TMI Blog1960 (12) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking that the amount of compensation that may be received by the company from the Bombay State Electricity Board would be deposited with the company solicitors, M/s. Kanga Co., pending the hearing and final disposal of the petition on merits in the trial court. The usual formalities such as advertisement and notices having been served, and the necessary preliminaries having been completed, the matter has now come up before me for final hearing. Before adverting to the affidavits that were tendered before me at the stage of the final hearing and the reasons, which induced the petitioners to do so, it is necessary to set out the facts in so far as they are necessary for determining the matters of controversy between the parties. I will begin with the facts which are either admitted or over which there is not much dispute. The aforesaid company was incorporated in the year 1930 under the Indian Companies Act, 1913. It appears that the shares of the company were purchased by the present shareholders in about the year 1937. The authorised capital of the company is rupees four lakhs divided into eight thousand shares of Rs. 50 each. The subscribed and paid-up capital of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint. No orders were passed on this application, because the company deposited in court the amount of the claim made by the petitioners in respect of the dividends due to them. Thereafter on March 29, 1957, the petitioners filed another application (I.C. No. 81 of 1957) under sections 397, 398, 402 and 439 of the Indian Companies Act of 1956. The prayer, however, for winding up the company was abandoned at a later stage. The said petition came up for hearing before Coyajee J. and the learned judge declined to accept the same. The petitioners went in appeal. In the meantime, the petitioners had filed suits in the City Civil Court for the recovery of the amount of dividends due to them. In the course of appeal before the High Court, an undertaking was given by the members of Brijlal group to the effect that the dividends would not be distributed till the disposal of the suits pending before the City Civil Court. The appeal, therefore, was not pursued and the matter was dropped. On December 6, 1959, the licence granted to the company by the Government under the provisions of the Indian Electricity Act expired. It may be mentioned at this stage that since its incorporation the only bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uing, viz., that electric undertakings should be taken over by the Government. The petitioners have also asserted that the only work that remains to be done is the distribution of the compensation money and they have expressed apprehensions that the compensation money would be frittered away by the directors of the company. The substratum of the company, therefore, has gone. It is not necessary to set out the defence taken on behalf of the company in detail and it is sufficient to state that they have denied both sets of allegations made by the petitioners. They contend that there are several objects for which the company was founded ; that all these objects are independent and that it is incorrect to say that the substratum of the company has gone or has been destroyed merely because the present undertaking was taken over by the Government. They have also denied the allegations relating to oppression and flouting of the interests of the petitioners and contended that the management of the company is being run smoothly and on economic lines, and there is no question of a deadlock. They point out that there are no allegations either of misconduct or misapplication of funds or mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members of Brijlal group have also given an undertaking in I.C. No. 81 of 1957 to the effect that the dividends would not be distributable until the final disposal of the suits pending in the City Civil Court. Now, the members of Brijlal group have given an assurance to the Additional Collector subject, of course, to their being released from the two undertakings referred to above, that out of the amount, which would fall to their share in the compensation moneys, they are agreeable to the payment of that money towards the discharge of income-tax liabilities of the partners of the firm. Mr. Bhatt, learned counsel on behalf of the petitioners, contended that this event has taken place recently and long after the filing of the petition and, therefore, it was impossible for them to make mention of that event in the petition. According to him, the circumstances, which supervened between the filing of the petition and the date of hearing, will have to be taken into account for the purpose of determining the question, whether any nucleus has been left over to the company for starting any fresh undertaking in fulfilment of the various objects mentioned in the objects clause of the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eet the second part of the case on behalf of the company. They point out that the contention, viz., that it was possible for the company to start a fresh undertaking on the basis of the nucleus that would be available to them out of the compensation money, does not survive in view of the undertaking given by all the partners. It is true that in the ordinary circumstances the petitioners must be kept confined within the bounds of the allegations made by them in the petition. Here, however, an extraordinary situation has arisen and when it is possible for the court to consider the new material in the present petition itself, it would not be proper to drive the petitioners to file a fresh petition merely on the technical ground that the amendment would introduce new matter. I do not think that either the company or the shareholders will be taken by surprise, if the affidavit is allowed to be introduced at this stage, as all the shareholders were parties to the undertaking. It is true that the company is not a party to the undertaking and at a later stage of this discussion, I will consider the effect of the company not being a party to the said undertaking. But, when all the sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny capable of being conveniently carried on in connection with the aforesaid business or calculated directly or indirectly to enhance the value of or render profitable any of the company's property or rights and generally to do all such other things as are incidental or conducive to the attainment of the aforesaid objects in any part of the world, either as principals, agents, contractors, trustees or otherwise, either alone or in conjunction and partnership with others." Pausing here, for a moment, it will at once be noticed that the wording of the clause is very wide and embraces a variety of topics or objects which appear to be more or less independent of each other. I will discuss this question in greater length at a later stage after referring to the relevant authorities on this point. Before doing so, I may refer to the other clauses which are mentioned with the preamble "without prejudice to the generality of the preceding objects, the company's objects will include the following" and as many as twelve objects have been included in this category. Mr. Bhatt referred me to a passage appearing under the caption "main object" rule in Palmer's Company Precedents, 17th editi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question. For example, several of the leading objects are sometimes made to commence each with the words 'as an independent object.' In other cases the first few paragraphs are expressed in very wide general terms, and any special object is made subordinate thereto, and is sometimes expressed to be ' without prejudice to the generality of the preceding objects '." It will thus be seen that the rule of construction set out in the above passage applies to a case where it is possible to discover the main or the dominant object and it is also possible to treat the other paragraphs or other objects as merely ancillary to the main object. Further, it is clear that this rule of construction will be excluded by the language adopted in the memorandum and the learned author has referred to the various devices that are adopted for getting rid of the inconvenient rule of construction. This can take place when several objects are expressly stated to be independent objects. It may also take place when some of the objects are set out after the preamble "without prejudice to the generality of the preceding objects." The learned author has also referred to the decision in Cotman v. Broug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Moreover, experience soon showed that persons who transact business with companies do not like having to depend on inference when the validity of a proposed transaction is in question. Even a power to borrow money could not always be safely inferred, much less such a power as that of underwriting shares in another company. Thus arose the practice of specifying powers as objects, a practice rendered possible by the fact that there is no statutory limit on the number of objects which may be specified. But even thus, a person proposing to deal with a company could not be absolutely safe, for powers specified as objects might be read as ancillary to and exercisable only for the purpose of attaining what might be held to be the company's main or paramount object, and on this construction no one could be quite certain whether the court would not hold any proposed transaction to be ultra vires. At any rate, all the surrounding circumstances would require investigation. Fresh clauses were framed to meet this difficulty, and the result is the modern memorandum of association with its multifarious list of objects and powers specified as objects and its clauses designed to prevent any spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer with purpose and indicating every class of act which the corporation is to have power to do. The practice is not one of recent growth. It was in active operation when I was a junior at the Bar. After a vain struggle I had to yield to it, contrary to my own convictions. It has arrived now at a point at which the fact is that the function of the memorandum is taken to be, not to specify, not to disclose, but to bury beneath a mass of words the real object or objects of the company with the intent that every conceivable form of activity shall be found included somewhere within its terms." This passage was cited by Chagla C.J. in a decision in Jayantilal v. Tata Iron Steel Co. Ltd. [1957] 27 Comp. Cas. 604 (Bom.). In my opinion, this passage does not assist Mr. Bhatt in the argument which he is advancing. It is true that while Lord Wrenbury has deplored or we can even say deprecated the practice which has recently grown up of including multifarious objects as independent objects or as objects put down after "without prejudice" preamble, Lord Wrenbury stated that he had to reconcile himself with this practice much against his convictions and with considerable reluctance. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case also there is a clause (4), which refers to entering into partnership or into any arrangement for sharing profits, amalgamation, union of interests, co-operation, joint venture, etc. He contended that, on the basis of the ratio of the above case, the amalgamation clause does not amount to an ancillary object, but it is one of the principal objects or, at any rate, on a par with the principal object. I will have no hesitation in acceding to this argument. For the present, I am referring to this case with a view to point out the principle of construction which governs the case where the memorandum of association first provides for specific object and then general words are used in which various objects have been mentioned. The learned judge held that in such a case the objects specified in general words may be treated as ancillary objects. In the case of the memorandum of the company in the present case, the process is reverse. This is not a case of specific object followed by general words. On the other hand, this is a case of general words followed by a specific object and also other objects. The general object is stated to be as follows : "The objects for which the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the resolution was withdrawn. At the time of the hearing of the petition those directors, with one exception, were replaced and an affidavit was filed by one of the present directors of the appellant company stating that it was the intention of the company to continue with the engineering business and to acquire the assets and undertaking of B. Co., for the appellant company. The affidavit which formed part of previous proceedings was introduced in support of the petition for the purpose of showing that the appellant company had no intention of carrying on the business of engineering, and on those facts an order to wind up the appellant company was made. From that order, the appellant company appealed. It was held : "( i ) since the main and paramount object of the appellant company was to carry on an engineering business of a general nature the disposal of the business of K. Co., which had been acquired about 46 years before did not amount to a destruction of the substratum, of the appellant company. ( ii ) the intention of the board of directors, at a given moment, to discontinue the business of engineering had no effect on the determination of the question whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma facie at any rate it is impossible to say that its substratum has gone. So far as this stage of the argument is concerned, it is to my mind quite impossible upon the true construction of this memorandum of association to limit the paramount object of this company to the specific business of Kitson Co., so as to lead to the result that as soon as Kitson Co.'s business was sold the substratum of the company had gone." In my opinion, the objects mentioned in the memorandum of the present company are far more numerous and wider in their scope than the objects in Kitson Co.'s case ( supra ) . As pointed out above, the very first object is general in its scope and amplitude. Although it is followed by a specific object, several other general objects again have been mentioned, all in one clause, and all of them appear to be independent of each other. Therefore, each of them will have to be treated as principal and independent object. I may incidentally point out that reference was made to Cotman's case ( supra ), in the judgment of Morton L.J. in In re Kitson Co.'s case ( supra ) and to the observations of Lord Parker. It is significant to note that these observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement of March 30, 1917, but with the widest powers to carry on a variety of other activities. Therefore, the sale of the T. estate did not result in a destruction of the substratum because the paramount object of the company was to carry on the business of conducting rubber estates, and was not limited to the business of carrying on the particular estate. ( ii )the fact that there was no concrete scheme before the court for dealing with the proceeds of the sale was no ground for making a winding up order." On a proper construction of the memorandum of the company in question, it is impossible to conclude that the company has been formed solely for the working of the Akola electric licence. Mr. Bhatt contended that if the main object of the company was to carry on the business and undertaking of an electric energy supply company, even that object had failed and was incapable of achievement because of the change in the Government policy. The statement that the Government policy has changed has not been specifically traversed in the affidavit put in on behalf of the company although it is challenged that everyone knew that the Government policy had changed. Any referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aunch upon a new project. The observations of Lord Greene M.R. in Kitson Co. Ltd.'s case ( supra ) are apposite on this point. They are : "The intention of the board of directors, at a given moment, to discontinue the business of engineering had no effect on the determination of the question whether the substratum of the company had gone." At a later stage. Lord Greene M. R. observed (page 439) : "Let it be supposed that at the time of the sale of the Kitson business, so far as the board was concerned they thought that there was no chance and that it was not desirable for the company ever to start again into engineering. It certainly is not proved nor was it proved that the shareholders 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legation that an important change has taken place as a result of the undertaking given by the shareholders of the company, who also happen to be the partners of Sarupchand Prithiraj firm, to the Additional Collector, Bombay, in which they agreed to pay the compensation money to discharge the income-tax liabilities of the partners of the firm. In their affidavit at paragraph (4) the petitioners allege : "From what is stated above, it is clear that there is no prospect of the company carrying on any other business; while denying that the company is entitled to carry on any other kind of business, I say that the substratum of the company has gone and that the company should be wound up and the court liquidator be appointed official liquidator thereof." In my opinion, the question as to whether the company is really in a position to start a new business is very relevant in considering the question as to whether the substratum has disappeared. This is clear from the observations contained in the cases on which reliance was placed by Mr. Banaji. In the editorial note in In re Kitson Co.'s case ( supra ) it is stated : "The material time for consideration is the date of the win ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm until a final decree has been passed in that behalf. Whatever that may be, there is no allegation made by the petitioners to the effect that it is beyond the means of the partners of the firm, who are also the shareholders of the company, to satisfy their income-tax dues. In any case, if the undertaking is not fulfilled and becomes incapable of being fulfilled, all that the Additional Collector can do is to put the shares of the present shareholders to sale and, as pointed out above, that will not bring about any change in the structure of the company. It is quite possible that the Additional Collector may succeed in recovering the income-tax dues from other properties of the firm or from separate properties of the partners. It is equally possible that the partners may pay off their share of the liabilities and in that way may free themselves from the undertaking at present given by them. The question raised in the present affidavits is based on a number of hypothetical considerations and at this time, we cannot make any assertion to the effect that the compensation money will be wiped out in the process of satisfying the income-tax dues of the partners of the firm. In case, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that they are acting in a way which is prejudicial to the interests of the company. The mere fact that differences have arisen between one group and the other by itself is not sufficient to lead the court to the conclusion that a situation similar to that of deadlock has arisen in the affairs of the company. Reference was made to the fact that the directors have been withholding the amounts of dividends, which are legitimately due to the petitioners and the petitioners have been driven to file suits to recover the same. It is also pointed out that the City Civil Court has passed a decree in one of these suits. In my opinion these circumstances have no bearing upon the question under our consideration. The decree passed by the City Civil Court is under appeal before the High Court. Furthermore, we cannot embark upon the investigation in the present case as to whether there was justification for the directors in withholding the amounts of dividends due to the petitioners. In any case, it is sufficient to point out that the petitioners have ample remedies and actually they are pursuing those remedies in properly constituted suits. Another question that was raised in the same cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of carrying on the other objects mentioned in the memorandum of the company. The observations cited above will, therefore, in no way help Mr. Bhatt in the argument that he is advancing before me. Mr. Bhatt then referred to a leading case in Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch. D. 426, 427 , and in particular to certain observations made by Lord Cozens-Hardy M.R. The facts of that case were as follows : "In 1914 W. and R., who traded separately as tobacconists and cigarette manufacturers, agreed to amalgamate their businesses and in order to do so formed a private limited company in which they were the only shareholders and directors. The constitution of the company was such that under the articles of association W. and R. had equal voting powers, one director was to form a quorum, and if any dispute or difference should arise consequent whereon inability to pass a directors' resolution should result, the matter in dispute should be referred to arbitration, the award to be entered in the minute book as a resolution duly passed by the board. The company's business was successfully carried on until June, 1915, when differences arose between the parties. One of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eadlock in the management of the affairs of the company, should be extended to the facts of that case. At page 430 the learned judge cited a passage from Lord Lindley's book on Partnership which runs as follows : "Refusal to meet on matters of business, continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly co-operation have been held sufficient to justify a dissolution. It is not necessary, in order to induce the court to interfere, to show personal rudeness on the part of one partner to the other, or even any gross misconduct as a partner. All that is necessary is to satisfy the court that it is impossible for the partners to place that confidence in each other which each has a right to expect, and that such impossibility has not been caused by the person seeking to take advantage of it." Lord Cozens-Hardy M.R. then proceeded (pages 430-31) : "Now here we have this fact. Mr. Rothman has commenced an action charging Mr. Weinberg with fraud in obtaining the agreement under which he, Rothrnan, sold his business to the company. I ask myself the question : When one of the two partners has commenced, and has not disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Of course, it was not a situation of deadlock but it was a situation worse than that of a deadlock, where one director was not only refusing to abide by the decision of the arbitrator but was also trying to prosecute the other director for fraud and the servant of the company was going on merrily with a fat salary without being obliged to carry on any work on behalf of the company. In the present case, there is no conflict between the directors of the company inter se. The dispute in the present case is between one group of shareholders on one side and the other group of shareholders from amongst whom the directors have been chosen. This dispute has nothing to do with the management and does not reflect itself in the affairs of the management of the company. No shareholder has a right to participate in the governance of the affairs of the company and, as stated above, the nature of the dispute between the parties is such that it is quite possible for the petitioners to have recourse to other remedies and they have actually had recourse to them. They have filed suits in the City Civil Court for the recovery of the moneys due to them by way of dividends. They had also started an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up." Now, if we examine the allegations contained in the petition, all that they boil down to is that lack of confidence springs from the petitioners' apprehensions at being outvoted on the business affairs of the company. There is no suggestion, whatsoever, that there is any lack of honesty or probity on the part of management. That being the case, mere trotting out of allegations, viz., that disputes have arisen and that the minority group has lost confidence in the majority group, will not be a sufficient ground for winding up the company. The above observations of the Privy Council have been cited with approval by the Supreme Court in R.E.S. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urs to substantiate their claim. Mr. Banaji, on the other hand, has relied upon certain observations in Eastern Telegraph Co. Ltd., In re [1947] 2 All. ER 104, 111. They are (page 111) : "The compensation has to be assessed and received. The amount of compensation is a matter of great importance, and it is obviously desirable in everybody's interest both in the interests of the preference stockholders and of the ordinary stockholders that the company's case as to the amount of compensation should be cogently and effectively put in order that the compensation received may be as large as possible. It seems to me that the proper people to look after that matter are the directors of the company, who are directors also of all the other companies in the group, and who are well acquainted with the undertaking of Cable and Wireless, Ltd." It is thus clear that even for the limited purpose of securing the maximum amount of compensation, it is desirable that the company should be kept on going, so that the directors would be in a position to extract the maximum advantage out of it. After giving my anxious consideration to the pros and cons of the situation, I have come to the concl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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