TaxTMI 
TaxTMI 
1960 (12) TMI 51
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....hat 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 company is rupees three lakhs divided into six....
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....m. 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 business that the company was carrying on was to run the undertaking of supplying electric energy to the citizens of Akola. On the termination of the licence, the Bombay State E....
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....ion 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 mismanagement. They, therefore, deny that there is any case for winding up of the company. When the case reached the stage of hearing, the petitioners put in an affidavit al....
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....he 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 memorandum of association. Mr. Banaji, learned counsel who appears on behalf of the company, and Mr. Dalai, who appears on behalf of the members of Brijlal group, have vehemen....
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.... 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 shareholders including the directors of the company are parties to the undertaking it will be too much to say that the company will be taken by surprise, if this new matter is allow....
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....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 edition, 1956 (Part I), at page 276. It would be worthwhile to cite the passage in entirety : "According to these authorities, where the objects of a company are expressed in....
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....n 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. Brougham [1918] AC 514 and to the distinction that was made in that case by Lord Parker between a case where the question was whether the main object or substratum had ceased to exist and a case where ....
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.... 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 specified object being read as ancillary to some other object. For the purpose of determining whether a company's substratum be gone, it may be necessary to distinguish between power and object and to determine what is t....
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.... 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. Now, it is one thing to deplore a practice prevailing in the matter of drafting the memorandum of association and quite another to say that although the memorandum specifically says that certain objects are independent of eac....
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.... 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 company is established are to carry on the business and undertaking of an electric energy supply company in all its branches and departments including all industries primary or subsidiary to the said business" Then there is a refe....
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....ention 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 substratum had gone." It is significant to note that the first object in the memorandum in that case was a specific business, i.e., to acquire and take over the business carried on under the style of K. & Co. The specific object was ....
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....ject 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 were not treated as enunciating a rule of construction of the memorandum of association for the purpose of determining the question as to whether the substratum has failed. Reference to certain passages were made only with a view to point out the double purpo....
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.... 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 reference to the policy of the Government is bound to be of an indeterminate character, because the policy is never static and is always liable to change and fluctuate. Although, for the time being, it may be the policy of the Government not to renew the licences of pr....
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....ct 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 (I know not which) seems to me to lead into a morass." The observations in In re Taldua Rubber Co. Ltd. [1946] 2 All. ER 763, are still more clear. Wynn-Parry J. observed (page 767) : "There then remains the question whether the absence before the cour....
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....mpensation 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 winding up petition, and if the company is then in a position to carry on a business within the principal object of its memorandum, it is quite irrelevant that the directors held a different intention at some earlier date" It is this consideration which induced ....
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....ncome-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, such an eventuality materialised, it is quite open to the petitioners to make a fresh application for winding up of the company. After all, the passing of an order for winding up is a matter within the discretion of the court. The remedy of compulsory liquidation....
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.... 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 context was that in case the amount of compensation is available to the company and falls into the hands of the directors and the latter decide to start a new undertaking with the nucleus of those funds, then it was argued that the starting of that venture will no....
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.... 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 differences was referred to arbitration, which, after a protracted hearing involving costs exceeding GBP 1,000, resulted in an award to which R. declined to give effect. He brought an action for fraudulent misrepresentation against W., and the parties became so host....
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....d 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 discontinued, an action charging his co-partner with fraud in the inception of the partnership, is it likely, is it reasonable, is it common sense, to suppose those two partners can work together in the manner in which they ought to work in the conduct of the partners....
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....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 action under sections 397, 398 and 402 of the Companies Act, 1956, for directions to check what they called mismanagement or oppressive management of the company. Reference was also made to a case reported in J.A.R. Arya v. East Coast Transport & Shipping Co. (Priva....
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....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. Corporation Ltd. v. Nageswara Rao [1956] 26 Comp. Cas. 91 (SC). It is not necessary to refer to the two other decisions relied on by Mr. Banaji, viz., Jambazar Manna Estate, Limited, In re [1931] 1 Comp. Cas. 243 and Seethiah v. Venkatasubbiah [1949] 19 Comp. Cas. 107 , because t....