' This judgment will dispose of J.M. No. 41 of 1979 and J.M. No. 43 of 1979. These are Company matters and both the petitions have been filed by Mansoorali Bandeali in relation to Marine Food Industries Limited, a private limited company incorporated under the Companies Act, 1913 (hereinafter referred to as "the Company") on 17-8-1966. J.M. No. 41 of 1979 has been filed under section 162 of the Companies Act, 1913, seeking the winding-up of the Company. J.M. No. 43 of 1979 is a petition under section 38 of the Companies Act, 1913, wherein the petitioner seeks rectification of register of firm in relation to certain shares. I have heard Mr. J.H Rahimtoola, learned counsel for the petitioner and Mr. Nasim Ahmad Faruqui, learned counsel for the respondents.
2. As stated earlier, the Company was incorporated on 17-8-1966 as a private limited company under the Companies Act, 1913 and the main objects of the Company are to carry on all kinds of fishing and marine or sea food business. The nominal capital of the Company is Rs.5,00,000 divided into 50,000 shares of the face value of Rs.10 each and the amount of capital paid-up is Rs.4,00,000 divided into 40,000 shares of Rs.10 each. It is the case of the petitioner that the Company was promoted and got incorporated by the petitioner and the petitioner got associated with him in the Company all his brothers namely Abdul Hussain Bandeali (elder brother) and Abdul Malik Bandeali, Abdul Muhammad Bandeali and Baradali Bandeali (younger brothers of the petitioner). Paragraph 8 of J.M. No.41 of 1979 read as follows:- "The foundation or basis for promotion and working of the Company was that the petitioner shall give the lead and shall have vested in him direction of management of the Company and be the Managing Director and there be mutual respect, trust and confidence in the petitioner and in and among brothers as and being members of the same family and of the Company."
3. According to the petitioner, he made a study of requirements of the project of the Company building, plant and machinery, got prepared plans and layouts and then got constructed and supervised the buildings and construction If the Company and procured licences for import of its plant and machinery and then got installed the machinery and plant, engaged and supervised engagement of staff and labour and brought the Company into production and working to produce quality product marketable in foreign countries. According to the petitioner, the entire product of the Company is exported and sold abroad and it was the petitioner, who established the links with foreign companies so as to channellize the export of Company's projects: In short, the case of the petitioner is that the establishment of the Company and its projects are the results of his endeavours and supervision and that he had associated his brothers in this Company and that the Company has progressed and prospered due to the petitioner's efforts. In the books of the Company, the five brothers are shown as holders of 8,000 shares of the face value of Rs.10 each, fully paid-up. It is then averred by the petitioner that in 1971, the Company acquired the undertaking of Coral Fisheries Limited and the transaction of purchase of this undertaking was carried out by purchase and acquisition of all the shares of Coral Fisheries Limited, which shares were transferred in the names of the petitioner and his four brothers. The facts and reasons, which have led the petitioner to file the petition under section 162 of the Companies Act, 1913 for winding- up of the Company, have been detailed by the petitioner in paragraphs 14 to 20 of J.M. No. 41 of 1979 and for convenience of reference these paragraphs of J.M. No.41 of 1979 are reproduced hereunder:- "(14). The Company did not pay any dividends and out of profits and gains were paid to the petitioner and his brothers remuneration, allowances, etc., and they were provided amenities, facilities and benefits on ad hoc basis in the beginning and as from about 1973-74 in share or proportion of 30 per cent to Abdul Hussain being elder brother, 22 per cent to the petitioner, 18.50 per cent to Abdul Malik, 14.75 per cent to Abdul Muhammad and 14.75 per cent to Baradali and this proportion of percentage continued till May, 1977 whereafter it was revised to 33 per cent to the petitioner, 25 per cent to Abdul Malik, 21 per cent to Abdul Muhammad and 21 per cent to Baradali.
(15). In about April/May, 1977, Abdul Hussain the elder brother stated and represented that he wanted to retire and withdraw from the Company and consistent therewith from Coral Fisheries Limited and made stipulations which he discussed and negotiated with Abdul Malik and Abdul Muhammad on behalf of the brothers and all of them stated and represented and it was agreed that Abdul Hussain, the elder brother be given or made over:
(a) Rs.6,00,000 in shares, securities and cash;
(b) a Launch;
(c) running businesses which held agencies of Premier Tobacco Industries Limited and Ameejee Valeejee and Company for Mekran Coast and sub-agency of Maldive Shipping Lines;
(d) Properties in Mekran and plot measuring 1,000 square yards in Clifton held in name of Abdul Hussain; and Abdul Hussain do make over and transfer 8,000 shares held by him in the Company and 1,000 shares held in his name in Coral Fisheries Limited, to the petitioner and his younger brothers so that out of the aforesaid 8,000 shares of the Company 5,334 shares be transferred to the petitioner, 1,000 shares to Abdul Malik Bandeali, 833 shares to Abdul Muhammad Bandeali and 833 shares to Bandeali Bandeali and as to 1,000 shares in the name of Abdul Hussain Bandeali in Coral Fisheries Limited, 667 shares be transferred to the petitioner, 125 shares to Abdul Malik Bandeali, 104 shares to Abdul Muhammad Bandeali and 104 shares to Baradali Bandeali.
(16) In accordance with contract, consideration aferesaid was paid, made over and transferred to Abdul Hussain Bandeali and the said elder and all the said younger brothers have time and again promised and assured that shares held by and in the name of Abdul Hussain Bandeali shall be transferred as agreed as aforesaid but the same is still not done and the petitioner submits that all the brothers have joined hands to deceive and play fraud upon the petitioner and they have combined to act in fraud of his rights, shares and dues in and in respect of the Companies.
(17) Remuneration, allowances, benefits, etc., paid and provided to the petitioner and his brothers were partly shown in books and partly not shown and were out of books of the Company and this arrangement continued throughout.
(18) The Company in 1976 made a declaration of Rs.10,00,000 as income or profits not shown in books being part of its such profits or income.
(19) As from June, 1977, the petitioner was paid as remuneration in accordance with proportion explained in para. 14 above, Rs.7,000 per month of which Rs.3,000 was shown in books and was provided amenities and facilities and benefits of car, petrol, maintenance, telephone and insurance, which were paid and provided to the petitioner uptil January, 1979.
(20) In about March, 1979 Abdul Malik and Abdul Muhammad drew cash cheques to totalling Rs.3,95,916.60 from bank account of the Company which they appropriated or misappropriated among themselves, admitting Baradali and possibly also Abdul Hussain to shares therein and upon the petitioner protesting, the said brothers made common cause and excluded and cut off the petitioner from his remuneration and benefits and also excluded and cut him off from exercising officer of Managing Director and Director of the Company, not permitting matters and papers of the Company to come to or be placed before the petitioner, not permitting him to take decisions or give directions and denying him access to files, papers, books and documents of the Company, disregarding his requests and refusing to supply him copies and behind his back and without notice to him purporting to pass resolutions intended to and effect of which is to vest control in themselves to the exclusion of the petitioner and on the basis thereof they are committing the Company to loans and indebtedness created by them, as security for which they are mortgaging and hypothecating the properties, plant, machinery and assets and also pledging securities, goods and movable property of the Company and they are creating and as from March, 1979 increasing the liability of the Company from what it was before the said date."
4. According to the petitioner, the aforesaid acts of his brothers are contrary to the basis upon which the Company was incorporated and founded and upon which the Company had worked from the time of 'its incorporation. According to the petitioner, in the facts and circumstances it is just and equitable that the Company be wound-up and dissolved. It may be observed here that according to the petitioner all the brothers held 8,000 shares in the Company, but later on through an oral agreement the elder brother Abdul Hussain, agreed to transfer his 8,000 shares in the Company to the petitioner and his younger brothers and out of the aforesaid 8,000 shares it was agreed that 5,334 shares be transferred to the petitioner but the elder brother and the other three younger brothers of the petitioner went back upon the agreement. The petitioner has claimed that he is entitled to 5334 shares which were held by elder brother Abdul Hussain but these have not been transferred in the books of the Company in the name of the petitioner and for rectification of the register of Company in relation to the aforesaid shares, J.M. No.43 of 1979 has been filed by the petitioner under section 38 of the Companies Act, 1913.
5. Opposing both the petitions, Abdul Hussain (elder brother) Abdul Malik and Abdul Muhammad have filed several affidavits/counter--- affidavits. In reply rejoinders have been filed by the petitioner. The oral agreement for transfer of the 8,000 shares of Abdul Hussain has been denied by the respondents. According to the respondents, each of the five brothers owns 8,000 shares in the Company and the Company is in sound condition, possessed of a very favourable growth rate and the creditors are properly secured. It has been denied that the Company and its projects were established/set up by the sole efforts of the petitioner and that all the brothers have actively participated in the business of the Company which was being carried on for the common weal of all the five brothers. According to the respondents, no action has been taken by them which could give any ground to a minority shareholder of 1/5th share of the Company to seek its dissolution.
According to the respondents, it was the joint efforts of all the brothers which contributed towards the establishment and development of the Company to its present stage of prosperity and solvency. According to the respondents, the petitioner merely wants preferential privileges which were not agreed to by the other shareholders/directors/brothers. It has been denied that any amount has been misappropriated as alleged by the petitioner. It has further been averred on behalf of the respondents that the accounts of the Company have been properly maintained and have been regularly audited by a reputed firm of auditors and all the shareholders have full access to the accounts and have approved the same and the Income-tax Authorities have also without exception accepted the trading results of the Company. The allegation of the petitioner that he has been excluded has been denied. It is averred that the petitioner has been allowed full access to the Company's records and papers and in fact he has participated in the deliberations in regard to the Company's affairs and suggestions had been adopted and that Board meetings had been held after notice to the petitioner and other directors.
6. In support of the petition under section 162 of the Companies Act, 1913, that it is just and equitable that the Company be wound-up, Mr. J.H. Rahimtoola, learned counsel for that petitioner, has canvassed the following grounds:-
(a) Exclusion of the petitioner from the management of the Company: According to the learned counsel for the petitioner, the petitioner was first physically excluded and this physical exclusion was later on followed by the purported legal exclusion of the petitioner from the management of the Company.
(b) Lack of probity and diversion of the funds of the Company by the respondents.
(c) Increase of liability of the Company by the respondents since taking over management of the Company to the exclusion of the petitioner.
(d) The use of the Company and its properties by the respondents as their own personal properties.
7. The petitioner became Managing Director of the Company in 1966 since its incorporation and remained so till 1979. This has been admitted by the respondents. According to the petitioner, he had been paid his remuneration till January, 1979, but thereafter disputes started between the parties. According to the petitioner, Abdul Malik and Abdul Muhammad used cash cheques of the amount of Rs.3,95,916.60 and misappropriated this amount and when the petitioner protested, he was removed from directorship as well as from the post of Managing Director. Initially this removal was physical, according to Mr. J.H. Rahimtoola, learned counsel for the petitioner, as no resolution was passed to this effect. According to the petitioner, he was not allowed access to books and papers of the Company and when copies of the Company papers were asked for by the petitioner, these were not supplied. In short, according to the petitioner, the respondents physically excluded the petitioner from the management of the Company and that later on they passed a resolution behind the back of the petitioner for his exclusion. Various vouchers of the Company have been filed by the parties and they show that upto January, 1979, vouchers have been signed by the petitioner but from March, 1979, onwards vouchers ha'e been signed on behalf of the Company by Abdul Malik. According to the petitioner, on 24-2-1979, instructions were given to the banks, in which the accounts of the Company were maintained, that henceforth the account will be operated by two directors and cheques should not be honoured unless they were signed on behalf the Company by two directors. Previously any one director could sign the cheques and operate the account on behalf of the Company. According to the petitioner, this was done without a resolution of the Board of Directors of the Company. However, this has been denied on behalf of the respondents who have averred that a meeting of Board of Directors was held on 24-2-1979, in which such a resolution was passed. According to the petitioner, this resolution was made up later on to fill up the legal infirmity in the action of the respondents and in any case no notice was given to the petitioner about the holding of this meeting. According to Mr. J. H. Rahimtoola, this action was taken by the respondents deliberately to exclude the petitioner from operating the. bank accounts of the Company. It is further the complaint of the petitioner that books and papers of the Company were made inaccessable to the petitioner and when requests for copies of certain documents were made by the petitioner copies were not supplied to him and it was, however, when an order was passed on 13-12-1981 in J.M. No.41 of 1979, that copies of the documents were made available to the petitioner. It was also argued that the petitioner was physically not allowed to participate in the meetings of the Board of Directors.
8. On the point of the legal exclusion of the petitioner from the Board of Directors of the Company and from the post of Managing Director of the Company by the board resolution dated 24-2-1979, learned counsel for the petitioner relied upon Article 39 of the Articles of Association of the Company which reads as follows:- "39. The directors may from time to time appoint one or more of their body to the office of the Managing Director for such term and on such remuneration (whether .by way of salary or commission or participation in profits or partly in one way and partly in another) as they may think fit, and a Director so appointed shall not, while holding that office, be subject to retirement by rotation, or be taken into account in determining the rotation of retirement of Directors, but his appointment shall be subject to determination ipso facto if he ceases for any cause to be a Director or if the Company in General Meeting resolve that his tenure of office as Managing Director be determined."
9. According to Mr. J.H. Rahimtoola, the petitioner was admittedly elected as a Managing Director by the Board of Directors and he was not subject to retirement by rotation according to Article 39 of the Articles of Association of the Company and there were only two ways in which he could cease to be a Managing Director and that was if he ceased for any cause to be a Director or if the Company in General Meeting resolved that his tenure of office as Managing Director be determined. According to the learned counsel for the petitioner, as in law the petitioner continues to be a Director and no resolution has been passed' by the General Meeting of the Company to determine the office of the petitioner as Managing Director, the purported action of the respondents determining the petitioner's Managing Directorship is illegal and accordingly it is a case of legal exclusion of the petitioner from the management of the Company.
10. On the allegation of physical exclusion of the petitioner from the management of the company, it was submitted by Mr. Nasim A. Faruqui, learned counsel for the respondents, that there was no exclusion and the material on record does not indicate at all that there was any physical exclusion of the petitioner from taking part in .the management of the Company as one of the directors. It was submitted that so long as he remained a director, he attended the meetings of the Board whenever he wanted and no restrictions were placed upon him by the respondents to exercise his rights and powers as a director. It was further submitted that the petitioner had access to the records of the Company as a director. On the point of purported legal exclusion, Mr. Nasim A.
Faruqui submitted that whatever actions that were taken by the respondents as directors and shareholders of the company, were strictly in accordance with law and no illegality was committed by them. It was contended that legal exclusion by itself does not entitle the petitioner to an order for winding-up of the company. It was submitted that the petitioner continued to be director till he voluntarily decided not to seek re-election. It was then submitted that regular meetings of the Board of Directors were held and even minute matters which were discussed or on which decisions were taken by the Board are reflected in the minutes of the meetings of the Board and that the minutes do not show that any agreement or decision was arrived at for transfer of shares held by the eldest brother Abdul Hussain, as wrongly alleged by the petitioner. About operation of the bank accounts of the company jointly by two directors and not singly, it was argued that this decision was taken in a lawful manner at a meeting of the Board of Directors in the larger interest of the Company and the shareholders. In regard to managing directorship, it was argued by Mr. Nasim A.
Faruqui that reliance on Article 39 of the Articles of Association of the Company was misplaced as at the time the Company was incorporated in 1966, the Companies (Managing Agency and Election of Directors) Order, 1972, was not in force and provisions of the 1972 Order override Article 39 of the Articles of Association of the Company.
' Mr. Nasim A. Faruqui also took objection to reliance by Mr. J.H. Rahimtoola on certain facts and events subsequent to the filing of the winding-up petition. It was argued that the winding-up petition must be framed in such a manner as to make up a prima facie case under section 162 and that the Court will not permit a winding-up petition to be converted into a fishing expedition and allow the petitioner to make references to and rely upon events subsequent to the filing of the winding-up petition. Reply of Mr. J.H. Rahimtoola was that there is no bar to reliance on subsequent events and that a petitioner is at liberty to take support from subsequent facts and events.
' Mr. Nasim Faruqui also denied the charges of the petitioner that the respondents had been using the Company and its properties as if these were their personal properties or that the Company's financial position had deteriorated or that funds of the Company were being diverted by the respondents for their personal benefit. It was argued that the petitioner had failed to prove his allegations. According to Mr. Nasim Faruqui no case was made out for winding-up of the Company.
11. At this stage I may briefly refer to the case-law on which reliance was placed by the two learned counsel. Mr. J.H. Rahimtoola cited the following reported judgments in support of the petitioner's case:-
(i) Ladli Prasad Jaiswa l v. Karnal Distillery PLD 1965 SC 221
(ii) In re: Yenidje Tobacco Company Limited (1935) 2 Ch. 426
(iii) Re: Lundi Brothers Limited (1965) 2 A E R 692
(iv) Ebrahim 'v. Westbourne Galleries Limited (1973) A C 360
(v) In re: Nagina Films Limited PLD 1983 Kar. 45 ' It may be mentioned here that the judgment in Nagina Films case was delivered by me and in that judgment the above-mentioned four cases of Ladli Prasad, Yenidje Tobacco, Lundi Brothers and Ebrahim have been discussed and considered. I may reproduce here the following passages from my judgment in Nagina Film case which appear at pages 57-59 of the report:- "It is now well-established, and also confirmed by the Supreme Court in PLD 1965 SC 221, that the following grounds, which are available to a partner for having a partnership firm dissolved, are also available to a shareholder for the winding-up of a private limited company under the just and equitable clause:-
(i) exclusion of a partner from the management of a firm;
(ii) the existence of a state of deadlock between the partners; and
(iii) justifiable lack of confidence in the management.
' In relation to the ground relating to the exclusion of a majority from the management of a private limited company it may be observed that this does not mean a right to manage any part of the company's business exclusively and that the right of the minority shareholder is to participate by the exercise of his voting right in the management of the company and further that it is not necessary that a part of the business of a Company, proportionate to the complainant shareholder's shareholding, must be separated and put under his exclusive control PLD 1972 Kar.
376. It was further held in this Karachi case that winding-up of a Company cannot be claimed by a minority shareholder on the ground that they had been excluded from managing a part of business of the company.
' When a private limited company is formed, there is generally a prior arrangement or agreement between the promoters, who may be representing different groups. Such agreement or under - standing may be reflected in the Memorandum and Articles of Association of a company that is formed and/or by a separate agreement between the promoters. It is also possible that the agreement or understanding may not be available in writing either as a separate document or expressed in precise terms in detail in the Memorandum and Articles of Association of the Company that is formed, but it may be possible to infer the major points of agreement or understanding between the promoters from the Memorandum and Articles of Association of the Company or from other documents. Strictly speaking once a company has been incorporated, its character, that is, the Memorandum and Articles of Association, govern the relationship, rights and obligations of the shareholders inter se and as between the shareholders and the company, but in equity it would be wrong for the majority shareholder or shareholders to disregard the terms of the agreement or understanding on the basis of which the promoters floated the private limited company. As held by the House of Lords in Ebrahim's case, a limited company was more than a legal entity, and the rights, expectation and obligations of the individuals hehind it inter se were not necessarily merged in its structure and it was open to the Court to subject the exercise of legal rights to equitable considerations of a personal character arising between individuals, which might make it inequitable to insist on legal rights or to exercise them in a particular way. I am, therefore, of the view that in the case of a private limited company, the Court is entitled to look into the agreement or understanding between the promoters and in spite of the legal cover of incorporation of the Company, if the Court is of the view that the exercise of legal rights by the majority shareholders would be inequitable, the Court may decline to enforce such legal rights and may go further, if the facts and circumstances so indicate, to wind-up the Company under the just and equitable provisions of the Companies Act, 1913.
(16) Subsections (f) and (e) of section 44 of the Partnership Act, 1932 may now again be 'perused.
Except for the first part of subsection (e), the other provisions in this subsection (e) are not applicable to cases of limited companies. In my opinion, grounds available to a partner for dissolution of a firm as are contained in subsection (e) and first part of subsection (e) of section 44 of the Partnership Act, 1932, are also available to a shareholder in a petition for winding-up of a private limited company, although the acts complained of might have been performed in exercise of their legal rights by the majority shareholders, if such acts violate or are contrary to the essential terms of the agreement or agreement on the basis of which the parties concerned formed the private limited company. This is so on principles of equity. The Court will consider it inequitable to permit the majority to deny the minority in a private limited company of such rights and privileges as were agreed to be conferred or granted by the essential terms of the agreement between the promoters. In such cases the Court will consider the following:-
(i) whether there was a promoters' agreement or arrangement;
(ii) whether any basic or essential term of such agreement has been violated by the majority shareholders; and
(iii) whether the complained action of the majority is inequitable and for this purpose the Court may look into the intention of the majority in exercising their so-called legal right as a majority "
(vi) Province of East Pakistan v. Nakuldas Mirdha PLD 1970 Dacca 549.
' This judgment was cited by Mr. J.H. Rahimtoola to support his contention that subsequent events, i.e. the facts subsequent to filing of a proceedings, can be taken into consideration by the Court. A Division Bench of the Dacca High Court after referring to certain reported judgment which were to the effect that it is open to a Court to take into consideration subsequent events, observed that the case law emphasized that a departure from the well-established principle is to be resorted to only in exceptional circumstances with a view to shorten litigation and only when such a course would be in the interest of justice. In the case which was before the Dacca High Court, however, request for taking into consideration the subsequent events was not accepted.
' Mr. J.H. Rahimtoola had also relied upon the case of Ladli Prasad and the case of Abdullah Bhai v.
Ahmad Din PLD 1964 SC 106 for the proposition that subsequent events can be taken into consideration in appropriate cases.
' Mr. Nasim A. Faruqui, learned counsel for the respondents, relied upon the following reported judgments in opposing the prayer for winding-up:-
(vii) In re Cine Industries and Recording Company Limited AIR 1942 Born.
231.
' In this judgment by Chagla, J. of Bombay High Court, inter alia, the following principles/observations were laid down/made:-
(a) The mere fact that the petitioner only held 5 shares out of a total of 1,696 shares should not by itself prevent the Court from making a winding-up order. But in coming to the conclusion whether the Court should wind-up the company or not, the main consideration is the interests of both the shareholders and the creditors, and the fact that an overwhelming majority of the shareholders are opposing the petition and a large number of creditors are also doing the same and the rest are taking no part is a fact which must bear with the Court in coming to its decision.
(b) In a petition for winding-up of a company, a Court will not go behind that balance-sheet of the company duly audited by the auditors moreso when it was open to the shareholder petitioner to challenge its correctness in other proceedings.
(c) In a petition for winding-up a company, the Court will refuse to give decision as to the probable success or non-success of the Company as a commercial speculation.
(d) The question of the directors exceeding the borrowing powers conferred upon them by the articles of association is essentially a question of internal management of the company and the Court will not go into that question on a winding-up petition especially when since the filing of the petition, the company has by resolution ratified the borrowings by the directors and has taken the view that the directors have acted in the best interests of the company.
(e) In the case of a petition for winding-up a company, the petitioner has got to make out a case for winding-up on the petition and the petitioner cannot be allowed to fish out a case by cross- examination of the directors of the company who have made affidavits or by inspection of the accounts of the company.
(f) The alleged misconduct of the directors or that business has been carried on at a heavy loss are per se not grounds on which the Courts would order the winding-up of a company.
(viii) Jagannath Gupta & Co. v. Mulchand AIR 1969 Cal.
363.
' In this case, in connection with an application under section 433 of the Indian Companies Act, 1956 (similar to section 162 of Companies Act, 1913) it was held that on the facts respondent's application for winding-up was not motivated by the desire to do justice to the company or to see that justice was done to shareholders but for private reasons, that is, to injure directors for acts of omission and commission in which respondent himself participated or acquiesced and in the circum stances the respondent should not be permitted to proceed with the hearing of the winding-up petition. It was also held in this case that the order for winding-up must be confined to grounds set out in the winding-up petition and allegations and circumstances on the date of the petition should alone be looked into.
(ix) Mohan Lal v. Grain Chambers Muzaffarnagar AIR 1968 SC 772.
' In this judgment it was observed that under section 162 of the Companies Act, 1913, the Court may make an order for winding-up of a company if the Court is of the opinion that it is just and equitable that the company be wound-up and that in making an order for winding-up on the ground that it is just and equitable that a company should be wound up, the Court will consider the interests of the shareholders as well as of the creditors. It was further observed that substratum of a company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities.
(x) In re: Kruddson Limited PLD 1972 Kar.
376.
' It was held in this judgment that winding-up of a company cannot be claimed by a minority of shareholders on the ground that they had been excluded from managing a part of the company's business. This judgment was discussed and considered in Nagina Film case by me.
(xi) Muhammad Ismail Ali v. Pakpor Ceramics Limited PLD 1973 Kar.
491.
' It was held here that a company could at any time remove any of its directors by an extraordinary resolution under section 86-G of the Companies Act, 1913. This judgment is also referred to in Nagina Film case.
(xii) In re Sulekha Works Limited AIR 1965 Cal.
98.
' It was held that in a winding-up petition grounds and particulars which are relied upon by the petitioner must be set out in the memo. of petition itself and not in the affidavit in reply. It was further observed that it is no part of the duty of the Court to collect materials for a petitioner in a winding-up petition on vague and uncertain charges made in the petition, so that the petitioner may be able to get an order for winding-up.
(xiii) Hind Overseas Private Limited v. R.P. Jhunjhunwala AIR 1976 SC 565.
' This apparently is the leading case from the Indian jurisdiction and reflects the latest view of the Indian Supreme Court on the principles of winding-up of private limited companies under the just and equitable clause. The main principles enunciated in that context are as follows:-
(a) When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besdies it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope and possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding-up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership.
(b) In a petition for winding-up under the just and equitable clause, allegations in the memo. of such petition are of primary importance. A prima facie case has to be made out before the Court can take any action in the matter. Even admission of a petition which will lead to advertisement of the winding-up proceedings is likely to cause immense injury to the company if ultimately the petition has to be dismissed. The interest of the petitioner alone is not of predominent consideration. The interests of the shareholders of the company as a whole apart from those of other interests have to be kept in mind at the time of considera tion as to whether the petition should be admitted on the allegations mentioned in the petition.
(c) The sixth clause of section 433 (corresponding to section 162 of the Companies Act, 1913) namely, "just and equitable" is not to be read as being ejusdum generis with the preceding five clauses, while the five earlier clauses prescribe definite conditions to be fulfilled for the one or other to be attracted in a given case, the just and equitable clause leaves the entire 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".
(d) There must be materials to show when "just and equitable" clause is invoked, that is just and equitable not only to the persons applying for winding-up but also to the company and to all its shareholders. The company Court will have to keep in mind the position of the company as a whole and the interests of the shareholders and see that they do not suffer in a fight for power that ensues between two groups.
(e) On the facts of the case it was held that the company in question was not in substance a partnership and merely because the shareholding is between two family groups, it could not be said that the company thereby takes the image of partnership.
(xiv) Muhammad Niaz Faruki v. Anaco (Pak) Limited PLD 1962 Kar. 71 ' It was held by Wahiduddin, J. in this case that the mere fact that the directors had a preponderating voting power and that they have not allowed the other shareholders to join in the management of the company is no ground to order its winding-up and that the real question for determination will be whether the confidence of the shareholder is lost not only in the policy but also in the probity of directors, and if that is so, it will be a good case for winding-up.
(xv) Rustom v. Karim Silk Mills Limited PLD 1975 Kar.
40.
' It was observed by late Chief Justice Tufail Ali A. Rehman in his judgment in this case that where winding-up of a company is sought on the "just and equitable" rule surely the expression "just and equitable" must have reference to the legitimate interests of persons concerned in the matter which would presumably be, in general, the shareholders and/or the creditors of the company.
(xvi) Usman Textile Mills Ltd. v. Board of Directors PLD 1976 Kar.
10.
' This decision was considered by me in Nagina Film case. This was an order on an injunction application and a learned Single Judge of this Court, while considering the provisions of the Companies (Managing Agency and Election of Directors) Order, 1972, observed that the appointment of the Chief Executive could be brought to an end by the Board of Directors of the Company, which is the appointing authority.
(xvii) Reliance was also placed by Mr. Nasim Faruqui, learned counsel for the respondents on the unreported judgment of a Division Bench of this Court in the case of Jaleel Brothers Ltd. v. Khawaja Abdul Jaleel (High Court Appeal No.21/1981)
' In this case, a learned Single Judge of this Court had allowed a winding-up petition filed by one shareholder holding 13% share in the equity of the company on the "just and equitable" ground. The petitioner was also a director of the company but he was removed from directorship by other directors, who were all his brothers and sisters. The Division Bench allowed the appeal against the judgment of the learned Single Judge and set aside the winding-up order. Mr. Nasim A. Faruqui relied upon this judgment to argue that even if the petitioner in the instant case was removed from directorship, it was done by the majority who had power under the law to do so. In Jaleel Brothers Ltd. case, the petitioner filed a petition for leave to appeal and the Supreme Court of Pakistan by order dated 24-8-1982 granted leave to appeal against the judgment of the Division Bench in High Court Appeal. One of the two grounds on which leave has been granted was whether the High Court in refusing the winding-up of the respondent Company acted in contravention of the law laid down by the Supreme Court in Ladli Prasad's case. The two learned counsel had informed that the Supreme Court has not yet decided the appeal.
12. There has been some conflict in the judgments as to whether the grounds, which are available to a partner for having a partnership firm dissolved, are available to a shareholder for the winding- up of a private limited company under the just and equitable clause. In Nagina Film's case PLD 1983 Kar. 45, following the judgment of the Supreme Court in Ladli Prasad's case, I had observed that the Supreme Court in Ladli Prasad's case, I had observed that the following grounds, which are available to a partner for having a partnership firm dissolved, are also available to a shareholder for the winding-up of a private limited company under the just and equitable clause:-
(a) Exclusion of a partner from the management of a firm.
(b) The existence of a state of deadlock between the partners.
(c) Justifiable lack of confidence in the management.
' As regards the existence of a state of deadlock between the partners where the two persons or two groups in a private limited company hold equal shares and on account of differences between them on decision can be taken, there appears to be no conflict in the judgments. In such a situation either party or group can competently file and maintain a petition for winding-up under the just and equitable clause. There also does not appear to be any noticeable conflict in the judgments on the ground of justifiable lack of confidence in the management, although there have been different interpretations of what is meant by the expression "justifiable lack of confidence in the management". However, there appears to be conflict in the judgment as regards the other grounds and that is exclusion of a minority from the management of a company. In AIR 1942 Bom.
231, the view was taken that the main consideration in a petition for winding-up under the just and equitable clause is the interests of both the shareholders and the creditors and the fact that an overwhelming majority of the shareholders are opposing the winding-up petition and a large number of creditors are also doing the same is a fact which must bear with the Court in coming to its decision. In AIR 1968 SC 772 also similar view was expressed. In AIR 1976 SC 565 it was held that in a petition for winding-up of a private limited company under the just and equitable clause there should be material on record to show that it is just and equitable not only to the persons applying for winding-up but also to the company and to all its shareholders and that the Court in considering such a petition will have to keep in mind the position of the company, as a whole and the interests of the shareholders.
' Then in PLD 1973 Kar. 491 it was held that a company could at any time remove any of its directors by an extraordinary resolution under section 86-G of the Compantes Act, 1913. In PLD 1962 Kar. 71 it was held that the mere fact that the directors had a preponderating voting power and that they had not allowed the other shareholders to join in the management of the company is no ground to order its winding-up. If only provisions of the Companies Act are seen, it would appear that a majority in a private limited company has not only the right to overrule the minority in all the decisions on behalf of the company but also the right to exclude the minority from taking part in the management of the company, subject to the provisions of the Companies (Managing Agency and Election of Directors) Order, 1972. lf, therefore, only the provisions of Companies Act are applied, the respondents in this case had the power and authority to exclude legally the petitioner from the management of the company, the petitioner owning only 1/5th of the total shareholding of the company and there being c only three directors on the Board of Directors of the Company. On the other hand, if this company is to be treated as a partnership firm for purposes of winding-up, petitioner's case for winding-up under the just and .equitable clause will stand proved if it is established that the petitioner has been legally and/or physically excluded from the management of the company.
' If the view that was taken by me in Nagina Film's case is correct, the present winding-up petition will be maintainable on the ground of exclusion, physical or legal, of the petitioner from the management of the company. In my opinion, in view of the law laid down by the Supreme Court in Ladli Prasad's case the petitioner's winding-up petition is maintainable on the ground of physical or legal exclusion from the management of the company as on lifting the veil of incorporation of this company it is found that in fact this company was being run and managed as if it were a partnership firm. The five brothers who were the only shareholders of this company held equal shares in the company i.e. 8,000 each and right from the date of the incorporation of the company in 1966, the petitioner remained its Managing Director till the disputes arose between the brothers some time in early 1979. It has also come on record that till the disputes started, all the directors had powers to operate the bank accounts of the company singly. No dividends were declared but the shares in the profits the company were apparently distributed amongst the brothers through remunerations or other methods. The normal method of distribution o profits in a company is through declaration and distribution of dividends which practice has not been followed in the case of the present company. The fact that the shareholders belong to the same family in fact the are all real brothers--and they hold equal shares and that no dividend was declared but profits made by the company were distributed through other means to the shareholders and the way in which the company has been run makes it clear that all the five brothers had agreed that th company will be run with the active participation of all the brothers in the management of the company and, therefore, it is clearly indicate that the company was being run as if it were a partnership firm. A such whatever interpretation is given to the principles laid down b the Supreme Court in Ladli Prasad's case, in the case of the company in question, the ground of exclusion of one of the brothers from th management of the company is a ground on which a winding-up petition can be maintained under the just and equitable clause. AIR 1976 SC 565, referred to earlier in this judgment, reflects the latest view o the Indian Supreme Court on the principles of winding-up of a private limited company under the just and equitable clause. The Supreme Court of India was of the view that when more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. The Indian Supreme Court was not referring to cases of private limited companies where the entire shareholding is held by the members of one family. As pointed out earlier, in the present case all the five shareholders were real brothers. Then the Indian Supreme Court has observed that in a given case the principles of dissolution of a partnership may apply squarely if the apparent structure of the company is not the real structure of the company and on piercing the veil it is found that in reality it is a partnership. As observed earlier, in the facts of the present case, the apparent structure of the company in question is not the real structure and when the veil is lifted it is found that in reality this company is a partnership firm.
' Coming now to the case-law on the question of the rights of the majority to exclude the minority from the management of a private limited company under the powers available to a majority by the provisions of the Companies Act reference may be made to Ebrahim's case (1973) A C 360, where it was held that a limited company was more than a legal entity and the rights, expectation and obligations of the individuals behind it inter se were not necessarily merged in its structure and it was open to the Court to subject the exercise of legal rights to equitable considerations of a personal character arising between individuals, which might make it inequitable to insist on legal rights or to exercise them in a particular way. This judgment was also considered by me in Nagina Film's case. I maintain the view taken by me in Nagina Film's case. In the case of a private limited company where it had been agreed that all the shareholders will participate in the management of the company and where on lifting of the veil of incorporation it is found that in fact the structure of the company.was in reality that of a partnership, it would be inequitable for the majority shareholders to exclude the minority from the management of the company, and as such, on exercise of the legal rights of the majority under the Companies Act to exclude the minority from the management of the company, the minority would be entitled to maintain a petitioner for winding-up of the company under the just and equitable clause.
' It is now to be seen whether in the facts of this case there has been any physical or legal exclusion of the petitioner from the management of the company. As regards the physical exclusion, it is the case of the respondents that no exclusion has taken place and as far as the legal exclusion is concerned, it was argued by Mr. Nasim A. Faruqui, learned counsel for the respondents, that at the time the winding-up petition was filed in October, 1979, the petitioner had not been excluded from the management of the company, and that on several occasions he had even attended meetings of the Board of Directors of the Company and it was only in December, 1981, that he lost his directorship, and that event being subsequent to the filing of the winding-up petition, cannot be taken into consideration for the purposes of deciding the present winding-up petition. The disputes between the parties apparently started some time in early 1979. From the documents filed in this petition it appears that on 14-9-1978, before the disputes started between the parties in the 12th Annual General Meeting of the Company petitioner, Abdul Malik and the petitioner, who were retiring, offered themselves for re-election and that they were re-elected. Prior to 24-2-1979, the bank accounts of the company were being operated by single signatures of any one of the directors of the company. However, on 24-2-1979, the respondents enclosed a copy of the resolution of the Directors' meeting held the same day i.e. 24-2-1979 to the bankers, according to which resolution as from 25-2-1979 all cheques would be signed by any of the two directors instead of one director. The three directors were respondents Abdul Malik, Abdul Muhammad and the petitioner. The resolution was purportedly passed in the meeting of the Board of Directors held on 24-2-1979 at 3.40 p.m. which was attended by only two directors, respondents Abdul Malik and Abdul Muhammad. The other four brothers including Directors Abdul Malik and Abdul Muhammad had become one group and the other party was the petitioner and obviously the four brothers forming the group of respondents was in majority holding 32,000 shares as against 8,000 of the petitioner. As observed earlier, previously the cheques were being signed by one director. The purport of the resolution, therefore, was that the petitioner should not be able to operate the bank accounts. Then it is an admitted position that the petitioner did not attend the meeting held on 24- 2-1979. The books of the company were called and from a perusal of the books it became evident that no notice was given to the petitioner before this meeting of the Board was held by respondents Abdul Muhammad and Abdul Malik. Being in a majority, this device was employed by the respondents to exclude the petitioner from the management of the company. Since 24-2-1979, the record indicates that the company has been completely in the control and management of the respondents to the exclusion of the petitioner.
' Then it is an admitted position that in December, 1981, the petitioner was not re-elected as a director of the Company. All the respondents joined hands and they saw to it that the petitioner was not re-elected. Being in majority and there being only three directors on the Board of Directors, they were able to achieve their ends by what can be termed as legal exclusion of the petitioner from the management of the company. Mr. Nasim Faruqui, learned counsel for the respondent, had argued that the fact of legal exclusion is a subsequent event and cannot be considered as a ground in support of the present winding-up petition filed in October, 1979. The case-law cited by both the learned counsel does not indicate that the law is that under no circumstances any subsequent event can be referred to or relied upon by the Courts while considering a winding-up petition. The general principle, no doubt, is that only such grounds should be considered as are taken in the winding-up petition and the petitioner should not be allowed to rely upon subsequent events. However , inH appropriate case, in the interest of justice, for compelling reasons or for shortening litigation, the Courts have allowed a petitioner to refe to subsequent events and the Courts have considered and relied upon such subsequent events for deciding the winding-up petition. In the instant case, the ground of physical exclusion has been specifically taken in the winding-up petition and the legal exclusion of the petitione from the Board of Directors of the company in December, 1981, is in fact a culmination of the actions of the respondents to completely exclude the petitioner from the management of the company. In the instant case, therefore, I am of the view that subsequent event of legal exclusion of the petitioner from the management of the company can be taken into consideration by this Court for deciding the winding-up petition.
' In the facts and circumstances of the present case, the petitioner was entitled to maintain the winding-up petitioner under the just and equitable clause of section 162 of the Companies Act, 1913, on the ground of physical and legal exclusion of the petitioner from theJ management of the company and on the material on record it is established that the respondents have physically and legally excluded the petitioner from the management of the company and on this ground, therefore, the petitioner has made out a case for winding-up of the company.
' On the ground of increase in liability of the company by the respondents since the taking over of the management of the company, the balance-sheets of the company do not indicate that the financial position of the company is such that it should be wound-up. The mere increase of the liability of the company by itself is no ground for winding-up of the company. What has to be established in this regard is that it is impossible to carry on the business of the company except at a loss or that the existing assets are insufficient to meet the existing libilities.
' On the ground of diversion of funds of the company by the respondents there are some indications about diversion of funds but no definite evidence has been brought on record in this context and as such this ground has not been established.
' The other ground is that the respondents have used the company and its properties as if these were their own personal properties. In my view, this ground has also not been established. The accounts areM being maintained and balance-sheet are being prepared and audited by regular auditors appointed by the company. Apparently Annual General Meetings of the Company are also being held.
' As regards J.M. No.43 of 1979 for rectification of the registers, neither copy of any agreement has been filed by the petitioner to show the agreement for the transfer of shares held by elder brother Abdul Hussain nor the minutes of any meeting of the Board of Directors of the Company indicate that any such agreement had been entered into between the parties for the purchase of the shares of elder brother Abdul Hussain. There are some unsigned documents but these do not make out a case under section 38 of the Companies Act, 1913, for the rectification of the register of the company as prayed in J.M. No.43 of 1979. J.M. No.43/79 is accordingly dismissed but with no order as to costs.
' As a case has been made out for winding-up of the company on the ground of physical and legal exclusion of the petitioner from the management of the company, J.M. No.41 of 1979 is granted with costs and the private limited company i.e. Marine Food Industries Limited is ordered to be wound- up. The Official Assignee is appointed as Official Liquidator of the Company with all powers and he is directed to perform such functions and take such proceedings as are required under the provisions, of the Companies Act, 1913.