cited in support of the
proposition that there the object of the trust had failed. The object has not
failed. The poor are always with us. This company, as to part, at once received
these sums as trustees for a charitable object, the feeding of the poor and the
care of animals. That trust, in my opinion, is to be assumed to be known to the
subscribers. It has been in part carried out by the investment of 30 per cent
of the moneys in securities earmarked in the memorandum for such purposes and
it is now too late for the subscribers to claim, or in the case of the Bond
holders, to be allowed to have, those sums. The beneficial interest has passed
from the company and these assets are in their hands not as a company but as
trustees for a charity. Section 84 of the Indian Trusts Act does not, in my opinion,
apply nor for the reason above assigned does not doctrine of resulting trusts.
I do not think that this is a case of a gift wholly
charitable in interest to two objects one illegal and one legal so as to fall
within the line of cases of which [1917] 1 Ir. Ch. 183 is an example where it
was held that upon the illegal object failing the whole went to charity. This
is a case where only a part of the scheme was charitable both according to the tenor of the
documents, the Memorandum of Association and the intention of the parties. It
is the non-charitable part that attracts the illegality springing from a
lottery.
Pursuant to the above
conclusions, in my opinion, the liquidators should act as follows : They should
work out the total amount of the subscriptions actually paid under (a) the
donation scheme, (6) the bond scheme. The above list should distinguish (1) the
subscriptions that have been wholly paid, and (2) the subscriptions that have
been partly paid. 30 per cent, of that amount should be paid into Court as a
fund set aside for charity. Next the liquidators will set aside a fund which I
will at present denote by the unknown X to meet the costs of liquidation. That
fund will be fixed on a generous scale because the consequence of this order
will be to dissipate the assets. The liquidator will mention an outside figure
that he considers necessary on the first day of the next sitting. The balance
of the assets collected will be paid into Court to a fund against which
claimants may claim. That fund will await the claims. Those claims will be
considered on the basis that each claimant who has wholly subscribed is
entitled to a proportionate return of the amounts so subscribed and the
claimants that have partly subscribed are entitled to a like return divided by
the figure equivalent to the proportion they have subscribed; that is to say,
if a person has half paid up he will be entitled to half of what he would have
been entitled to had he wholly paid up; if he has one-third paid up he will be
entitled to a third; and so on.
Costs of all parties, as fixed
below, will come out of the estate:—
|
The Advocate-General |
… |
Rs. 500 |
|
His Junior |
… |
Rs. 150 |
|
(Claimant) Messrs. S.
Parthasarathy and Tiruvenkatachari |
… |
Rs. 300 & 150 |
|
Mr. Sivaprasad |
… |
Rs. 300 |
|
Counsel for Liquidator |
… |
Rs. 300 |
|
His Junior |
... |
Rs. 150 |
|
Certificate-holders and
bond-holders, each |
... |
Rs. 76 |
All these sums will be paid to the Counsel direct without any
further orders out of the estate. If the liquidator has already agreed another
fee that fee is to be paid.
I do not part with this case without expressing my pleasure
that the Advocate-General was able to bring to my attention the great help he
had received from Mr. Sivaprasad, and that Mr. Brooke Elliott was able to
express an equal indebtedness to Mr. Nagaraja Sastri. These encomiums, well
earned, are, I am sure, good hearing to the young men themselves and I think
come gracefully, from the leaders who thus recognise an indebtedness to their
juniors.
The unknown X on page 30 may be taken as ascertained at the
figure of Rs. 60,000.
[1966]
36 COMP.CAS. 87 (QB)
V.
City Wall Properties
Ltd.
MOCATTA,
J.
JUNE
28,29,30;
July
1,5, 1965
MOCATTA, J. stated the facts and continued : This action
came on before me for trial in the commercial list on Monday, June 28. On the
previous Friday counsel for the defendants informed counsel for the plaintiffs
that he had been instructed to take the point that the alleged contract sued
upon was ultra vires the plaintiff company, since it was not authorised by the
objects clause in the plaintiff's memorandum of association. I allowed the
defendants to amend their defence to raise this point. [His Lordship read the
amended defence as set out in the facts.]
It was agreed
between counsel that I should try the matter so raised as a preliminary issue,
since if the point was a good one the action must fail, at any rate as at
present constituted. I accordingly heard arguments and evidence upon the
preliminary issue, and the judgment I am now giving deals solely with that
matter. I would add that the late stage at which this issue was raised took
both counsel, or certainly the plaintiffs’ counsel, by surprise, with the
results that the hearing of the argument an evidence upon it followed rather a
different course and shape than might otherwise have been the case. The
arguments in particular took a new aspect as the investigation proceeded and
various difficulties came to light.
Finally, three
separate points arose for decision. First, can a defendant when sued upon a
contract by a company, take the point that that contract is ultra vires the
company; secondly, if he can do so when the contract is executory, can he do so
or is the point relevant when the contract has been executed so far as the
company's obligations are concerned; thirdly assuming that the answers to the
first two question are in the affirmative, was this contract ultra vires the
plaintiffs?
It is
convenient at the outset to refer to the leading authority on the doctrine of
ultra vires in relation to companies, namely, Ashbury Railway Carriage and Iron
Co. Ltd. v. Riche ([1875] L.R. 7 H.L. 653). In that case the respondent sued
the appellant company for damages for breach of contract based upon repudiation
by the appellants, and the ultra vires point was raised by the company by way
of defence. The respondent, upon a case stated, succeeded before the Court of
Exchequer, the judges being equally divided in the Exchequer Chamber, but
failed in the House of Lords.
Lord Cairns
L.C. said (Ibid. 672) : "In a case such as that which your Lordships have
now to deal with, it is not a question whether the contract sued upon involves that
which is malum prohibitum or malum in se, or is a contract contrary to public
policy, and illegal in itself. I assume the contract in itself to be perfectly
legal, to have nothing in it obnoxious to the doctrine involved in the
expression which I have used. The question is not as to the legality of the
contract; the question is as to the competency and power of the company to make
the contract. Now, I am clearly of opinion that this contract was entirely, as
I have said, beyond the objects in the memorandum of association. If so, it was
thereby placed beyond the powers of the company to make the contract. If so, my
Lords, it is not a question whether the contract ever was ratified or was not
ratified. If it was a contract void at its beginning, it was void because the
company could not make the contract. If every shareholder of the company had
been in the room, and every shareholder of the company had said, ‘That is a
contract which we desire to make, which we authorise the directors to make, to
which we sanction the placing the seal of the company,' the case would not have
stood in any different position from that in which it stands now. The
shareholders would thereby, by unanimous consent, have been attempting to do
the very thing which, by the Act of Parliament, they were prohibited from
doing. But, my Lords, if the shareholders of this company could not ab ante
have authorised a contract of this kind to do made, how could they subsequently
sanction the contract after it had, in point of fact, been made."
I need not
read the whole of the paragraph dealing with ratification, but later the Lord
Chancellor says (L.R. 7 H.L. 653, 673) : "In my opinion, beyond all doubt,
on the true construction of the statute of 1862" [the Companies Act of
that year] "creating this corporation, it appears that it was the
intention of the legislature, not implied, but actually expressed, that the
corporation should not enter, having regard to its memorandum of association,
into a contract of this description. If so, according to the words of Mr.
Justice Blackburn, every court, whether of law or of equity, is bound to treat
that contract, entered into contrary to the enactment, I will not say as
illegal, but as extra vires, and wholly null and void, and to hold that a
contract wholly void cannot be ratified."
Lord
Chelmsford said ([1875] L.R. 7 H.L. 653, 679) : "I have already observed
that the contracts entered into by the company with Messrs. Riche was not a
voidable contract merely, but being in violation of the prohibition contained
in the Companies Act, was absolutely void. It is exactly in the same condition
as if no contract at all had been made, and therefore a ratification of it is
not possible."
Lord Selborne
said (Ibid 694) : "I think that contract for objects and purposes foreign
to, or inconsistent with, the memorandum of association are ultra vires of the
corporation itself. And it seems to me far more accurate to say that the
inability of such companies to make such contracts rests on an original
limitation and circumscription of their powers by the law, and for the purposes
of their incorporation, than that it depends upon some express or implied
prohibition, making acts unlawful which otherwise they would have had a legal
capacity to do. This being so, it necessarily follows (as indeed seems to me to
have been conceded in Blackburn J.'s judgment) that, where there could be no
mandate, there cannot be any ratification; and that the assent of all the
shareholders can make no difference when a stranger to the corporation is suing
the company itself in its corporate name, upon a contract under the common
seal. No agreement of shareholders can make that a contract of the corporation
which the law says cannot and shall not be so."
These are
strong and, if I may respectfully say so, clear statements and I must confess
to some initial surprise when Mr. Dunn, in his able argument in difficult
circumstances for the plaintiffs, submitted that it was not open to the
defendants to take the ultra vires point. He based his argument on statements
in two textbooks, the support afforded them by dicta in two cases and the fact
that as far as he could ascertain there was no reported case in which a
defendant had ever successfully raised the point in answer to a claim by a
company. Whilst he could not, and did not, submit that the law on the matter
was clear, he argued that I should decide the first point in his favour, and
that, if I did so, I would be acting in accord at any rate with the object and
intent of the ultra vires rule.
He referred me
for the latter to the statement of Lord Parker in Cotman v. Brougham ([1918]
A.C. 514; 520; sub nom. In re Anglo-Cuban Oil, Bitumen and Asphalt Co. Ltd.,
Cotman v. Brougham, 34, T.L.R. 410, H.L.) : "The question whether or not a
transaction is ultra vires is a question of law between the company and a third
party. The truth is that the statement of a company's objects in its memorandum
is intended to serve a double purpose. In the first place it gives protection
to subscribers, who learn from it the purposes to which their money can be
applied. In the second place it gives protection to persons who deal with the
company, and who can infer from it the extent of the company's powers. The
narrower the objects expressed in the memorandum the less is the subscribers'
risk, but the wider such objects the greater is the security of those who
transact business with the company."
Enforcement of
the contract pleaded was beneficial here to the shareholders in the company and
no question of the security of the defendants arose. If a defendant were
allowed to take the point when sued by a company that had contract ultra vires,
he could then escape from what would otherwise be his liability to the
detriment of the shareholders of the company and the application of the rule in
such circumstances would go beyond its object and intent and work injustice.
The defence was an unmeritorious one. The latter point may well be true, but it
must nevertheless prevail if sound in law.
The first
textbook statement relied upon is Street, The Doctrine of Ultra Vires,
published in 1930, where at p. 30 it is said : "There appears to be a
second principle running through the cases. The plea of ultra vires may always
be taken by the corporation guilty of the impugned transaction, whether such
corporation be plaintiff or defendant, and no estoppel will preclude the plea.
But the doctrine having been enunciated as a weapon of defence for the
protection of corporations, no other party can take the plea as a defence
against it."
In Professor
Gower's book on Modern Company Law, 2nd ed. (1957), there appears the following
passage at pp. 90 and 91 : "It is not clear whether the other party when
sued by the company can pleaded as a defence that the contract was ultra
vires" - he then cites in a footnote the passage in Street on the Doctrine
of Ultra Vires which I have just read - "On normal principles of the law
of contract he should not be able to set up the incapacity of the person with
whom he has contracted, but whether this applies in cases of ultra vires is
obscure."
So far as
textbooks go, the only other references to this topic which the industry of
counsel could discover were in Anson's Law of Contract, 22nd ed. (1964), p.
202, where it is said : "In its turn, the company cannot enforce the ultra
vires contract." A similar statement appears in Cheshire & Fifoot on
the Law of Contract, 6th ed. (1964), at p. 366. Both these statements are based
on an article by Mr. M.P. Furmston in (1961) 24 Modern Law Review, p. 715.
No special
reliance was, however, placed upon that article by Mr. Wilmers for the
defendants. He submitted that the statements in Mr. Street's and Professor
Gower's works were illfounded and inconsistent in principle with the reasoning
of the House of Lords in the Ashbury Railway case, (L.R. 7 H.L. 653) that the
dicta in the only two cases relied upon by Mr. Dunn were irrelevant or wrong in
principle, and that Mr. Dunn's general submission was contrary to one case
decide before the Ashbury Railway case (L.R. 7 H.L. 653) and inconsistent with
many other decided since it.
Unless there
are authorities clearly supporting Mr. Dunn's argument, I am of the opinion
that it cannot be right, having regard to the reasoning in the Ashbury Railway
case (L.R.7 H.L. 653). I can find no reason in principle to support the
proposition that a defendant, when sued upon a contract, is debarred from
pleading that that contract is and always was void and a nullity in the eyes of
the law. It was no suggested that any technical estoppel arose. As to the
statement in Professor Gower's book that on normal principles of the law of
contract a defendant should not be able to set up the incapacity of the person
with whom he has contracted, Mr. Dunn was only able to refer me to the Infants
Relief Act, 1874, and the view that has been expressed that, although that Act
provides that all contracts, other than contracts for necessaries, "shall
be absolutely void," those words may mean no more than "void at the
option of the infant" : see the discussion in Chitty on Contracts, Vol. 1,
General Principles, 22nd ed. (1961), at pp. 178 and 179.
The law as to
the enforceability by an infant of contracts not for necessaries is notoriously
uncertain (see, in addition to Chitty, Chalmer's Sale of Goods, 12th ed.
(1945), p. 21), and arguments by analogy from one uncertain branch of the law
are of little assistance in dealing with another. Moreover, there may be good
special reasons for reading "absolutely void" in the Infants Relief
Act as meaning "void at the option of the infant" by reason of the
context in which those words are used - namely, an Act for the relief of
infants and not for the relief of traders, and in the previous common law on
the subject. I do not consider the law in relation to contracts by infants of any
assistance.
Dicta in two
cases were relied upon by Mr. Dunn. One was National Telephone Co. Ltd. v.
Constables of St. Peter Port ([1900] A.C. 317, 321 P.C.). There the plaintiffs
had brought an action in Guernsey against the local authority to recover
damages for cutting down and removing telephone wires stretched across a public
street. The cause of action appears to have been that the cutting of the
plaintiffs' wires was "mal-a-propos et contre droit." One of the
pleas raised was that the plaintiffs' memorandum of association did not
authorise them to erect a telephone system in Guernsey. This point was not
argued in the Privy Council, where, as in the Guernsey courts, the defendants
succeeded, but Lord Davey said ([1960] A.C. 317, 321, P.C.) : "It was also
admitted that the company was not then authorised by its memorandum of
association to carry on business within the island. The latter point does not
appear to their Lordships to be material. If the business was ultra vires of
the company, that is a question for the shareholders or for the
Attorney-General, and not one which the constables had any interest to
raise." In my judgment, this remark, having regard to its context, is of
little assistance or relevance in dealing with the present point.
The other case
is more important ; it is In re Collman ([1881] 19 Ch. D. 64, C.A.). There the
trustees of a friendly society, who were the claimants, had, in excess of their
authority under the Friendly Societies Act, 1875, lent money to someone not a
member of the society on the security of a promissory note signed (inter alia)
by Coltman. The trustees claimed in the administration of his insolvent estate
by the court to prove for the money lent and interest. The personal
representative challenged this claim on the basis that the loan was made ultra
vires and succeeded before Fry J. on the ground of illegality; but the trustees
were successful in the Court of Appeal, who held that although unauthorised,
the loan was not illegal.
Mr. Dunn in particular
relied on the judgment of Brett L.J., who said (19 Ch. D. 64, 70, 71 C.A.) :
"The only objection to this loan is that it was made without authority.
But it does not seem to me that the borrower can set up as a defence to an
action that the person who lent him the money, and to whom he has made a
promise to repay that money, had no authority to lend it to him. That is an
objection which it is not for him to take. The contract is, If you will lend me
so much money I will pay you that money back on demand. The consideration is
the handling over the money. That is not illegal. The promise to pay back money
which you have borrowed is not illegal. The money was not borrowed for any
illegal purpose, in order to do an illegal or immoral thing, and I cannot see
that there is anything illegal in the contract. The only objection is, that
those who made the contract with the debtor had no authority to make it, and
that is an objection which he cannot take." He then referred to the
Ashbury Railway case (L.R. 7 H.L. 653), and continued (19 Ch.D. 64, 71) :
"But the House of Lords did not hold that if money had been lend by
directors without authority, the money could not have been recovered, or that
the borrowers could set up the defence that those who lent them the money had
no authority to do so." He concluded his judgment by saying : "Under
these circumstances I am unable to agree with the learned judge whose judgment
is appealed from. He proceeds on the ground that the contract was illegal,
whereas, in my opinion, the only objection is that it was made by persons who
had no authority to make it, and that is an objection which the makers of the
note could not take."
Mr. Wilmers
submitted that these dicta by Brett L.J. were in the light of subsequent
authorities, not binding on me. In particular he relied on Brougham v. Dwyer
([1913] 108 L.T. 504; 29 T.L.R. 234, D.C.). That case was but one of many
arising out of the affairs of the Birbeck Permanent Benefit Building Society,
who had for many years ultra vires carried on the business of bankers. The
claim by depositors of money with the society in its liquidation gave rise to
the famous case of Sinclair v. Brougham ([1914] A.C. 398; 30 T.L.R. 315, H.L.)
in which it was held that the depositors could not recover their deposits as
money had and received, since the society could not intra vires have impliedly
promised to repay it. They were left, therefore, to a less valuable equitable
remedy. But in Brougham v. Dwyer (108 L.T. 504; 29 T.L.R. 234, D.C.) the
liquidator of the society sued to recover from a depositor who had overdrawn
his account. In the Divisional Court Lush J., after explaining that the loan by
the directors of the society was not illegal, but merely ultra vires and
unauthorised, held that an action for money had and received would lie. The
liquidator did not have to rely on any contract. In re Collman (19 Ch. D. 64)
was applied. That case was also referred to in Tauranga Borough v. Tauranga
Electric Power Board ([1944] N.Z.L.R. 155, 227, 228). In my judgment, In re
Coltman (19 Ch.D. 64) properly regarded, is a case, like Brougham v. Dwyer (108
L.T. 504; 29 T.L.R. 234) where the lender of money, although acting ultra vires
in making the loan, was entitled to recover on the basis money had and
received. I do not think the dicta of Brett L.J. are relevant on the first
point I have to decide.
So much for
the textbooks and cases relied upon by the plaintiffs. Mr. Wilmers cited the
old case of Copper Miners of England v. Fox ([1851] 16 Q.B. 229) as being clear
authority against the plaintiffs. There the plaintiffs, who were a corporation
incorporated at the end of the seventeenth century by Royal Charter, brought an
action in assumpsit on an agreement by which they were to supply the defendant
with 2,700 tons of iron bars of their make, to be made according to plans to be
furnished by the defendant, and to be paid for at so much a ton. Mutual
promises were alleged. Seven hundred tons were supplied and paid for, and the
breach alleged was that the defendant would not furnish plans to enable the
plaintiffs to supply the remaining 2,000 tons. The plea was non assumpsit. The
charter of the plaintiffs did not expressly authorise them to deal in iron
rails, and it was in effect admitted that such dealing was not incidental or
ancillary to carrying on the business of copper miners. In his judgment Lord
Campbell said (16 Q.B. 229, 235) : "We are of opinion that in this case
the rule should be made absolute. The objection relied upon by the defendants,
if well founded, may clearly to taken advantage of under the plea of Non
assumpsit. If the contract given in evidence is void, the defendant did not
promise in manner and form, and no special plea could be necessary." He
went on to show that as the plaintiffs' powers under their charter did not
extend to trading in iron bars there was no valid contract between the parties.
Although the case is complicated by reason of the necessity, in the state of
the law as it then was, for the plaintiffs, who had not contracted under seal,
to bring themselves within one of the exceptions to the rule that a corporation
could not sue on a simple contract, it is clear that the defendants were held
entitled to raise the question of the capacity of the plaintiffs to make the
contract sued upon.
Apart from
this case Mr. Wilmers referred me to a number of relator actions, of which I
need only mention Attorney-General v. L.C.C. ([1902] A.C. 165; 18 T.L.R. 298,
H.L.) and Attorney-General v. Mersey Railway Co. ([1907] A.C. 415; 23 T.L.R.
684 H.L.) as being inconsistent with Mr.Dunn's argument. They certainly shows
that the ultra vires point can be raised by other persons than shareholders,
the liquidator of a company or the company itself.
He also drew
some support from the recent case of Anglo-Overseas Agencies Ltd. v. Green
([1961] 1 Q.B. 1; [1960] 3 W.L.R. 561; [1960] 3 All E.R. 244; [1961] 31 Comp.
Cas. 38) decided by Salmon J., where a similar point as regards the contract
sued upon being ultra vires the plaintiff company was raised by the defendant
and tried as a preliminary issue. In that case, counsel on both sides and the
judge proceeded on the basis that if the contract were ultra vires, which was
ultimately held not to be the case, the action must fail. It apparently
occurred to no one to argue that the defendants could not raise the point.
In my
judgment, a defendant, when sued on a contract by a company, is entitled to
take the point by way of defence that the contract was ultra vires the company.
In short, my reasons are that any other conclusion would be inconsistent with
the reasoning in the Ashbury Railway case (L.R. 7 H.L. 653) in that the
contract is void and in the eyes of the law non-existent, that to hold a
defendant liable under a non-existent contract would be to act contrary to all
principle, that there are no authorities which, properly understood, support
Mr. Dunn's argument and that the authorities relied upon by Mr. Wilmers, though
perhaps not conclusive, point strongly the other way.
As to the
second point, Mr. Dunn argued that the ultra vires doctrine could not be
invoked or successfully relied upon by way of defence by a defendant when the
plaintiff company, under the contract made by it ultra vires had performed its
part of the contract. The doctrine only had application to executory contracts.
If sound this argument would have no application to the plaintiffs' alternative
claim in this action for damages. It would, however, apply to the first way in
which their claim is pleaded - namely, that the fee of Ponds 20,000 is due to
them, they having completely performed their part of the contract.
In support of
this argument, Mr. Dunn relied upon the statement in Mr. Furmston's article
already cited, at page 719, that in America "once the contract has been
completely performed, the law lets it alone and any property rights acquired by
either party thereunder will be protected, and most jurisdictions will give
some relief either in contract or in quasi-contract where the contract has been
partly performed." He also relied on Copper Miners of England v. Fox (16
Q.B. 229), where there was certainly some argument about the difference between
executory and executed contracts and Lord Campbell said (Ibid. 236) "the
cases respecting executed contracts are here wholly inapplicable."
Mr. Dunn's
argument can be summarised as the submission that if the defendant has had the
benefit of money, goods or services under a contract made by a company ultra
vires, the company can notwithstanding sue in respect thereof and the fact that
the contract was made ultra vires is irrelevant.
I can say at
once that in my view Copper Miners of England v. Fox (Ibid 229) is irrelevant
on this matter. There was no decision there about the law relevant to executed
contracts and no expression of judicial opinion upon it. If the point had
arisen, it would have been in relation to the exception from the rule that
corporations could not sue on contracts not under seal established eventually
in the case of non-trading corporations: see Cheshire & Fifoot, Law of Contract,
5th ed. (1960), pp. 352, 353.
In my
judgment, there is no ground in principle for distinguishing between executory
and executed contracts in the manner contended for by Mr. Dunn. If the
plaintiff company that has made an ultra vires contract has to rely upon the
terms of that contract in order to succeed in its action, it must in my
judgment fail, since the contract was void ab initio and the defendant is
entitled to raise the point. I need not repeat my reasoning on the first point,
which is equally applicable here.
That, however,
does not necessarily in every case exhaust such a company's remedies. In an
appropriate case that company may be able to obtain relief quasi-ex contractu
in an action for money had and received: see, for example, In re Coltman (19
Ch. D. 64), Brougham v. Dwyer ((1913) 108 L.T. 504: [1913] 29 T.L.R.234), and
the remarks of Myers C.J. in Tauranga Borough v. Tauranga Electric Power Board
([1944] N.Z.L.R. 155, 227, 228), the New Zealand case mentioned earlier. In
other cases relief may be obtained on a quantum meruit basis: see the decision
of the Court of Appeal in Craven Ellis v. Canons Ltd. ([1936] 2 K.B. 403; 52
T.L.R. 657; [1936] 2 All E.R. 1066; [1937] 7 Comp. Cas. 307, 313 C.A.). In that
case it was held that a plaintiff, who and done work for defendants under a
void agreement, was entitled to recover something on a quantum meruit. As was
said by Greer L.J. ([1936] 2 K.B. 403, 412; [1937] 7 Comp. Cas. 307), "the
obligation to pay reasonable remuneration for the work done when there is no
binding contract between the parties is imposed by a rule of law, and not by an
inference of fact arising from the acceptance of services or goods."
There is,
however, no claim put forward on a quasi-contractual basis in the present
action nor must anything I say in this judgment be taken as indicating any view
on the question whether any such claim could in the circumstances of this case
succeed. On this preliminary issue I can deal only with the claims raised on
the pleadings before me. On those pleadings, which are based exclusively on the
alleged contract between the parties, the defendants are in my judgment
entitled to take the point that the contract sued upon, whether executory or
executed, was ultra vires the plaintiffs, and, if that be right, the claims
must fail.
I now,
therefore, turn to the third point. Was the contract sued upon ultra vires the
plaintiffs? The plaintiffs were incorporated on November 21, 1953, as a private
company. The year 1953 seems to have been the first post-war year when
large-scale private property development became possible. Mr. Randall Bell was
the originator of the company and at all material times its alter ego. He is a
Fellow of the Association of Auctioneers and Landed Property Agents. Prior to
1953 he had acted as an estate agent in the purchase and sale of previously
developed properties. He was, and remained, chairman and director of the
plaintiff, and his brother and wife were the other two directors. Mr. Bell then
held two-thirds of the ordinary shares and his brother, a practising member of
the Bar, the remaining third. This position obtained in 1962, the period
relevant to this action, though now Mr. Bell's brother has dropped out, Mr. and
Mrs. Bell are the sole directors and Mr. Bell holds 80 per cent. of the equity
in the company, the remainder being held by his wife.
The
plaintiffs' principal business has always been that of developing housing
estates, but they have never owned the land that they have developed. Sometimes
they have built the houses by direct labour, sometimes and more often they have
employed other contractors to do the building. The land upon which their houses
have been built has been acquired by one or other of a number of private
companies formed by Mr. Bell, the shareholding in which has been owned by him,
other members of his family and others.
The objects
clause in the plaintiffs' memorandum of association is, as is usual, of great
length. I can greatly abbreviate sub-clauses (a) and (b), and need only set out
in full sub-clauses (c) and (u). So abbreviated the relevant parts of clause 3
of the memorandum read: "The objects for which the company is established
are: (a) to carry on the trade or business of general, civil and engineering
contractors and in particular......to construct.....either by the company or
other parties....houses....either upon land acquired by the company or upon
other land; (b) to acquire by purchase.....any lands; (c) to carry on any other
trade or business whatever which can, in the opinion of the board of directors,
be advantageously carried on by the company in connection with or as ancillary
to any of the above businesses or the general business of the company;.....(u)
to do all such other things as are incidental or conducive to the above objects
or any of them."
Assuming, as I
must for the purposes of this preliminary issue, that the facts set out in the
statement of claim are established, the claim made here by the plaintiffs is
one for commission, or for damages in lieu thereof, in respect of a contract
made by them to introduce a financier prepared on certain terms to provide
Ponds 1 million of short-term credit to the defendants for property
development. The plaintiffs were, therefore, in this instance acting as money
or mortgage brokers, and this was not gainsaid by Mr. Dunn. What he did argue
was that such an activity was within sub-clause (c) or (u) of the objects
clause since the plaintiff, in the person of Mr. Bell, their chairman, acquired
from time to time knowledge of sources of finance available for property
development, and that they were entitled, within the wording of those clauses,
to turn such knowledge to account by making a contract such as the present one,
even though the plaintiffs had never themselves obtained finance from such
sources, had no other connection with or interest in the schemes of property
development of the defendants, had never been employed by the defendants as
builders or developers of housing or any other estates, and were not to be for
the scheme to be financed by the financier to be introduced by the plaintiffs.
For the
defendants it was argued in the first place that such knowledge of the sources
of supply of finance for property development as Mr. Bell had, came to him in
his personal capacity and not as chairman of the plaintiffs. The evidence
clearly established that the plaintiffs had never availed themselves of such
finance, they had obtained finance for house building solely from buildings
societies advancing money on behalf of the future householders for whom the
houses were to be built, and the finance which had been used in relation to the
purchase of land upon which the plaintiffs had subsequently erected houses had
always been advanced to the other companies, controlled in whole or part by Mr.
Bell, which held no shares in the plaintiffs and in which the plaintiffs had no
shares. In those circumstances, Mr. Wilmers argued that the plaintiffs could
not claim that Mr. Bell's knowledge was theirs and that the raising of finance
for the purchase of sites was any part of their business.
Apart
altogether, however, from this line of argument, which depended on a close
analysis of rather complicated facts, Mr. Wilmers submitted that, as a matter
of law and on the true construction of sub-clauses (b) and (u) of the objects
clause, the contract sued upon was ultra vires.
For a general
summary of the relevant law I was referred by both counsel to the following
passage from Buckley on the Companies Acts, 13th ed. (1957), p. 23: "The
doctrine that any act not authorised by the memorandum is ultra vires is to be
applied reasonably. Anything fairly incidental to the company's objects as
defined is not (unless expressly prohibited) to be held to be ultra vires. The
question is not, however, whether the act or business not expressly authorised
by the memorandum can conveniently or advantageously be done or carried on in
conjunction with acts or businesses which are so authorised, but whether it is
reasonably incidental or accessory thereto. Thus, it is ultra vires for a
company formed to work tramways to carry on either the business of an omnibus
company or a general parcels collection and delivery business, however
conveniently or advantageously such business can be combined with the tramways
business."
In addition
Mr. Wilmers drew my attention to two points of law of some importance in
approaching the present problem. First, in clause 3 of the plaintiffs'
memorandum of association there is no provision that any sub-clause shall not,
except when the contract expressly so requires, be in any wise limited or
restricted by reference to or inference from the terms of any other sub-clause,
words, or to similar effect. It is clear from Coltman v. Brougham ([1918] A.C.
514) and Anglo-Overseas Agencies Ltd. v. Green ([1961] 1 Q.B. 1; [1961] 31
Comp. Cas. 38) that the presence of such a term in the memorandum may make all
the difference to the construction of the provisions and may greatly extend the
powers of the company. Secondly, in the absence of such words, one must bear in
mind that was said by Lindley L.J. in In re German Date Coffee Co. ((1882) 20
Ch. D. 169, 188 C.A.): "The first question we have to consider is, what is
a fair construction of the memorandum of association? It is required by the Act
of 1862 to state what the objects of the company are. In construing this
memorandum of association, or any other memorandum of association in which
there are general words, care must be taken to construe those general words so
as not to make them a trap for unwary people. General words construed literally
may mean anything; but they must be taken in connection with what are shown by
the context to be the dominant or main objects. It will not do under general
words to turn a company for manufacturing one thing into a company for
importing something else, however general the words are."
This statement
of principle must, in my judgment, be applicable in this case.
Mr. Wilmers
submitted that the plaintiffs could derive little, if any, more assistance from
sub-clause (c) than from sub-clause (u). Certainly he is right that the mere
fact that the board of directors of a company may be of the opinion that an
activity can be advantageously carried on by the company, even if the opinion
be well founded, will not per se make that activity intra vires: see In re
Crown Bank ((1890) 44 Ch. D. 634, 644). The words in sub-clause (c) -
"which can, in the opinion of the board of directors, be advantageously
carried on by the company" - can therefore, for present purposes, be
ignored.
If those words
be disregarded there is little distinction left between sub-clauses (c) and
(u). One provides that the plaintiffs may "carry on any other trade or
business whatsoever......in connection with or as ancillary to any of the above
businesses or the general business of the company," whilst the other
provides that the plaintiffs may 'do all such other things as are incidental or
conducive to the above objects or any of them." The words in sub-clause
(c) - "any other trade or business whatsoever" - which are absent
from sub-clause (u), cannot in my opinion make that sub-clause wider in effect
than the later one or be material here. If making the contract sued upon, which
was the only one of its kind ever made by the plaintiffs, was not carrying on a
trade or business, sub-clause (c) is irrelevant to the issue I have to decide.
If making the contract was the carrying on of a trade or business, which I
think to be the better view, then I have to decide whether making this contract
was "in connection with or ancillary to" the general business of the
plaintiffs, or was "incidental or conducive" to it.
There was no
evidence whatever to support an argument that making this contract was
"conducive" to the general business of the plaintiffs. In the final
analysis, therefore, I have to decide whether it was "in connection
with" or "ancillary to" or "incidental to" the general
business of the plaintiffs, which was, as I have said, that of developers of
housing estates.
It is clear
law that even without express words in the memorandum of association, charter
or statute, a company, corporation or statutory body has certain rights in law
to exceed its express objects. Thus, in the early case of Copper Miners of
England v. Fox (16 Q.B. 229, 236), to which I had already twice referred, it
was clearly recognised in the judgment of Lord Campbell that the plaintiffs
would have been entitled to trade in iron rails had this been shown to be in
any way incidental or ancillary to the business of copper miners. In
Attorney-General v. Great Eastern Railway Co. ((1880) 5 App. Cas. 473, 378;
(1879) 11 Ch. D. 449, C.A.) it was said by Lord Selborne that "whatever
may fairly be regarded as incidental to, or consequent upon," those things
which the legislature had authorised should be held to be intra vires without
there being any express provision to that effect, and that has frequently been
recognised to be the law: see Attorney-General v. L.C.C. ([1902] A.C. 165),
Attorney-General v. Mersey Railway Co. ([1907] A.C. 415), and Dunde-Harbour Trustees
v. Nicol ([1915] A.C. 550; 31 T.L.R. 118, H.L.).
It is not
easy, therefore, to see how the words in sub-clause (c) or (u) add anything to
what the law would imply without them or to give any meaning to "in
connection with" or "as ancillary to" which would not be
included within "incidental." Mr. Dunn submitted that "in
connection with" was perhaps the widest in meaning of these various words
and phrases, and I am prepared to accept this.
Is it possible
to bring the making of the present contract within those words? The contract as
pleaded related to the introduction of a financier by the plaintiff and not
specifically to the introduction of Nestle's Pension Trust. The plaintiffs
could, therefore, have introduced any financier prepared to advance money on
the contractual terms regardless of whether they, or Mr. Bell as their chairman
and director, had any prior knowledge of the financier in connection with the
plaintiffs' business of developers of housing estates.
I find
difficulty in seeing how a contract in these terms can be said to be made in
connection with the plaintiffs' business, even if at the time of contracting
the plaintiffs had in mind a financier of whom they had previous knowledge.
The strongest
way the case can be put for the plaintiffs is that the financiers they did
introduce to the defendants pursuant to the contract - and there were two
before the introduction of Nestle's Pension Trust on March 28, 1962 - all came
to their knowledge as potential sources of finance for property development by
reason of the fact that they carried on business as developers of housing
estates. The contract was, therefore, turning to good account knowledge
acquired by them in their business: the contract was therefore made in
connection with their business.
In my
judgment, the mere fact that a contract is entered into to make money out of
knowledge acquired in the course of carrying on an authorised business does not
constitute such a contract one made in connection with such business. The
carrying on of any business is bound to bring some other knowledge to a company
in the persons of its directors and staff who carry it on. As time goes on the
field of such knowledge may and often does become progressively wider. If it
were held that a company could exploit such knowledge to its profit,
notwithstanding that such exploitation did not come within its express objects,
merely on the ground that it was "in connection with" such objects,
the ultra vires doctrine as laid down in the Ashbury Railway case (L.R. 7 H.L.
653) would be rendered nugatory. In such a case the right course for a company
to pursue is to incorporate a subsidiary company with objects stated in its
memorandum of association expressly authorising the exploitation - a course
very frequently taken - or alter, if it can, its own memorandum of association
as provided by the Companies Act.
I am satisfied
that the contract sued upon cannot be brought within either sub-clause (c) or
sub-clause (u), since in my judgment the mere facts that at the time of making
it the plaintiffs might have performed it by using knowledge acquired by them
in the course of their business, or did so perform it later, do not bring the
making of the contract within the words "in connection with" or
"as ancillary to" or "incidental" or "conducive"
to any express object in the objects clause of the plaintiffs memorandum of
association.
For those
reasons, I decide the preliminary issue in favour of the defendants and hold
that the contract sued upon was ultra vires the plaintiffs.
I have reached
this conclusion on an assumption as to the facts most favourable to the
plaintiffs, namely, that the knowledge that Nestle's Pension Trust and the two
other financiers introduced by the plaintiffs to the defendants were interested
in supplying finance for property development came to Mr. Bell in his capacity
as chairman and director of the plaintiffs and was therefore the plaintiffs'
knowledge. It was strongly argued by the Wilmers that the contrary was the true
conclusion to be derived from the evidence, that knowledge came to Mr. Bell in
his personal capacity, that he as a company promoter put his knowledge to the
use of whichever of the companies that he was interested in suited him best, and
that the contract sued on was made in the name of the plaintiffs for the
consequential tax advantage to Mr. Bell. The decision whether the knowledge as
to the availability of finance for property development in the two other
financiers and in Nestle's Pension Trust came to Mr. Bell in his personal
capacity or as chairman and director of the plaintiffs is a difficult one on
which my mind has wavered. The decision was not necessary to the reasoning of
my judgment, but in case the matter goes higher, I think I ought to say, should
it be thought relevant and of assistance, that on balance I have formed the
view, though not without doubt, that the relevant knowledge came to Mr. Bell as
chairman and director of the plaintiffs. But for his position as chairman and
director of the plaintiffs he would not, I think, have been interested in
acquiring knowledge of sources of supply of finance for property development;
not do I think third parties would have made it available to him.
Judgment for
the defendants.
Defendants of
recover three-quarters of their costs.
[1931] 1 COMP CAS 256 (MAD.)
HIGH COURT OF
VENKATASUBBA RAO, J.
OCTOBER 7, 1930
S. Panchapagesa Sastri and K.S. Viswanatha Sastri, for Respondents Nos. 6 and 8 in Application No. 820 of 1930.
This is a misfeasance
summons under s. 235 of the Indian Companies Act. Certain breaches of duty are alleged
against the directors and some other officers of the company and the summons
asks, that they may be ordered to bring into Court a sum of about Rs. 42,000.
An objection in limine is taken that the applicants have no locus standi. If
they are creditors, as they allege themselves to be, they can apply under the
section to which I have referred. The question is, are they creditors of the
company and have they, as such, a locus standi?
The company was started in 1878 under the name of the Madras Native Permanent Fund, Ltd., with a capital of two lakhs divided into two thousand shares of Rs. 100 each. Each shareholder was to pay one rupee per month per share and at the end of seven years, he was to receive from the company Rs. 100 and his account was then to be closed: in other words, on his paying a sum of Rs. 84, he receives Rs. 100. The objects of the company, as stated in the memorandum of association were, to make advances to shareholders upon security of movable or immovable property, for enabling them to purchase, build and repair houses and to grant to them simple loans to a limited extent and to do such things as are incidental to the attainmment of the adove objects. In 1887 a new branch was started and was called the Deposit Branch, to distinguish it from the Loan Branch, the name adopted to designate the company's original activities. The capital of the company was raised by Rs. 10,000 divided into thousand shares of Rs. 10 each and the shares newly raised were allotted to the Deposit Branch. It is stated for the respondents, that the accounts of each branch were separately kept and that there was no mixing up of the moneys or the dealings of the two branches. This statement is not merely borne out by such of the balance sheets as have been handed to me, but is not even disputed by the applicants. While the Loan Branch was confined to the original objects, the Deposit Branch developed into an ordinary bank and carried on banking business. In fact, the operations of the Deposit Branch assumed large proportions, whereas the Loan Branch did business on a very limited scale. In the deposit Branch, there were deposits and advances, customers depositing moneys, and loans being advanced on pledges of jewels. The customers of the bank included both members and strangers. This went for about forty years and it was then found that the company's affairs were not being conducted satisfactorily. Certain irregularities occurred, such as loan being advanced on jewels of insufficient value. The result was, the company having sustained a loss, the depositors were unable to get back their moneys. A liquidation petition was filed and a compulsory order was made in May, 1927. To make clear the point that has now arisen, I may briefly refer to certain previous orders made in the course of the winding up. The liquidators, Messrs. Fraser & Ross, treated in the list filed by them, certain 357 persons of the Loan Branch, as contributories in the liquidation. Mr. Justice Waller, observing: "The Loan Branch of the Fund is, I consider, nothing but a Mutual Benefit Society, with rules resembling those of the Mylapore Hindu Permanent Fund—vide Board of Revenue v. Mylapore Fund," held that the 357 persons in question could not be treated as contributories. The learned Judge in effect held that there was nothing illegal in the company closing the accounts of the shareholders of the Loan Branch by paying each Rs. 10 at the end of seven years. The Appellate Court reversed the order of Mr. Justice Waller holding that the payment of the share capital to the members contravened the provisions of the Companies Act as such payment amounted to a reduction of capital forbidden by the Act. The 357 persons were accordingly declared to be contributories. Before the Appellate Court, the question was raised, where the debts which it was sought to make these persons liable to liquidate, debts incurred ultra vires of the company. This question was left open and no decision was pronounced upon it. This is what the learned Judges observe:
"When these persons are called upon to contribute to the liquidation of definite debts, it will be open to them to argue that the debts which they are called upon to contribute to pay are ultra vires of the powers of the company, that is to say, are not in law debts at all."
The matter came back to the Original Side. For the contributories it was contended that the amounts which the company made itself liable to return were those deposited by its customers in the Deposit Branch and that the company, in receiving such deposits, practically converted itself into a bank. This, it was argued, was going beyond the memorandum of association, was ultra vires of the company. Mr. Justice Pandalai, relying upon Ashbury Carriage Co. v. Riche, accepted this contention. From his judgment, I quote the two following passages:—
"On the best consideration, I can give to the matter, I see no escape from the conclusion that the taking of deposits in Deposit Branch from strangers to the company was ultra vires of the powers of the company."
"All that I do decide and declare is that the contributories are not as such liable to contribute to the debts due to stranger depositors in the Deposit Branch of the Fund."
Some of these depositors are the applicants in this misfeasance summons. The short question I have to decide is, are the amounts due to them debts ? In other words, are the lenders, in the eye of the law, creditors and is the borrowing company, debtor ? This point is now well setted by authority. Where the carrying on of a business by the company was ultra vires it was held that the ultra vires transactions created no debt, either legal or equitable. This was held in In re Birkbeck Permanent Benefit Building Society . The facts of that case resemble those of the present. A Building Society carried on a banking business altogether beyond what was authorised. Cozens-Hardy, M. R., observes that the so-called contracts of loan, though not illegal, are void and in truth have no existence. This is treated as the doctrine as to ultra vires borrowing. The case went up to the House of Lords and this view was affirmed, although on another point the decision of the Court of Appeal was varied: Sinclair v. Brougham. The relation between the depositor and the company is not that of debtor and creditor and the only possible remedy for the person who has paid the money is one in rent and not in personam. This is a most unequivocal declaration that ultra vires transactions do not create the relationship of debtor and creditor. The preliminary objection, therefore, must be upheld, and on this short ground the application is dismissed.
From this it does not follow that the lenders can, in no circumstances, recover their deposits. The very case I have cited, Sinclair v. Brougham, decides what their rights are and how and to what extent they can be enforced. There are no persons other than the depositors who have any claims to the moneys in the Deposit Branch; the question of priority decided in Sinclair v. Brougham does not, therefore, arise in the case. The Loan Branch, as I have said, was always treated as being separate from the Deposit Branch. Some trifling amounts are due to some unadvanced shareholders of that branch. I see no reason why they should not be paid the sums due to them from the moneys to the credit of that branch. Now, as regards the depositors to whom moneys are due from the Deposit Branch, they have already, under orders of Court been paid sums amounting to over a lakh. These payments cannot be questioned. I may mention that some of the directors of the company are also among such depositors. They have offered, at my suggestion, as a matter of fair dealing, to bring back the amounts they withdrew, during the period of one year before the commencement of the winding up. As the other depositors have already been paid 11 annas in the rupee, these directors are, on this basis, bound to bring back only a sum which represents five annas of their drawings. The following table shows the amounts they are thus liable to bring back and I understand that they have this day paid these sums to the liquidators:—
|
Name. |
Amount of deposit withdrawn within one year before liquidation. |
Amount to be refunded at 5 as. in the rupee. |
|||
|
|
|
Rs. |
Rs. |
A. |
P. |
|
P. Lakshminarasu Naidu |
... |
2,000 |
625 |
0 |
0 |
|
T.S. Natesa Sastri |
... |
15,00 |
468 |
12 |
0 |
|
V. Sadagopan Naidu |
... |
813 |
254 |
1 |
0 |
|
|
|
Total |
1,347-13-0 |
||
Of the sum of Rs. 436 mentioned in the affidavit of the liquidators, Rs. 375 represents the sum paid to them by the first 2 of the 3 directors named in the above table, when calls were made after the decision of the Appellate Court to which I have referred. This sum, as well as the above-mentioned sum of Rs. 1,347-13-0 together with Rs. 1,500 (vide Application No.3485 of 1929) shall, subject to the payment of all proper costs, be treated by the liquidators as available for distribution among the depositors of the Deposit Branch. Rs. 1,955-13-9 in the Loan Branch shall be distributed among the unadvanced shareholders of that branch; if any balance is left over, it shall be carried forward to the Deposit Branch.
This order disposes of (1) Application No. 820 of 1930 (misfeasance summons), (2) Application No. 436 of 1930 (the liquidators' application as to the disposal of Rs. 2,330-13-9 said to be the assets of the Loan Branch), and (3) Application No. 3485 of 1929 regarding the disposal of Rs. 1,500.
In the misfeasance summons, the liquidators shall take their costs which I fix at Rs. 150 and pay the applicants' costs which are also fixed at Rs. 150. In Application No. 436 of 1930, the liquidators may take Rs. 35 as their costs.
I desire, before closing, to tell the liquidators that they must, to save further costs, take steps to have the affairs of the company wound up as early as possible.