A. RUSTOM Versus KARIM SILK MILLS LTD.

This is a petition under section 162 of the Companies Act seeking the winding‑up of the Karim Silk Mills Ltd., a public limited company which is respondent No. 1 in this case and is hereinafter referred to as the company. The petitioner is one Mirza Rustom who is a shareholder having shares of the nominal value of 4, 700 rupees while the paid‑up capital of the company is Rs. 65,00,000 divided tip in shares, having the face value of Rs.

10. Respondent No. 2 is Messrs Karim Corporation Limited, a private limited company which is the Managing Agent of the company and in which the share building is entirely owned by members of a family whose surname is Karim and which family is, referred to in the petition as the Karim family. The petitioner alleges that the majority of the shares of the company are held by the Karim family but this is denied by the respondents who, however, admit that the Karim family are the largest group of the shareholders and that they are in effective control of the management of the company and the question, therefore, whether they have an actual majority of the shares or not is really of as great importance.

2. The petition is not based upon any of the specific grounds stated in the first five clauses of section 162 of the Companies Act, but upon the last ground namely that it is just and equitable that the company should be wound up and arises in somewhat peculiar circumstances. After the promulgation of Martial Law in 1969 a Martial Law Regulation, which was numbered 32, was promulgated, paragraph 2(1) of which reads thus :‑

"Any person, who has filed the return of his income under the Income tax Act, 1922, for the assessment year 1960‑61 or any assessment year thereafter up to and including the assessment year 1968‑69 and who has reason to believe that the return so filed is not correct may file a revised return of his true income by June 16, 1969. No action of any kind whatsoever shall be taken for having submitted as incorrect return originally or in respect of nature of the transaction from which the income represented by the difference between the revised return and the original return hereinafter called the `excess income' was derived, nor will the effect of his having filed a revised return be taken as a ground for the re‑opening of any assessment under subsection (2) of section 34 of the Income‑tax Act."

It would seem, and, it is indeed admitted, that the company‑as such and not the Directors in their personal capacity‑made a declaration of an excess income in terms of this Regulation in the sum of Rs. 15,03,600 but so far as the shareholders are concerned this was not disclosed before the Director's Report for the year 1969 which was placed before the 6th Annual General Meeting of the shareholders of the company on the 27th June 1970. It is an admitted position that this is so, as it is admitted that the income in question was not derived during the year for which the report was being made, and the inference, which the respondents are unable to resist, is that, to that extent, false statements were made in the reports and accounts of the previous years for since this was concealed income it naturally was not reflected either in the books of account or in the reports made to the shareholders. In accordance with the ordinary practice of this Court, notice went to the company upon the petition and the matter came up for consideration whether advertisement should take place as it generally does under rule 781 of the Chief Court Rules. Respondents opposed the making of an advertisement and, after a few hearings upon which the matter did not proceed, on the 6th of November 1972, I passed an order whereby I decided that an advertisement should not, for the time being, take place mainly upon the grounds that since admittedly the company was in a flourishing stage, irreparable damage might possibly be caused by the advertisement should it ultimately be decided that the petition ought not to be allowed. I, therefore, decided to hear the matter first and if at any stage came to the conclusion that the matter ought to be advertised, I would then do so. On the 26th of March 1973, 1 heard the case on its merits further and a short quotation from that order will show what my purpose was in initially directing that advertisement should not take place until I had heard the matter at greater length‑‑

"It is unnecessary to repeat my reasons but it will be seen that my intention was to ascertain first whether there really was a case to be tried or that Mr. Khalid Anwar , learned counsel who appeared for the company, was right in saying that there was no prima facie case. In the latter event it is obvious that not only no useful purpose have served by advertising the matter but considerable and irreparable damage might have been occasioned on that account. I therefore decided to hear the matter without advertisement but, with the full agreement of parties, decided that if upon further hearing of the matter it became necessary advertisement should take place."

3. Having heard learned counsel on both sides I came to the conclu sions that there was a fit case to be tried and, since I had yet to hear the case in full and after advertisement, I deliberately refrained from stating why I had gone to this conclusion as that might have had the effect of prejudicing the decision in the matter. By this order I directed that advertisement should take place.

4. The respondents in this case applied to the Supreme Court for leave to appeal against my order and their Lordships of the Supreme Court initially granted a stay of two months but later granted leave to appeal and directed that in the meantime advertisement should not take place, although they permitted the proceedings to continue. In these circumstances I have therefore proceeded with the hearing of the petition without advertisement, although, I have at all time had a somewhat uneasy feeling as to what my proper course of action would be if after hearing of parties at length I came to the conclusion that the company should be wound up and whether I would then be justified in passing an order of winding up without advertisement. However, in obedience to the Supreme Court's orders, I was bound not to allow an advertisement but it would not, I think, have been in keeping with a spirit of that order to postpone the hearing altogether until the Supreme Court had finally decided the matter and I, therefore, proceeded to hear the petition on its merits on the 18th of January 1974, after which I reserved judgment.

5. Now the facts of the case are really simple and do not admit of any dispute. On their own showing an excess income was declared in 1969 by the company and it is the case of the company itself, as reflected in paragraph 6 of the counter‑affidavit filed on their behalf and which I reproduce below, that this excess income had been made in years prior to the year 1969 and had been utilised in the main for the purchase of machinery which had already been imported and installed and the benefit of which therefore had accrued to the company and naturally in turn to the shareholders. A small part that is to say Rs. 2,40,000 was in cash and was credited in the company's account

"With regard to pare 4, I state that the contents thereof are incorrect. The actual position is that the respondent No. 1 make a declaration under Martial Law Regulation 32 of Rs. 18,00,000 as stated in the annual report for the year 1969. The bulk of this amount namely Rs. 15,60,000 was a declaration with regard to machinery and equipment which had already been imported and installed for the benefit of the shareholders. Depreciation for this machinery was also claimed and allowed for the years 1967 and 1968 as is evident from the Annual Report for the year 1969. The balance amount of Rs. 2,40,000 which was cash, was credited to the Company's account. The declaration was processed and accepted by the Income‑tax Authorities as being correct and conclusive. Under the provisions of M. L. R. 32 the said declaration is not susceptible to any challenge. Thus it will be seen that the entire benefit was accrued to the share holders who had in fact already been receiving the benefits even prior to the declaration. It is accordingly incorrect and is denied that the Directors are making any secret profits. The shareholders have approved of the conduct of the Directors as is revealed by the minutes of the annual general meeting (Annexure H). It is also denied that the Directors have accumulated any foreign exchange shared. It is submitted that there is no justification for any of the allegations which are being made against the Directors. The said allegations are male fide and are being made with a view to harass the Directors."

6. It is, therefore, impossible for the respondents to deny that the conduct of the Directors was dishonest but they claim that they had made no personal profit from it and that it was dishonesty committed, as it were, on behalf of and for the benefit of the company itself. It was claimed and it cannot be denied that in the years 1965 and 1966 the company paid a dividend of 15 percent. in the years 1967 and 1968 a dividend of 20 per cent. and in the year 1969 issued 50 per cent. bonus shares and that in the succeeding two years it has paid a dividend of 10 per cent. in each year. Now I am by no means certain that the grant of bonus shares to the shareholders really amounts to giving them anything at all, for it only means that the amount lying in cash in the company has been capitalised and that the capital of the company as increased is now divided into a larger number of shares that it originally was. Be that as it may, however, the contention of learned counsel for the respondent however that in that event at any rate the subsequent dividend of 10 per cent. amount really a dividend of 15 per cent. upon the shares as they originally stood is clearly correct.

7. As against this, although vaguely, it was asserted that the Directors have been guilty of personal dishonesty, no evidence of any kind whatever has been brought before me from which such an inference could be drawn and, to be fair to Mr. Naseem Farooqui, learned counsel for the petitioner, he quite candidly conceded that he could not put forward such a case although he did make a claim to which I shall make reference again in greater detail hereafter, that a more thorough investigation of the affairs of the company might reveal such dishonesty, for the time being therefore, ( must proceed upon the basis that while dishonesty on behalf of the company and its Directors cannot be denied, personal dishonesty on behalf of the Directors in the sense that they have made a profit out of the company which they had diverted into their own personal pocket and thus deprived the shareholders of their legitimate rights is not established or indeed even really asserted. It might also be noted that it is claimed by the respondent that, after the shareholders were given full information of these secret transactions, they have approved unanimously of the conduct of the Directors; it is true that on behalf of the petitioner it is denied that this was a unanimous resolution but at any rate there does not appear on record to have been any opposition and it is safe to conclude at least, nor was it argued otherwise, that the company in its general meeting did approve of the conduct of the Directors.

8. Although several points have bee stated in the petition and in the affidavits in rejoinder, such as for instance the allegation that the substratum of the company has vanished or that the Directors have accumulated for themselves secret foreign exchange abroad, these contentions were not pressed before me in the oral hearing and the simple question that arises therefore before me is whether upon these facts it would be "just and equitable" to order the winding‑up of the company. I, therefore, asked myself the question: just and equitable to whom? Surely the expression "just and equitable" must have reference to the legitimate interests of persons concerned in the matter which would presumably be, in general, the share holders and/or the creditors of the company. I cannot imagine that, merely because the Legislature used the word "just" it gives me jurisdiction, by reason of the admitted dishonesty of the Directors, to punish them or the company without reference to the interest of the shareholders or the creditors. For penal action against the Directors for such cases of dishonesty, the Companies Act makes express provisions and, while it may be true that by reason of the Martial Law Regulation, no action can be taken against any of them, a question which was argued before me but which I do not think it necessary to decide, that does not therefore enlarge the scope of my power or the reasons which would justify me in holding that it is just and equitable to order a winding‑up. In the present case, it is not alleged that the company is unable to pay its debts and indeed it had to be admitted that the interests of the creditors are not in jeopardy at all, although a suggestion was made, with which I shall deal, that I should order a meeting of the creditors to be held. I think, therefore, that in the context of the present case‑and I am not attempting to lay down a rule wider than that‑the expression `just and equitable' must have reference to the interest of the shareholders any nobody else. The prime question, therefore, to be examined is, how are these interests affected by the admitted dishonesty and how will they now be safeguarded by a winding‑up order. Upon the facts as I have stated them, I can see no reason whatever to answer these questions against the respondents.

9. Mr. Nasim Farooqui argued that upon their own showing the Directors have not only been dishonest but they have reduced the incidence of tax upon this previously undeclared issues. This might be so and, while this conduct can certainly not be approved, it can hardly be said that this has worked against the interest of the company or of its shareholders. If there has been a saving in tax it is the public exchequer that must have suffered and not the shareholders. As to whether this should be permitted that is a question which is hardly for me to decide. The express purpose of Martial Law Regulation :i2 was in effect, upon certain terms, to grant amnesty in regard to previous criminal acts of evasion of tax but, even so, I am not going into the argument whether the words "no action of any kind" occurring in the sub‑paragraph of the Regulation which I have quoted applies only to the action which can be taken under the Income‑tax Act or not for I am not now concerned with what other action can be taken against the Directors of the company and I do not think that it can be argued, nor has it been argued, that an order of winding up is an action of any kind such as is contemplated in the Martial Law Regulation.

10. Mr. Farooqui then drew my attention to three sections of the Companies Act, that is 'to say sections 174, 223 and 239 which read thus :‑

"174. The Court may, as to all matters relating to a winding‑up, have regard to the wishes of the creditors or contributories as proved to it by sufficient evidence.

223. The Court may, in deciding between a winding‑up by the Court and winding‑up subject to supervision, in the appointment of liquidators, and in all other matters relating to the winding‑up subject to supervision, have regard to the wishes of the creditors or contributories as proved to it by any sufficient evidence.

"239.‑(1) Where by this Act the Court is authorised in relation to winding‑up to have regard to the wishes of creditors or contributories, as proved to it by any sufficient evidence, the Court may, if it thinks fit for the purpose of ascertaining these wishes, direct meetings of the creditors or contributories to be called, held and conducted in such manner as the Court directs, and may appoint a person to act as Chairman of any such meeting and to report the result thereof to the Court

(2) In the case of creditors, regard shall be had to the value of each creditor's debt.

(3) In the case of contributories regard shall be had in the number of votes conferred on each contributory by the articles."

Now section 174 is the last of a group of sections which is headed "winding up by the Court." Clearly, I think it refers to a stage after the winding up. Section 223 on the other hand refers only to a choice between a winding‑up by the Court and a winding‑up subject to supervision, assuming a winding‑up in either case. and section 239 clearly relates back to these sections. In my view, therefore, any reference to these sections is premature, but the learned counsel read to me a passage from Ghosh's Commentary on the Company Law (well known Indian treatise) and argued that section 174 applies during as well as after winding‑up proceedings. But a reference to Ghosh indicated that the observation of the learned author was based upon the case of Western of Canada Oil, Land and Works Company ((1873) 17 Eq. Cas. 1) which was not then immediately available in Court but which I have later examined. The passage in question upon which the remark in Ghosh is made obviously is the following:

"If the 91st section applies, as I think that their interest would be better promoted by delay, and the delay appears to me in the circumstances no unreasonable. I have no doubt that the 91st section is a part of the Act which is applicable before making any winding up order, and then the petition for winding up is before the Court, and that it does presuppose a winding‑up order, or relate .only to the manner in which that shall be made, or the terms upon which it shall be made."

Now in the First instance I have not been able to find out the exact language of this section of the Companies Act, then in force in England and therefore do not feel sure that it does indeed correspond to our section 174, but, that apart, the case is clearly distinguishable because of its facts. The petition in that case was by a debenture‑holder and in the first order the Lord Chancellor held that if a debenture‑holder, after giving proper and reasonable time, is not paid, is entitled to a winding up order and therefore deferred the case for three months and it is in the ,course of this order that this observation which I have quoted appears. In point of fact after the deferment, the case coming up before the learned. Master of the Rolls and nothing having been done in this three months delay that had been granted to the company, a winding‑up order was in fact made. But clearly the case was of an entirely different type from the one which I am now considering. There is no question here of creditors or debenture‑holders not being paid.

11. It was then argued that in this case the petitioner had no con fidence in the management and that was a sufficient reason for winding up and reliance was placed on Kruddson's case (P L D 1972.Kar. 376). Reliance was placed upon the following passage at page 388 :‑

"16. It is neither possible nor desirable, I think, to attempt an exhaustive enumeration of the circumstances in which a Court would order a winding‑up order the just and equitable' clause. The Legislature has not chosen to 'do so in order that the variety of circumstances which are the result of. human conduct and business affairs and which would justify an order be unqualified to enable the Court to consider always the justice of each particular case. But, in relation expressly to the present case and the present case alone, I think it is correct, as argued by the learned counsel for the respon dent, Mr. Fakhruddin that three criteria are attracted, one of which at least must be held established before a winding‑up may be properly ordered :‑

(1) That there is a deadlock which prevents the making of decisions either in the Board of Directors or at a general meeting.

(2) That the petitioners have been excluded from participation in the profits of. the company or in its management.

(3) That there is a justified lack of confidence in the probity "justified"; the lack of confidence must not be arbitrary or asserted merely with a view to obtaining an order of winding‑up."

Now this was a case of a private Limited Company which was in fact a family concern and I held in that case that for the purposes of a winding‑u7 petition under section 162 of the Companies Act, such a company should be treated as a partnership firm in the limited sense that it would be just and equitable to wind it up upon the grounds which would justify the dissolution of a firm under the Partnership Act. The present case is entirely distinguishable inasmuch as I am dealing with a Public Limited Company and, even so, the emphasis that I laid in Kruddson's case was on a "justified lack of confidence". In the present case there is no evidence every of a lack of confidence (except perhaps in the mind of the petitioner alone) much less a justified lack of confidence. On the contrary such evidence as there is shows a continued confidence in the management of the company by the shareholders. Reliance was then placed upon the case of' Gopal Chetti v. The Ripon Press & Sugar Mill Co. (A I R 1925 Mad. 633) and it would suffice I think merely to reproduce the headnote of that case

"It is a good reason for making a winding‑up order that there is a. justifiable lack of confidence in the conduct and management of the Company affairs owing to the management being held in one family which is in a position to dominate the other shareholders and monopolise the Company affairs for its own individual benefit.

The facts of this case show, however, that not only was the management of the company held by one family but that in fact advantage had been taken: by that family of its position for acquiring certain benefits for themselves at the expense of the company.

12. Reliance was then placed upon the case of Loch v. Blackwood (1924 A C 783). In this case the House of Lords allowed the appeal and ordered the company to be wound up both upon the basis that there was a lack of confidence and the fact that the principal Director was behaving as if the business was his. own. This case, which incidentally has been referred to both in Kruddson's case as also in A I R 1925 Mad. 633 is hardly similar to the case that I have got before me and I think that the following passage from the judgment might be usefully referred to :‑

"It is undoubtedly true that at the foundation of applications for winding‑up, on the "Just and equitable" rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs But this lack of confidence must be grounded on account 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.

It is true that the House of Lords refers to a lack of probity in the conduct of the company's affairs as justifying a winding‑up but, surely in the contexts they were referring to a lack of probity in relation to the company and" not, as it were, a lack of probity on behalf of the company in relation to, the public exchequer.

13. Reference was then made to the case of Madan Gopal v. The' People's Bank of Northern India (A I R 1935 Lah. 779) and the following passage therefrom. was relied upon :‑

"It is particularly the duty of the Courts of this country to see that Directors and other officers of limited liability companies carry out their duties honestly and to punish them if they do not. Compulsory liquidation under the Court affords the best opportunity of performing this duty when there is a prima facie case of dishonesty against the officers of a company. It is of the utmost importance industrial ambitions, that defaulting Directors should be brought to book so that the public at large may have confidence in the administration of public companies."

Here again reference to the facts of the case would show that the dishonesty' in question was personal, and against the interest of the company itself.

14. Reference was then made to a passage in the case of the Superin tendent and Remembrancer of Legal Affairs v. Akil Bandu (A I R 1936 Cal. 680) at page 685 which is as follows :‑

"Of course, no opinion expressed by an auditor or accountant can turn a false balance‑sheet into a true one and the only importance of this lies in the effect that it may have had upon the intention of the respondents. So far as Mr. Reed is concerned, it has none at all because he was only shown the accounts a few days before he gave evidence and was merely called to depose that there was nothing. wrong in the balance‑sheet. He was severely shaken in cross‑examination and I do not believe him when he says that in his opinion the balance‑sheet was carefully drawn up. I am further of opinion that the learned Magistrate formed a proper estimate of the auditor. He was related to one of the respondents and was clearly under an obligation to them. That he was not carrying out his duties to the shareholders is abundantly clear from the fact that he did not press, and call their attention to his objection that the advances made by the respondents to the Eastern Bengal Jute Mills were improperly made.. I cannot place any reliance on the opinion that he has given. But be that as it may, the plain fact of the matter is that the opinion of an accountant or an auditor that a balance‑sheet, which does not disclose the true state of affairs of a company has been properly drawn is of no value whatsoever."

I regret I am entirely unable to see the relevance of this case which was a judgment delivered in an acquittal appeal the respondents being charged with offences under the Companies Act. In the present case the dishonesty of the present balance‑sheets is not a fact in dispute at all.

15. Then again reference was made to the case of Rajahmundry, Electric Supply Corporation v. A. Nageshwara Rao (AIR 1956 SC213) reliance being placed upon the following passages :

"(9) Now, the facts as found by the Courts below are that the Vice- Chairman pressly mismanaged the affairs of the Company, and had drawn considerable amounts for his personal purposes, that arrear due to the Government for supply of electric energy as on 25‑6‑1955 was Rs. 3,10,175‑3‑6, that large collections had to be made, that the machinery was in a state of disrepair, that by reason of death and other causes the directorate had become greatly attensuated and "a powerful local junta was ruling the roost", and that the share holders outside the group of the Chairman were apathetic and powerless to set matters right. On these findings, the Courts below had the power to direct the winding‑up of the company under section 162 (vi), and no grounds have been shown for our interfering with their order."

I am in respectful agreement with what has been stated in this paragraph but really cannot see, how it applies to the present case, the facts of the ,present case being what they are.

I was then referred to Volume VI of the Third Edition of Halsbury's Laws of England, paragraph 1035, where among the various grounds which would make it just and equitable to wind up a company, it is stated that one is "where the Directors withhold information from shareholders in circum stances which give rise to suspicion' that they are attempting to buy their ,shares at an undervalue". The authority, however, which is cited in support of the proposition is the case of Loch v. Blackwood to which I have referred. ‑Even otherwise I do not see how the principle applies in the instant case.

17. After the oral hearing of the case some more citations were given ,to me by counsel in chambers and one of these is the case of In re: The Varities Limited ((1893) 2 Ch. D 35). I am really unable ;to see how this case applies unless ,it be because upon the petition which was one for compulsory winding‑up on the ground that the substratum of the company had gone, the Court .disregarded a special resolution which owed its existence to the preponderating .influence of those whose conduct itself required investigation. I ‑assume .that the purpose of counsel was that I should, in similar manner, disregard the resolution that has been passed by the general meeting in favour of the Directors but the two cases are hardly analogous.

18. The other citation that was handed to me in chambers was In re: Haycraft Gold Reduction & Mining Company ((1900) 2 Ch. D 231) and here again the purpose would seem to be the same inasmuch as the Court ignored a resolution for the voluntary winding‑up of the company and ordered its compulsory winding‑up.

19. It was finally argued that, since prima facie and indeed admittedly, the Directors have been guilty of dishonesty an investigation into the affairs of the company which would necessarily take place if a winding‑up is ..ordered and a liquidator appointed, might show personal dishonesty and on that ground, therefore, I should order a winding‑up. It seems to me that the argument is misconceived for in effect I am being asked, then, to wind up this company in the hope that as a result sufficient material would be .disclosed which would justify its winding‑up. I regret, I cannot agree and I think, I must order or refuse to order a winding‑up on the basis of .material that I at present have and not upon the speculative possibility of What a winding‑up might disclose.

20. In these circumstances I have come to the conclusion that I ought not to order the winding‑up of this company and therefore dismiss this petition. In view of the fact, however, that it is in part the conduct of the Directors of the company itself and of respondent No. 2 which is responsible for the filing of this petition, I refuse to award any costs against the petitioner.

K. B. A. Petition dismissed.