1. This is an appeal against an order whereby Ray, J. dismissed the application made by two shareholders of a company in liquidation, for setting aside of a sale under Order 21, Rule 90 of the Code of Civil Procedure. The facts are briefly as follows: Bhagawandas Kalla, Gobordhandas Kalla and Bulakidas Kalla were the owners of a piece of land measuring 5.87 acres with structures at Lillooah (hereinafter referred to as the 'said Lillooah property'). In January, 1957 the Kalla properties and Industrial Corporation Ltd. were incorporated under the Indian Companies Act (hereinafter referred to as the 'said Act'). It is stated that one of the primary objects of the said company was to take over the said 'Lillooah Property' and premises No. 143/1/1, Cotton Street in Calcutta. The company had a nominal capital of rupees one crore divided into 5000 shares of 5 per cent tax free cumulative preference shares of Rs. 100 each and 9,50,000 equity shares of Rs. 10 each. The paid up capital was Rs. 28,01,010. Shyamlal Purohit is a registered holder of 47,725 ordinary shares of Rs. 10 each, 1050 preference shares of Rs. 100 each, and 12,500 deferred shares of Rs. 5 each. Kamal Kamini Devi is a registered holder of 400 equity shares of Rs. 10 each, since its incorporation. By a conveyance dated 31st October,1950 the said company purchased the said 'Lillooah property' for a consideration of Rs. 15,00,000 from the Kallas. We are concerned in this case with the 'Lillooah property.' On or about the 12th June1951 the said company mortgaged the said 'Lillooah property' and the Cotton Street property to Jagannath Roy and Balaram Roy of Bhagyakul for Rs. 3,25,000. In the year 1952 the Bhagyakul Roys filed a mortgage suit being suit No. 4606 of1952 (Jagannath Roy and Anr. v. Kalla Properties and Industrial Corporation and Ors.) for enforcement of their mortgage. Thereafter, certain leases and subleases were granted of the said mortgage property, but I do not think they are very relevant for our purpose. On the 11th June, 1956 a mortgage decree was passed in the said mortgage suit, in favour of Roys of Bhagyakul by consent of parties, entitling the mortgagees to bring the mortgaged properties to sale without obtaining any further decree. In August1962 an application was made by the said Kamal Kamini Devi, supported by the said Shyamlal Purohit, for the winding up of the said company by Court and on 9th August 1962 the Official Liquidator was appointed as the provisional liquidator and was directed to take possession of the said company forthwith. On the 15th January, 1963 an order was made for the winding up of the said company and the official liquidator was appointed liquidator. By the said order the Court inter alia directed the official liquidator to frame a scheme of the partition of the properties of the said company after valuation, for the purpose of distribution amongst the shareholders after payment of the mortgage claim and to go into the account of the company, particularly the drawings of the shareholders and directors from time to time and take into consideration the liabilities of the company. On or about the 13th August, 1966 the mortgagees brought the 'Lillooah property' to sale in two lots, which were purchased by Messrs. Bengal Properties Ltd. On or about the 8th September, 1966, the said Shyamlal Purohit and Kamal Kamini Devi caused a letter to be written to the official liquidator requesting him to make an application for setting aside the sale. The official liquidator by his letter dated the 9th September, 1966 stated as follows:--
'As Sm. Kamal Kaminl Debi is one of the petitioning creditors she has as much interest in setting aside the sale of the property as the Official Liquidator. Your client is, therefore, asked to move the application for setting aside the sale if so advised.'
On or about the 9th September, 1966 the said Shyamlal Purohit and Kamal Kaminl Devi (hereinafter referred to as the 'said petitioners') made an application to this Court for setting aside the sale held on 13th August 1966 by the Registrar of this Court in the said mortgage suit of the said 'Lillooah property', under Order 21, Rule 90 of the Code of Civil Procedure, on the ground that there was material irregularity and fraud in publishing and conducting the sale. This application was resisted, both by the mortgagees as well as by the purchaser. This application came up for hearing before Ray, J. and by his order dated 25th November 1966 the application was dismissed with costs, principally on the ground that the petitioners had no locus standi to maintain the application. It is against this order that this appeal is directed.
2. The provisions of Order 21, Rule 90 of the Code of Civil Procedure are as follows:--
'Application to set aside the sale on the ground of irregularity or fraud.-- (1) Where any immoveable property has been sold in execution of a decree, thedecree-holder or any person entitled to share in a rateable distribution of assets, or whose interests are affected by the sale, may apply to the Court to set aside the sale on the ground of a material irregularity or fraud in publishing or conducting it: Provided that no sale shall be set aside on the ground of irregularity or fraud unless upon the facts proved the Court is satisfied that the applicant has sustained substantial injury by reason of such irregularity or fraud.'
3. It has been argued before us, that the petitioners, the appellants before us are persons 'whose interests are affected by the sale' and as such they have locus standi to make the application to set aside the same. Therefore, the point is a short one, but as will presently appear, is a question of first impression and the decided cases throw light upon it, but do not definitely solve the problem. In other words, it will be found that none of the decided cases have dealt with the specific question as to whether any shareholder of a company in the process of compulsory winding up has a locus standi to make an application under Order 21, Rule 90 of the Code of Civil Procedure for setting aside the sale of a property belonging to the company. This is precisely the point which will have to be answered in this case.
4. Before deciding the point and the principles involved in it, it will be necessary to consider the cases cited and the principles laid down in such decisions.
5. Before I come to the cases, I should like to deal with certain sections of tha Indian Companies Act, 1956. The subject of winding up of registered companies is dealt with in Part VII of the said Act, In Sections 425 to 560. Chapter I deals with the modes of winding up, which are three in number, namely winding up of a company by the Court or voluntary, or subject to the supervision of the Court. In the present case we are concerned with a winding up by the Court This subject is dealt with In Chapter II, Sections 433 to 483. Chapter III deals with voluntary winding up. We are not concerned with voluntary windbag up in this case except that a reference has been made to Section 511 in passing. The sections which are relevant for us to consider will be Sections 457 and 475. The relevant part of Section 457 runs as follows:--
'Powers of liquidator.-- (1) The liquidator in a winding up by the Court shall have power with the sanction of the Court .....
(e) to do all such other things as may be necessary for winding up the affairs of the company and distributing its assets.
... ... ... ... ... ... ... ... ... ... ... ... (3) The exercise of the liquidator in a winding up by the Court of the powers conferred by this section shall be sub-ject to the control of the Court; and any creditor or contributory may apply to the Court with respect to the exercise or proposed exercise of any of the powers conferred by this section.''
Section 475 runs as follows:--
'Adjustment of rights of contributoriess The Court shall adjust the rights of the contributories among themselves, and distribute any surplus among the. persons entitled thereto.'
Section 511 which relates to voluntary winding up is in the following terms:---
'Distribution of property of company--Subject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding up, be applied in satisfaction to its liabilities pari passu and, subject to such application, shall, unless the Articles otherwise provide, be distributed among the members according to their rights and interests in the company,'
6. While Section 511 specifically states that upon a winding up the assets shall first be applied in satisfaction of liabilities and thereafter distributed amongst the members. In the case of compulsory winding up by Court the wordings of Section 457(i)(e) as to the distribution of assets amongst the members found are not so explicit But read with Section 475. we find that the result is not different. In the case of a compulsory winding up by Court, the debts and liabilities will have to be paid first by the liquidator, and then the Court shall adjust the rights of the contributories between themselves, and distribute the surplus amongst the persons entitled thereto. This is of course subject to the terms contained in the Articles of Association. The duties and powers of the liquidator In this respect have thus been stated in Palmer's Company Law, 20th Edition page 709:--
'Duties and powers of the liquidator.
The liquidator's principal duties-speaking generally--are to take possession of and protect the assets, to make out the requisite lists of contributories and of creditors, to have disputed cases adjudicated upon, to release the assets subject to the control of the committee of inspection (if any) in certain matters, and to apply the proceeds in payment of the company's debts and liabilities, in due course of administration, and, having done that, to divide the surplus amongst the contributories and to adjust their rights.'
7. The case most relied upon by the respondents is a Bench decision of this Court, Basanta Kumar Roy v. Charu Chandra Pal, : AIR1958Cal543 . The facts hi that case were asfollows: The respondent Charu Chandra Pal obtained a money decree against the principal debtor Burdwan Fisheries and Industries Ltd. and the guarantor, the Managing Director of the principal debtor company. The decree was put into execution in Money Execution Case No. 18 of 1955 and on 21st May, 1956 it was sold by auction to the highest bidder, namely the decree-holder who had been permitted to bid at the sale. On 21st June, 1956 the appellant Basanta Kumar Roy, describing himself as the principal judgment-debtor of the company, filed an application under Order 21, Rule 90 for setting aside the sale. The ground was that the decree-holder had purchased the properties 'secretly and fraudulently and in an illegal and irregular way by causing a show of auction sale.' The decree-holder auction-purchaser contested the application. The learned judges referred and relied upon the English cases, Macaura v. Northern Assurance Co., (1925) AC 619 and Commissioner of Inland Revenue v. Forest, (1924) 8 Tax Cas 704 (710) as well as two Supreme Court decisions--Sholapur Mills case, : 1SCR869 and Bacha F. Gazedar v. Commissioner of Income-tax, Bombay, : 27ITR1(SC) . Reference was also made to a Madras case, Vaidyanatha v. Bank of India Ltd., : AIR1955Mad486 . The Court held as follows:--
'We are of opinion that there Is no substance in the contention. However, wide may be the meaning of the expression any person whose interests are affected by the sale' such person must have an existing or present interest, which is affected by the sale of the property. The existing or the present interest must be in the property which is sold. A corporator is not the corporation, which is a distinct legal person. In the assets of a corporation. Its share-holders have no legal or equitable interest.
There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest In the property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder Is that on buying shares an Investor becomes entitled to participate in the profits of the company in which he holds the shares. If and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole as Lord Anderson puts it.
The legal position of a shareholder being hereinbefore Indicated the appellanthad no interest in the auction-sold property, which was adversely affected by the sale.'
8. It was held accordingly that the application for setting aside the sale was not maintainable and the appeal was dismissed.
9. Since great reliance has been placed before us on this Division Bench judgment. I shall briefly notice the authorities mentioned therein. In the House of Lords' decision 1925 AC 619 (Supra) the facts were as follows-- The owner of a timber estate sold the whole of the timber thereon to a timber company in consideration of fully paid-up shares in the company. He was the sole shareholder in the company and also a creditor of the company to a large extent. Subsequently, by policies effected in his own name with several insurance companies, he insured this timber against the risk of fire. The greater part of the timber having been destroyed by fire, he sued the insurance company to recover the loss. The point was as to whether he had any 'insurable interest' in the goods Insured. Lord Buckmaster said as follows:--
'Turning now to his position as shareholder, this must be independent of the extent of his share interest. If he were entitled to insure holding all the shares in the company, the shareholders would be equally entitled, if the shares were in separate hands. Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to share in the profits while it continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.'
10. It was held that he had no insurable interest. The rights of a shareholder in the assets of a company were also dealt with in the Supreme Court decision Charanjit Lal Chowdhury v. Union of India, : 1SCR869 . This case is familiarly known as the 'Sholapur Mills case.' It was held that the 'property' of the shareholder, besides and apart from his right to elect directors, pass resolutions, giving directions to the directors and to present a winding up petition, consists of his right to participate in the dividends declared on the profits made in the working of the company and, in case of winding up to participate in the surplus that may be left after meeting the wind-Ing up expenses and paying the creditors. This right was further explained in .the Supreme Court decision of : 27ITR1(SC) . The Supreme Court said as follows:
'It was argued by Mr. Kolah on the strength of an observation made by Lord Anderson in (1924) 8 Tax Cas 704 at p. 710, that an investor buys in the firstplace a share of the assets of the industrial concern proportionate to the number of shares he has purchased and also buys the right to participate in any profits which the company may make in the future. That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. The use of the words 'assets' in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company.
A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The Interest of a shareholder 'vis-a-vis 'the company, was explained in the 'Sholapur Mills case', : 1SCR869 . That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association, to declare that dividends should be distributed out of the profits of the company to the shareholders, but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company.
The company is a Juristic person and Is distinct from the shareholders. It is the company which owns the property and not the shareholders.'
Ghulam Hasan, J. pointed out that although Lord Anderson in (1924) 8 Tax Cas 704, had stated that a shareholder buys in the first place a 'share in the assets of the company', proportionate to the number of the shares purchased, this did not mean that he had acquired an interest in any property of the company,
11. I will now refer to some cases which do not relate to companies or their liquidation but deal with the general question as to what 'interest' means in Order 21, Rule 90 of the Civil Procedure Code.
12. The first Is a Bench decision of this Court -- Dhirendra Nath Roy v. Kamini Kumar Pal, . The question was whether a creditor decree-holder attaching the property of the judgment-debtor has an interest as would entitle him to apply under Order 21, Rule 90 of the Code of Civil Procedure to set aside a sale held In execution of a decree obtained by another creditor. Suhrawardi, J. held as follows:--
'It has also been urged with great deal of emphasis that the word 'interest' in Rule 90 must be interest in property; that is interest which must be some sort of proprietary or possessory title. I am not prepared to restrict the meaning of a plain word so as to exclude all other interest such as pecuniary interest. In my opinion the present petitioner is a person whose right to the property, however insignificant it might be, is affected by the sale. In this view of the law I am of opinion that the Rule ought to succeed.'
13. It will be observed that although the learned Judge says that it need not be a 'proprietary' title, still he holds that the right involves a right in property. It was a right to realise his decretal amount by sale of the property attached. Reference may also be made to a single Bench decision of this Court Bulanda Bashini Dassi v. Prangovinda Dhar, 40 Cal WN 1334 = (AIR 1936 Cal 547). Speaking about a decree-holder who had attached a property Mitter, J. said as follows:--
'In my judgment, a decree-holder acquires a pecuniary interest in the -property, the sale of which at the Instance of any decree-holder he challenges, as soon as he has done a formal act, an act in Court which indicates unequivocally that he wants that property for the satisfaction of his decree. The act must be specifically in relation to that particular property, and must not remotely but proximately or immediately connect his intention to realise his dues out of that property.'
The next Calcutta case cited before us is a Bench decision of this Court--Hiralal Saha v. Akshoy Kumar Saha, : AIR1933Cal815 . The facts in that case were as follows: There was an auction sale held in execution of a decree obtained by the petitioner and the property put up to sale was purchased by one Akshoy Kumar Saha, the opposite party, for Rs. 3005. The earnest money was deposited by Akshoy Kumar but he failed to pay the balance, with the result that the property was resold and purchased by the petitioner, the decree-holder, for Rs. 1,510 and Akshoy was directed to put in the deficiency viz. Rs. 1,495. Thereupon, Akshoy filed an application under Order 21, Rule 90, Civil P. C. for setting aside the sale. It was held that Akshoy had an 'interest' sufficient to maintain an application under Order 21, Rule 90. Mitter, J. (sic) said as follows:--
'In the present case the petitioner Akshoy was defaulting auction-purchaser and as such he was under the provisions of Order 21. Rule 71 of the Code liable to make up any deficiency of any pricewhich might happen on a resale of the property. He had, therefore, a contingent liability even before the sale; and as the term 'interest' under Order 21, Rule 90 has been held to include all kinds of interest it is, in my opinion, wide enough to include a contingent liability also.'
It will be observed that Akshoy had already incurred liability and was directed to pay the deficiency when he made an application. With great respect I do not see how it can properly be said that his interest was a contingent one.
14. I will now deal with some cases decided by other High Courts. In a Division Bench judgment of the Madras High Court. : AIR1955Mad486 it was held that where the property of a company was sold in execution, a shareholder of the company alleging that the property of the company had been sold at an unconscionably low price, as a result of collusion by the auction purchaser and the Managing Director of the Company had no locus standi to apply under Order 21 Rule 90, to set aside the execution sale. It was pointed out that the legal ownership of the properties vested in the company and only the company. The company could act only through its accredited representatives -- accredited in the manner prescribed by its constitution. A shareholder is no doubt interested in the properties of the company in which he holds shares; if the property is not properly looked after and administered the shareholder would naturally suffer in his pocket, but this does not mean that every shareholder who apprehends that the property of the company is being mismanaged or is being fraudulently disposed of, is entitled to interfere and come to Court and apply for setting aside the sale under Order 21, Rule 90. In Official Receiver of Ramnad v. Veerappa Chappra, AIR 1943 Mad 199 it was held that a person applying under Order 21, Rule 90 must possess an interest which can be said to have been affected at the date of the sale and not by reason of any subsequent event or act. In the Full Bench decision of Ayyappa Naicker v. Kasiperumal Nayakar, AIR 1939 Mad 250 (FB) it was held that Order 21, Rule 90 intended to confer the right to apply on any one who is directly and immediately affected by the sale. The same view was taken in another Bench decision -- Murugoppa Chettiar v. Kannammai Achi, : AIR1959Mad76 where it was held that the interests which are alleged to be affected by the sale within the meaning of Order 21, Rule 90, Civil P. C. should be interests which are directly, Immediately and likely to be affected and not interests which may hypothetically and remotely be affected by the sale.
15. The result of these decisions may be summarised as follows:--
(1) In the case of a public limited company registered under the said Act the company is a separate entity from its shareholders. It is the company which is the owner of its assets, including immoveable properties, and not the shareholders.
(2) The shareholder in such a company has a right to share in the profits, by way. of receipt of dividends. He has a right, in an appropriate case, to apply for the winding up of the company and to take part in the distribution of the surplus assets after payment of the debts and liabilities, which must of course be done in accordance with the Articles of Association and the provisions of the said Act.
(3) As long as the company continues to exist, that is to say before its dissolution, no shareholders can be said to have any interest in the properties and assets of the company, either legal or equitable. Shareholders in a company are certainly interested in the properties and assets of the company in the sense that a wastage or frittering away of the assets might affect their rights to enjoy the profits and eventually the distribution of surplus assets in a winding up. This, however, is too remote an interest and cannot be included within the definition of 'interest', within the meaning of Order 21, Rule 90 of the Civil P. C.
(4) The words 'or whose Interests are affected by the sale', in Order 21, Rule 90, are no longer confined to an interest in immoveable property or to proprietary or possessory rights. The word 'interest' must be given a wide meaning, and may include a contingent interest, but the right may be exercised by one who is directly and immediately affected by the sale of an immoveable property. Rights which are likely to be affected or interest which may hypothetically or remotely be affected cannot be considered as coming within the four corners of Order 21, Rule 90.
16. Let us apply these principles to the facts of the present case. The 'Lillooah property' belongs to the company. The company continues to exist even after the order of winding up, until there has been an order of dissolution. Only the company is its owner and not the petitioning shareholders. These shareholders have no right in the property, either legal or equitable. Now that the company is being wound up, their only right is to participate in the surplus assets after the payment of debts and liabilities. Until the debts and liabilities are ascertained and paid, it cannot be said as to what the surplus assets are, or whether there will be any surplus at all. Let us look at some of the facts involved in this case. I have already mentioned that the company was the owner of two properties, namely the Lillooah property andthe Cotton Street property. The Lillooah property, according to the petitioners themselves (see paragraph 6 of the petition) had been valued by Mr. Parkes at Rs. 13.25 lakhs. It was actually purchase ed for Rs. 15 lakhs. The Cotton Street property, although mortgaged to the Roys of Bhagyakul was withdrawn from sale as the bids did not reach the reserved price. It is stated in paragraph 28 (f) (i) and (ii) of the petition that in the balance-sheet for 1959 the Lillooah property was valued at Rs. 17,19.586.26 p. and the Cotton Street property was valued at Rs. 10,18,130.16 p. As regards the mortgage in favour of the Roys of Bhagyakul, the principal debt was Rs. 3,50,000 in respect of the Cotton Street property and Rupees 3,25,000 in respect of the Lillooah property, aggregating to Rs. 6,75,000. By the mortgage decree which was passed by consent, the amount payable was assessed at Rs. 9,09,514/2/3 with interest at 4 per cent from 1st June 1956. The sale which has been impugned was of the two plots of Lillooah property for a consideration of Rs. 9,45,500. At the moment we do not also know what the other liabilities of the company are. At this moment, therefore, it is impossible to state with certainty as to what the surplus assets will be after payment of the debts and liabilities. At present therefore. It can never be said that the Lillooah property or any part of it will form a part of the surplus. How then can it be said that the petitioners, the appellants before us are interested directly and immediately In the said property and its sale? It is argued that if they are successful in setting aside the sale, and if it is resold at a higher price, then there will be more money available as surplus assets which will be distributed amongst the shareholders and the appellants will get the benefit thereof. In my opinion, this argument takes into consideration a right which is too remote. At the time of the sale, it was the company which was the owner of the Lillooah property. The shareholders have no present interest in the property, nor can it be said that they have an immediate or direct interest in the property, since it is not known whether any part thereof will form part of the surplus assets. It has been argued that the order dated 15th June 1963, which directs the official liquidator to frame a scheme of partition creates some kind of proprietary right, and creates an interest' sufficient to bring the matter within Order 21. Rule 90. The order dated 15th June 1963 does not create any new legal right. It directs the official liquidator to frame a scheme for payment of the debts and liabilities of the company and obviously in a winding up there cannot be a partition of properties between the shareholders, that is to say partitionof the surplus assets until debts and liabilities are ascertained and paid In any event, the Lillooah property could never be the subject matter of a 'partition' by metes and bounds until it fell into the surplus, after meeting all the debts and liabilities of the company. We do not know whether, even the Cotton Street properties would be saved and form any part of the surplus. At the present moment, therefore, the appellants have only a right to participate in the surplus and they have no right in the property sold, either of a legal or equitable nature.
17. It is not that the appellants have no right whatsoever. I have already mentioned that in a compulsory winding up, it is the duty of the liquidator to do all things necessary for winding up the affairs of the company and distribute its assets, and this is subject to the control of the Court. Under Section 457(3), any contributory may apply to the Court to direct the liquidator to take any steps which will be beneficial to the winding up. For the reasons aforesaid, I am of the opinion that the appellants have no right to make an application under Order 21, Rule 90, to set aside the sale of the 'Lillooah property', because it cannot be said that their 'interest are affected by the sale'. The learned Judge in the Court below was right in holding that the appellants had no locus standi.
18. The appeal accordingly fails and Is dismissed, but no order is made as to costs.
19. Certified for two Counsel as against their own clients.
Arun K. Mukherjea, J.