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Mohanlal Saraf Vs. the Cuttack Electric Supply Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtOrissa High Court
Decided On
Case NumberCompany Act Case No. 1 of 1963
Judge
Reported inAIR1964Ori191
ActsCompanies Act, 1956 - Sections 433
AppellantMohanlal Saraf
RespondentThe Cuttack Electric Supply Co. Ltd.
Appellant AdvocateRanjit Mohanty, Adv.;R.C. Ram, Adv.
Respondent AdvocateA.P. Choudhury and ;R.N. Misra, Advs.
DispositionApplication dismissed
Excerpt:
.....the existence or non-existence of a particular scheme all the less fruitful. if this point were well taken, it would follow that a shareholder who desired a company to be wound up would be well-advised, as soon as the resolution for the sale of the company's business had been passed, immediately to put a petition on the file and bring the petition on in circumstances in which he could accurately allege that there was no scheme before the court......government by. octavius steel and company limited under, the indian electricity act known as the cuttack electric license, 1929 to generate electricity at cuttack. on june 28, 1929 the cuttack electric supply company limited was incorporated having its managing agents octavious steel and company limited. in september 1929 the licence granted in the name of octavious steel and co. limited was transferred to the cuttack electric supply company limited.on september 6, 1961 the works department of the government of orissa gave notice to the company, making certain charges of alleged dereliction of duty and non-compliance with the requirements under the act. by a letter dated january 15, 1962 issued by the secretary to the government of orissa, works department, the government of orissa.....
Judgment:

1. This is a petition by one singleshareholder of 1100 shares of Rs. 10/- each for winding up--on the alleged ground of substratumgone -- of the Cuttack Electric Supply Company Limited (hereinafter referred to as the company) which has been supplying electric light and power to Cuttack town since 1929. It is said that at all material times the company was and is still a prosperous and well managed business concern. Theshareholders of the company are satisfied with the progress and prosperity of the company; ever since 1956 the shareholders have earned good dividends in respect of their shares.

In about 1930 the company invested Rs. 5 'lacs or thereabout in its undertaking at Cuttack ...and at present the total capital employed in the working of the said undertaking amounts to about Rs. 31.5 lacs. On the basis of the present valuation of lands and buildings at Cuttack and its suburbs and on the basis of the high cost of machinery, materials, stores and other articles in the market in India, the present value of the land, buildings, machinery, materials and stores appertaining to the company's undertaking at Cuttack would be Rs. 80 lacs or thereabout. The authorised capital of the company is Rs. 10 lacs divided into one lac shares of Rs. 10/- each and the issued share capital is 66,014 shares of the value of Rs. 6,60,140/-. The amount of capital paid up or credited as paid up is Rs. 6,60,040/-. Octayius Steel and Company Limited previously were the Managing Agents and at present is the Secretary and Treasurer of the company.

2. The main ground upon which the petitioner seeks to have the company wound up is set out in paragraph 11 of the petition :

'............the main object and the sole under.taking of the Company has all along only been to generate and supply electric energy at Cuttack. By the Government of Orissa purchasing the undertaking of the Company, the substratum of the Company is gone. There is no other business in which the Company is engaged and even if any new business is started in future at a later date, there is no reasonable hope that the object of trading at a profit with a view to which the Company was formed can be attained. Your petitioner further states that the shares of the Company had been sold to and purchased by the shareholders including your petitioner on the basis of the Company being engaged in the business of generating and supplying electric energy and in particular at Cuttack and now that the main object and business of the Company is gone, there is no justification of the Company in continuing to exist.'

It is on these grounds that the petitioner submits that it is just and equitable that the said company should be wound up.

3. The learned counsel for the petitioner, at the hearing, wished to introduce a further ground on which the company should be wound up. His ground is that the company suspended its business for more than one year from February 1, 1962 and that there was no hope of its carrying on business and attaining its objects.

4. The company was incoporated on June 28, 1929, that is 34 years ago. Under Clause 3(1) of the memorandum of association, the objects for which the company was established are thus described :

'To carry on, in the Empire of India and elsewhere, and in particular at Cuttack and the surrounding districts, the business, of an electric light and power company in all its branches.'

Then Clause 3(2) begins :

'To construct, lay down, establish, fix, and carry out all necessary buildings, works, machinery mains, cables, wires, lines, accumulators, lamps, and appliances and to generate, accumulate, distribute, and supply electricity, in bulk and otherwise, and to light streets, markets, buildings, and places both public and private.'

Clause 3(5) is:

'To carry on the business of electricians, mechanical engineers, suppliers of electricity for the purpose of light, heat, motive power, or otherwise, and manufacturers of, and dealers in, all apparatus and things required for, or capable of being used in connection with the generation,distribution, supply, accumulation and employment of electricity.'

There are in all 25 sub-clauses in the objects clause including Sub-clause (7) and Sub-clause (12) which read as follows :

'3 (7) To carry on all or any of the business of iron, brass, metal, and other founders and fitters, mechanical engineers, metal-workers, colliery-owners, ship-owners and shipbuilders, tramway owners, manufacturers of any commodity in the manufacture of which electricity is employed or any other business which can be conveniently carried on in connection with any business which the Company is authorised to carry on, or which may seem to the Company calculated, directly or indirectly, to benefit this Company, and to acquire and carry on all or any part of the property or business, and to undertake any liabilities of any person, firm, association or company possessed of property, suitable for any of the purposes of this Company, or carrying on any such business as aforesaid, and as the consideration for the same to pay cash or to issue any shares, stocks, or obligations of this Company.'

'3 (12). To purchase or otherwise acquire andundertake all or any part of the business, property, and liabilities of any person or corporation carrying on any business which the Company isauthorised to carry on or possessed of property suit-table for the purposes of the Company.'

5. The principal argument on behalf of the petitioner is that the predominant object of the company, according to him, was to generate and supply electric energy at Cuttack as mentioned in Clause 3 (i) of the memorandum; he contends that the other objects mentioned in the subset quent sub-clauses were merely subsidiary to that.

6. The background shortly stated is this : In May 1929 an electric licence was obtained from the Government by. Octavius Steel and Company Limited under, the Indian Electricity Act known as the Cuttack Electric License, 1929 to generate electricity at Cuttack. On June 28, 1929 the Cuttack Electric Supply Company Limited was incorporated having its managing agents Octavious Steel and Company Limited. In September 1929 the licence granted in the name of Octavious Steel and Co. Limited was transferred to the Cuttack Electric Supply Company Limited.

On September 6, 1961 the Works Department of the Government of Orissa gave notice to the company, making certain charges of alleged dereliction of duty and non-compliance with the requirements under the Act. By a letter dated January 15, 1962 issued by the Secretary to the Government of Orissa, Works Department, the Government of Orissa purported to revoke the licence of the company under the Indian Electricity Act with effect from January 31, 1962. By a further letter the Government of Orissa directed the company to sell its undertakings at Cuttack to the Orissa Electricity Board and to deliver the same with records on February 1, 1962, pending the determination and payment of the purchase price of the said undertaking.

On January 29, 1962 a writ petition was filed by the company challenging the legality of the Government direction. On that petition there was an order for interim stay of the sale. On February 1, 1962 the Government of Orissa took posses-sion of the company's property. On December 5, 1962 the company gave notice of an Extraordinary General Meeting to be held on December 28, 1962 in which two Resolutions were proposed -- one for sale of the company's property to the State of Orissa and the other being for the purpose of utilising the sale proceeds for the purpose of a business which the company is, by its memorandum of association, authorised to carry on. The petitioner by a letter dated December 19, 1962 intimated to the company that he agreed to the first resolution but not to the second resolution. On December 28, 1962 the Extraordinary General Meeting was duly held. The said two resolutions were proposed, seconded and carried unanimously. The petitioner did not attend the said meeting. The two resolutions unanimously carried at the Extraordinary General Meeting of the share-holders were these :

'Resolution No. 1. That the Directors be and they are hereby authorised to sell the undertaking of the Company to the Governor of the State of Orissa (subject to the right of the said Governor to direct that the said undertaking and possession thereof be transferred to the Orissa. State Electricity Board) for such sum as shall represent in the opinion of the Directors and of the said Governor the market value of the said undertaking or, in the absence of agreement between them, for such sum as may be determined by arbitration as representing such market value.'

'Resolution No. 2. That the whole or any part of any sum that may be received by the Company in respect of the purchase price of its undertaking may be utilised by the Directors in their sole and absolute direction for the purpose of establishing, developing and maintaining any business which the Company is, by its Memorandum of Association, authorised to carry on.'

7. The petition for winding up was presented on February 13, 1963. On March 20, 1963 there was an agreement for sale of the company's undertaking to the Orissa State Electricity Board on the terms and conditions stated therein.

It was agreed that the State Electricity Board would pay to the company a sum of Rs. 18 lacs as an on-account payment towards the purchase price of the undertaking within seven days from the date of withdrawal of the writ petition (O.J.C No. 31 of 1962); that both the company and the Electricity Board will endeavour to finalise the amount of purchase price and pay the same after deduction of the said sum of Rs. 18 lacs within six months from the date of the agreement; that in case the market value fixed as above is not acceptable to the company, the points of dispute will be referred to arbitration for determination of the market value of the undertaking as per the provisions of the Indian Electricity Act; that, within three months from the date of the making of the award by the arbitrators determining the market value of the undertaking the Electricity Board will pay to the company the amount awarded deducting the payment of Rs. 18 lacs to the company as mentioned above. On April 3, 1963 the company's said writ petition was withdrawn.

8. Thus under the agreement dated March 29, 1963 the undertaking of the company was agreed to be sold to the State Electricity Board in the circumstances hereinbefore stated. The petitioner says that this destroyed the substratum of the company, and he turns to the memorandum of association and says that it is in that sense that the memorandum of association must be construed because, according to the petitioner, the sole undertaking of the company to generate and supply electric energy in the town of Cuttack only in as early as 1929 (when the company was incorporated) was expressed to be the first in sequence of the company's objects and all other powers and objects specified in the memorandum must be regarded as ancillary to the carrying on of that business.

9. In my opinion, this narrow construction of the memorandum is not correct. First of all, the form of the memorandum is the common form where a business is being acquired. It sets out in the usual way the acquisition of the business as the first step which the company is going to undertake. We are not considering now whether failure in 1929 to acquire the business of generating and supplying electric energy at Cuttack would have destroyed the substratum of the company. It might possibly have been thought that unless it got this business it was not really starting its career in the way in which the share-holders bargained it should be started. But the question we have to decide here is whether, that business having been acquired 34 years ago, the sale of it this year in the circumstances aforesaid amounted to a destruction of the substratum.

In my opinion, the main and paramount object of this company was to carry on a business of electric light and power company in all its branches (of a general kind) as per Sub-clause (5) quoted above. It was one such type of business that was so long being carried by the company since 1929. This memorandum cannot be construed as limiting the paramount object and restricting the contemplated adventure of the shareholders to the carrying on of the business of generating and supplying electric energy at Cuttack only. The impossibility of applying such a narrow construction appears to be manifest when one remembers the observations of Lord Greene, M.R. in In Re Kitson and Co., Ltd., .(1946) 1 All ER 435:

'......that a business is a thing which changes. It grows or it contracts. It changes; it disposes of the whole of its plant; it moves its factory; it entirely changes its range of products, and so forth. It is more like an organic thing.'

10. The learned counsel for the petitioner cited a number of very well known authorities on which it has been held that on particular facts, the substratum of particular companies had gone. It is unnecessary to deal with these authorities, because they do not assist this Court in construing this particular memorandum. It. is to be kept in view in these substratum cases that there is every difference between a company which on the true construction of its memorandum is formed for the paramount purpose of dealing with some specific subject-matter and a company which is formed with wider and more comprehensive objects.

What I mean is this : With regard to a company which is formed to acquire and exploit a mine, when the Court comes to construe its memorandum of association of the Court has to construe the language used in reference to the subject-matter, namely, a mine, and, accordingly, if the mine cannot be acquired or if the mine turns out to be no mine at all, the object of the company is frustrated, because the subject-matter which the company was formed to exploit has ceased to exist.

It is exactly the same way with a patent, as, in the well known case of In Re German Date-Cofee Co., (1882) 20 Ch D 169. A patent is a defined subject-matter, and, if the main object of a company is to acquire and work a patent and it fails to acquire that patent, to compel the shareholders to remain bound together in order to work some other patent or make some unpatented article is to force them into a different adventure to that which they contracted to engage in together; but when you come to the subject-matter of a totally different kind like the carrying on of a type of business, then, so long as the company can carry on that type of business, it seems to. me that prima facie at any rate it is impossible-to say that its substratum has gone. It is quite impossible upon the true construction of this memorandum of association to limit the paramount object of this company to the sole undertaking of generating and supplying electric energy at' Cuttack only, so as to lead to the result that as soon as the company's undertaking was sold to the Orissa Electricity Board as aforesaid, the substratum of the company had gone.

11. Therefore, the position must be looked at on the footing that the main and paramount object of the company is to carry on a business of an electric light and power company in all its branches. All that the Resolution No. 2, unanimously passed at the Extraordinary General Meeting, empowers the company to do is that the whole or any part of the sale proceeds may be utilised for the purpose of establishing, developing and maintaining any business which the company is, by its memorandum of association, authorised to carry on. Thus it is clear that the resolution does not go beyond the objects for which the company was established. In fact, the company's agreement with the Government of Orissa for sale was not entered upon until March 29, 1963 that is after the share-holders had approved of the sale to the State of Orissa by Resolution No. 1 in the Extraordinary General Meeting held on December 28, 1962. So the agreement was entered into with the consent of the share-holders. The share-holders by Resolution No. 2 also consented to the company utilising the sale proceeds for the purpose of any business which the company, by its memorandum of association, is authorised to carry on, If the company would have started a similar type of business immediately then it would have been quite impossible to say that the substratum of the company had gone. Supposing the company in immediate future starts a business of the same nature authorised by the memorandum of association it may be a good or a bad transaction for the company to enter into from a business point of view; but that is the last sort of thing that this Court is concerned with in winding up cases.

12. In this context the well known observations of Lord Cairns, L. J. in In re Suburban Hotel Co., (1887) 2 Ch A 737 may usefully be quoted in reference to a great deal of argument which has been pressed before this Court on behalf of the petitioner:]

'.........what I am prepared to hold is this.this Court, and the winding up process of the Court, cannot be used, and ought not to be used, as the means of evoking a judicial decision as to the probable success or non-success of a company as commercial speculation ......... it is not for thisCourt now to pronounce, and above all, not for this Court to pronounce on opinion-evidence, that this is likely to be an unprofitable speculation: and that, therefore, ......... the company should bewound up and put an end to.'

It is premature at this stage to say whether the contemplated venture of the company as expressed in Resolution No. 2 would be one which would be successful or would not be successful. Indeed, that is a business matter for he shareholders to decide whether or not they would engage in it. In the present case, the share-holders except the petitioner had consented to the company's contemplated venture to utilise the sale proceeds in any business which the company, by its memorandum of association, is authorised to carry on, and the resolution to that effect was unanimously carried at the Extraordinary General Meeting. Apart from writing some letters expressing his view against the said resolution, the petitioner did not care to attend the meeting nor voted against it.

13. It is clear from paragraph 33 of the affidavit dated April 11, 1963 by one of the Directors Mr. S. C. Farmer that the share-holders of the company are keen that the company should carry on business within the framework of its memorandum of association and articles of association. In the explanatory note to Resolution No. 2 it is made clear that as it is not proposed to put the company into liquidation after disposing of its undertaking and as there will be available surplus funds, it is suggested that the company should embark on other activities authorised by its memorandum of association, and for this purpose the necessary consent of the share-holders was obtained at the meeting.

14. It is not that the company is suffering from any financial disability. In fact there is no financial disability which would prevent the company embarking on other activities authorised by its memorandum of association. The company is perfectly solvent; it has at present a total capital amounting to 31.5 lacs as aforesaid. It is in position to embark on other activities authorised by its memorandum of association and to continue such business within the primary object defined in its memorandum of association.

15. The fact that there is no concrete scheme before the Court for dealing with the proceeds oi sale is no ground for making a winding up order. The common sense of the matter demands that existence or non-existence of a concrete scheme at the time the winding up petition comes before the Court should be regarded as a wholly irrelevant matter, otherwise it would be impossible for the Court to draw any safe line in any particular case. Where is the Court to draw the line? What period is to be allowed to elapse? What is to be regarded as satisfactory evidence of the intention of the company to go forward into some new venture? That Court clearly is not called on to adjudge the merits or demerits of any scheme, and this fact appears to me to make the consideration by the Court of the existence or non-existence of a particular scheme all the less fruitful. If this point were well taken, it would follow that a shareholder who desired a company to be wound up would be well-advised, as soon as the resolution for the sale of the company's business had been passed, immediately to put a petition on the file and bring the petition on in circumstances in which he could accurately allege that there was no scheme before the Court. It is exactly this line of reasoning which weighed with Wynn-Parry, J. in dismissing a petition for compulsory winding up in In Re Taldua Rubber Co. Ltd., (1946) 2 All ER 763.

16. Here, on facts the company's stand opposing the application for winding up in substance is this : Clause 3(1) of the memorandum of association is sufficiently wide. The nature of business. permitted by it is business of an electric light and power company in all its branches as mentioned in Sub-clause (5) quoted above. The area of such business is Empire of India (now Union of India) including Cuttack and its surrounding districts. In this case the company does not rely on the words 'and elsewhere' for its carrying on business. Thus the company is competent to carry on business of an electric light and power company including business of manufacturers of and dealers in things required for generation, distribution and supply of electricity; it is within this type that the company can embark on any business authorised by its memorandum of association.

17. Even on narrow construction of the memorandum of association as limiting the business of the company to Clause 3(1) as primary object and other subsequent sub-clauses of Clause 3 as merely ancillary, it is open to the company to embark on a business of electric light and power company in all its branches within the area authorised by Sub-clause (i) of Clause 3; it cannot be said that the substratum of the company is gone merely because it sold its undertaking at Cuttack.

18. In view of my finding that the substratum of the company has not disappeared by reason of the sale of its undertaking at Cuttack to Orissa Electricity Board, it is unnecessary to deal with the other points raised by the respective parties in course of hearing of this matter.

19. As regards alleged suspension of business for one whole year from February 1, 1962 as a ground for winding up, this ground was not taken in the petition presented on February 13, 1963. The petitioner cannot be allowed to go beyond the statements contained in his petition. The petitioner is confined strictly to the grounds expressly taken in the petition; he is not permitted to extend or enlarge upon the grounds taken in the petition.

That apart, even on merits this ground is wholly untenable. The company had to make over possession of the undertaking on February 1, 1962 as a result of the order of the Court in the writ petition O. J. C. No. 31 of 1962. On February 13, 1963 when the winding up petition was presented the company was still negotiating for sale of the undertaking to Orissa Electricity Board; the sale had not then yet been completed. In any event in view of the circumstances in which the company had to make over possession as aforesaid there is no question of the company having suspended its business voluntarily. In my opinion, apart from defect of not pleading this further ground which is fatal as aforesaid, there is no substance in this ground on merits.

20. The Company's Workers' Union who supports the winding up petition has itself no locus standi to present an application for winding up. The position of the workers of the company has been sufficiently made clear in the said agreement with the State of Orissa dated March 29, 1963. Under Clause 9 of the agreement, the company has undertaken to take suitable steps to provide for the transfer of the provident fund account of the employees of the company to be managed by the Orissa Electricity Board according to law. However, the question of the workers' alleged grievances, if any, are matters outside the scope of the winding up petition.

21. In this view of the case, the applicationfor winding up is dismissed. All interim orderspassed herein stand vacated. The petitioner is topay the costs of this application. Hearing feeRs. 100/-.


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