1998 PLP 1109 (CLC)

The present petition has been filed under section 290 of the Companies Ordinance, 1984, with following prayers:‑‑‑ (i) to order the respondents 2 to 6 and members of their groups or any of them or the respondent No. l company to purchase the shares of the petitioners at their real value as indicated in paragraph 24 above; (ii) to direct that necessary alterations/additions, if any, be made in the Memorandum and Articles of the respondent No. l company; (iii) to declare that the purported transfer of shares in favour of respondent No.7 is illegal and of no effect and to restrain the respondent No.7 from participating in affairs of the respondent No. l company as its shareholders; (iv) to restrain the respondents from changing the present share structure of the company by floating additional shares among the shareholders or outsiders or by inducting outsiders as members/shareholders of the company; (v) to compel the respondent No.2 and/or respondents 3 to 6 or ally of them to repay or restore the money or property or any part thereof with surcharge at such rate as the Court thinks just or to contribute such sum to the assets of company by way of compensation of misapplication retainer, misfeasance or breach of trust as the Court thinks just under section 412 read with section 294 of the Companies Ordinance, 1984; (vi) to pass any other order as the Court thinks fit with view to bringing to an end the matters complained of in this petition;" (vii) to award costs of the petition." The petition was originally filed by petitioners Nos. l to 7 but in the year 1994 an application, being Civil Miscellaneous Application No. 162 of 1994, was filed on behalf of respondents Nos.3(i) to 3(v) to be transposed as petitioners Nos.8(i) to 8(v), which was granted on 22‑2‑1994, and accordingly, amended title page was filed on 27‑2‑1994. The brief facts, as per petition are that respondent No.l is a private limited company and petitioners and respondents are the directors holding certain percentage of share which are given in para. 3 of the petition and admitted by both the parties. The petitioners and the respondents have formed into two groups and the petitioners are the minority shareholders holding an aggregate of 31.60 per cent shares in the respondent company while the respondents are the majority shareholders holding 63.84 per cent shares in the company. This percentage was changed to 40.64 per cent and 54.8 per cent respectively after the respondent No.3 was transposed as petitioner No.8. One of the shareholders, Muhammad Ali Zindani, holding 4.56 per cent shares (3420 shares) has not associated himself with the proceedings. The respondent No.l, which is a private limited company, came into existence in the year 1975 as an off shoot of one Golden Industries Limited which was set up by the present respondent No.2 and one Abbas Gabaji in the year 1962. In 1974 a winding up petition was filed by Abbas Gabaji as a result whereof his shares were purchased by the present petitioners. The allegations in the petition are that the respondent No.l company was/is being run by the majority shareholders/respondents and the General Body Meetings which were being called were mere eye‑wash and just to keep attendance of the Directors. First ever election of the Directors took place at the Annual General Meeting of the Company called on 27‑12‑1987 but even then section 178 of the Companies Act and Article 51(a) of the Memorandum and Articles of Association of the Company were not complied with as the meeting of the Directors for fixing the numbers of Directors was called on 30‑12‑1987 while the Directors were elected in General Body Meeting held on 19‑1‑1988. Further, at the Annual General Meeting held on 8‑12‑1988, the annual accounts of the Company ending on 31‑12‑1987 were not presented and section 233 of the Companies Ordinance, 1984 and Article 81 of the Company's Constitution were not complied with. Similarly, audited accounts ending on 31‑12‑1988 were not prepared and not placed before the Annual General Meeting held on 30‑7‑1989. The respondents Nos.2 and 3 have caused false accounts to be maintained. The petitioners, who are the minority members were not heard in the general management and affairs of the Company. It is further alleged that no dividends in the past several years were issued and distributed among the shareholders while the share capital of the Company had risen from initial capital of Rupees five lacs to Rupees Seventy lacs. Labour strikes continued for months resulting in huge losses to the Company. Further, allegations of fraud, plundering end looting of respondent Company's wealth, mismanagement, pilferage, under- invoicing have been alleged against the respondents in the petition. The breaking point in the relationship of the petitioners and the respondents came in the year 1987 due to one of the cases filed by the Customs Authorities against the Company wherein the petitioner No.5 was made a scapegoat as he was shown as "Finance Director" but was never allowed to appear before the Collector of Customs. Due to arbitrary decisions of the Respondents the Company reached a stage of bankruptcy and, as such, winding up petition being Judicial Miscellaneous No.70 of 1988 was filed by the Habib Bank Ltd. which was rejected. Notices of the petition were issued to the respondents and respondent No.2 filed Counter‑Affidavit denying the allegations contained in the petition. According to the said affidavit, the petitioners were participating in all the activities of the Company and have been receiving benefits accordingly. The contention of the learned counsel for the petitioners is that the basic understanding at the time when minority group joined the respondent No. l and its subsidiary Golden Industries (Pvt.) Limited was that on shareholder from each minority group would be taken as a paid working director either on the Board of Respondent No. l or Golden Industries Ltd. but one by one all the working directors were removed from both the companies and due to mismanagement of the affairs of the Company it has sustained losses resulting in decline of the share price to the disadvantage of the petitioners. He relied on the cases of In re: Companies Act, 1913 and another (PLD 1983 Kar. 45), Ebrahimi v. Westbourne Galleries Ltd. and others (1973) AC 360 and Bhaskar Stoneware Pipes (Private) Ltd. and others v. Rajinder Nath Bhaskar and another (1988) 63 Comp. Cases

184. He further contended that the respondent twice attempted to alter the composition of the company but the same was resisted by obtaining injunction orders and the said acts of the respondent establish oppression within the meaning of section 290 of the Companies Act, 1984 and relied on the cases 'of Clemens v. Clemens Bros Ltd. and another (1976) 2 AER 268 and Gluco Series (Pvt.). Ltd. and others. In re: (1987) 61 Comp. Cases

227. On the other hand Mr. Mohsin Tayebaly, the learned counsel for the respondents, objected to the filing of the petition as according to him, section 290 of the Companies Ordinance speaks of the present and future actions and not of past actions. According to him, the section provides "conducting" or "likely to be conducted" or "being conducted" and in view of the language of the section, the petition does not lie. He further referred to section 305(F)(iii) of the Ordinance which speaks of future actions and not past. Against section 265(B)(i) the Ordinance speaks of "being" or "has been" which means present and future actions and since the petition has been filed in regard to the alleged past actions of the respondents, the same is not maintainable. His next objection was that in the main prayer the petitioners have sought directions for orders that the respondents purchased the shares of the petitioners but out of 21 members only 12 members have been impleaded and, as such, the prayer cannot be granted in the absence of necessary parties. Next he argued that the petition is supported by an affidavit of petitioner No.5 only and at the relevant time he was 4 director of the Company and, as such, the petition is not properly filed. He denied all the allegations levelled by the petitioners. According to him, the number of directors were fixed vide letter, dated 30‑12‑1987 and, as such, the allegations are totally baseless. He further contended that in all the meetings of the board of directors and general body meetings the petitioners participated and three of them became directors also and continued for 15 years, as such, the allegations are frivolous and have no grounds. He denied that the capital was increased for shareholding was diluted. He further stated that the allegations that the dividends were not declared is baseless as dividends were announced in the shape of bonus shares and till the filing of the petition no grievance was ever raised by the petitioners. According to him, due to defects in the petition, prayer No. 1 cannot be granted. His further contention was that the respondent‑directors cannot be forced to purchase the shares of the petitioners, however, directions can be given to the Company, respondent No. 1, but according to him, all the assets of the Company are mortgaged with Habib Bank Limited (HBL) which is not a party to the petition and in the absence of the secured creditor, the reduction in capital or sale of the assets of the Company to raise funds to enable the Company to purchase the shares of the petitioners, cannot be granted. I have heard both the counsel and have perused the entire record Mr. Mohsin's objection, as regard to the impleading of the necessary party, is well taken as some of the members of Group A are missing, out of Group B only Mr. Saleem A. Qadir was made party while Groups C, D and I are not party to the proceedings. However, apart from the above legal objection and before going into the merits of the case, it can be seen from the documents that the petitioners have been participating in the affairs of the Company and it was only in 1988 that they started raising objections and filed application in Petition No.70 of 1988 filed by H.B.L., as such, the allegations of theft of buttons, irregular and false accounts and under invoicing, which, according to the petitioners, started in 1987, were all taking place while the petitioners were directors/members of the Company. The petitioners' letters of protest are on record which confirm their allegations. The transfer of shares to the respondent No.7 were also made without giving details of the share price to other directors but the said transfer has not made material difference in management of the Company. The basic problem is that the petitioners and the respondents who are shareholders in the Company, being respondent No. 1, cannot work together and the Company is closed for last many years. Logical options are either to force the Company or the majority group to purchase the shares of the minority group or to wind up the Company so that each director can get whatever its share worth is possible. Mr. J.H. Rehimtoola and Mr. Hamza I. Ali, the learned counsel for the petitioners, relied on the case of Re: Companies Act, 1913 and another (PLD 1983 Kar. 45) wherein inter alia following prayers were made: "(a) Order and direct that affairs of the Company be conducted in a manner to secure the petitioner his rights as 20% shareholder of the Company and in the said right to be director and to participate in the direction, management and administration of the Company and in the meetings and proceedings of the Company and to be supplied copies of accounts minutes of meetings and proceedings; (c) Relieve the petitioner from oppressive manner of conducting the affairs of the Company and order/direct that no criminal complaints and cases be filed against him end pending complaints and cases be withdrawn." In the said case the Company was floated by members of three families. Various allegations were levelled against one of the directors including purchase of shareholding of the Company on face value which was, according to the petitioner, under valuation and pressurising and coercing the petitioner company towards the objective and also acquiring shareholding of one of the families to exercise voting rights for the purpose of putting pressure on the petitioner company to sell his shares without payment or at gross under valuation. In the said case the number of directors were reduced from 5 to 3 oust the petitioner representing 20% shareholding who was entitled to one directorship and it was observed that "reduction of directors from 5 to 3 was patently made by the majority for the purpose of getting rid of the petitioner as a director and this Court will not permit the exercise of the right as a majority to deny the petitioner of a directorship and also his right to be part of the management so long as he holds 20% shares in the Company" and the petition was granted and the company was ordered to be wound up. In the case of Ebrahimi v. Westbourne Galleries Ltd. and others (1973) AC 360, analogy was drawn between a partnership and the members of a private company and it was observed that "the super imposition company equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence this element will often be found where a pre‑existing partnership has been converted into a limited company; (ii) an agreement, or understanding that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company ‑‑ so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere, and it is these and analogous, factors which may bring into play the just and equitable clause and they do so directly through the force of the words themselves". Disputes arose between the directors of the company levelling allegations that the minority group was ousted from management of the company rendering him at the mercy of the other group for receiving or even the dispose of his shares. It was held that "all these matters lead only to the conclusion that the right course was to dissolve the association by winding up". Another case relied upon by the learned counsel for the petitioner was of In Re: Haycraft Gold Reduction and Mining Company (1900) 2 Ch. 230 wherein also disputes had arisen between the directors/shareholders of the company loosing confidence in each other and it was held that "I think it is eminently just and equitable that this company should be wound up by the Court and such inquiry and investigation be made as is contemplated by the statute". Yet in another case of Gluco Series (Pvt.) Ltd. and others (1987) 61 Comp. Cases 227, wherein the allegations were of mismanagement and oppression of majority shareholders. It was held that "It is settled law that it is not open to the directors of a company to issue and allot shares in a manner by which the existing majority of shareholders are reduced to a minority. The Court will scrutinize with particular circumspection any such issue or allotment and unless it is satisfied beyond reasonable doubt that such issue was inevitable and was resorted to as an express and emergency measure with an object of fundamental importance for example saving the existence of the company, it will not allow the existing balance of power in the company to be disturbed". In the said case the petitioners were holding 2200 shares while the respondents who were directors of the company were controlling 1800 shares. The allegations were of mismanagement and oppression by issuing 900 shares by the respondents to their friends, thus, reducing the petitioners to a minority and the petition was filed for declaration that the issue of the said 900 shares was illegal and void and not binding on the company and its shareholders. The petition was allowed holding that "The petitioners have made out a case of mismanagement within the meaning of section 398 of the Companies Act, 1956 and also have made out a case of oppression against the petitioners which brings respondents Nos.2 and 3 within the mischief of section 397 thereof." The issuance of 900 shares was held as illegal and void the interim orders were passed. In the case of In re: London School of Electronics Ltd. (1986) 1 Ch. 211 wherein the petitioner who was a director of the company was holding 25% of the issued share capital of a limited company which was formed with the object of providing courses in electronics. The remaining of the 75 % shares were held by respondent company of which A and G were directors end owners of most of the shares. The company was a quasi‑partnership between A and G. The relationship between them worked well but deteriorated gradually and in a meeting called in 1983 the A and G, purporting to act as directors, gave the petitioner notices of a directors meeting to be held on July, 27 for the purpose of removing him as a director on the ground of his allegedly detrimental behaviour throughout the preceding year. A resolution was also passed purporting to remove the petitioner as a director. Meanwhile, the petitioner had discovered that A and G, without informing him, had made an agreement with an American University to grant recognition for B.Sc. Degree course to CTC from the benefit of which the company was excluded. A petition was filed alleging that the conduct of the A and G had been unfairly prejudicial to his interest by diverting to CTC the company's electronic students by his defacto dismissal as a director and displaying the notice about his dismissal. Orders were sought under section 75 of the Companies Act, 1980 that CTC be required to purchase or obtain purchasers for his shares in the company on a basis therein specified. It was held that "section 75 of the Companies Act, 1980 empowered the Court to grant such relief as it thought fit, provided that it was satisfied that the company's affairs were being or had been conducted in a manner unfairly prejudicial to the interests of some part of the members; that the section had to be construed as it stood, without importing the test applicable under section 210 of the Companies Act, 1948, whether it was just and equitable, and therefore, although the conduct of the petitioner could affect the relief which the Court thought fit to grant under section 75, there was no independent or overriding requirement that it should be just and equitable to grant relief or that the petitioner should come to Court with clean hands," However, by consent orders were passed accordingly. Contention of the learned counsel is that in the present case also the shares of the company be assessed and value be fixed in the same manner and the majority shareholders or the company be directed to purchase the shares of the minority group. Going through the facts of the case of London School of Electronics, firstly the parties agreed to such settlement, secondly it can be assessed and calculated that the value of the company's shares had not fallen to the extent where it will be to the disadvantage or inequitable in the interest of the other party or the company as it is in the present case, to grant such relief. A Court granting relief to a party has to keep in view that the relief granted to the petitioner should not be more than the alleged oppression perpetrated by the majority members on the minority. In the case of Ladli Prasad v. The Karnal Distillery Co. Ltd. (PLD 1965 SC 211) it was observed that "in the case of private limited company the tendency of the Courts has uniformly been to treat it more or less as a partnership and to apply the same principles in the winding up of a private limited company as to entitle a partner to have partnership firm dissolved. Commonly the exclusion of a partner from the management of the firm, the existence of a state of deadlock between the partners or the justifiable lack of confidence in the management, had been regarded as just and proper grounds for dissolving a private limited company. Judicial Miscellaneous No.70 of 1988 was filed by. Habib Bank Limited against the present respondent No. l for winding up the company with allegations that the loans, advances and finances made by the petitioner to the respondent were only partly paid and that the company is unable to pay its debts. In the said petition the present petitioners which are the minority shareholders had filed an application for winding up of the company. The allegations at the relevant time were the same as at present. It was observed by the Court that "Minority shareholders have effective remedy under section 290 of the Companies Ordinance for relief against mismanagement and oppression and the material indicate that the minority shareholders are acting unreasonably in seeking to have the company wound up instead of pursuing other remedy and the petition was rejected. However; the company gave an undertaking to the Court that it will not dispose of or encumber or deal with the assets of the company except in the ordinary course of its day‑to‑day business. The case was reserved for judgment on 26‑5‑1997 but the counsel for the petitioner sought time to file synopsis in reply to Mr. Mohsin Tayebaly's arguments and by consent it was agreed that no judgment be passed before the expiry of the summer vacation as the parties may negotiate for settlement. After the summer vacation both the counsel were called when they expressed their inability to come to any compromise. Further, through the arguments and through the behaviour of the respondents it is apparent that the respondents or the other members who are not before this Court in the proceedings are not willing to purchase the shares of the minority group. The share price of the company admittedly is somewhere between Rs.3 to Rs.4 for Rs.10 share. In the circumstances, it will be fatal for the company to raise its capital and purchase the shares of the petitioners. Another problem which was pointed out by Mr. Mohsin Tayebaly, the learned counsel for the respondents, is that all the assets of the company are mortgaged with H.B.L. which is not a party in the present proceedings. Although I am conscious of the fact that while passing judgment in Judicial Miscellaneous No.70 of 1988 the learned Company Judge dismissed the application of the present petitioners for winding‑up of the company and passed orders that they have a remedy under Article 290 of the Companies Ordinance but, as I have enumerated hereinabove the prevalent circumstances at the relevant time were different as of today as the Company is constantly going in losses and the relationship between the two groups has deteriorated to the extreme. Before parting, I may add that the submission filed on behalf of the petitioners on 3‑3‑1998 after re‑hearing, contained assessment of present share value of the respondent No. l‑company. However, the auditor's report for the year ending 30‑6‑1997 belies the fictional value worked out on behalf of the petitioners. The claim based on such assessment without taking into consideration the huge liabilities is evidently excessive and not acceptable to the respondents. The enormous liabilities' and continuous losses coupled with the fact that it is a private limited company hardly leaves much option. Considering the facts that there are allegations and counter allegations, the existence of a state of deadlock between the parties and complete lack of confidence between the minority shareholders and the majority shareholders the low value of the shares, continuous losses suffered by the company and absence of all the shareholders in the present proceedings, I find it just and equitable to order winding‑up of the company. Official Assignee is appointed as liquidator to take over the company and proceed according to law. A.A./R‑51/K Order accordingly