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Petitioner: CENTRAL COTTON MILLS LTD. VS Respondent: NAVEED TEXTILE MILLS LTD. and others
Court Name: Sindh High Court Judge(s): G. H. Malik Title: CENTRAL COTTON MILLS LTD. vs NAVEED TEXTILE MILLS LTD. and others Case No.: Suit No,227 of 1991 Date of Judgment:1992-05-13 Reported As: 1993 MLD 42 Result: Order accordingly
Judgment ORDER ' The plaintiff has made this application under Order 40 read with Order 39, Rules, 1, 2, 7 and 10 and section 151, C.P.C. for appointment of a receiver of the properties and assets of defendant No,1 and for an order restraining the defendants from doing various things and also directing them to do certain other things. The temporary reliefs sought by the plaintiff by this application are reproduced below in extenso--- "(i) restraining the defendant No,1 from taking any steps that would result in diluting the equity interest of the plaintiff in any manner whatsoever, including but not limited to by the issuance of Right Shares of the defendant No,1; (ii) restraining the defendant No,1 from alienating, transferring, charging, mortgaging, disposing of, or erecting any encumbrance in any manner whatsoever, its properties including its shareholding in other companies and operating any of its bank accounts; (iii) restraining defendants Nos.2--6 from dealing in any manner with the share certificates issued in their favour by defendant No,1; (iv) the defendant No,1 be directed that the dividends on the shares in question be deposited in Court; (v) share certificates in respect of the 517,400 shares may be taken into custody of the Court and the same be retained under lock and seal of the Court; (vi) defendants Nos.1 to 7 be personally restrained from dealing in any manner with the balance 165,500 lost shares; (vii) directing the defendant No,7 not to register, file or record any transfer of shares of defendant No,1 in respect of 517,400 shares owned by the plaintiff, and illegally transferred by the defendants
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Nos.1--6 in their favour." 2. The circumstances, as set out in the plaint, in which the present application has arisen may briefly be stated. The plaintiff is the owner of 776,100 shares in the share capital of the defendant No,1, which is 39.8 percent. thereof. Munir Ahmed, the Chief Executive of the plaintiff holds, directly and indirectly, over 15% of the share capital of the defendant No,1 and such share holding enables the plaintiff to have at least three directors elected to the Board of Directors of the defendant No,1 and "gives control majority of defendant No,1" to the plaintiff. The plaintiff and the defendant No,1 are "associated" companies and their registered offices, at the relevant time, i.e. up to March, 1990, were in common premises; and they had common directors who are brothers inter se. The spearation of the two companies within the common premises was maintained but with brotherly feeling that neither party shall interfere or take the assets or properties of the other. The 776,100 shares, mentioned above, were kept at the common premises and "on or about 1 February 1990, it transpired that from within the said common premises 682,900 (in 225 scrips) of the plaintiff's said shares were missing and were not found". This fact immediately came to the notice of Gulzar Ahmed, Chief Executive of defendant No,1, and his son Tanveer Ahmed. On the 14th February, 1990, a notice of the loss of shares appeared in 'Dawn' and on the same day, the plaintiff wrote a letter to defendant No,1 forwarding a copy of the resolution passed by the plaintiff on the 18th April, 1989, to the effect that the shares held by the plaintiff in defendant No,1 could only be transferred under the joint signatures of its Chief Executive and Secretary. Another copy of the resolution was handed over to the defendant No,1 earlier i.e. on or about the date on which it was passed. On the 17th February, 1990, the plaintiff wrote .to defendant No,1 formally informing it of the loss of the shares and requesting that duplicate share certificates be issued. The defendant No,1 ignored the plaintiff's letter and the plaintiff, "being apprehensive", desired inspection of the Register of Members of defendant No,1 but requests for inspection were avoided by the defendant No,1 and its Chief Executive Gulzar Ahmed; and, consequently, the plaintiff sent, on the 17th February, 1990, a telex message to the Registrar of Companies, Islamabad, complaining of refusal on the part of defendant No,1 to allow inspection of its Register of Members. The defendant No,1 re-wrote the Register of Members and on the 18th February, 1990, the plaintiff complained to the Registrar about the re-writing. On the same day i.e. the 18th February, 1990, the defendant No,1 allowed inspection of the Register and it was found, on inspection, that 517,400 shares of the plaintiff, out of the "missing" 682,900 shares, had been transferred, on the 27th January, 1990, to-- {{TABLE}} Firdous Spinning and Weaving Mills (defendant No,2) 50,000 shares Mrs. Nilofar Aftab (defendant No3) 10,000 shares Qamar Ahmed (defendant No,4) 12,000 shares Aftab Investment (Pvt.) Ltd. (defendant No,5) 221,000 shares (5) GlzarInvestment (Pvt.) Ltd. (defendant No,6).................................................... 224,400 shares ' The defendants Nos.2 and 5 are companies of. Aftab Ahmed who is a brother of Munir Ahmed and Gulzar Ahmed; the defendants Nos.3 and 4 are the wife and the son, respectively, of Aftab Ahmed and defendant No,6 is a private company of Gulzar Ahmed. 3. The plaintiff repeatedly protested against the action of the defendants but the defendants paid no heed and their plan was to "squeeze out" the representation of the plaintiff from the shareholding and board of directors of defendant No,1. The plaintiff, however, tried to avoid family
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disgrace and scandal but, on the 8th March, 1990, the defendants colluded and conspired to deny the plaintiff's voting rights in respect of its 776,100 shares on the plea that 517,400 out of those shares had been transferred; and the plaintiff was excluded from the board of directors of defendant No,1 and cheated out of majority control of defendant No,1. 4. In the above alleged circumstances, it is the case of the plaintiff that the transfer of the 517,400 shares was made "without the knowledge or authority of the plaintiff' and that the transfer was "wholly unauthorised, illegal, malicious and mala fide and also fraudulent and without cause or consideration and a nullity in law." The plaintiff has, therefore, sought numerous reliefs including, (i) a declaration that the transfer of 517,400 shares has been made fraudulently and without sufficient cause, (ii) rectification of the Register of Members of defendant No,1, (iii) permanent injunction restraining the defendant No,1 from diluting equity interest of the plaintiff in any manner including issuance of Right Shares and (iv) Rs,2,500,000 by way of damages. 5. It may here be noted that there is no allegation in the plaint that the defendants Nos.1 to 6, or any one else on their behalf or at their instance, removed or was suspected of removing the shares which were found "missing" on the Ist February, 1990. All that is alleged is that 682,900 shares were found "missing"---See para. 2.03 of the plaint; and the share certificates, aggregating 517,400 shares were "wrongfully removed"---See para. 3.05 of the plaint. 6. The defendants Nos.1 to 6 have filed a joint written statement denying all the allegations in the plaint; and their case, as set out in the written statement, briefly stated, is as follows: The plaintiff and defendants Nos.1 and 2 are companies which were floated by family members of the late Fazal Ahmed (the father of Gulzar Ahmed, Aftab Ahmed and Munir Ahmed) who, during his lifetime, remained in control of the companies. Those companies acquired shares in each other and, as a result thereof, the brothers and/or their nominees were directors of all the companies. After the death of Fazal Ahmed, the management of the companies was carried on by the brothers and at first there were no differences. However, Munir Ahmed started reneging on mutual understandings and confidence and, abusing his position as Chief Executive of the plaintiff company, ousted Aftab Ahmed and his wife from directorship of the plaintiff by forging letters of resignation. The plaintiff company then issued Right Shares but did not offer proportionate number of shares either to Gulzar Ahmed's group or Aftab Ahmed's group and the shares held by those groups were illegally shown as reduced in the returns filed by the plaintiff with the result that Munir Ahmed's group increased its shareholding in the plaintiff company relative to and at the expense of the other two groups. The plaintiff company also did not pay dividends due to Aftab Ahmed's group and Gulzar Ahmed's group and, consequently owed large sums of money to those groups. The latter, however, did not take any legal action "for the sake of family amity' but, instead, an arrangement was worked out whereby 517,400 shares held by the plaintiff in defendant No,1 were transferred, in partial payment of the amounts outstanding, in favour of Gulzar Ahmed's and Aftab Ahmed's groups. Subsequently, Munir Ahmed had second thoughts and alleged that the shares were stolen and the transfers thereof were illegal; and, to resolve the issue, the brothers agreed, by a written agreement dated the 20th February, 1990, that each brother's group was entitled to exclusive control/management of its companies. In the circumstances, it is stated, the plaintiff is estopped from challenging the transfer of the shares. 7. The plaintiff, in its affidavit in support of the application, has reiterated the allegations in the plaint and has further alleged that the balance of convenience is in its favour and that it will suffer irreparable harm if the application is not granted as prayed. Nothing, however, has been said to substantiate the allegations regarding the balance of convenience and irreparable harm. The defendants have reiterated their version in the counter-affidavit. In the affidavit-in-rejoinder, the
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plaintiff has denied the defendants' version; denied that a large sum of money was due from the plaintiff to defendants; asserted that, on the contrary, it was the defendants who owed the plaintiff very large sums of money; denied the allegation regarding forgery of resignation letters; alleged, for the first time, that no transfer deeds were signed for transfer of the shares and the transfer was, therefore, void and of no effect; and asserted that the agreement dated the 20th February, 1990, was conditional and contingent upon resolution of disputes between the parties and was, in any case, not binding on the defendants. 8. On the 21st February, 1991, notice of the application was ordered and it was further ordered:--- "In the meanwhile the defendants Nos.1 to 6 are directed to maintain status quo in all respects including the issuance of right shares in relation to 776,100 shares claimed to have been held by the plaintiff...." ' When the application came up for hearing on the 4th March, 1991, the above order was clarified in the following terms--- "Mr. Muhammad All Sayeed, learned counsel for the plaintiff states that according to his interpretation the operation of the status quo order passed on 21-2-1991 would not extend to restraining operation of bank accounts by the defendant No,1 and accordingly he has no objection if the bank accounts are being operated upon by the defendant No,1. With this clarification, the order of status quo granted on 21-2-1991 shall continue till the next date." ' The order to maintain status quo was then modified on the 2nd May, 1991, when it was ordered by consent:--- "That the scope of the status quo order dated 21-2-1991 shall extend to only 776,100 shares which were originally in the name of the plaintiff company." 9. While the hearing of this application was in progress and had been adjourned to the 28th April, 1992, the plaintiff moved another application (C.MA. 1732/92) to restrain the defendant No,1 from conducting special business specified in the public notice published in the "Morning News" dated the 9th April, 1992. Arguments on that application were advanced by the counsel on the 28th and 29th April, 1992, and on the 29th April, 1992, the following order was passed:--- "By consent of the learned counsel for the parties, it is ordered that the defendants may hold meeting and pass resolutiOns mentioned in the notice dated the 9th April, 1992, published in the daily 'Morning News' but that the resolutions will not be implemented until after the decision in C.MA.917 of 1991. This application, therefore, stands disposed of subject to whatever order may be passed in C.MA. 917/91." 10. With regard to the allegation that the shares were found missing, the plaintiff apparently did nothing between the Ist February, 1990, when they were missing and the 14th February, 1990, when a public notice was published in daily 'Dawn% and no explanation for inaction on the part of the plaintiff during that period has been offered. Again, on the 14th of February, 1990, the plaintiff wrote a letter to the defendant No,1 sending a copy of the resolution dated the 18th April, 1989, but made no mention in that letter of the alleged loss of the shares. That was done on the 17th February, 1990, when the plaintiff wrote to the defendant No,1 asking for issuance of duplicate shares. The plaintiff, admittedly, came to know on the 18th February, 1990, that the shares had been transferred; it had already asked for issuance of duplicate shares and their demand in that connection had not been accepted by the defendant No,1; and, on the 20th February, 1990, an agreement to resolve the disputes among the groups of Munk Ahmed, Aftab Ahmed and Gulzar Ahmed was signed. In that agreement, it has been stated, inter alia, that the real problem and difficulty between the parties is in connection with the bank liabilities and dues of the companies. If the dispute regarding the shares in question is serious enough to compel the plaintiff to resort to litigation now, surely it would have been serious enough on the 20th February, 1990, to have found mention in that agreement. It is alleged in the plaint that "The plaintiff tried to avoid family disgrace and scandal
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but the defendants have taken further steps to oust the plaintiff" on the 8th March, 1990, when it was excluded from the board of directors of defendant No,1 on the ground that it no longer held the 517,400 shares which had been transferred to defendants Nos.2 to 6. The implication of the plea appears to be that because of the action taken by the defendants on the 8th March, 1990, it was no longer possible for the plaintiff "to avoid family disgrace and scandal" and it was compelled to seek a remedy with regard to the shares. Yet, the present suit was not filed until the 20th February, 1991, i.e. after almost one year. In these circumstances, the allegation that the shares were "missing" is, at least, open to serious doubt. It was contended, on behalf of the plaintiff that the agreement of the 20th February, 1990, was a personal agreement between the brothers and was not binding on the companies. The fact, however, remains that the agreement was entered into in relation to the affairs of the companies and if there was a dispute about the shares, it would, naturally, have been mentioned therein. 11. There is no dispute among the parties that prior to the 27th January, 1990, the plaintiff was owner of 776,100 shares in defendant No,1 and that those shares amounted to 39.8% of the share capital of the defendant No,1. The plaintiff's case is that out of the 776,100 shares, 682,900 shares were found missing on the Ist February, 1990, and that out of those missing shares, 517,400 shares were transferred to the defendants Nos.2 to 6 without authority, without consideration and illegally. In order, apparently, to show that the transfer was without authority, it is alleged that on the 18th April, 1989, a resolution was passed by the plaintiff company to the effect that the shares of the company can only be transferred under the joint signatures of its Chief Executive and Secretary; and that a copy of the resolution was immediately handed over to the defendant No,1 and another copy was sent to the defendant No,1 under cover of the plaintiffs letter dated the 14th February, 1990. The defendants contend that the resolution is fake and that no copy thereof was sent to them prior to the 14th February, 1990. Mr. Khalid Anwar pointed out that the resolution, which is alleged to have been passed by circulation, has been signed by Munir Ahmed and his close-relations but has not been" signed by Gnlzar Ahmed who was a Director of the plaintiff company. Nothing has been said in the plaint as to the necessity of passing such a resolution and, in reply to my query in that regard, Dr. Pervez Hassan said only that there was a "possibility of mischief". He did not however, specify the source from which the plaintiff apprehended "mischief". It may, in this connection, be noted that, according to the allegations in the plaint, both the plaintiff and the defendant No,1 had their registered offices in common premises and that there was mutual trust and confidence between them and that they continued to occupy common premises until March, 1990. There appears to be nothing in the plaint or in the affidavits filed by the plaintiff to show that there was any apprehension on the 18th April, 1989, that the shares might be transferred or removed either by the defendants or any other person. The allegation that a copy of the resolution was "handed over" immediately to defendant No,1 has been denied by the defendant No,1; and the averment, in the plaint, in that regard suffers from vagueness because the allegation is only that a copy of the resolution was "handed over" to defendant No,1, without any mention of the letter dated the 18th April, 1989, a copy of which has been annexed to the plaint. In other words, a copy of the letter of 18th April, 1989, has been annexed to the plaint but there is no allegation that a copy of the resolution was sent through that letter. It, therefore, appears, at least prima facie, that the resolution was not passed on the 18th April, 1989, and that there is no proof that a copy thereof was "handed over" to defendant No,1 immediately or at any time prior to the 14th February, 1990. 12. As far as the agreement dated the 20th February, 1990, is concerned, it has been attacked on several grounds by Dr. Pervez Hassan and Mr. Muhammad All Sayeed. It was contended that the agreement is only between three brothers and, therefore, not binding on the companies, that it is without consideration, that it was conditional and contingent and also that it lacks the due formalities required of an agreement between companies. The agreement, on the face of it, has
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been signed by the three brothers for and on behalf of their respective groups and the contention of Mr. Khalid Anwar was that it was intended to be an agreement on behalf of the companies which were mentioned in the agreement and which were being managed by the three brothers respectively. Mr. Khalid Anwar contended that Gulzar Ahmed and his group have been described, in the agreement, as majority shareholders in defendant No,1 only on the basis of the transfer of the 517,400 shares to them. Mr. Muhammad Ali Sayeed contested the correctness of that assertion and submitted that the group of Gulzar ahmed does not own majority shares in the defendant No,1 even after transfer of 517,400 shares. Be that as it may, the present suit is not concerned with the management of the defendant No,1 but only with the alleged rights in the 517,400 shares which according to the plaintiff have been illegally transferred and which according to the defendants were transferred in pursuance of an arrangement prior to the 20th February, 1990. A perusal of the agreement shows that it does not deal with the transfer of 517,400 shares but is concerned only with the management and control of the several companies mentioned therein. The agreement, therefore, has been relied upon by defendant No,1 only for the purpose of showing that Munir Ahmed, who is the Chief Executive of the plaintiff, impliedly confirmed that the disputed shares had been transferred in pursuance of an earlier arrangement between the parties. It is, therefore, not necessary to decide as to the effect of this agreement with regard to the management and control of the companies. 13. It was next contended on behalf of the plaintiff that the transfer of the shares to defendants Nos.2 to 6 was without consideration. The defendants' case, on the other hand, is that the plaintiff was indebted to Aftab Ahmed group and Gulzar Ahmed group for "large sums of money" on account of dividends on the shares held by those two groups and, therefore, an arrangement was worked out whereby 517,400 shares held by the plaintiff in defendant No,1 company were transferred in partial payment of the amount due. The plaintiff contends that there was no such arrangement because whereas the plaintiff owed the defendants Nos.5 and 6 a total of Rs,3,82,64,035, the defendant No,1 owes the plaintiff a total of Rs,5,807,682 on account of dividends due and other accounts. Mr. Muhammad All Sayeed referred to Annexures `C-1' and `C-2' to the affidavit-in-rejoinder of the plaintiff to show that the advances and receivables as against the plaintiff company were the same on the 30th June, 1990, and 30th June, 1991, to contend that no partial payment as alleged by the plaintiff has been made. However, the shares were transferred on the 27th January, 1990, and it cannot be ruled out that the amount shown as receivables on 30th June, 1990, is the amount after taking into account the partial payment by transfer of the shares on 27th January, 1990. 14. It was contended by Dr. Pervez Hassan that the transfer is without' consideration also because the alleged transfer was made allegedly in partial payment of the money due by the plaintiff company to Gulzar Ahmed group whereas the shares have been transferred to defendants Nos.2 and 5, who are the companies owned by Aftab Ahmed, and to defendants Nos.3 and 4, who are wife and son respectively of Aftab Ahmed. Mr. Khalid Anwar replied that Aftab Ahmed and his group which includes the defendants Nos.2, 3, 4 and 5 do not claim any interest in the shares transferred to them but that they hold the shares on behalf of Gulzar Ahmed and his group. Mr. Muhammad All Sayeed pointed out that Aftab Ahmed has not dislcosed the transfer of these shares in his Wealth Statement but Mr. Khalid Anwar said that the non-disclosure was precisely for the reason that Aftab Ahmed does not claim any interest therein. Mr. Khalid Anwar further said that the transfer of all these shares have been disclosed in the Wealth Statement of Gulzar Ahmed; but no such Wealth Statement is on the record of this case. In the present state of allegations and counter allegations between the parties, it is not possible to decide whether the transfer of the shares to Gulzar Ahmed's group or to Aftab Ahmed's group was without consideration or that Aftab
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Ahmed's group holds the shares transferred to it on behalf of GnIzar Ahmed; and it will be a question to be decided upon evidence at the trial. 15. It was then contended that the transfer of the 517,400 shares was in violation of the provisions of subsections (1) and (2) of section 208 of the Companies Ordinance, 1984. Those provisions are:---" 16. (1) A company shall not make any investment in any of its associated companies or associated undertakings except under the authority of a resolution which shall indicate the nature and amount of investment and terms and conditions attaching thereto. Explanation.---The term "investment" shall include any amount which is not in the nature of normal trade credit. (2) No change in the nature of an investment or the terms and conditions attaching thereto shall be made except under the authority of a resolution." ~~Now, the transaction in dispute in this suit is not a fresh investment by the plaintiff in the defendant No,1 but the transfer of an existing investment from the plaintiff to defendants Nos.2 to 6. This transfer cannot be said to be A investment in the defendant No,1 and, in fact, the effect of the transaction is disinvestment rather than investment. Subsection (1) of section 208 is, therefore, not attracted to the facts of this case.~~ Dr. Pervez Hassan, however, attempted to argue that the transaction of transfer of shares amounts to change in the nature of the investment although he was not able to show how the change was effected. Mr. Muhammad Ali Sayeed contended that even disinvestment by sale of shares results in change in the nature of the…
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