TMI Blog1961 (7) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission to wind up the company would unfairly and materially prejudice the interests of the company or any part of its members that the petitioner did not want the company to be wound up but wanted relief under section 153C of the Indian Companies Act, 1913. The petitioner had in any event to establish that it was just and equitable to wind up the company. If the facts were such as justified the making of a winding-up order on the ground that it was just and equitable to do so, the petitioner could always abandon the relief under section 153C of the Indian Companies Act, 1913, and ask the court to make an order for compulsory winding up of the company. The only point which I have, therefore, to consider in the present case is whether there are sufficient reasons for making a compulsory winding up order against the company on the ground that it is just and equitable that the company should be wound up. Before I proceed to deal with the arguments advanced by the learned Advocate-General in support of the petition, I must observe that this is a shareholder's petition. The principles applicable in dealing with a shareholder's petition are now well settled and may be stated in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny is Rs. 16,45,400 and out of this, shareholders holding share capital to the extent of Rs. 2,43,210 support the petition while shareholders holding share capital to the extent of Rs. 9,49,050 oppose the petition. The rest of the shareholders have not appeared before me but even assuming that they support the petition, the total share capital in support of the petition would be Rs. 5,50,950, as against the share capital of Rs. 9,49,050 opposing the petition. It will thus be seen that the majority of the shareholders are against the winding up of the company. They are of the opinion that the continuance of the company is in the best interests of the shareholders and that the company should not be wound up. The Government of Gujarat is the largest single shareholder opposing the petition, its shareholding being Rs. 5,00,000 and the point of view of the Government is succinctly set out in the written statement filed by Shri S. K. Gangopadhyaya as the Government nominated director on the board of directors of the company. The relevant passage is in paragraph 19 of the written statement and runs as follows: " .The company is solvent, the machinery is in good condition the industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir power to the prejudice of the interests of the minority shareholders. This ground could not possibly made good by the learned Advocate-General merely by relying on the fact that respondents Nos. 21 and 22, who are the partners of Messrs. Commercial Sales Agency, are the sons of respondent No. 2 or even benamidars of respondent No. 2. In order to substantiate the allegation that the lease of the factory to Messrs. Commercial Sales Agency constituted advancement of the personal and private interests of respondent No. 2 in disregard of the interests of the minority share holders, it was necessary for the learned Advocate-General to go further and prove that the company could have run the factory and carried on the business, of manufacturing hydrogenated vegetable oils, soaps and other allied products and made profit out of the same, but that in order to oblige respondent No. 2 or respondents Nos. 21 and 22, who are the sons of respondent No. 2, the company controlled by respondent No. 2 and the majority shareholders supporting him gave a lease of the factory to Messrs. Commercial Sales Agency so that the profit which would have been earned by the company might be diverted into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian Companies Act, 1913, and I need not, therefore, consider whether the company has suspended its business for a whole year and is, therefore, liable to be wound up. As a matter of fact, on the view I am taking as regards the true construction of the memorandum of association, in the present case, it cannot possibly be said that the company is not carrying on any business since March 31, 1955, and even if any contention based on section 162 ( iii ) of the Indian Companies Act, 1913, had been urged before me, I would have rejected such contention. I will, therefore, now turn to examine the last ground urged by the learned Advocate-General, namely, that the substratum of the company is gone and that it is, therefore, just and equitable to wind up the company and see how far that ground has been made good by the learned Advocate-General. It is now well settled by authorities that when the substratum of the company is gone, it is just and equitable to wind up the company. It was Lord Cairns who first suggested in In re Suburban Hotel Co. [1867] LR 2 Ch. App. 737 that if the substratum of the company were gone, that might render it just and equitable to make a compulsory windi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the head-note in that case contains a precise and accurate statement of the principle: "Where the court is satisfied that the subject-matter of the business ... has substantially ceased to exist, it will make an order for winding-up of the company, although the large majority of the shareholders desire to continue to carry on the company." This passage was adopted as a sufficient statement of the principle by Jenkins J. in Re Eastern Telegraph Co. Ltd. [1947] 2 All. ER 104; [1948] 18 Comp. Cas. 46 and, after quoting this passage, the learned judge added the following explanation: "That, I take it, means that, if a shareholder has invested his money in the shares of the company on the footing that it is going to carry out some particular object, he cannot be forced against his will by the Votes of his fellow shareholders to continue to adventure his money on some quite different project or speculation." The same principle was applied in In re German Date Coffee Company [1882] 20 Ch. D. 169 , where it was found on a true construction of the memorandum of association that the main object of the company was to exploitGerman patent of making coffee from dates and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder or a creditor could demonstrate that the substratum had completely disappeared is by his very words, and by other judges alike, limited to the case where that object or purpose; held to be primary in the fullest sense, that is, not merely first in order of importance, but containing the whole substance or substratum of the venture, has now become an impossible purpose." : The main or primary object for which the company is formed may become impossible either, by reason of the subject-matter of the company being gone or for any other reason; in either case the substratum of the company would be deemed to be gone because, the shareholders having come together and subscribed money for a particular object, they cannot on the failure of such object be compelled by the votes of their fellow-shareholders to "continue to adventure their money on some quite different project or speculation". It is, however, necessary for the application of the principle that the main or primary object must have become impossible of fulfilment. It is not sufficient that the main or dominant object should have been abandoned. The abandonment of the main or dominant object may be treated as one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders had any such intention; but assume that it was. A little time afterwards something might happen to make them change their minds. They might see a profitable opportunity of using the company's money again in the engineering business. What has intention to do with it ? We are dealing with the question of substratum, and to say that the substratum can exist at one moment and cease to exist a moment later, or vice versa simply through a change of intention of the board or of the shareholders (I know not which) seems to me to lead into a morass. It is, therefore, clear that in order to bring the case within the principle underlying substratum cases, it is not enough to show that the main or dominant object for which the company is incorporated has been abandoned or that there is no intention on the part of the company to carry out such object but it must be proved that such object has become impossible of fulfilment either by reason of the subject-matter of the company being gone or for any other reason. The requirement of the principle that the main or primary object of the company must have become impossible is emphasized in all the substratum cases and particular referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough paragraph 30 of clause 3 of the memorandum authorised the company to lease the factory, the object contained in that paragraph was not an independent object but was an object ancillary to the main object contained in paragraphs 1 to 6 and that the power of leasing the factory could, therefore, be exercised only for the purpose of achieving the object not in a manner so as to destroy the main object. The learned Advocate-General contended that the leasing of the factory to Messrs. Commercial Sales Agency was an act destructive of the main object of carrying on any one or more of the businesses specified in paragraphs 1 to 6 of clause 3 of the memorandum and as a result of leasing out the factory to Messrs. Commercial Sales Agency, the whole substance or substratum of the venture came to an end and the substratum of the company was gone. This contention of the learned Advocate-General is, however, untenable and cannot bear examination. This contention is based on the premise that the object of carrying on any one or more of the businesses specified in paragraphs 1 to 6 of clause 3 of the memorandum is the main object of the company and that the objects set out in the remaining p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held that the company is established as much for the object set out in paragraph 30 as for the objects set out in any one or more of paragraphs 1 to 6. All the objects are independent objects and the company may carry out any one or more of such objects to the exclusion of the rest. There is thus no main or primary object ot, to put it differently, all the objects set out in the various paragraphs of clause 3 of the memorandum are main or primary objects. If, therefore, the company leased the factory to Messrs. Commercial Sales Agency and such act of leasing is authorised under paragraph 30 of clause 3 of the memorandum, I do not see how it can be contended that the main or dominant object of the company failed. It may be that by leasing the factory to Messrs. Commercial Sales Agency the company ceased to carry on the business of manufacturing hydrogenated vegetable oils, soaps and other allied products specified in paragraphs 1 to 3 of clause 3 of the memorandum though this proposition is also not clear and free from doubt and I need not express my opinion on the same. That does not, however, mean that the main or dominant object for which the companp was formed became impossibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject of the company according to the learned Advocate-General was to carry on the business specified in one or more of paragraphs 1 to 6 of clause 3 of the memorandum. The learned Advocate-General urged that the company stopped carrying on the business of manufacturing vegetable oils, soaps and other allied products and gave a lease of the factory to Messrs. Commercial Sales Agency which lease has continued for a period of over five years and in the submission of the learned Advocate-General these facts clearly warranted the inference that the company has abandoned its main or primary object of carrying on the business specified in any one or more of paragraphs 1 to 6 of clause 3 of the memorandum, since the leasing of the factory to Messrs. Commercial Sales Agency is inconsistent with the company being able to carry on any such business. The learned Advocate-General contended that since the company has abandoned its main or primary object, the substratum of the company must be deemed to be gone. I am afraid this contention of the learned Advocate-General cannot be accepted as correct and for a very good reason. As I have already pointed out above, in order to make out a case for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the facts on record. Of course, when I refer to the main or primary object, I mean the object set out in any one or more of paragraphs 1 to 6 of clause 3 of the memorandum as contended by the learned Advocate-General. The facts on record are eloquent and clearly show that the company did not at any time abandon the business of manufacturing vegetable oils, soaps and other allied products which it was carrying on until March 31, 1955, or any of the other businesses specified in paragraphs 1 to 6 of clause 3 of the memorandum. The company started incurring losses from the year 1952 onwards and by the end of 1954, the carried forward loss of the company was Rs. 5,17,824. During the first three months of the year 1955 also, the company suffered a loss of Rs. 70,800 and the company, therefore, thought that it was not advisable to continue to run the factory and to carry on the business of manufacturing vegetable oils, soaps and other allied products, but that it would be better to give a lease of the factory with a condition that the lessees should run the factory and carry on the same business so that the business would be preserved and the products of the company would not go out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions in the indenture of lease clearly show that the object of the company was that the factory should continue to run and the business of manufacturing vegetable oils, soaps and other allied products, which was carried on in the factory, should continue to exist so that on termination of the lease the company could take over the factory and carry on the business without any break or interruption which might ruinously affect the business. Unless the intention of the company was to resume the business on the termination of the lease, there is no reason why any obligation should have been imposed on Messrs. Commercial Sales Agency to run the factory and to carry on the same business. The company was leasing the factory and getting rent for it and it should have been a matter of little concern to the company as to how the factory was used by Messrs. Commercial Sales Agency. It is obvious that the lease was given because of adverse circumstances and the intention of the company was at no time to abandon the business of running the factory and manufacturing vegetable oils, soaps and other allied products. This becomes all the more apparent when one turns to the explanatory statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Advocate-General constitutes the main and dominant object of the company, there is no reason why the company should have obtained a licence for the putting up of the solvent extraction plant or should have applied for a loan of Rs. 7,00,000 from the Bombay State Financial Corporation. This circumstance clearly shows that the intention of the company was not to go on giving leases of the factory to Messrs. Commercial Sales Agency indefinitely and merely earning rent from such leases, but to carry on the business which, in the submission of the learned Advocate-General, constitutes the main or primary object of the company. The company was merely waiting for the time when its financial position would improve and it would be in a position to run the factory. Even the reasons given by the shareholder, B. B. Sanghvi, at the general meeting of the shareholders of the company held on October 8, 1960, which ultimately resulted in reducing the period of the lease from five years to one year with an option of renewal for a further period of one year, would support this inference which I am inclined to draw as regards the intention of the company vis-a-vis the factory and the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 1,00,000 per year is a desirable thing or not, is a question which relates to the internal management of the affairs of the company. It the result of giving the lease to Messrs. Commercial Sales Agency is that no amount is left for declaration of dividend on ordinary shares, it is a matter for the shareholders and not for the court. The lease of the factory to Messrs. Commercial Sales Agency may be a bad transaction for the company to enter into from a business point of view, but as observed by Lord Greene M.R. in Re Kitson Co. Ltd. [1946] 1 All. ER 435 " that is the last sort of thing that this court is concerned with in winding up cases." It is not for the court to say whether the lease should or should not have been entered into or whether the lease is a good transaction or a bad transaction from the point of view of the ordinary shareholders. That is a business matter for the shareholders to decide and they have so decided. I cannot be called upon by the learned Advocate-General to make a compulsory winding up order on the ground that the lease is such a transaction that no dividend would possibly come to the ordinary shareholders. A consideration such as this can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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