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Petitioner: IQBAL ALAM and anothers VS Respondent: Messrs PLASTICRAFTERS (Pvt.) Limited and 4 JUDGMENT
Court Name: Sindh High Court Judge(s): Mamoon Kazi Title:IQBAL ALAM and anothers vs Messrs PLASTICRAFTERS (Pvt.) Limited and 4
JUDGMENT
Reported As: 1991 CLC 589 Result: Order accordingly Judgment JUDGMENT ' These petitions have been filed by two opposing groups of directors of a joint stock company known as Plasticrafters (Pvt.) Limited under the provisions of sections 305, 309 and 290 respectively of the Companies Ordinance, 1984. 2. It is a common ground between the parties that before the said Company had men formed, M/s. Plasticrafters was originally started as a single proprietary concern by S.M.Yousuf, the father of Masood Alam and Iqbal Alam, the main contenders in this case. The said concern subsequently became a partnership firm in April, 1950. In 1966 the said firm was reconstituted with S.M. Yousuf, Masood Alam and Iqbal Alam as its partners. After the death of S.M. Yousuf in 1970 the firm was converted into a private limited company with Iqbal Alam and Muzaffar Alam (hereinafter, for the sake of convenience, referred to as "the petitioners) and Masood Alam, Abdul Hassan Kazim, Imran Alam and Safdar Hussain (hereinafter referred to as "the respondents") as its directors. The nominal capital of the Company is Rs,10 million divided into 1,00,000 shares of Rs,100 each. The paid-up capital of the company is Rs,53, 30,500. Divided into 53,305 shares of Rs,100 each. Admittedly, the shares of the company are controlled by Masood Alam and Iqbal Alam, both sons of the late S.M. Yousuf, in the ratio of 60% and 40% respectively. The shareholding of the parties in the company presently is as follows:-- 1. Masood Alam 6,688 shares 2. Iqbal Alam 4,442 3. Muzaffar Alam 50 4. Abdul Hassan Kazim 50
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5. Imran Alam 2,400 6. Safdar Hussain 1600 3. Initially, after its incorporation, the company was being jointly managed by three brothers, namely, Masood Alam, Iqbal Alam and Muzaffar Alam and the affairs of the company were being carried out in harmony under Masood Alam, the oldest of the three brothers. With the joint efforts of the three brothers the company was brought on the sound footing and "Rahber" brand water coolers were introduced by the company which brought great fame and profit to the company. However, subsequently, it appears that mistrust among the brothers started as it has been alleged by the petitioners that Masood Alam started taking decisions autocratically and misappropriating huge sums of money from the company and thereafter, the affairs of the company were entirely in shambles. 4. Thereafter, a Council of Elders was constituted consisting of the two elder brothers of the petitioners, namely, Mohammad Alam and Mehmood Alam and one Mr. E.U. Khawaja, a family friend. Masood Alam of his own free will agreed to purchase the shareholding of petitioner Iqbal Alam at the price of Rs,11,000,000 and a separate memorandum in this regard was also drawn but subsequently the agreement did not materialize. The matter was once again referred to the Council of Elders and the agreement dated 18-11-1984 was drawn between the parties pursuant to which, Iqbal Alam was appointed Managing Director of the Company with effect from 26-7-1986 and Masood Alam was appointed its Chairman. 5. It appears that this arrangement between the parties also did not work as it has been alleged by the petitioners that although the number of directors in the company throughout had remained equal but Masood Alam started manoeuvring his desire to alter the same from four to three with a view to assume full and complete control of the company. Imran Alam the son of Masood Alam was introduced into the company to work on the marketing side. Masood Alam also started insisting on exercising his casting vote as a Chairman of the company. The petitioner No,1 Iqbal Alam with a view to resolve the differences made a request to Masood Alam to refer the matters in dispute to arbitration by the Council of Elders but the latter instead filed J. Misc. Application No,27/89, seeking to restrain him from doing the same. 6. On the expiry of the tenure of the directors fresh elections were required to be held. Accordingly notices, after approval of all the directors, were issued for holding a general meeting for election of four directors. Respondent Masood Alam and his nominee directors filed nominations and so did the petitioners. However, Masood Alam raised legal objections in respect of the proposed meeting scheduled for 10-8-1989 and instead called a meeting of the Board of Directors on 7-8-1989 and reduced the number of directors from four to three. Admittedly, Iqbal Alam and Muzaffar Alam did not attend such meeting of the Board of Directors. Thereafter, they were restrained through the order of this Court from holding the extraordinary general meeting, scheduled for 10-84989. It has been further alleged by the petitioners that a meeting of the Board of Directors of the Company called on the 23rd October, 1989 resulted in a deadlock as name of Iqbal Alam was proposed to act as Chairman for such meeting but Masood Alam claimed that notwithstanding the expiry of his term as Chairman of the Board of Directors on 26-7-1989, he continued to be the Chairman till such time as a new Chairman was appointed. 7. In J.M. 81/89, the case of the petitioners now is that, the apparent structure of the Company, in view of the present relationship between the parties, is not the real structure as on piercing the yeil of incorporation, it would be found that the Company in reality is a partnership business. According to the petitioners, there is a complete deadlock, particularly in the matter of election new Directors whose term of office expired on 26th July, 1989. The attempt c a the part of the group controlled by the respondents to substitute three directors in place of the original four is clearly to frustrate the existing arrangement of equal participation between the two groups. Therefore, the minority group
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controlled by the petitioners has no confidence in the straightforward and honest management by Masood Alam and his nominees. The efforts on the part of minority group for conciliation, according to the petitioners, have failed, resulting into a complete deadlock. The Company is indebted to the bankers to an extent of Rs,40 million and it is not possible for the banks to continue to extend the facilities if the parties are unable to run the Company in harmony and peace. In view of the heavy liabilities of the Company it has to generate a sum of Rs,5,00,000 every month for debt servicing alone. The sales of the Company have considerably fallen. The Company has lost its creditability in the market. Consequently according to the petitioners, it is just and equitable that the Company be wound up. 8. The case of petitioners Iqbal Alam and Muzaffar Alam has been resisted by respondents Masood Alam and others who have also filed J. Misc. Application No,51/89. The respondents have sought a declaration to the effect that the notice issued for convening the extraordinary general meeting on 10-8-1989 is illegal. The responents have also sought further consequential relief by restraining of the petitioners Iqbal Alam and others from holding the extraordinary general meeting of the Company on the said date or on any other date, contrary to the decisions made in the meeting of the Board of Directors held on 7-8-1989. 9. I have heard Mr. Mohsin Tayabally, learned Counsel for the petitioners and Mr. Khalid Anwar, learned counsel for the respondents. I have also perused the respective pleadings of the parties in the two cases. 10. In support of J.M. No,51/89, Mr. Khalid Anwar, learned counsel for the respondents, has argued that Section 178 of the Companies Ordinance requires that the number of Directors of the Company be fixed not later than thirty-five days before convening of the general meeting and since no meeting of the Board of Directors had been called by the Secretary of the Company to fix the number of Directors first, the meeting convened for 10-8-1989 was not in accordance with the mandatory requirements of Section 178 of the Companies Ordinance. Referring to the meeting convened by Masood Alam on 7-8-1989, at which the number of Directors of the Company was fixed as three, the learned counsel contended that, such meeting was a valid meeting as vide Article 81 of the Articles of Association of the Company, a meeting could be convened by any of its Directors. No doubt the respondents abstained from attending such meeting but nevertheless two Directors were present at the meeting and consequently it was a valid meeting. According to the learned counsel, the question of deadlock could hardly arise as the number of the elected Directors fixed at such meeting is three. It was further contended that the proceedings initiated by Iqbal Alam vide J. Misc. Application No,81/89 are mala fide and meant to sabotage the Company. Mr. Mohsin Tayabally, on the other hand, has disputed the claim of the respondents that the number of Directors was three. According to the learned counsel, the number of Directors had already been agreed to be four by all the Directors of the Company and in pursuance of such understanding all the Directors including the respondents had filed their nomination papers. However, subsequently, the respondent Masood Alam took a somersault and raised objection to the convening of meeting scheduled for 10-8-1989 claiming that the said meeting was not being held in accordance with Section 178 of the Companies Ordinance. However, according to the learned counsel, a decision having already been taken in regard to the number of Directors of the Company, such number could not be altered except in the manner provided by Section 178 of the Companies Ordinance, that is to say, with the prior approval of the general meeting of the Company. Mr. Mohsin Tayabally has further contended that after the expiry of the term of three years, for which respondent Masood Alam had been appointed as Chairman of the Board of Directors, he could not continue as such thereafter and for each of the meeting of the Board of Directors a Chairman will have to be elected unless a new Chairman has been appointed.
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11. Since the controversy first revolves around Section 178 (1) of the Companies Ordinance, it is pertinent to reproduce the same first. Section 178 (1) provides as follows: "178. Procedure for election of Directors.--(1) The Directors of a Company shall, subject to Section 174, fix the number of elected Directors of the Company not later than thirty-five days before the convening of the general meeting at which Directors are to be elected, and the number so fixed shall not be changed except with the prior approval of a general meeting of the Company." 12. Subsection (1) of Section 178 clearly shows that the Directors of a Company have first to fix the number of elected Directors of the Company not later than thirty-five days before the convening of the general meeting at which Directors are to be elected. Mr. Khalid Anwar contends that the Directors shoul have first fixed the number of the elected Directors of the Company at a meetin of the Board of Directors. In this regard it may be pointed out that although there can be no cavil with the said contention, but, at the same time, nothing can be spelt out from Section 178 to indicate that the number of Directors could not be fixed otherwise then at a meeting of the Board of Directors. Reference may also be made in this regard to Section 196 of the Companies Ordinance, subsection (2) whereof enumerates the powers which can be exercised by the Board of Directors of a Company by means of a resolution passed at their meeting and fixation of the number of Directors is not included as one of such functions to be performed by the Board of Directors by means of a resolution at its meeting. Reference to the copies of documents filed alongwith the counter-affidavit of petitioner Iqbal Alam shows that vide notice of meeting issued by the Secretary of the Company dated 18-7-1989 (Annexure E-5) the number of Directors to be elected at the next extraordinary general meeting scheduled for 10-8-1989 had been shown as four. A copy of the letter addressed by the Secretary to petitioner Iqbal Alam and respondent Masood Alam dated 2-8-1989 (Annexure E-6) shows that after issuance of the notice dated 18-7-1989, besides petitioner Iqbal Alam, responent Masood Alam alongwith Muzaffar Alam, A.H. Kazim and Imran Alam {{WORDS MISSED}} had sent applications notifying their intention to contest for the election of Directors at the said meeting. Admittedly, it was only subsequently that vide letter dated 2-8-1989 respondent Masood Alam raised an objection regarding the of the meeting scheduled for 10-8-1989 without a prior resolution of the Board of Directors in regard to the fixation of the number of Directors to be at the said meeting. The documents, reference to which has just been made by me, clearly show that the number of Directors originally fixed with the consent of all the parties concerned was four. Consequently, in my opinion, the uirement of Section 178 regarding fixation of the number of Directors to be elected at the next general meeting had been met in the present case. However Section 178 further requires that such number of Directors be fixed not later than thirty-five days before the convening of the general meeting at which the Directors are to be elected. Mr. Mohsin Tayabally has argued that the requirement of minimum thirty-five days which should elapse between the fixation of the number of Directors and the holding of the general meeting for their election is not mandatory but only directory, and consequently, if a clear thirty-five days' notice in regard to the election of the Directors was not given by Secretary of the Company, the meeting scheduled for 10-8-1989 would still have been valid. In my opinion, the controversy has no bearing on the real point since the meeting scheduled for 10-8-1989 was not held on account of the injunction granted by this Court vide its order dated 10-8-1989. However, as far as the fixation of the number of Directors by the parties is concerned, the appears to be four, according to the original understanding between the Merely because the number of Directors was fixed less than thirty-five for the convening of the general meeting would not reduce the entire to a nullity. It is also pertinent to point out that as is evident from Section the Companies Ordinance, once a number of Directors is fixed in accordance with the provisions of the said section, the same cannot be altered except
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with the prior approval of a general meeting of the Company consequently, fixation of the number of Directors as three at the meeting of the Board of Directors held on 7-8-1989 in the, absence of petitioners Iqbal Alam and uzaffar Alam apparently was in violation of the provisions of Section 178 as the amen was done only by two of the Directors of the Company in absence of the three two and without prior approval of a general meeting of the Company. ' Consequently, I am inclined to agree with Mr. Mohsin Tayabally that the number of Directors to be elected at the next general meeting is four. 13. The next contention of Mr. Khalid Anwar is that after the expiry of his term as Chairman on 27-7- 1989, respondent Masood Alam still continues to be the Chairman of the Company as his successor has not yet been appointed. Learned counsel has further argued that there was no provision analogous to Section 177 of the Companies Ordinance in regard to the retirement of Directors in the repealed Companies Act, 1913. However, in Kailash Chandradut v. Jogesh Chandra Majundar (AIR 1928 Cal. 868), when a question arose, whether the Directors after the expiry of their term as Directors could continue to act as such till such time as new Directors were elected, it was held that the existing Directors could continue to function as such till a general meeting was held to elect the new Directors. Basing his arguments on the dictum laid down by the Calcutta High Court in this case, Mr. Khalid Anwar has argued that notwithstanding the absence of any specific provision in this regard in the Companies Ordinance, respondent Masood Alam could still continue to be the Chairman of the Company till such time as the new Chairman was appointed. I find no force in the argument. In the case decided by the Calcutta High Court it came to the said conclusion because the Articles of Association of the Company provided that the Directors should be elected annually at a general meeting. Consequently it was concluded that so long as the general meeting of the Company was not held for election of the Directors, the Directors elected at the previous general meeting would continue in office. The Calcuatta High Court clearly could not envisage a situation where the Company could continue to work without its Directors till such time that new Directors were elected at the general meeting. The facts of the present case are, therefore, clearly distinguishable. In the present case, a complete answer to the controversy is provided by Article 82 of the Articles of Association of the Company. The said Article provides as follows:- "82. The Directors may elect a Chairman of their meeting and determine the period for which he is to hold office, but if no such Chairman is elected, if at any meeting the chair is not present within ten minutes after the appointed for holding the same or is unwilling to act as Chairman, the Directors present may choose one of their number to be Chairman of the meeting." 14. Article 82 therefore shows that if no Chairman is elected or if at an meeting the chair is not present or the Chairman is unwilling to act as such, the Directors present may choose, one of their members to be the Chairman of the meeting of the Board of Directors. Admittedly, the term of the office of the Chairman expired at the end of three years after respondent Masood Alam has been appointed as such on the 28th July, 1986. In my opinion, Masood Ala cannot continue to act as Chairman of the Board of Directors and till such Time as a new Chairman is appointed, a Chairman will have to be elected by the Directors at each meeting of the Board of Directors. 15. Turning now, to the case of the petitioners in J. Misc. Application No,81/89, which, as pointed out earlier, has been filed under sections 305 and 309 of the Companies Ordinance, 1984, the relevant factual position may first be stated as follows:- (i) That although the company was incorporated as a private limited company but in reality it is controlled by two brothers namely petitioner Iqbal Alam and respondent Masood Alam. (ii) Although the shareholding of the said two brothers in the company is not the same but the equity controlled by them is in the ratio of 40% and 60% respectively.
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(iii) Four Directors of the company are to be elected at a general meeting, which has not yet been convened. (iv) The term of three years for which respondent Masood Alam had been appointed as Chairman expired on 27-7-1989 after which for each meeting of the Board of Directors a Chairman has to be elected. (v) Both the parties have made allegations against each other in regard to misappropriation of the funds of the company, which, however, require to be substantiated by documentary proof. 16. I would now like to examine the case law referred to by both the learned counsel. The first case referred to by Mr. Mohsin Tayabally is the case of Ladli Prasad Jaiswal v. The Karnal Distillery Co. Ltd. (PLD 1965 SC 221) decided by the Supreme Court. The factual position obtaining in this case may be described in the words of Hamoodur Rehman, J., the learned Judge who delivered the judgment of the Supreme Court, as under:-- "We have come to the conclusion that the company with which we are concerned was in substance a partnership, for, its shareholders were only the members of the family of Kishori Lal and no outsider was interested. Under the unanimous resolution of the 16th October, 1945, the appellant was made a permanent Director and Chairman of the Board of Directors and he was to have an equal voice in the management of the affairs of the company. Indeed, no decision could be taken to bind the company which was not arrived at unanimously by all the three directors of the company who together formed the quorum for a directors' meeting. In these circumstances, since the trial Court has found that the resolution of the 28th of March, 1946, which purported to remove the appellant from the directorship of the company was an illegal resolution and this finding has not been reversed by the Letters Patent Bench which has proceeded upon the assumption that the resolution was illegal, it clearly follows that the appellant was wrongfully excluded from participation in the management of the affairs of the company and indeed a deadlock was hereafter created by the refusal of the other directors to allow him to participate in the managemnet. The subsequent conduct of the other co-directors ,nd the appellant leaves no room for doubt that feelings had become so embittered that conciliation was now well-nigh impossible. They ,were determined to exclude the appellant completely. Indeed, they had ;one even to the extent of forfeiting his shares and selling them to others." the above background it was observed by the learned Judge as follows:- "Now in the case of a private limited company the tendency of the Courts has uniformly been to treat it more or less as a partnership, and to apply the same principles in the winding up of a private limited company as would entitle a partner to have a partnership firm dissolved. Commonly the exclusion of a partner from the management of the firm, the existence of a state of deadlock between the partners or the justifiable lack of confidence in the management have been regarded as just and proper grounds for dissolving a private limited company. Thus, in the case of In re: Yenidji Tobacco Company Limited (1916) 2 Ch.426, this principle was applied in England in the case of winding up of a private limited company and the winding up order of the company made by a learned Single Judge was upheld on appeal, as it was proved that the two directors of the company were not on speaking terms, that the so-called meetings of the Board of Directors have been almost of a farce or comedy and no business which deserves the name of business in the affairs of the company could be carried on. The Master of the Rolls Lord Cozens-Hardy observed that in affirming the order he had treated it as a partnership, although it was strictly not a partnership, for, according to him, precisely the same principles ought to apply to a case like this where in substance it is a partnership in the form or guise of a private company. Similarly Warrington Lord Justice took the view that 'the company ought to be wound up if there exists such a ground as would be sufficient for the dissolution of a private partnership at the suit of one of the
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partners against the other.' Such grounds existed in that case and so the winding up order was held to be just and equitable." 17. In Messrs Nagina Films Ltd. v. Usman Hussain and others (1987 C L 2263) a Division Bench of this Court comprising of Ajmal Mian and Mohammad Mazhar Ali, JJ., while dealing with a similar situation, after examination of number of cases on the subject, enumerated the following principles for the guidance of the Courts:- (i) That in a particular case the principles of dissolution of partnership m be applied if the apparent structure of the company is not the fare structure and on piercing the veil it is found that in reality it is partnership. (ii) That generally the exclusion of a partner from the management of the firm, existence of a state of deadlock between the partners or justifiable lack of confidence in the management have been regarded as just and proper grounds for dissolving a private limited company. (iii) That when the members of a company had entered into membership of the company on the basis of personal relationship involving mutual confidence or an understanding as to the extent to which each of the members was to participate in the management of the company, exclusion of any member from the management in breach of the above understanding would entail the grant of winding up petition. (iv) That if a Company is floated by more than one family or several friends and relations in the absence of agreement for active participation of the members who are sought to be excluded from the management, the principles of dissolution of parthership cannot be liberally invoked but in the case of agreement for the active participation in the management by all the members of all the groups, the exclusion from the…
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