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The Bharat Bank Ltd., Delhi v. Lajpat Rai Sawhney And Others

Punjab & Haryana High Court

Dec 15, 1949

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Judgment Summary — Kapur, J. (F.A.O. 54 of 1949 and F.A.O. 64 of 1949)

Factual and Procedural Background

The judgment disposes of two appeals arising from proceedings concerning Capital Glass Works Ltd. (originally incorporated as Malko Limited). The company converted into a public company in December 1944. Between 1943 and 1946 the company borrowed repeatedly from Bharat Bank Ltd., creating charges over plant, machinery, buildings and subsequently over raw materials and finished goods. By August 1948 the indebtedness to the Bank was about Rs. 8,00,000.

On 24 September 1948 the company proposed an arrangement with the Bank under which the factory would be handed over to the Bank to run, the Bank would have control (including borrowing authority and power to lease or sell subject to 30 days' notice), and certain conditions made the arrangement irrevocable except in specified circumstances. An irrevocable power of attorney in favour of the Bank was executed on 22 October 1948, and a special resolution approving the arrangement was passed on 10 November 1948. The Bank took over management on 2 December 1948, invested further funds, but later found operations unprofitable and gave notice of a sale offer.

On 12 January 1949 Dr. J.H. Leighton applied for winding up, alleging the company was heavily in debt and alleging that the Bank's sale was unfair and intended to defraud claimants; he applied under section 175 of the Indian Companies Act and Order 39, Rule 1, Civil Procedure Code for appointment of a provisional liquidator and an injunction. The Bank and the company challenged locus standi and opposed the relief.

On 29 January 1949 Lajpat Rai Sawhney filed another winding-up petition claiming to be a contributory holding fully paid-up shares and applied for an injunction and for a provisional liquidator. Various allegations were made in his amended petition concerning insolvency, management handing over control to the Bank, alleged fraudulent sale procedures and misappropriation.

The District Judge initially issued an order (25 February 1949) restraining completion of sales; this order was vacated on 13 May 1949. On 13 May 1949 the District Judge appointed a provisional liquidator (Mr. Amrit Lal Patni). On 1 June 1949 the mentioned purchasers acquired the property for Rs. 10,00,000. On 12 August 1949 the District Judge overruled the objection to Lajpat Rai Sawhney's locus standi, relying on two Madras decisions; on 19 August 1949 the District Judge made an order for winding up and appointed the provisional liquidator as official liquidator. Two appeals were brought to this Court: F.A.O. No. 54 of 1949 (against the locus standi ruling) and F.A.O. No. 64 of 1949 (against the winding-up order and appointment of official liquidator).

Legal Issues Presented

Whether a holder of fully paid-up shares (a fully paid shareholder), in the absence of an allegation and prima facie proof of a tangible surplus, falls within the meaning of "contributory" for the purpose of presenting a winding-up petition under section 166 of the Indian Companies Act and thus has locus standi to present such a petition.
Whether the District Judge erred in allowing Lajpat Rai Sawhney to be treated as a contributory entitled to present a winding-up petition despite the absence of a prima facie allegation/evidence of a surplus which would give him an interest in the winding up.

Arguments of the Parties

Petitioners' Arguments (Dr. J.H. Leighton; Lajpat Rai Sawhney)

Dr. Leighton alleged the company was heavily indebted, unable to carry on business, and that Bharat Bank was selling assets at a price far below market value to the detriment of shareholders and creditors; he sought appointment of a provisional liquidator and an injunction to restrain disposition of assets.
Lajpat Rai Sawhney, claiming to be a contributory holding fully paid-up shares, alleged the company was insolvent (liabilities alleged as high as Rs. 17,00,000 in his amended petition), that management had handed control to the Bank and an irrevocable power of attorney had been executed, and that the Bank's advertised sale of the company's assets was fraudulent and in the Bank's own interest—alleging procedural defects in notifying shareholders and possible transfer to parties connected with the Bank.
In his petition Lajpat Rai Sawhney sought the appointment of a provisional liquidator and injunction under section 175 and Order 39, Rule 1 CPC.

Respondents' Arguments (Capital Glass Works Ltd. and Bharat Bank Ltd.)

The Bank and the company challenged the locus standi of Dr. Leighton, arguing he was not a creditor, shareholder or director and therefore not entitled to present the petition.
The company opposed the injunction and provisional liquidator applications as frivolous, mala fide and an abuse of process, and contended that irreparable injury would be caused to the company if a provisional liquidator were appointed.
The Bank disputed the locus standi of Lajpat Rai Sawhney to bring a winding-up petition, and stated that the Bank was prepared to accept the highest offer with the consent of the company; the Bank's affidavit also asserted that after sale proceeds credited to the Bank there remained a significant balance due from the company (the Bank claimed it was still a creditor to the extent of Rs. 1,75,000).
In the Court below the respondents relied on Madras authorities (as noted by the District Judge) to support the view taken by that Court.
Before Kapur, J., the respondent counsel (Mr. Chatar Behari Lal) did not advance any authorities beyond those already relied upon by the District Judge.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
The Sabapathi Press Co. Ltd. v. B. Sabapathi Rao, I.L.R. 53 Mad. 38; A.I.R. 1930 Mad. 240	Held that fully paid-up shareholders presented a petition supported by many shareholders with allegation they would have a tangible interest in a surplus on winding up.	The Court distinguished this Madras authority as factually different because that petition was supported by many shareholders and contained an allegation of tangible surplus; therefore it was not treated as authority for the position asserted in the District Judge's ruling in the present case.
Narayandas Girdhardas v. The P. & O. Banking Corporation Ltd., Madras, A.I.R. 1934 Mad. 476; I.L.R. 57 Mad. 955	Held that a holder of fully paid-up shares is a contributory; concerned adjustment of contributories and distribution where shares were subject to an equitable mortgage.	The Court held this case inapplicable to the present question (whether a fully paid-up shareholder may present a winding-up petition without alleging a surplus) because in that case the dispute concerned entitlement to surplus distribution and a pledge of shares rather than locus standi to initiate winding-up.
Re Rica Gold Washing Co. (1879) 11 Ch. D. 36	Established that a petitioner holding fully paid-up shares must allege and prove there will be a tangible surplus to authorise him to present a petition; mere allegation without showing likelihood of surplus is insufficient.	The Court cited Re Rica as authority supporting the requirement that a fully paid-up shareholder must show a tangible or prima facie surplus to have locus standi; Kapur, J. relied on this English precedent in preference to the Madras cases relied upon by the District Judge.
Re Diamond Fuel Company (1879) 13 Ch. D. 400	Reinforced that fully paid-up shareholders must show likelihood of tangible surplus; where prima facie case existed for repayment to shareholders and for recovery from directors, winding up could be just and equitable.	Used by the Court to illustrate that where prima facie facts support the existence of a surplus (and recoverable assets), a fully paid-up shareholder may properly present a winding-up petition — a standard not met in the present case.
Re The Patent Artificial Stone Company Ltd. (reported in text without full citation)	Held that a petitioner with fully paid-up shares, having no real interest except a remote possibility of surplus, lacked sufficient interest to support a winding-up petition absent other circumstances.	The Court cited this decision to support the proposition that a remote contingency of surplus is insufficient and a paid-up shareholder must show more than a mere hypothetical interest.
Re Anglesea Colliery Company (1866) 1 Ch. App. 555; 2 Eq. 378	Held that holders of fully paid-up shares were contributories within the Companies Act (1862) for purposes of adjusting rights between paid-up and partly paid-up shareholders.	The Court acknowledged this authority as establishing that fully paid-up shareholders fall within the statutory definition of contributory for adjustment purposes, but observed that it was not a case of a contributory petitioning for winding up and therefore did not control the locus standi question before the Court.
National Savings Bank Association (1866) 1 Ch. App. 547	Recognised as authority that fully paid-up shareholders are contributories within the meaning of the Companies Act.	The Court noted this case but observed it did not assist respondents on the particular issue of a paid-up shareholder's right to present a winding-up petition without showing a surplus.
In re Iron Colliery Company (1881) 20 Ch. D. 442	Jessel, M.R. observed a fully paid-up shareholder has no locus standi to apply for winding up unless he alleges and gives some evidence of a surplus; otherwise the petition is demurrable.	The Court relied on the principle in this case as supporting the requirement that a fully paid shareholder must allege and prima facie prove a surplus to have standing to petition for winding up.
In re Cine Industries and Recording Co. Ltd., A.I.R. 1942 Bom. 231 (Chagla, J.)	Observation that while a shareholder is not under disability compared with a contributory, courts should keep in mind the company's internal management and exercise discretion; Chagla, J. emphasised judicial caution when a shareholder petitions.	The Court read this decision and concluded it did not stand for the proposition that a fully paid shareholder need not satisfy the requirement of alleging/proving a tangible surplus; Kapur, J. did not treat it as displacing the English authorities requiring a prima facie showing of surplus.
Imperial Oil Soap & General Mills Co. Ltd., Delhi v. Ram Chand, A.I.R. 1916 Lah. 78	Noted that section 158 (definition of "contributory") is in pari materia with English law; repeated English holdings that a fully paid-up shareholder is a contributory but must show prima facie grounds for a surplus to present a winding-up petition.	The Court cited this colonial precedent for the proposition that Indian law follows the English approach: a fully paid-up shareholder is a contributory but must allege and prima facie demonstrate a tangible surplus to justify a winding-up petition.
Kaslo Slocan Co. (1910) W.N. 13 (referenced in Palmer's Company Law citation)	Referenced in commentary to illustrate judicial reluctance to entertain petitions by fully paid-up shareholders where no interest or surplus is shown.	Referred to as part of the body of English authority supporting the requirement that a fully paid-up shareholder show a tangible interest (surplus) to sustain a petition.

Court's Reasoning and Analysis

Kapur, J. began by identifying the central statutory provisions: section 166 (who may present an application for winding up), section 156 (liability as a contributory of present and past members), and section 158 (definition of "contributory"). The judge noted that section 158 defines a contributory as "every person liable to contribute to the assets of a company in the event of its being wound up" and that a person "alleged to be a contributory" is included in proceedings to determine contributories.

The Court reviewed the authorities (principally English cases) concerning the position of fully paid-up shareholders. The controlling principle drawn from Re Rica and similar authorities is that although a fully paid-up shareholder is a contributory for purposes of adjustment, such a shareholder seeking to present a winding-up petition must allege and, at least to the extent of a prima facie case, prove that there will be a tangible surplus available on winding up. Without such an allegation and prima facie evidence of a surplus, a fully paid-up shareholder has no sufficient interest in the winding up and therefore no locus standi to present the petition.

Kapur, J. examined the authorities cited by the District Judge (Madras decisions) and distinguished them on their facts: the Sabapathi Press case involved many supporting shareholders and explicit allegations of a tangible surplus; Narayandas Girdhardas concerned distribution and rights where shares were subject to equitable mortgage and was not on the precise question of locus standi to present a winding-up petition without an allegation of surplus. The Court expressed a preference for the English authorities (Re Rica, Re Diamond Fuel, Re Iron Colliery, Re Patent Artificial Stone, Re Anglesea Colliery, etc.) which were taken to require the prima facie showing of surplus by a fully paid-up shareholder.

The Court considered the material before it: Lajpat Rai Sawhney's petition did not allege a surplus nor did it present prima facie evidence of a tangible surplus. A report of the provisional liquidator (dated 4-8-1949) suggested a possible surplus "if the auditors' figures were correct," but the Court found that report halting, dependent on auditors' figures not fully relied upon by respondents, and in any case not responsive to the petitioner's allegation that the company was hopelessly insolvent. The District Judge, the Court concluded, had not directed his mind to the condition that a fully paid-up shareholder must make a prima facie showing of surplus before being allowed to present a winding-up petition; reliance only on the proposition that a fully paid-up shareholder is a "contributory" was insufficient.

Applying the legal principle to the facts, Kapur, J. held that Lajpat Rai Sawhney had no locus standi to maintain the winding-up petition because he had not alleged or shown a prima facie tangible surplus. Accordingly, the order of winding up and appointment of the official liquidator (so far as based on Sawhney's petition) were set aside.

Holding and Implications

HOLDING: The appeal by the parties challenging the locus standi of Lajpat Rai Sawhney is allowed; the order for winding up of the company and the appointment of an Official Liquidator (to the extent they were founded on Sawhney's petition) are set aside. The appellants are awarded costs in this Court of Rs. 500.

Implications:

Direct effect: The winding-up order and official liquidator's appointment made by the District Judge are set aside insofar as they arose from the petition presented by Lajpat Rai Sawhney. The judgment expressly states it does not affect the petition filed by Dr. Leighton.
Legal implication: The Court reaffirmed the established principle (as derived from English authorities and applied in Indian cases) that while a fully paid-up shareholder is a contributory for adjustment purposes, a fully paid-up shareholder seeking to present a winding-up petition must allege and make out, at least prima facie, that there will be a tangible surplus on winding up; absent that, he lacks the requisite interest to maintain such a petition.
No broader new precedent was declared beyond applying and preferring established English authorities on the point and distinguishing the factual basis of certain Madras decisions relied upon by the District Judge.

Disposition

Appeal allowed. Order of winding up and appointment of Official Liquidator set aside (as to the petition presented by Lajpat Rai Sawhney). Costs in this Court assessed at Rs. 500.

Source: Excerpted judgment text provided — Kapur, J.

Show all summary ...

Kapur, J.:— This judgment will dispose of two appeals F.A.O 54 of 1949 and F.A.O 64 of 1949.

2. In 1942 a private company under the came and style of Malko Limited with its registered office at Delhi was incorporated under the Indian Companies Act and on 12th December, 1944, by a special resolution this company was converted into a public company under the name of Capital Glass Works Ltd. Its capital was Rs. 20,90,000 made up as follows:—

3. Rs. 1,30,000 ordinary shares of Rs. 10 each. Rs. 80,000 deferred shares of Rs. 2-8-0 each.

4. Rs. 50,000 6% Cumulative Redeemable Preference Shares of Rs. 10 each Para 18 of the affidavit in opposition of the Bharat Bank Ltd. shows that shares are fully paid up and so also does the balance sheet.

5. On 31st January, 1943 when the company was still a private company it borrowed Rs. 3,50,000 from the Bharat Bank Limited on the security of the plant, machinery and buildings but not the stock-in-trade and on 22nd May, 1945 a further charge was created and a sum of Rs. 3,00,000 was borrowed on the original security with accretions and addition which had been made to the plant and to the buildings. On the 2nd July, 1946 a further sum of Rs. 1,00,000 was borrowed against the security of raw materials, finished goods and all movable assets of the company. Thus the total indentedness to the Bharat Bank was about Rs. 8,00,000 in August, 1948. In about the end of that month the Bank made a demand for payment of the amount due to it. In reply to this demand on the 24th September, 1948 the company wrote a letter in which they said that they were financially at the end of their resources as they had several times before written to the bank and it would not be possible for them to continue working the factory any longer unless financial assistance was available and they offered in the mutual interests of the Bank and themselves an arrangement which the Bank had agreed to, which inter alia contained the following provisions:—

(1) The company to hand over the factory to the Bank giving complete possession and the Bank was to run the factory under its own management;

(2) the Bank was to have complete control over the factory and staff and finances with authority to borrow further sums from the Bank for and on behalf of the company fir the running of the factory;

(3) net profits were to be applied to the reduction of the debt in a certain order,

(4) if any money was received by the company after the date of the arrangement that was to be paid to the Bank and

(5) the company undertook to have a special resolution passed giving the Bank control of the accounts, factory, etc.

6. Two more clauses of this letter are important.

7. Clause (2). The Bank was authorised to lease the factory to anyone but it was to give 30 days notice to the company to enable it to get a better offer if it could.

8. Clause (3). The Bank was given the power to matte the sale of the property ar such price as it thought reasonable and to credit the sale price Page: 417to the debt due from the company to the Bank but there was a proviso that the Bank before accepting such an offer was to serve a written 30 days' notice on the company intimating its intention to sell at the price available so as to enable the company to procure a better offer and in default of the company being able to get a better offer the Bank could effect the sale.

9. Clause (4). This arrangement was irrevocable except—

“(a) with the consent of the Bank, (b) the amounts due to the Bank in all accounts with interest thereon and charges were paid in full, (c) or the company made its own arrangements for funds and paid the full amount due to the Bank in all its accounts.” The company was to get the necessary resolutions passed at the special meetings and to execute the necessary documents for the implementation of this arrangement within 30 days of the letter.

10. On 7th October, 1948 this arrangement was approved of by the directors. The account was to be operated by one J.D Goel, a nominee of the Bank, to be called the Controller of the company. This account was previously operated by Malak Ram, the managing director of the company. On 22nd October, 1948 an irrevocable power of attorney was executed by the company in favour of the Bank. In clause 8 of the power of attorney it was said that if the Bank found that the working was not profitable or found that the work should not be continued, the Bank had the power to either give on lease or sell the factories on such terms as it thought proper, but before doing so the Bank had to give notice of 30 days as was provided for in the letter of 24th September, 1948. On 10th November, 1948, a special resolution was passed approving of this arrangement. I find from a copy of the proceedings placed on the record marked as annexeure ‘D’ to the affidavit of Mr. J.D Goel dated 7th July, 1949 that 9 share holders were present in person and there were proxies of 16 others.

11. On 2nd December, 1948, the Bank started running the factory and within the next two months it invested another Rs. 3,00,000 but found the working to be impossible and wholly unprofitable and on 22nd December, 1948, therefore, the Bank intimated to the company that it had received an offer of Rs. 7,50,000 for sale of the property of the company from two gentlemen, Mr. Jallan and Mr. Jagmohan Lal. Thirty days' notice was given to the company which would expire on 21st January, 1949 but at the request of the company time was extended to 31st January, 1949 to enable them to get a better offer if they could.

12. On 12th January, 1949 one Dr. J.H Leighton who claimed to be a share-holder, director and creditor of the company brought an application for winding up in the Court of the District judge at Delhi. In paragraph 7 he alleged that the company was heavily to debt and it was not possible to carry on the business. There were due to the Bharat Bank Limited a sum of Rs. 10,00,000 and as the company was unable to pay the debt, management had been banded over to the Bank on the express understanding that business will be continued and debt liquidated out of the income and that there was another Rs. 1,00,000 also due from the company which he described as sundry debts. The Bharat Bank, according to the allegation, instead of acting in accordance with the arrangement were selling off the entire property and assets of the company to the detriment of the share-holders and other creditors and the amount offered as price was very much less than the actual market value. He also alleged that the business and assets were being transferred to “one of the patties known Page: 418to the persons concerned and thus sale to all intents and purposes is not fair and is intended to defraud other claimants.” He went on to allege that the proposed sale was a fraud on other creditors and share-holders. On 14th January, 1949 he made an application under section 175 of the Indian Companies Act and Order 39, rule I, Civil Procedure Code, praying that a provisional liquidator be appointed and till such appointment was made the Bharat Bank and the creditors of the company be restrained from disposing of the assets of the company. Notice of this was given to the Bank. The Bank made its reply on 25th January, 1949 in which it questioned the locus standi of Dr. Leighton pleading that he was neither a creditor nor a share-holder nor a director and be was not entitled to present the petition for winding up. To the application of Dr. Leighton asking for a temporary injunction the company made an application in opposition on 4th February, 1949. In it the company submitted that the petitioner had no locus standi. They pleaded that the application was frivolous, it was not bonafide and was an abuse of the process of the Court and that irreparable injury would be caused to the company if a provisional liquidator was appointed or an injunction issued to the company.

13. On 6th February, 1949 an extraordinary general meeting of the company was held in which it was revived that it was not in the interests of he share-holders to wind up the company at that stage. A sub-committee consisting of three persons was constituted to consider any offer that may be made with regard to the company's property. This it was stated was done because the learned District Judge wanted to know the views of the share-holders with regard to the sale and it was not always easy to call an extraordinary meeting at a short notice.

14. On 24th February, 1949 the company filed its reply in opposition to the application of Dr. Leighton for winding up. It was stared therein that the position of Dr. Leighton was malafide, that the extraordinary meeting of the share-holders was against winding up and that arrangements were being made with the Industrial Finance Corporation of India Limited for raising a loan and arranging for finances and that the winding up of the company at that stage would result in sale of the factories of the company at a very “nominal price”. On the 25th of February 1949 the Bank made an application that it may be allowed to proceed with the sale as it wanted to realise its security and on the same day the learned District Judge issued a direction to the company “not to complete the sale of their assets” till after the hearing of the winding up petition but I may state here that this order was vacated on the 13th May, 1949.

15. On 29th April, 1949, the Bharat Bank made a reply in opposition to Dr. Leighton's application in which it disputed the locus standi of Dr. Leighton to bring the application and also submitted that the Bank was prepared to accept the highest offer with the consent of the company.

16. Another application for winding up was filed on 29th January, 1949 by Lajpat Rai Sawhney who claimed to be a contributory holding ??? fully paid-up shares of Rs. 10 each and he also applied for the issue of an injunction under Order 39, Rule 1, Civil Procedure Code restraining the company from disposing of by sale or otherwise its assets pending the decision of the case. On the same day he made another application asking for consolidation of his case with that of Dr. Leighton. The company replied to this application on 24th February, 1949 in which it was admitted that the company was in debt and owed money to Bharat Bank but Page: 419denied their being unable to pay the debt and also said that they were carrying on their business and the business was very profitable. On 5th April, 1949 Lajpat Rai Sawhney made an application under section 175 of the Indian Companies Act for the appointment of a provisional liquidator. He evidently after getting permission from the Court filed an amended application which is dated 5th April, 1949 in which he alleged that he was a share bolder holding fully paid-up shares, the liabilities of the company were Rs. 17,00,000 and the company was paying Rs. 6,000 as expenses every month and the indebtedness of the company was so great that it could not carry on its business and was in an absolute bankrupt condition, that the management knowing that it was not possible for them to carry on the business had handed over the management of the company to the Bharat Bank Limited and had executed an irrevocable power of attorney in their favour and that the Bank instead of carrying nut the undertaking had advertised for sale of “the entire assets” and that the effort made to sell the property was fraudulent because (a) wishes of the shareholders had not been ascertained in a proper manner, notices having been issued to them on their addresses in Pakistan although they were no longer there and no advertisement had been issued, (b) the management had appointed a sub-committee for the purpose of sale and had not taken into consideration the wishes of the share holders although the Court had expressly ordered this to be done and (c) the assets of the company were being sold to one of the constituents of the Bharat Bank and for that purpose information was not being supplied to other intending purchasers. At the same time he also alleged that the Bank had advertised sale of the assets of the company and the sale was taking place in the interests of the Bank itself neglecting the interests of the other creditors and share-holders and that the “management” had misappropriated huge sums of money and were continuing doing the same. He made several other allegations.

17. On 13th May, 1949 the learned District Judge passed an order withdrawing his previous order of 25th February, 1949 bur he ordered the appointment of a provisional liquidator and appointed Mr. Amrit Lal Patni, Advocate. On 1st June, 1949 Raizada Jagmohan Lal and Mr. R.K Jallan, the persons mentioned above, purchased the property for Rs. 10,00,000, the order prohibiting alienation of the factory having been vacated on 13-5-49.

18. On 10th June, 1949 the provisional liquidator obtained directions from the learned Judge for taking possession of the property and he was allowed to take possession even though the name of the company had since been changed. He tried to take possession hut was not allowed to do so and on 16th June, 1949 the learned Judge ordered that the provisional liquidator need not take possession.

19. It may here be stated that on 29th April, 1949 some share-holders, collectively holding 1,44,069 out of a total of 1,98,201 i.e, 73 per cent of the votes (shares) filed a written statement opposing the winding up. It was pleaded in this application that Dr. Leighton had no locus standi to file the application. This reply is signed by as many as 29 share-holders and at page 65 of the record all the names of the persons holding shares are given. It may be pointed out that later on 22nd June, 1949 Mr. Malak Ram and other share-holders supported the winding up. What happened in between the interval has not been made clear on the record. On 7th July—page 89 of the record Mr. J.D Goel. Controller of Capital Glass Works Limited, on behalf of the Bharat Bank made an affidavit in Page: 420opposition in which inter alia he submitted that Lajpat Rai Sawhney being a fully paid-up share-holder of the company was not competent to make the application, that there would be no surplus available for distribution at any time amongst the share-holders and therefore Lajpat Rai Sawhney could not maintain the application and that the sale had taken place in favour of Raizada Jagmohan Lal and Mr. R.K Jallan and the money had been credited in the name of the Bharat Bank in accordance with the arrangement of the 24th September, 1948 and even after this payment the Bank was a creditor of the company to the extent of Rs. 1,75,000 and the only assets available to meet this debt was about Rs. 40,000 standing in the books of the company as book debt. The learned Judge on 12th August, 1949 overruled the objection about the locus standi of Lajpat Rai Sawhney to bring the petition. He relied on two rulings The Sabapathi Press Company Ltd. v. B. Sabapathi Rao I.L.R 53 Mad. 38 , A.I.R 1930 Mad 240 and Narayan das Girdhar das v. The P.O Banking Corporation Ltd. Madras A.I.R 1934 Mad. 476 , I.L.R 57 Mad. 955. Against this order ar appeal has been filed in this Court on 19th August, 1949 which is F.A.O No. 54 of 1949.

20. On the same date i.e 19th August, 1949 the learned Judge passed an order for winding up and appointed Mr. Amrit Lal Patney who was working as a provisional liquidator to be the official liquidator of the company. Against this order another appeal has been filed in this Court, being F.A.O No. 64 of 1949. This was filed on 5th September, 1949.

21. I shall first deal with the appeal relating to the objection in regard to locus standi of Lajpat Rai Sawhney to apply for winding up. The learned Judge has held that “contributory” includes a member whose shares are fully paid up and he has relied on The Sabapathi Press Company Ltd. v. B. Sabapathi Rao I.L.R 53 Mad. 38 , A.I.R 1930 Mad 240 and on Narayandas Girdhirdas v. The P. & O. Banking Corporation, Ltd. Madras A.I.R 1934 Mad. 476 , I.L.R 57 Mad. 955. I shall discuss these cases a little later. Under section 166 of the Indian Companies Act an application for winding up can be presented by a contributory and section 156 of the Act gives the liability as a contributory of present and past members and in sub-clause (iv) of section 156(1) it is said—

“In the case of a company limited by shares, no contribution shall be required from any member exceeding the amount (if any) unpaid on the shares in respect to which he is liable as a present or past member.”

22. Section 158 of the Act defines the term “contributory” in the following words: “means every person liable to contribute to the assets of a company in the event of its being would up and, in all proceedings for determining and in all proceedings prior to the final determination of the persons who are to be deemed contributories, includes any person alleged to be a contributory.” In regard to fully paid up share-holders it has been said that they are contributories without any qualification. Every holder of fully paid shares is a contributory as be is entitled to share in the adjustment of the rights of the contributories among themselves, though he will not be placed on the list of contributories except at his own desire.

23. The question to be decided in this esse then is whether Lajpat Rai Sawhney who was the holder of a 1,000 fully paid up shares does come within the term “contributory” and is, therefore, entitled to bring this application.

24. In Palmer's Company Law at page 406 it is said:

“Occasionally, a contributory petitions on the ground that the company is insolvent or unable to pay its debts; but in such case the petitioner, if fully paid, should, if possible, allege and prove that there will be a substantial surplus for the share-holders Re. Rica Gold Co. (1879) 11 Ch. D. 36; otherwise he has no interest in the company and in spite of section 171 of the Act there is a serious risk that a petition by a fully paid up share-holder alleging that the company has no assets will be dismissed. Kaslo Slocan Co. 1910 W.N 13.”

25. In re. Rica Gold Washing Compony (1879) 11 Ch. D. 36 a petition had been filed by a member holding fully paid up shares. It was held that such a person must both allege in his petition and shew by evidence that there are assets of the company of such an amount that in the event of winding up be would have a tangible share of surplus to receive. The petitioner in that case had seventy five fully paid-up shares of £ I each. It was not disputed in that case that the company had no assets and that the mine was worth nothing and it was held by Hall, V.C—

“Under these circumstances, it appears to me that I cannot treat this as being a substantial and bada fide petition and I therefore decline to make any order upon it.”

26. It may be noted that in that case the application was opposed by a very large number of share-holders and in the case now before me the application was so opposed although later on the share-holders made a somersault. On the case going up to the Court of appeal it was observed by Jessel, M.R at page 42—

“Now I will say a word or two on the law as regards the position of a petitioner holding fully paid up shares. He is not liable to contribute anything towards the assets of the company and if be has any interest at all, it must be that after full payment of all the debts and liabilities of the company, there will remain a surplus divisible among the shareholders of sufficient value to authorise him to present a petition. That being his position and the rule being that the petitioner must succeed upon allegations which are proved, of course the petitioner must shew the Court by sufficient allegation that he has a sufficient interest to entitle him to ask for the winding up of the company. I say “a sufficient interest,” for the mere allegation of a surplus or of a probable surplus will not be sufficient. He must shew what I may call a tangible interest. I am not going to lay down any rule as to what that must be, but if he shewed only that there was such a surplus as, on being fairly divided irrespective of the costs of the wincing up, would give him £ 5, I should say that would not be sufficient to induce the Court to interfere in his behalf.”

27. In that case there was also an allegation of fraud and it was held that a vague allegation of fraud was not sufficient and the facts which constitute the fraud must be stated and if there is only a vague and general allegation of fraud, evidence of the acts of fraud is not admissible. At page 47 Brett, L.J observed in the same case—

“* * * that assuming all the facts which are alleged on this petition to be proved by any evidence which could be brought forward, it could not be shewn that any tangible amount would ever come to the petitioner and, in as much as the petitioner is a paid up share-holder, he, therefore, has not shewn sufficient interest to support this petition.”

28. He further on said—

“It is necessary, therefore, to shew that there are facts stated on this petition which, if proved, would satisfy the Court that some tangible amount might come to the petitioner.”

29. In re. Diamond Fuel Company (1879) 13 Ch. D. 400 at p. 411, Thesigar L.J observed:

“I quite agree that when a fully paid up share-holder is seeking to wind up a company it is necessary for him to shew that there is likely to be some tangible surplus in the event of the company being wound up and its assets collected; but here I think that not only a prima facie case is made for the repayment of money by the directors and promoters, but also, looking at the small amount of debt of the company, a prima facie case for the existence or a surplus for the share-holders.”

30. In the circumstances of that case where a prima facie case had been made out for the repayment of money by the directors and promoters and also there was a case for the existence of a surplus for the share-holders, it was held that the Court would be justified in holding that it was just and equitable that the company should be wound up. I may add here that was a case in which it was shewn that there were moneys to be recovered for the purpose of being divided among the share-holders.

31. In re. The Patent Artificial Stone Company Ltd.6, the petitioner was found to have personally no interest, properly so called, because all his shares were paid up and be could not be called upon to contribute anything more. The Master of the Roils said:

“If the assets are more than sufficient to pay the debts, he might, by possibility, get some return of the money he has paid; but this is a very remote contingency and it is not, in my opinion, a sufficient interest, in the absence of other circumstances, to support such a petition.”

32. In re. Anglesea Colliery Company (1866) 1 Ch. A 555 , 2 Eq. 378 a holder of fully paid up shares in a limited liability company was held to be a contributory within the meaning of the Companies Act. There the company bed gone into voluntary liquidation, all debts had been provided for and a call had been made by two of the liquidators upon the partly paid up share-holders for the purpose of adjusting the rights between them and the fully paid up share-holders. The third liquidator objected to these proceedings and several of the partly paid up share-holders presented a petition to the Court, praying for a declaration that the liquidators had no authority to make a call for the purpose of dividing the proceeds, or any part thereof, among the owners of paid up shares; and that the resolution was ultra vires and void. The question debated before the Court was whether the holders of the paid up shares in companies to which the Act of 1862 applied, fell within the description of contributories contained in that Act; because if they did not, there was no authority given by the Act to make a call for the adjustment of their rights, for which purpose the call had evidently been made. It was in these circumstances that it was held that a holder of fully paid up shares was a contributory within the meaning of the Act. At page 560 Sir G.J Turner, L.J, observed:—

“Now it seems to me to be clear, beyond all doubt, that the purpose of the Act is, inter alia, to adjust the rights of all the members of companies which should be wound up under it. Indeed, I do not see how the rights of those members who have not paid up in full could be adjusted without the rights of those members who have paid up in full being taken Page: 423into account. Throughout the Act we find members and contributories used inter-changeably………….”

33. The learned Lord Justice agreed with the learned Vice-Chancellor who had dismissed the petition, being of opinion that the paid up share-holders were contributories within the meaning of the Companies Act, 1862 and that the liquidators had therefore power to make a call for adjusting the rights between them and the other contributories.

34. A similar view was taken by the same learned Lord Justice in the National Savings Bank Ltd. (1866) 1 Ch. A. 547

35. Another case which supports the submissions of the appellants is In re. Iron Colliery Compony (1881) 20 Ch. D 442 where Jessel, M.R at p. 447 observed:—

“Then he says he is a share-holder, but he is a fully paid up shareholder and has no locus standi to apply for a winding up order unless he alleges that there is a surplus and gives some evidence in support of the allegation, for otherwise he has no interest in a winding up. There is no allegation in the petition that there will be a surplus and the petitioner is not a creditor, so the petition was demurrable.”

36. As against these cases which support the submissions of the appellants the learned Advocate for the respondents Mr. Chatar Behari Lal did not cite any case which would go to support the judgment appealed against. The only cases that he did mention were the ones that are given in the judgment of the District Judge. At his request the hearing of the case was adjourned and at the next hearing i.e on the 9th December, 1949 he sent a telegram saying that he was unable to be present in Court and asked for an adjournment which I refuse cause there was no adequate reason or any kind of reason for which this part ??? case could be put off. As a matter of fact, this date was fixed at the request of Mr. Chatar Behari Lal and he did not avail of the concession that was shown to him. But at the first hearing the learned Advocate had nothing mote to say on the question of locus standi except the few cases that have been referred to by the learned District Judge.

37. The other learned Advocates who were appearing for the other parties made their submissions and reliance was placed on National Savings Bank Association (1866) 1 Ch. A. 547. Their Sir G.J Turner, L.J referred to his judgment In re. Anglesea Colliery Company7 case, a case that I have already referred to and be agreed with his observations that he had made in that case. So, in my opinion, this case does not help the respondents. Mr. Inder Dev Dua then relied on In re. Cine Industries and Recording Co. Ltd. A.I.R 1942 Bom. 231 where Chagla, J., as be then war said at p. 238:—

“This is a share-holder's petition. It is true that as the law stands today, he is under no disability as compared with a contributory nor is he under any obligation, as he at one time was to satisfy the Court that on a winding up there would be surplus assets. But there is a special rule that the Courts have laid down in exercising their discretion in winding up a company on the petition of a share-holder. The Court constantly be an in mind that the internal management of the company is its own concern and it is a much better judge of business prospects of a trading venture than the Court can ever hope to be.”

38. As I read the observations of the learned Judge I do not feel that his opinion was that a fully paid up share-holder can bring a petition for Page: 424winding up, nor do I see any authority which the learned Judge has relied upon in support of his opinion which the learned Advocate thinks was laid down in the judgment referred to above. In any case, in the face of authorities of the cases that I have referred to above and the opinions of such eminent Judges as Jessel M.R and others I would respectfully prefer to follow the opinion laid down in the English cases.

39. It was faintly suggested that a fraud had been committed on the share-holders by the Bharat Bank Ltd., in so far as they had brought about a sale of the machinery and buildings of the company for a very small sum of money. On the record there was nothing to support it but the appellants made an offer before me that although the sale had taken place for Rs. 10,00,000 they were quite prepared to get the sale set aside provided the company or anyone of the respondents was prepared to pay them Rs. 9,00,000 within a reasonable distance of time but the respondents were not prepared to accept this offer.

40. Taking the rule laid down in the English cases above referred to I am of the opinion that where a contributory files an application for winding up and (1) does not allege thar there is a surplus and (2) dots not give prima facie evidence of the likelihood of there being some tangible surplus he is not entitled to bring under the law a winding up petition because he has no interest in winding up and is not a contributory within the meaning of section 166 although for the purpose of adjustment he will come within the definition of the word “contributory”. I may add here that In re. Anglessa Colliery Company (1866) 1 Ch. A 555 , 2 Eq. 378, supra, was not a case of a winding up by a contributory but was decided on a petition by the share-holders who objected to a call being made for the purpose of adjustment of rights of fully paid up share-holders and partly paid up share-holders.

41. The learned District Judge, as I have said before, has relied on two Madras Cases, the first one being The Sabapathi Press Company Ltd. v. A. Sabapathi Rao I.L.R 53 Mad. 38 , A.I.R 1930 Mad 240. There a petition had been filed for winding up by share-holders who had fully paid-up shares. The petition was in that case supported by no less than 84 share-holders and there was an allegation that, in the event of winding-up, the petitioners (fully paid-up share-holders) would have a tangible interest in the surplus assets. That is the distinguishing feature of that case and, therefore, in my opinion, the decision of that case is not available to the petitioner Lajpat Rai Sawney and in my judgment the learned Judge has not, if I may say so with respect, correctly read the rule laid down in that case.

42. The next case relied upon by the learned Judge was Narayandas Girdhardas v. The P. & O. Banking Corporation Ltd., Madras A.I.R 1934 Mad. 476 , I.L.R 57 Mad. 955. There the banking directors of the company were the firm of C & Sons whose sole proprietor was R.C who held 5,000 fully paid-up shares in the company in his own name. In September 1924, he borrowed two lakhs of rupees from P. and O. Banking Corporation, Ltd. and by way of an equitable mortgage he lodged the security of 5,000 fully paid-up shares. The Bank obtained a decree on the equitable mortgage against C. & Sons and subsequently the company went into liquidation in 1926 and a few years later the firm of managing directors became insolvent and the assets of that company became vested in the Official Assignee of Madras. In the course of the win ling up the liquidator paid Re. 1 per share to the contributories of the company except R.C or P. & O. Banking Corporation, Ltd., who applied to the liquidator for the 5,000 shares covered by the Page: 425equitable mortgage and their claim was upheld. It was held that a holder of fully paid up shares was a contributory without any qualification and that the proceedings were clearly an adjustment of the rights of contributories. In that case reliance was placed on Buckley's commentary on the Companies Act, tenth edition, where it was stated—

“A holder of fully paid shares is a contributory within the meaning of the Act; when all debts have been paid, a call may be made upon the partly paid share-holders to adjust the rights between them and the fully-paid share-holders.”

43. This case, in my opinion, again has no application to the facts of the case now before me. There the dispute was, as I have said above, as to whether the Bank with which the shares had been pledged and which had not yet got its name entered in the register of the company could or could not demand the surplus which was being distributed. That is quite a different proposition than the one before me where the question is whether a person who holds fully paid up shares can or cannot bring an application for winding up as a contributory.

44. In Imperial Oil Soap and General Mills Co. Ltd., Delhi v. Ram Chand A.I.R 1916 Lah. 78 (2), it was observed by Shadi Lal, J., as he then was:—

“………it is sufficient to say that section 158 is in tol idem verbis with the corresponding section in the English Act and that it has been repeatedly held in England that a fully paid up share-holder is a contributory and may present a petition, for winding up (vide, inter alia, National Savings Bank Association (1866) 1 Ch. A. 547). But his right to make the application is subject to certain conditions. ‘A holder of fully paid shares,’ says Buckley in his book on the Law of Companies, 9th Edition, at page 321, is a contributory within the meaning of section 124 of this section, (namely section 337) and can present a petition for winding up, even if there is already a voluntary winding up. But he must shew sufficient grounds; he cannot be called upon to contribute, his interest is only that if there be surplus, he is entitled to repayment. If he be sole petitioner and the creditors do not press and the company has nor had a fair trial, the order will be refused. If the Company's assets are insufficient for repayment of its debts, a paid up share-holder has no interest. If he presents a petition he must allege and prove, at least to the extent of a prima facie case, that there are assets of such amount as that in the winding up he will have a tangible interest.”

45. After a careful consideration of these authorities I am of the opinion that if a fully paid up share-holder presents a petition, he must allege and prove, at least to the extent of a prima facie case, that there are assets of such amount that in the winding up he will have tangible interest.

46. Mr. Inder Dev Dua referred me to a report of the liquidator dated 4-8-1949 which is at page us of the record in which the provisional liquidator said that it appeared to him, if the figures given by the auditors report were correct, that there would be a surplus available to the shareholders if the company went into liquidation. The report is a very halting one and depends on figures of auditors which nobody seems to have relied upon, nor nave they been placed before me by the respondents. At any rate, that report is not available to the petitioner because his allegation was that the company was hopelessly insolvent. He never alleged that there was any surplus least of all a tangible surplus. I am not very much impressed by the report.

47. The learned Judge has not directed his mind to this aspect of the case. He has mainly relied on the observations of some of the cases where it has been held that a fully paid up share-holder is a contributory and can bring a petition for winding up but the conditions under which he can bring such a petition seem to have been overlooked by the learned Judge and that perhaps led him into the error in which he has fallen.

48. As I am of the opinion that Lajpat Rai Sawhney had no locus standi to bring this petition for winding up, this appeal must be allowed and the order of winding up of the Company passed by the learned District Judge set aside and so also the order of appointment of Official Liquidator. The appellants will have their costs in this Court as well as in the Court below. I assess the costs in this Court at Rs. 500. Of course my judgment will affect only the appeal in the petition for winding up which was presented in the Court of the District Judge by Lajpat Rai Sawhney and will not affect the petition filed by Mr. Leighton.

49. Appeal allowed.