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A.M. Varkey Vs. J.R. Motishaw - Court Judgment

LegalCrystal Citation
CourtKerala High Court
Decided On
Case NumberC.P. No. 9 of 1961
Reported inAIR1964Ker114
ActsCompanies Act, 1956 - Sections 293(1), 398, 398(1), 398(2), 402, 433 and 484(1)
AppellantA.M. Varkey
RespondentJ.R. Motishaw
Appellant Advocate Mani J. Meenettur and; K.C. Abraham, Advs.; K.P. Abraham
Respondent Advocate P. Govindan Nair,; K.V.R. Shenoi,; P.K. Kurlan and;
company - oppression - sections 293 (1), 398, 398 (1), 398 (2), 402, 433 and 484 (1) of companies act, 1956 - ordinary resolution passed to sell sole undertaking of company - petition by shareholders under section 398 contending sale prejudicial to interest of company - sale of sole undertaking of company amounts to winding up for which special resolution required - company was trying to bypass provisions of winding up - company not allowed to sell undertaking except by passing special resolution. - - the company itself has entered appearance through its managing agents and has lent strong support to the petitioner. 5,00,000/- worth of debentures to be mortgaged on the estate'.but, before this, the managing director of the managing agents seems to have thought better of the.....orderp.t. raman nayar, j.1. this is an application under section 398 of the companies act, 1956 drought by one of the 145 members of a company called the udayagiri rubber company limited, with the written consent of 16 of the otter members for compliance with the requirements of section 399. a principal share-holder of the company, j. r. motisaw by name, has, on his application, been impleaded as a respondent under section 405. notice was issued to the central government as required by section 400, and the central government has made a representation confined to affirming or denying such averments of fact in the application as are within the knowledge of the registrar of companies and referring to an order made by it under section 409(2) on a complaint made by the managing agents of the.....

P.T. Raman Nayar, J.

1. This is an application under Section 398 of the Companies Act, 1956 Drought by one of the 145 members of a company called the Udayagiri Rubber company Limited, with the written consent of 16 of the otter members for compliance with the requirements of Section 399. A principal share-holder of the company, J. R. Motisaw by name, has, on his application, been impleaded as a respondent under Section 405. Notice was issued to the Central Government as required by Section 400, and the Central Government has made a representation confined to affirming or denying such averments of fact in the application as are within the knowledge of the Registrar of Companies and referring to an order made by It under Section 409(2) on a complaint made by the managing agents of the company, another company by the name of A. V. George and Company Limited regarding a threatened change in the Board of Directors. The company itself has entered appearance through its Managing Agents and has lent strong support to the petitioner.

2. The company was Incorporated In 1937 for the purpose of acquiring certain rubber estates and carrying on the business of planting and of other allied lndustries. A. V. George and Company Limited have been its managing agents from Its Inception. By 1952 the company had sold the rubber estates it had acquired; and with the proceeds it bought a tea estate called the Ashley Tea Estate for Rs. 7,50,000/-. It has since expended about Rs. 3,00,000/- on the estate on words of a capital nature so that its total investment on the estate is about Rs. 10,50,000/-. This estate is now its sole undertaking.

3. The dispute culminating in the present application has arisen out of the Insistence of the respondent who, as I have already said, is himself the holder of a large number of shares and, by reason of his influence over some other share-holders commands a majority of the votes, that the estate which is the sots undertaking of the company should be sold for a price of not less than Rs. 8,00,000/-. This is strongly opposed by the petitioner and by the managing agents (the petitioner, who holds 10 equity shares of the face value of Rs. 10/-each out of a total of 30,000 shares, is a first cousin -- once removed -- of the managing director of the managing agent company, and, it is said, is also an employee of a concern run by the managing agents) according to whom the sale of the sore undertaking of the company which is a profitable undertaking would be greatly pro-judicial to its interests.

4. As a result of what happened at the annum general meeting of the company held on 28-6-1961, ithas been estimated that the holders of about 14,900 out of the 30,000 shares of the company belong to what I might for convenience call the respondent's group, that the holders of about 4390 shares belong to what I might call the petitioner's group (although perhaps the name suggested by counsel for the respondent, namely, the managing agents' group might be nearer the mark) while the holders of the remaining shares, about 10,700 in number, stand uncommitted. Of the seven directors of the company, three including the respondent himself belong to the respondent's group, three including the managing director of the managing agents belong to the petitioner's group while the remaining director, it is said, is a habitual absentee who takes no interest in the affairs of me company, but has nevertheless leanings towards the respondent. (I am Ignoring changes that have occurred since the presentation of this application).

5. The sale of the estate seems to have been under consideration from some time before November 1960, and, to begin with, it would appear that neither the managing agents nor the Board of Directors was averse to it. Ext. R-4 of the 2nd November 1960, a letter addressed by the managing agents to the respondent would indicate that they had previously commissioned the respondent to find buyers for the estate, and by this letter they authorised the respondent to tell prospective buyers in an informal way that, 'the directors may consider accepting mortgage debentures in lieu of cash as part of the purchase consideration.'

The respondent obtained an offer, Ext. R-6 dated 27-1-1961, from one C. K. Isaac, a co-director of his In another planting company to buy the estate for Rs. 8,10,000/-, the offer being open up to the 27th March 1961. This offer which was addressed to the directors of the company was placed before the Board at a meeting held on the 30th January 1961. This meeting was attended by the respondent and another director of his group and by the three directors or me petitioners group including the managing director of the managing agents. What the Board decided to do with regard to the offer is revealed by the following extract from the minutes, Ext. P-8 :

'Mr. J. R. Motishaw placed before the Board the offer from Mr. C. K. Isaac, Oppottil House, Kottayam to purchase the Ashley Estate for Rs. 8,10,000/- This offer was considered and it was resolved to place the matter before the share-holders. Further resolved that an Extraordinary General Meeting be convened on 14th March 1961, to consider the above proposal'.

The resolution was unanimous and it is clear that the Board which included three directors of the petitioner's group (the respondent's group being in a minority of two) thought the offer worthy of consideration and also thought it worthwhile to convene an extraordinary general meeting to consider the offer. It is obvious that the Board was in favour of the proposal; and the pretence that the Board did not commit itself to one view or another, but only decided to place the proposal before a general meeting to ascertain the pishes of the members, seems to me idle. By Ext. R-7 dated 31-1-1961 the managing agents informed C. K. Isaac that his offer would be placed before the share-holders and their decision conveyed to him in due course.

Meanwhile they wanted to know how much cf the price would be paid in cash, and to that they got thereply, Ext R-8 dated 11-2-1961, to the effect that at feast Rs. 4,60,000/- would be paid in cash 'and the balance in the form of debentures from out of a series of Rs. 5,00,000/- worth of debentures to be mortgaged on the estate'. But, before this, the managing director of the managing agents seems to have thought better of the resolution of the Board of the 13th January to which he was a party, for, he addressed the letter, Ext. R-1 dated 2-2-1961, to the respondent telling him that the news of the Ashley sale had come as a great shock to the members of his family (Messrs. A. V. George and Company Limited, the managing agent of Company, it would appear, is a family concern) and that the sale of an esate by one planting group to another planting group in the small town of Kottayam had given rise to a great deal of gossip. Therefore he requested the respondent, as a personal favour, to reconsider the decision to sell the Ashley Estate and to give, him a year's time to buy his (the respondent's) shares or to have the estate acquired by some other company of his group. To this the respondent replied with Ext. P-4 dated 4-2-1961 saying that since the price he had been offered for his holdings was too low, he had no alternative but to get the estate sold at a reasonable price, that his intention was to invest the proceeds in a manufacturing industry, and that the managing agents could have the satisfaction of being the managing agents of a company which was attending to a manufacturing line instead of the planting industry.

A few days later, on the 13th February, the managing agents who must have received Ext. P-4 meanwhile, issued the notice Ext. P-l for the general meeting called for the 14th March. But the meeting could not be held on account of an injunction issued by the Sub-court, Konayam in a suit instituted by the petitioner and some members of the company on the score of the notice being defective. (The respondents' allegation is--and that seems to me in accord with the probabilities -- that the managing agents in order to thwart him by means fair or tour deliberately issued a defective notice and then set up some members on their side to institute the suit on the ground of the defect).

At the next board meeting which was held on the 27th March 1961, the respondent was in a minority, for, while all the three directors of the petitioner's group were present only two of the respondent's group Including the respondent himself were there. Despite the respondent's protest on the ground that the matter was not on the agenda, advantage was taken by the directors of the petitioner's group of this temporary superiority to reconsider the question of sale and to pass a resolution (three for, and two against to the effect that the sale of the estate would be detrimental to the interest of the company and that the managing agents be directed to return the advance received from C. K. Isaac and to inform him that his offer was rejected. The respondent's answer to this move was to requisition (with the aid of his supporters) an extraordinary general meeting for the purpose of considering, and, if thought fit, of passing a resolution that the company do sell the estate for a price of not less than Rs. 8,00,000/-, the other terms and conditions of the sale being such as the Board may in its discretion think proper. Conscious perhaps of the fact that the power of sale was vested in the Board and not in the general meeting, the respondent proposed a further resolution to the effect that two of the directorsof the petitioner's group be removed before the expiry ot their term and the vacancies so caused be not filed up.

It is the common case that had this extraordinary general meeting been convened, the respondents with his superior voting strength would have got both resolutions through and, thus assured of a mandate from the general body, to sell the estate, and of a majority on the Board, would have been able to put through the sale either to C. K. Isaac or to some other person of his choice at a price of not less than Rs. 8,00,000/-. The managing agents were, however, not at the end of their resources, for what they did was to issue the notice, Ext. P-3, calling for an extraordinary general meeting for the 29th May 1961 to consider the new situation but without appending to the notice the explanatory statement required by Section 173 of the Companies Act on the ground that the requisitionists had not given any explanatory statement to be annexed to the notice. They, however, thought it necessary to add that neither the majority of the directors nor the managing agents subscribed to the views of the requisitionists on the items of business notified.

On the 23rd May, scarcely a week before the date fixed for the meeting, the petitioner came with his present application, and, chiefly on the score that the notice Ext. P-3 was bad in law for failure to comply with Section 173 of the Companies Act, obtained an injunction from this Court against the holding of the meeting. (That, in fact, the petitioner who holds' only ten shares in the company is a mere name-lender who knows very little about all these matters is apparent from the fact that in paragraph 13 of his application he refers to a circular letter, Ext. P-2 dated 3-3-1961, appearing in his name and protesting against the proposed sale which was to be put before the extraordinary general meeting on the 14th March, as a circular letter issued by one of the share-holders of the company, and to the suit filed in his name in the Subordinate Judge's Court, Kottayam as a suit by some of the share-holders of the company). The result is that no meeting has been held and that me proposed sale is held up pending the disposal of this application.

6. In the course of the hearing it became apparent that it would be in We interests of the company it one or the ether of the two warring groups left it, and I called for proposals from both sides as to how best this could be secured. The petitioner, the managing director or the managing agents (on behalf of both the company and the managing agents) and the respondent have submitted proposals in the form of affidavits but, since each side insists on sending out the other, and that on its own terms, the proposals have furnished no meeting ground and it is therefore unnecessary to consider them.

7. As is perhaps to be expected much of the argument on both sides has been devoted to exposing me motives and machinations of the other. Fortunately it is not necessary for me to go into this question or to assess the relative virtues or vices of the parties. I am prepared to proceed on the assumption that both are actuated by what I might call personal motives and neither by the interests of the company. (The narration of the facts I have made above and in particular me letters, Exts. R-1 and P-4, should suffice to show this). Also, what is transparently so, that the petitioner is only a name-tender for the managing agents, what has come up clearly, and indeed what is not disputed, is that unlessthe court interferes, the respondent will be able to carry out his avowed purpose of selling the estate, cttecnng such changes in the Board of Directors as is necessary for the purpose, it this is prejudicial to the interests or the company the matter would fall both within Clause (a) and Clause (b) of Sub-section (1) of Section 398(2) or the Companies Act and 1 would be justified in exercising my powers under Section 402 irrespective of the attitude that may have, been taken in the past by the managing agents or the Board of Directors or of the attitude may may take in the future, for, it is as much my duty to protect the company against them as against the respondent.

8. What stares one in the face is that what the respondent wants to do is virtually to take the company into liquidation. The estate is its sole undertaking, and, although I repeatedly asked the question, counsel for the respondent was unable to tell me what the respondent proposed the company should do after having sold the undertaking. All that I have been able to gather is that, as stated in Ext. P-4, the respondent has some vague notion of converting the company from a planting company into a manufacturing company, something it would appear that its memorandum does not permit of, and would probably be beyond the scope of an alteration under Section 17 of the Companies Act. So far as t can see, all that can be done with the money realised by the sale of the estate would be to divide it between the shareholders after paying the debts of the company, in other words, wind up the company.

No doubt a company can go into liquidation if it wishes to. But, for this, a special resolution is necessary whether action is taken under Section 433(a) or under Section 484(1)(b). But the respondent wants to do this not by a special resolution, but by an ordinary resolution, and, in the circumstances of this case, I find little point in the argument that Section 293(1) permits ot a sales of the whole of the undertaking of a company with the consent of the company in general meeting in other words, on the strength of an ordinary resolution, what is not to be forgotten is what I have already sufficiently stressed, namely, that this is not a sale of an undertaking with a view to embarh on some other business, but a sale which, so far as one can now see, is tant-amount to winding up the company, it is also not to be forgotten that the respondent proposes to carry out his purpose, not merely by obtaining the consent of the company in general meeting for a sale, but also by gening it to effect a change in the management by securing a majority for his group on the Board, so that the Board in which the power resides, will put through the sale. It is precisely when the ordinary provisions of the ACT prove inadequate to safeguard the interests of a company, that resort is had to the powers of the court under Sections 397 and 398.

9. Prima facie it seems to me that to take a company into liquidation otherwise than in accordance with law, in this case without the special resolution required by law, must be prejudicial to the interests of the company, it is possible to argue that the sale of an undertaking of a going company might fetch a better price than, a sale in liquidation and that therefore it might be in the interests of the company to effect the sale first and then go into liquidation. Even so, and assuming what is denied by the respondent, that the proposed sale is a step towards liquidation it would be reasonable to insist that the sale must be on the strength of a special resolution so as to ensure that a winning up is not forced uponWe company by an ordinary resolution, in other words, by a simple minority.

10. It is remarkable that, until he filed his objections in the present application, no reason was given by the respondent or by anybody else as to why the company should sell its only undertaking apart from the reason that can be gathered from Ext. P-4, We respondent's reply to the entreaty of the managing director or the managing agents that the sale of the estate be reconsidered, namely, that the respondent wished to pull out his money on his own terms, his holdings being bought at his own price a price higher than what the managing agents were prepared to pay, and, since the snares of the company are being quoted in the market, obviously higher than the market price, since that price was not forthcoming he would see to it that the sole undertaking of the company was sold, its assets converted into cash, and its business stopped, mere is, no doubt, the vague suggestion that the sale proceeds should be invested in a 'manufacturing industry' and the assurance that the decision to sell the estate was taken only with this in view. But apart from its vagueness, the suggestion is, as we have seen, impracticable. Hence, an that could be done after the estate was sold would be to distribute the proceeds; and that it would appear was the sole object of, and the sole reason for, the proposed sale. The reason, for the first time stated in the respondent's objections, is that the estate is a poor, unprotitable estate, the continued working of which must necessarily involve the Company in loss, This seems to be an after-thought and a is not surprising that the material that has been placed before the lends little support to this view.

11. It will be recalled that the estate was bought in 1952 for Rs. 7,50,000/- and that a further sum of Rs. 3,00,000/- has been invested in it by the company, partly in new planting over nearly 100 acres. it is notorious that the prices of tea estates have been going up from day to day, and there would appear to be no reason why this company should sell the estate at a loss or nearly Rs. 2 1/2 lakhs. Prima facie it would appear that the proposal is for a sale at a price much below the real value of the estate.

12. As I have said, the snares of the company are quoted in the market and the price at which its snares sen in the market must be some indication of the soundness or its undertaking. In 1958, the ten rupees equity snares of the company were quoted in the Madras Stock txchange at prices ranging between Rs. 10/- and Rs. 11-75 per share. The price has been steadily increasing from year to year, and this year the nignest price quoted is Rs. 21.25, while the lowest is Rs. 17/-. This does not indicate that the sole undertaking of the company is an unprofitable concern.

13. in 1950 the company made a profit of Rs. 16,018/-and declared a dividend of 5 per cent. In 1951 and 1952 no dividends were declared al-though there was 3 profit of Rs. 30,577/- in the former year and of Rs. 15,429 in the latter, in 1953 a dividend or 10% was declared on a profit of Rs. 56,047/- and in 1954 a dividend of 25 per cent was declared on a peak profit of Rs. 1,42,870/-. In 1955 and 1956 the profits were much lower, Rs. 15,605 and Rs. 37,511/- and the company declared a dividend of 6% and 7 1/2 per cent respectively. In 1957 there was a loss of Rs. 16,948/-. Nevertheless a dividend of 6% was declared, in 1958 there was a profit of Rs. 25,495/-; on that a dividend of 7 1/2% was declared, in 1959 there was a pro-fit of Rs. 61,035/- on which a taxable dividend of 15% was declared; and, in 1960 which, as the petitioner ana the managing agents have explained, was a year of unusual expenditure there was a profit of RS. 12,829/- without making provision for taxes. On this the Board recommended a taxable dividend of 10% but the respondent, as part of his tactics in his fight for the sale of the estate, got the general meeting held on 28-6-1961 to reduce this to 1% taking advantage of his voting strength although he himself had, as a member of the Board, recommended a dividend of 10%. The profits made by the company and the dividends declared by it furnish no ground for thinking tnat its undertaking is a losing concern.

14. Ext. P-11, a report by a visiting agent (a Mr. Kershaw, according to both sides a very experienced Planter) of an inspection made by him on the 6th October 1960 gives the gross proauce of the estate in terms or made tea from 1952 onwards. In 1952 the total produce was 1,96,335 lbs. the yield per acre being 473 lbs. mere was a progressive increase thereafter trom year to year till in 1958 production reached a peak of 3,03,920 lbs., the yield per acre being 759 lbs. Sines then there has been a tall. In 1959 the gross produce was only 2,91,700 lbs. In 1960 there was a further fall and the produce was only 2,75,000 lbs. The indications are, that in 1961 there will be a further fall, for, up to the end of July the produce was only 54,/US kilograms as against 76,502 kilograms for the corresponding period or the previous year. (The area covered by mature plants has remained throughout in the neighbourhood of 400 acres -- it was 414 acres in 1952 and 402 acres in 1959; but when the new planting over about 100 acres begins to yield there must be an increase and a proportionate increase in the production).

It would thus appear that mere has been a declinefrom 1958, But that, it is clear from Ext. P-11, is largelydue to inadequate manuring and perhaps also to adverseseasonal conditions. Ext. P-11 gives excessive rainfallas one of the likely reasons for the comparatively puorcrop in 1960; the rainfall in 19bl has been much higher.the progressive increase in production up to 1958 eventhough followed by a decline since then, lends little support to the respondent's case that the estate is a worthless estate, which had best be sold, even if it be at aloss.

15. The report is on the whole reassuring rather than discouraging and it shows that the estate is a good estate and that if its yield in terms of quality (as retrected by the prices fetched) and quantity of made tea in recent years is disappointing, in tact below the general average, that is only because manuring has been inadequate and the machinery in the factory, old and detective. The new planting, it says, is impressive and the estate favourably situated; and given adequate manuring and good tea-making machinery it is capable or high yields with good profits. True this will mean money; in particular the renovation of the factory will require considerable capital outlay. But there is no case that this is beyond the resources of the company, and the report shows that the outlay will be amply rewarded by higher yields and profits.

16. How far the respondent is capable of twisting facts to suit his purpose is apparent from the following statement in his objections:

'It is noteworthy that in the report of the visiting Agent, Mr. K. L. Kershaw dated the 14th April 1960 (Sic. 14th October) it is mentioned that the running of the estate is 'a waste of fertiliser and finance'.

This gives a completely false, and I might add a deliberately false, impression of the purport of the report, by the not uncommon device of tearing a phrase out of its context and setting it in an entirely different context. What Mr. Kershaw actually said was that the application of fertiliser should be at the rate of not less than three ounces for each bush per year, whereas the actual application in the estate was only about a third of this. He went on to observe:

'In my view the sole reason for the lack or improvement in the annual crop target since 19b3 is this lack of proper and adequate manuring. I consider that we application of one ounce of manure to the tea bush as occurred in 1959 a waste of fertiliser and of finances. Hence once again I stress the necessity for the adoption of a proper annual manuring programme . . . .' Certainly Mr. Kershaw did not say that 'the running of the estate was a waste of fertiliser and finance'.

17. Far from there being anything to snow that the running of the estate must involve the company in loss, the evidence placed before me shows that, with proper management, it should result in considerable prom. Unless the respondent and his supporters are stopped by appropriate orders made by the court under Section 398 of the Companies' Act, it is obvious that they will effect a change in the management of the company and will see to it that, for no legitimate reasons the sole undertaking of the company is sold at a price which, on the face of it, seems inadequate, and will thus virtually take the company into liquidation. This I should think would be highly detrimental to the interests of the company. No doubt, as I have already remarked, it should be open to a company to go into liquidation if it so chooses, tot under the law, that can be only by a special resolution and not by an ordinary resolution.

18. I think I can best safeguard the interests of the company by directing that for a specified period--five years I think would be reasonable-- the estate which is the only undertaking of the company should not be sold except on the strength of a special resolution. At the same time I think it would be fair to allow the respondent and others, who like him, think that the estate should be sold, an opportunity of withdrawing their money on the basis of what has been called the break-up value of the company, in case a majority of the members wish the estate to be sold. There is no compulsion on them, and this is not a case where the majority are being asked to sell their shares to the minority. The choice is entirely theirs, but I think It would be clearly to the advantage of the company if those who are intent on selling its sole undertaking for no other object than converting its assets into money, leave it on getting what would have been their share if the assets were so converted and the liabilities met.

19. For these reasons I make the following order;--For a period of five years from this day the estate, which is the sole undertaking of the company, will not be sold unless the company by special resolution resoives that it be sold. This only adds to the restriction imposed on the powers of the Board by Section 293(1)(a) of the Companies Act by requiring that the consent of the company in general meeting shall be by special resolution; It does not mean that by a special resolution the members can compel the Board to effect a sale. When any meeting of the company is called for the purpose under Section 169 of the Act, the provisions of Section 188(1)(b) shall apply to any statement which the re-quisitionists might wish to place before the general meeting.

If any such special resolution, moved within six months from this date, secures the number of votes required for an ordinary resolution then, on request made within a fortnight thereof by any member of the company, the managing agents will, as agreed to by them and by the company, arrange for the purchase of the shares hem by that member at a price of Rs. 10/- per preference snare and Rs. 24.85 per equity share within a period of three months thereafter. (Both sides are agreed that only the face value need be paid for preference snares which are being quoted In the market at or above par. The value of equity shares has been worked out on the basis of a price of Rs. 8,10,000/- for the estate -- the statement dated 4-9-1961 filed by the respondent gives the details), it default is made, it will be open to the member concerned to come to court, and ask for appropriate directions which might include the rescission of the direction that a sale shall De effected only on the strength of a special resolution.

The company, or any member thereof, will be at liberty to seek further directions of this court with regard to any matter arising out of this petition.

I think I have said enough to justify an order that the parties should bear their costs and the further order that the managing agents will themselves bear the costs Incurred by them in their professed appearance on behalf or the company and that no expense of any kind incurred for the purpose of this petition will be debited to the company. Ordered accordingly.

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