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Petitioner: Messrs NAGINA FILMS LTD. VS Respondent: USMAN HUSSAIN and others
Court Name: Sindh High Court Judge(s): Ajmal Mian, Muhammad Ali Mazhar Title: Messrs NAGINA FILMS LTD. vs USMAN HUSSAIN and others Case No.: High Court Appeals Nos. 68 of 1982 and 6 of 1985 Appeal No.21 of 1981 Date of Judgment:1987-05-25 Reported As: 1987 CLC 2263 Result: Appeals dismissed
JUDGMENT
JUDGMENT ' AJMAL MIAN, J.-- Since the above two appeals involve inter alia a common point of law, we intend to dispose off the same by this common judgment. The brief facts leading to the filing of the above two appeals are:- ' H.C.A. No.68 of 1982. ' The appellant is a private limited company incorporated under the Companies Act, 1913 in 1975 with an authorised capital of Rs.5,00,000 divided into 5000 shares of face value of Rs.100 each. The paid up capital of the company was Rs.2,50,000. The break up of the share-holdings and directorship is as follows:- "Group No. 1. {{TABLE}} T . M. Yousuf 500 shares Two Directors (i) (ii) Mrs. Rabia wife of T.M.Yousuf. 500 shares Group No. 2. (iii) Adam son of Haji Tar Muhammad Suleman son of Haji Tar Mohammad Brothers of Adam 500 shares 500 shares Two Directors Group No.3. (iv) Usman Husein 500 shares One Director
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{{TABLE}} ' Respondent No. 3, who had 20% holding filed J. Misc. 24/1981 under Section 153-C of the Companies Act, 1913 (hereinafer referred to as the Act) for enforcing his rights as shareholder, whereas he also filed J. Misc. 25/1981 under Section 162 of the Act for winding up of the appellant Company on the ground that he was excluded from participating in the management/affairs of the Company. The above two petitions were resisted by the other shareholders having 80% shareholdings and also by the Company as the latter was managed by the other group. The learned Company Judge by judgment, dated 15-9-1982 dismissed the former J. Misc. But granted the latter J. Misc. On the ground that as respondent No. 1 was excluded from the management of the Company by the removal from the Directorship, the principles of dissolution of Private Partnership Firms would be applicable. The Deputy Registrar (Judicial) of this Court was appointed as the Official Liquidator of the Company with all powers and was directed to perform such functions and take such proceedings as were required under the provisions of the Act. The appellant Company being aggrieved by the above order has filed the above appeal. ' H.C.A. 6 of 1985. ' This appeal has been filed by the four brothers, appellants 1 to 4 and the Private Limited Company as appellant No. 5 against one respondent, who is real brother of appellants 1 to 4 and who was one of the three Directors in the Company which was incorporated on 17-8-1986 (sic) and of which respondent was its first Managing Director. The Company had an authorised capital of Rs.5,00,000 divided into 50,000 shares of Rs.10 each, whereas the issued and subscribed capital of the Company was Rs.4,00,000. The appellants 1 to 4 having 8,000 shares each i.e. 80% share holding and respondent having 2,000 shares i.e. 20%. It is an admitted position that prior to 24-2-1979 each of the Directors could operate accounts severally but on the aforesaid date it was resolved that two Directors were to sign the cheque and not one. It was the grievance of the respondent that by the aforesaid resolution the majority share-holders excluded him from the management of the Company. The respondent, therefore, filed J.M. 41/79 on 24-10-1979 for winding up of the Company. He also filed J.M.43/1979 on the same day for rectification of the shares register to the effect that he was in fact holding 13,334 shares and not 8,000 shares. While the above petition was pending a general meeting of the share-holders was held and respondent No.1 was ousted from the Directorship because of the majority of appellants 1 to 4. The above two petitions were resisted by the appellants. However, the Company Judge by his judgment, dated 23-12-1984 allowed J.M. 41/1979 on the ground found favour with him in his aforesaid earlier judgment, dated 15-9-1982, which is subject-matter of above H.C.A. 68/1982 but dismissed J.M.43/1979, and appointed the Official Assignee as the Official Liquidator of the Company with all powers and he was directed to perform such functions and take such proceedings as were required under the provisions of the Act. The appellants, therefore, filed the above appeal. 2. We intend to deal with the main contention of the learned counsel for the appellants jointly in both the above appeals after dilating upon the individual contentions advanced by the learned counsel for the appellants in the two appeals. It will, therefore, be appropriate to take up the contentions of Mr. Rasheed Akhund learned counsel for the appellant in H.C.A. 68 of 1982.He has inter alia urged as follows:- (1) That even if there was illegal exclusion of the respondent or removal from the Directorship the Court should have remedied the illegality but should not have granted petition under Section 162 of the Act in view of the facts of the present case. (2) That since the respondent had not approached the Court with clean hands, his petition should have been dismissed. (3) That factually in view of Article 12 of the Companies (Managing Agencies and Election of Directors) Order, 1972, hereinafter referred to as the Order, the respondent remained as the Director
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and the alleged illegal removal by the majority share-holders was of no consequence. (4) That in fact section 290 of the Companies Ordinance, 1984 hereinafter referred to as the Ordinance was applicable and not section 153-C of the Act and it is the interest of all the share- holders and the Company is to be considered while deciding a petition for winding up and not of the share-holder who approached the Court for winding up. ' On the other hand Mr. J. H. Rahimtoola has submitted as follows:- (1) That the learned Company Judge has taken into consideration all the relevant facts while granting the petition. (2) That respondent had not approached the Court with unclean hands but in fact the conduct of the appellants 1 to 4 was questionable. (3) That before the learned Company Judge, it was contended by the appellants that Article 12 of the Order is not applicable, whereas before this Court a contrary stand has been taken. He has further submitted that in any case the appellants had removed the respondent from the directorship even without giving any notice of the meeting. (4) That section 290 of the Ordinance has no application to the instant case as the petition was filed several years prior to the enforcement of the said Ordinance. 3. In support of the above first contention that the learned Company Judge should have not granted the petition for winding up but should have remedied the alleged illegal acts committed to section 170(1-A) of the Act which provides that "if, on a petition presented by any member of the registrar, the Court is of the opinion that, although the facts would justify the making of a winding up order, the making of such order would unfairly prejudice the member or members concerned, the Court may make such order as it thinks fit in the circumstances for regulating the conduct of the affairs of the company and bringing to an end the matters complained of." ' It was urged by Mr. Rasheed Akhund that in view of the above provision the learned Company Judge should have taken into consideration the interest of all the members and not of the respondent alone. Whereas it was submitted by Mr. J.H.Rahimtoola that the reference to the member or members concerned is to the member or members, who have filed the petition for winding up and not all the members/ s hareholders . ' Be that as it may, the learned Company Judge has taken into consideration this aspect and has found that it was just and equitable to order the winding up of the Company. We see no reason to take different view on this aspect of the matters. ' We may dilate upon the above submission of Mr. Rasheed Akhund noticed hereinabove, namely that section 290 of the Ordinance was applicable and not section 153-C. It may be observed that he has referred to the above section of Ordinance and submitted that in fact it corresponds to section 153-C of the Act.He has also pointed out that under clause (b) of the subsection (2) of section 290 the Court has to take into consideration the fact, whether the winding up of the Company would unfairly prejudice the members or creditors and not only the member or members who have filed the petition for winding up. It is true that there is a marked difference between phraseology of section 153-C of the Act and section 290 of the Ordinance inasmuch as the interest of the creditors has also to be taken into account while considering an application under section 290. In our view, section 290 of the Ordinance is not applicable to the present case as the petition was filed prior to the enforcement of the Ordinance and secondly, the learned Company Judge has declined the respondent's application under section 153-C of the Act. 4. As regards Mr. Akhund's submission that the respondent had not approached the Court with clean hands, it may be observed that he has pointed out that from the time of incorporation of the Company till 30-6-1980 when the respondent voluntarily resigned from the Managing Directorship, he was managing the affairs of the Company as the Managing Director and that during his above tenure he had mismanaged the affairs of the company inasmuch as the Company had to lodge 8
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criminal cases against the respondent. He has invited our attention to the extract from the cash book and pointed out that on the last date of his working as the Managing Director the respondent created a credit in his favour for a sum of Rs.75,000 and shown payment of Rs.75,000 to one Ibrahim Dawood. It was vehemently urged that these entries were made incorrectly. He has also invited to the letters/affidavits filed by Ibrahim Dawood in which he has allegedly stated that he had not received Rs.75,000. ' On the other hand Mr. J.H.Rahimtoola has submitted that factually the respondent had advanced a sum of Rs.75,000 to the Company in respect of which the respondent filed Suit No.5889/1982 in the Court of 3rd Civil Judge, Karachi and got a decree against the appellant recently and that the alleged letter/affidavit of Dawood are not worth relying as he had himself given different version in different affidavits. The learned Company Judge has held that there is not sufficient material on record to conclude in favour of the appellants' above allegations. We are also inclined to hold that on the basis of the material on record we cannot hold that factually the above two entries in the two sums of Rs.75,000 each were fabricated. Though Mr. Rahimtoola has not placed a copy of the decree allegedly obtained by the respondent in Suit No.5889/82 but Mr. Rasheed Akhund, learned counsel for the appellant was unable to contradict the above statement for want of instructions. As regards the second entry in respect of payment of Rs.75,000 to Ibrahim Dawood, it may be pointed out that he has given affidavit in favour of the appellants at one stage and then in favour of the respondent and then again he has changed his stand. In view of the above contradictory stand taken by Ibrahim Dawood, no implicit reliance can be placed on his affidavits/letters. ' We may also deal with the second limb of Mr. Rasheed Akhund's above argument, namely, that factually the respondent had filed the petition for collateral purpose in order to avoid the prosecution in criminal cases, which were initiated by the Company against the respondent and which were pending. In furtherance of his above submission he has referred to the case of the Re: Bellador Silk Ltd. (1965) All England Law Reports 667, in which the petitioner who was a Director filed the petition for winding up. The real object was to get satisfaction regarding repayment of loan to credit of Companies in which the petitioner had interest. It was held by a learned Single Judge of the Chancery Division, England that the object of the filing of the petition was to bring pressure in order to achieve a collateral purpose and, therefore, it was abuse of the process of the Court. The petition was dismissed. ' Mr. J.H. Rahimtoola has submitted at the bar that all criminal complaints filed by the appellant Company have been dismissed by the Courts concerned. However, he has not placed the orders of the dismissal on record. Mr. Rasheed Akhund was unable to confirm or contradict the above statement for want of instructions. ' Be that as it may, the learned Company Judge has not dilated upon the merits of the above criminal complaints as it might have prejudiced either of the parties. It will suffice to observe that there is not sufficient material on record on the basis of which it can be concluded that the appellants' aforesaid criminal complaints had any merits. In the absence of any such material, it cannot be concluded that the object of the respondent in filing of the petition was to frustrate the above criminal complaints or to avoid his prosecution. 5. This leads us to the last submission of Mr. Rasheed Akhund noticed hereinabove that in view of Article 12 of the Order the attempt on the part of the majority share-holders to remove the respondent from the Directorship was of no consequence and, therefore, this could not have been made a ground for granting the winding up petition. It may be pointed out that before the learned Company Judge, it was urged by the learned counsel for the appellants that Article 12 of the Order was not applicable and that in terms of section 86(g) of the Act read with the Memorandum and Articles of Association of the Company the majority share-holders were entitled to remove the respondent from the Directorship. This stand is directly in conflict with the present stand taken by
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the appellant before us. It has been concluded by the learned Company Judge that no notice of the general meeting on 25-2-1981 in which the respondent was removed from the Directorship was given to him. Mr. Rasheed Akhund had candidly conceded before us that since no notice was given it was illegal removal and in fact was of no consequence. According to him in any view of the matter the respondent remained the Director of the Company inspite of the above resolution and, therefore, was in fact not removed. We will dilate upon this question more in detail while dealing with the main contention of both the learned counsel for the appellants but for the time being suffice to observe that the majority share-holders in fact removed the respondent from the Directorship though the appellants' attempt might have been in conflict with Article 12 of the Order, or was illegal for want of notice for the meeting. 6. Mr. Liaquat Merchant in support of H.C.A. No. 6 of 1985 has submitted as follows:- 7. (1) That Article 39 of the Articles of Association of the Company did not create a vested right in the respondent to hold office of the Managing Director. (2) That even resolution of 1979 providing that the accounts were to be operated by two directors jointly and not by one ceased to be effective upon the seizure of the respondent as a Director and, therefore, this could not have been a ground for the grant of winding up petition. (3) That the filing of J.M.43/79 by the respondent in which he sought rectification of the shares register in the form of showing that he owned 13,334 shares and not 8,000 shares as was shown, was in conflict with his J.M.41/79 for winding up of the Company. Mr. J. H. Rahimtoola on the Wier hand has urged as follows:- (1) That Article 39 of the Articles of Association contained the arrangement, which was arrived at between the brothers for running the Company. (2) That the act of appellants 1 to 4 to exclude the respondent from operating the accounts was in fact further completed by the ouster of the respondent from the Directorship. (3) That there was no inconsistancy between J.M.41/79 and J.M. 43/79. 7. Adverting to the above first submission of Mr. Liaquat Merchant, it may be pertinent to reproduce Article 39 which reads as follows: - "39. The Directors .Nay from time to time appoint one or more of their body to the office of the Managing Director for such term and on such remuneration (whether by way of salary or commission or participation in profits or partly in one way and partly in antoher) as they may think fit, and a Director so appointed shall not, while holding that office, be subject to retirement by rotation, or be taken into account in determining the rotation of retirement of Directors, but his appointment shall be subject to determination ipso facto if he ceases for any cause to be a Director of if the Company in General Meeting resolve that nis tenure of office as Managing Director be determined." ' A perusal of the above quoted Article indicates that the Directors were to appoint one or more of their body to the office of the Managing Director for such terms and on such remuneration as they may think. It further shows that once a Director so appointed was not subject to retirement by rotation but his appointment was subject to determination ipso facto if he ceases to be a Director or if the Company in General Meeting resolves that his tenure of office as Director be determined. It is an admitted position that the respondent was appointed as the First Managing Director of the Company and remained as such till his exclusion by the appellants 1 to 4. The learned Company Judge has concluded as follows:- "If the view that was taken by me in Nagina Film's case is correct, the present Winding up petition will be maintainable on the ground of exclusion, physical or legal, of the petitioner from the management of the company. In my opinion, in view of the law laid down by the Supreme Court in Ladli Prasad's case the petitioner's winding up petition is maintainable on the ground of physical or legal exclusion from the management of the company as on lifting the veil of incorporation of this
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company it is found that in fact this company was being run and managed as if it were a partnership firm. The five brothers who were the only share-holders of this company held equal shares in the company i.e. 8,000 each and right from the date of the incorporation of the company in 1966, the petitioner remained its Managing Director till the disputes arise between the brothers sometimes in early 1979.Lt has also come on record that till the disputes started, all the Directors had powers to operate the bank accounts of the company singly. No dividends were declared but the shares in the profits of the company were apparently distributed amongst the brothers through remunerations or other methods. The normal method of distribution of profits in a company is through declaration and distribution of dividents which practice has not been followed in the case of the present company. The fact that the share-holders belong to the same family in fact they are real brothers and they hold equal shares and that no dividend was declared but profits made by the company were distributed through other means to the share-holders and the way in which the company has been run makes it clear that all the five brothers had agreed that the company will be run with the active participation of all the brothers in the management of the company and, therefore, it is clearly indicated that the company was being run as if it was a partnership firm. As such whatever interpretation is given to the principles laid down by the Supreme Court in Ladli Prasad's case, in the case of the company in question, the ground of exclusion of one of the brothers from the management of the company is a ground on which a winding up petition can be maintained under the just and equitable clause." 8. The above conclusion of the learned Company Judge is supported by the material on record. It is true that even above-quoted Article 39 contemplates the termination of the Managing Directorship is the events mentioned therein and under Article 32 the Company in the General Meeting can fix the number of Directors. The powers are also contained in section 86(g) of the Act for the removal of a director by extraordinary resolution subject to the provision contained inter alia under Article 12 of the Order referred to hereinabove. In view of the above quoted conclusion of the learned Company Judge the factum that Article 39 itself contemplates termination of the Managing Directorship in the events mentioned therein or that Article 32 empowered the Company in its General Meeting to fix the number of Directors or that under section 86(g) of the Act the power to remove a Director is contained though subject to Article 12 and the other provisions of the order referred to hereinabove, is of no consequence. 9. As regards Mr. Liaqat Merchant's second submission that even the resolution of 1979 providing restriction as to the operation of the accounts by two Directors, instead of one, had ceased to operate in December, 1981 when the respondent ceased/failed to get himself elected as a Director, it may be observed that the learned Company Judge has rightly concluded that the alleged resolution passed in 1979 providing that the two directors were to operate the bank accounts instead of one, which was the practice from the inception of the incorporation of the Company was in fact a device to render the respondent ineffective as a Managing Director and to prevent him from the participation in the affairs of the Company. The ouster of the respondent from the Directorship in the meeting held on 28-12-1981 was in fact the completion of the act of ouster. ' Adverting to Mr. Liaquat Merchant's contention that filing of J.M. 43/79 by the respondent in which he sought rectification of the shares register in the form of showing that he owned 13,334 shares and not 8,000 shares as was shown was in conflict with his J.M.41/79 for winding up of the company, it may be observed that there seems to be no inconsistancy as even in case of winding up of the company the share-holders would be entitled after the discharge of all the liabilities, to the assets proportionate to their holding and, therefore, if respondent's J.M.43/79 would have been granted, he would have been entitled to proportionate increase in his shares in the assets of the wound up Company.
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10. We may point out that though both the winding up petitions were supported by other grounds but the learned Company Judge was of the view that other grounds were not sufficiently established. ' Mr. J.H.Rahimtoola in terms of Order XLI, Rule 22, C.P.C. Attempted to support the two judgments under appeal even on the grounds which were not found in favour of the respondents. In our view, the findings recorded by the learned Company Judge on the grounds seem to be correct. Since we are inclined to maintain the above two judgments on the ground found favour with the learned Company Judge, it is not necessary to dilate upon the same in detail. 11. This leads us to the main submission namely, whether the principles of dissolution of a Private Partnership can be pressed into service in the instant two cases or to put it differently whether the ratio of the case of Ladli Prasad Jaiswal v. The Karnal Distillery Co., Ltd. Reported in PLD 1965 SC 221 is applicable to present cases. In the above Supreme Court case inter alia, the following observations were made: "Now in the case of a private limited company the tendency of the Courts has uniformly been to treat it more or less as a partnership and to apply the same principles inthe winding up of a private limited company as would entitled a partner to have a partnership firm dissolved. Commonly the exclusion of a partner from the management of the firm, the existence of a state of deadlock between the partners or the justifiable lack of confidence in the management have been regarded as just and proper grounds for dissolving a private limited Company." 12. It may be pertinent to point out that clause (vi) of section 162 of the Act corresponds to clause (g) of section 44 of the Partnership Act, 1932. The former provides that 'if the Court is of opinion that it is just and equitable that the company should be wound up', whereas the latter reads that 'on any other ground which renders it just and equitable that the firm should be dissolved'. 13. M/s. Rasheed Akhund and Liaquat Merchant, learned counsel for the appellants in the present two appeals have vehemently submitted that the principles of dissolution of a private partnership firm cannot be made applicable to the instant cases and that the above case of Supreme Court namely Ladli Prasad's case is distinguishable from the present cases. ' Mr. Rasheed Akhund as well as Mr. Liaquat Merchant have…
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