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Petitioner: LADLI PRASAD JAISWAL VS Respondent: THE KARNAL DISTILLERY Co., LTDHonorable Justice HAMOODUR RAHMANBalraj Tulli,A. N. Khanna
1965 P T D 291
1965 P T D 291
[Supreme Court Pakistan]
Present: A. R. Cornelius, C. J., S. A. Rahman, Fazle-Akbar and Hamoodur Rahman, JJ
LADLI PRASAD JAISWAL-Appellant
Versus
THE KARNAL DISTILLERY Co., LTD: Respondent
Civil Appeal No. 18 of 1963, decided on 16th June 1964.
(On appeal from the judgment and order of the High Court of West Pakistan, Lahore, dated the 19th January 1956, in Letters 'Patent Appeal No. 8 of 1955).
(a) High Courts (Punjab) Order, 1947, Art. 13 (2) (b) read with Art. 13 (6)-"Appeal" in Art. 13 (6) means "further appeal" Supreme Court, Pakistan, competent to dispose of such "further appeal" from order of High Court at Lahore.
Held, that the appeal referred to in paragraph (6) of Art. 13, High Courts (Punjab) Order, 1947 necessarily refers to a further appeal, and not to the appeal mentioned in paragraph (2) (b) of Art. 13, for, under the latter paragraph the High Court at Lahore retained the jurisdiction to determine any appeal from an order of a Judge of the said Court on its original side. This provision would thus seem to indicate that an appellate Court having otherwise jurisdiction to hear appeals from an appellate order or decree of the High Court at Lahore would be competent to confirm, vary or reverse the appellate decree and that the judgment given on such an appeal is to receive effect as if the judgment and decree appealed against were also the judgment and decree of the High Court of East Punjab. In other words Supreme Court (Pakistan) is to be regarded for the purposes of such pending proceedings as a Court of appeal from that High Court also.
Midnapore Zamindari Company Limited v. The Province of West Bengal and others (1949-50) F C R 309 ref.
(b) Companies Act (VII of 1913), S. 162-Petition for winding up by a shareholder of a private limited company-Other shareholders by resolution forfeiting pendente lite shares of such shareholder and selling same to third persons, converting company into a public limited company and challenging such shareholder's locus standi to proceed with his petition for winding up company-Rights of parties, held, must be adjudged according to legal position prevailing at time of institution of petition for winding up and not on basis of changes introduced pendente lite unilaterally by other shareholders without consent of shareholder who had instituted proceedings for winding up.
(c) Companies Act (VII of 1913), S. 153-C (introduced in India in 1951)-Furnishes a remedy alternative to winding up of company-Court cannot force a person to resort to remedy under S. 153-C who has already applied for winding up under Ss. 162 & 166, Indian Companies Act.
(d) Companies Act (VII of 1913), S. 162-Petition for winding up by co-director of a private limited company-Tendency of Courts to treat such company more or less as a partnership, in matter of winding up-Grounds for dissolution of partnership, held, admissible as grounds for winding up company Just and equitable grounds-Existence of a state of "deadlock" in business of company-Unanimity in decisions of directors required by resolution of directors not possible due to embittered feelings-Winding up, held, "just and equitable."
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.
The company (in this case) was in substance a partnership, for; its shareholders were only the members of a family and no outsider was interested. Under a unanimous resolution the appellant (who .applied for winding up) 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 had found that the resolution which purported to remove the appellant from the directorship of the company was an illegal resolution and this finding had not been reversed by the Letters Patent Bench, which had proceeded upon the assumption that that resolution was illegal, it clearly followed that the appellant was wrongfully excluded from participation in the management of the affairs of the company and indeed a deadlock was thereafter created by the refusal of the other directors to allow him to participate in the management. The subsequent conduct of the other co-directors and the appellant left 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 gone even to the extent of forfeiting his shares and selling them to others.
In the facts proved in the case it had become clearly just and equitable to dissolve the company.
In re : Yenidji Tobacco Company Limited (1916) 2 Ch. 426; Loch and another v. John Blackwood Limited (1924) A C 783 and In re : Davis & Collett, Limited (1935) 1 Ch. 693 ref.
In re : Cuthbert Cooper & Sons, Limited (1937) 1 Ch. 392 and Charles Porte Investments, Ltd. v. Amanda (1963) 2 All E R 940 distinguished.
Balraj Tulli Advocate Supreme Court of India (Iftikharul Haq Khan Advocate Supreme Court with him) instructed by Naziruddin Senior Attorney for Appellant.
A. N. Khanna Advocate Supreme Court of India (Fazle Ghani Khan Advocate Supreme Court on record absent) instructed by Munir Ahmad Attorney for Respondent.
Dates of hearing: 15th and 16th June 1964.
JUDGMENT
HAMOODUR RAHMAN, J.-This appeal has come before us under a certificate granted by the High Court of West Pakistan on the 23rd of October 1956, under Order XLV, rules 2 and 3 read with sections 109 and 110 of the Code of Civil Procedure. It arises out of a petition under section 162 of the Companies Act filed on the 1st of May 1946, in the High Court of Judicature at Lahore for the winding up of the Karnal Distillery Company Limited by the appellant herein.
Karnal Distillery was started by one Kishori Lal who carried on the business of manufacture and sale of liquor in the name of Kishori Lal & Sons at Karnal. He died in 1906 leaving him surviving three sons Durga Prasad, Ladli Prasad and Shanti Prasad. After the death of Kishori Lai, Durga Prasad as senior member of the family took over the management of the business which had then become a joint family business. Durga Prasad died in 1934 leaving behind two minor sons, Madan Lal and Sajjan Lal and a widow Suraj Mukhi. The appellant Ladli Prasad being the eldest male member of the family took over the Management of the business as karta of the said family and the business continued as a joint family business till November 1940, when the severance of the joint family was effected and the joint family properties partitioned. The joint family business was, however, first converted into a partnership firm and then a few months thereafter on the 23rd of March 1941, the partnership was again converted into a private limited company under the name and style of the Karnal Distillery Company Limited. It was registered as such under the Indian Companies Act, 1913, on the said 23rd of March 1941, with its registered office at Karnal. Its shareholders were the members of the joint family. Durga Prasad's branch was granted 1,004 shares, Ladli Prasad and Shanti Prasad 1,003 shares each. Under its articles of association it was to have three directors, namely, Ladli Prasad, Shanti Prasad and Suraj Mukhi. Each of them was to get a remuneration of Rs. 250 per month. Ladli Prasad, the present appellant, was to be the Managing Director for 10 years with an option to continue as such for a further period of 10 years. He was, in addition to the Rs. 250 per month payable as director's remuneration, to get a further sum of Rs. 1,850 per mensem as salary and Rs. 350 per mensem as car allowance. He was at the same time to receive 7? % of the profits earned by the company as commission.
The shares were allotted in lieu of the assets of the shareholders in the partnership business of Kishori Lal & Sons and the Karnal Distillery, but the articles of association further provided that the shareholders holding 2/3rds of the total share capital would have the power to compel the owners of the remaining 1/3rd shares to transfer their shares to the majority. The main object of the company was to acquire and take over the partnership business of Kishori Lal & Sons and the Karnal Distillery together with the properties, assets, good-will and liabilities thereof as a going concern.
Three members were sufficient to constitute a quorum either at a general meeting of the company or at a directors meeting and every member present at a meeting was to have one vote for every share held by him in the event of a poll being desired and one vote each on a show of hands. But Suraj Mukhi was to be allowed to act as the natural guardian of her two sons who were allotted 335 shares each from out of the quota of Durga Prasad's branch.
The business of the company was carried on smoothly till July 1941, but from that time onward differences began to arise between the appellant and the other directors mainly on the ground that the others felt that the appellant was taking the largest share out of the profits of the company which was doing good business. The other directors charged the appellant with abusing his position as Managing Director, as, according to them, the appellant who was also carrying on business privately on his personal account with the Government, purchased spirits produced by the company at rates below the market rates to meet the requirements of his own personal business and had also become a shareholder in another liquor manufacturing company called Jagjit Distillery and Allied Indus tries Limited started in Kapurthala State in 1944.
The disputes came to a head in 1945 when on the 20th of February 1945, the branches of Shanti Prasad and Durga Prasad held a general meeting of the company in which they purported to remove the appellant from the office of the Managing Director and to appoint Shanti Prasad as Managing Director in his place. The appellant challenged the validity of this meeting on various grounds and refused to hand over the management of the company to Shand Prasad. Ultimately Shanti Prasad was forced to file a suit on the 10th of April 1945, in the Court of the Senior Sub Judge at Karnal praying for a declaration that he was the Managing Director of the company, that the appellant had been lawfully dismissed from the Managing Directorship and for injunctions to compel the appellant to make over all files, documents and other books of the company as also to restrain him from interfering with the management of the company by Shanti Prasad.
Ladli Prasad retaliated with another suit for a declaration that Shanti Prasad had himself ceased to be a director of the company, because, he had contravened section 86-D of the Companies Act by entering into a contract with the company itself.
In the suit of Shanti Prasad an ad-interim order was also obtained for the appointment of a receiver. The trial Court appointed Suraj Mukhi and her son Madan Lal (who had just attained majority) as joint receivers. The appellant filed an appeal against this order in the High Court and obtained a stay of the operation of the trial Court's order. There was, however, a compromise effected between the parties through the intervention of common friends and relations on the basis that the appellant would give up his position as Managing Director and all the three directors would be placed on an equal footing each being entitled to a remuneration of Rs. 900 per month. Shanti Prasad was to be made Manager with no salary and no travelling allowance and henceforward all resolutions, whether of a general meeting or of the directors, were to be passed unanimously.
In pursuance of this compromise a general meeting of the company was held on the 16th of October 1945, and resolutions were passed to give effect to the compromise. It appears that the appellant Ladli Prasad had under the compromise also to transfer proportionate shares from the extra 500 shares which he had got allotted to himself in August 1941, in order to equalise the shares of all the three branches. One of the resolutions passed at this meeting made the appellant a permanent Chairman and Director of the company. The number of directors was fixed at three and the quorum was also fixed at three. The most important resolution, however, that was passed at this meeting was that all decisions must be taken at a meeting of directors unanimously. The purpose of these resolutions was to give the three branches equal shares and equal voice in the management of the business which could henceforward be run only with the assent of all the three branches. No meeting could be held unless all the three directors were present and no decision was to be valid unless it was passed by all the directors. In the general meetings also unanimity was made essential, and it was provided that a meeting of the Board of Directors shall be held on the 1st Sunday of every calendar month. Provision was also made for opening a bank account of the company which was to be operated under the joint signatures of the Chairman and two other directors. The Manager was also required to submit, duly audited accounts, together with a detailed report on the working of the Distillery at every meeting of the directors.
Unfortunately the compromise was short-lived and the very next meeting demonstrated that the parties were still at loggerheads. At the meeting of the 4th of November 1945, the directors differed on almost every question. Shanti Prasad thereafter not being well disposed towards those who had been employed by the appellant began dismissing those who still sided with the appellant. The appellant took exception to this and challenged the authority of the Manager to dismiss any employee without the approval of the Board of Directors. Then on the 25th of February 1946, Suraj Mukhi and Madan Lal requisitioned a meeting for the purpose of passing a resolution against Ladli Prasad and for removing him from the office of Chairman and Director, and for making certain amendments to the articles of association. In pursuance of this requisition a meeting of the directors was held on the 3rd of March 1946, but as at this meeting only Madan Lal and Suraj Mukhi were present the meeting was adjourned till the 28th of March 1946. On this date Ladli Prasad, the appellant, was not present, as he alleged that he had no notice of this meeting. It may be mentioned here that under the compromise all notices of meetings were also required to be sent out by registered post-cards. Notwithstanding the absence of Ladli Prasad the meeting was held and a number of resolutions were passed, inter alia, (1) removing Ladli Prasad from the office of Chairman and Director and appointing Suraj Mukhi in his place as a Director, (2) appointing Shanti Prasad as Managing Director with a remuneration of Rs. 1,000 per mensem plus Rs. 200 as car allowance in addition to the director's remuneration of Rs. 900 per month and, (3) deleting the article which empowered the shareholders to the extent of 2/3rds to force the owners of the remaining 1/3rd to sell their shares.
The appellant alleging that he came to know of this meeting on the 1st of April 1946, filed the petition for winding up on the 1st of May 1946, from which this appeal arises. He alleged in this petition that the attitude of high-handedness adopted by Shanti Prasad had resulted in a complete deadlock in the management of the company's business and that its sub-stratum had gone making it just and equitable to order the winding up of the company. He further alleged that the company was unable to meet its liabilities on various grounds. This petition was contested by the company and the other directors.
After about 8 years this petition came up for hearing before a learned Single Judge of the High Court at Lahore on the 29th of November 1954, and was heard for seven days. The learned Judge framed the following issues:-
(1) Is the company unable to pay its debts?
(2) Are the debts alleged to be due from the company disputed bona fide?
(3) Is it, for the reasons stated in the application, just and equitable that the company be wound up?
The first two issues were decided against the appellant, but he succeeded on the third issue and the learned Judge came to the conclusion that there was a deadlock in the affairs of the company, as the relations between the parties had deteriorated to such an extent that they could not possibly agree to anything. Furthermore that since the company was 'only a private limited company and one of the persons entitled to participate in the management had been illegally excluded from taking any part therein, it would be just and equitable to wind up the company. The order for winding up was, accordingly, made on the 26th of January 1955.
The company went up in Letters Patent appeal from this order and a Division Bench of the High Court reversed this decision mainly upon the grounds, namely, (1) that there was no equity on the side of the appellant Who had by his own previous misconducts led his brothers and nephews to revolt against him (2) that liquidation would ruin the business and (3) that since the company was now situated in India and its business was carried on there it would be more appropriate to leave the parties to seek remedy under the provisions of the new section 153-C introduced in 1951 in India in the Companies Act which enabled the Courts in India to make appropriate orders for putting an end to disputes between the shareholders of a company without putting an end to the company itself in order to protect the interests of the company or any part of its members. From this decision the appellant has now come up to this Court with a certificate from the High Court.
It may be mentioned here that before the Letters Patent Bench the decision of the trial Court on the issue as to whether the company was unable to pay its debts was not challenged. The only question that was urged was that the learned Single Judge was wrong in taking the view that it was just and equitable to order the winding up of the company. On this point it was contended on behalf of the appellant therein that the meeting of the 28th of March 1946, by which Ladli Prasad was ousted from the management was a resolution which had been lawfully passed but the Letters Patent Bench proceeded upon the assumption that even if this meeting was illegal, the case for winding up on the basis of it being just and equitable to do so had not been made out. The only question, therefore, that arises for consideration in this case is whether the Letters Patent Bench was right in taking the view that it was not just and equitable to order the winding up of the company in the facts and circumstances of the case.
Before we enter upon a consideration of the merits of the winding up petition we have, however, to dispose of a preliminary objection which has been taken on behalf of the respondent as to the competency of this Court to hear this appeal.
Learned counsel for the respondent has contended that since after Partition the company's registered office had fallen in India, the winding up petition filed by the appellant herein on the 1st of May 1946, on the original side of the High Court at Lahore could only be heard and determined by the said High Court by virtue of the provisions of Article 13(2) of the High Courts (Punjab) Order, 1947, and since paragraph (2)(b) of the said Article empowered the High Court at Lahore only to hear an appeal from such an order passed on the original side, no further appeal lay to the Supreme Court of Pakistan, as under paragraph (4) of Article 13 the appellate order of the High Court was for all purposes to have effect not only as an order of the High Court at Lahore but also as an order made by the High Court of East Punjab. It is therefore contended that since an appeal is a creature of a statute, the further appeal, if any, would lie to the Supreme Court of India and not to the Supreme Court of Pakistan.
Article 13 is in these terms:-
"13(1) Subject as hereinafter provided the High Court at Lahore shall have no jurisdiction in respect of the territories for the time being included in the Province of East Punjab or in the Province of Delhi.
(2) Notwithstanding anything contained in this order-
(a) any proceedings which, immediately before the appointed day, are pending in the High Court at Lahore on its original side, including any proceedings then pending in the said High Court as a Court of reference, shall be heard and determined by that Court;
(b) the High Court at Lahore shall have the like jurisdiction to hear and determine any appeal from an order of a Judge of the said Court on its original side as if this Order had not been made, and the High Court of East Punjab shall have no jurisdiction to hear or determine any such appeal; and
(c) the High Court at Lahore shall have the like jurisdiction to review any order made by any Judge of the said High Court as it would have had if this Order had not been made, and the High Court of East Punjab shall have no jurisdiction to review any such order.
(3) Subject to the preceding provisions of this Article, all proceedings pending on the appellate side of the High Court at Lahore immediately before the appointed day, shall, where the Court of origin is, as from that day, situated in the
Province of East Punjab or in the Province of Delhi, stand transferred by virtue of this Order to the High Court of East Punjab.
(4) Subject to the following provisions of this Article with respect to appeals, any order made by the High Court at Lahore either-
(a) before the appointed day; or
(b) In any proceedings with respect to which the said High Court retains jurisdiction by virtue of paragraphs (2) and (3) of this Article;
shall for all purposes have effect not only as an order of the High Court at Lahore but also as an order made by the High Court of East Punjab.
(5) Subject to the following provisions of this Article with respect to appeals, any order made by the High Court of East Punjab in proceedings transferred to that High Court by virtue of this Article shall for all purposes have effect not only as an order of that Court but also as an order made by the High Court at Lahore.
(6) Where any such order as is mentioned in paragraphs (4) and (5) of this Article has, whether before or after the appointed day, been confirmed, varied or reversed on appeal, effect shall be given to the decision of the appellate Court as if the order appealed from were an order not only of the High Court by which it was made, but also of the High Court at Lahore or the High Court of East Punjab, as the case may be.
(7) Any reference in this Article to a High Court shall be construed as including a reference to a Judge or division thereof; and for the purposes of this Article proceedings shall be deemed to be pending in a particular Court until that Court has disposed of all issues between the parties, including any issues with respect to the taxation of the costs of the proceedings."
It will be noticed from paragraph (6) above that where any order mentioned in paragraphs (4) and (5) of this Article has, whether before or after the appointed day, been confirmed, varied or reversed on appeal, effect shall be given to the decision of the appellate Court as if the order appealed from were an order not only of the High Court by which it was made but also of the High Court at Lahore or of the High Court of East Punjab, as the case may be. The appeal referred to in paragraph (6) necessarily refers to a further appeal, and not to the appeal mentioned in paragraph (2) (b), for, under the latter paragraph the High Court at Lahore retained the jurisdiction to determine any appeal from an order of a Judge of the said Court on its original side. This provision would thus seem to indicate that an appellate Court having otherwise jurisdiction to hear appeals from an appellate order or decree of the High Court at Lahore would be competent to confirm, vary or reverse the appellate decree and that the judgment given on such an appeal is to receive effect as if the judgment and decree appealed against were also their judgment and…
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