P L D 1952 Lahore 148 (PLP)

CORNELIUS, A. C. J.‑By this petition, one Abdus Salam, a ‑shareholder in the Asiatic Commercial Bank, Ltd., Lahore (in voluntary liquidation) seeks the exercise of the powers of the Court under sections 208 and 213 of the Companies Act, 1913, fort he removal of the liquidator Mian Muhammad Sharif. The special resolution for the voluntary winding‑up of this company under section 203 (2) of the Act was passed on the 18th September, 1949, and Mian Muhammad Sharif was appointed liquidator at the same time. As a ground for his removal, it was alleged in the petition, which is dated the 19th December, 1950, that certain mandatory provisions of law were not observed in making this appointment, and therefore the liquidation has been continuing without legal authority. As regards the conduct of the liquidator, justifying the proposed removal, the allegations made were that he did not call a meeting of the creditors and members of the society until he was compelled to do so by pressure brought to bear upon him by the Registrar of Joint Stock Companies as well as by the shareholders and creditors, and that even then, he did not call the meeting at Lahore but called it at Karachi ; in addition, it was stated that the liquidator was showing partiality in favour of certain creditors by paying dividends to them and leaving certain other creditors unpaid, although the proper course was to place the matter before the meetings which he had called. (As regards these meetings, the facts are that the liquidator first called a meeting for the 11th November, 1950, at Karachi which was stayed by an order of this Court made at the instance of the petitioner, and another meeting called by the liquidator at Lahore for the 7th January 1951, was similarly stayed, also at the instance of the petitioner). Finally, it was stated that at a meeting of the shareholders held on the 18th December, 1950, under the chairmanship of one Malik Hamid ud‑Din, where the respondent laid before the shareholders a statement of accounts and a report regarding the progress of the liquidation, the shareholders, who were present, expressed dissatisfaction with the working of the liquidation and declared that ‑the respondent was unfit for the work entrusted to him and should no longer function as liquidator ; they resolved that one Mirza Asghar Hussain should be appointed as liqui dator in his place. The liquidator preferred objections, challenging the right of the petitioner to ask for his removal, traversing the allega tions that his appointment was illegal, furnishing explanations for the calling of the first creditors' meeting at Karachi and for the failure to hold any such meeting until the institution of the petition, explaining the circumstances in which he had paid out certain dividends, and generally claiming that his conduct of the liquidation proceedings was in all respects as efficient as it could possibly be in the circumstances. The power to remove a liquidator in the circumstances of this case is conferred by subsection (2) of section 213 of the Act, which is in the following terms :‑ "The Court may, on cause shown, remove a liquidator and appoint another liquidator." On the pleadings of the parties, an issue was framed as under :‑ "Is the respondent liquidator liable to be removed on any of the grounds mentioned in the petition?" Evidence for both parties has been recorded, and I have heard arguments at length. It is not necessary to make any very thorough examination of the nature of the grounds on which a liquidator may be removed, under the powers conferred by section 213 of the Act, for the reason that in this particular case, I find that the grounds put forward for the removal of the liquidator are very weak. It will be sufficient to refer to the observation of Jessel, M. R. in the case In re Sir John Moore Gold Mining Company [(1879) 12 Ch. D. 325], with reference to the some what similar expression in section 141 of the (English) Com panies Act of 1862. There, the words were "on due cause shown" and the Master of the Rolls observed as regards the context of these words as follows :‑ "I should say that, as a general rule, they point to some unfitness of the person‑it may be from personal character, or from his connection with other parties, or from circum stances in which he is mixed‑some unfitness in a wide sense of the term." And in the case In re Eyton, ex parte Charlesworth [(1887) 36 Ch. D. 299], Bowen L. J:, when considering the same expres sion, viz., "due cause shown", observed; that "the due cause is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is oppointed. Of course, fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation" Now, what are the grounds that are urged in the present case as constituting "cause shown" for the removal of the liqui dator? It was said that he had proved himself to be inefficient, because in fifteen months, he had spent Rs. 6,000 and recovered only Rs. 4,

000. That is an incident of all but a very few cases of liquidation, viz., that in the early stages, recoveries are not equal to the expenditure, and the reason is sufficiently obvious, namely, that ex hypothec the debts due to the company have not been found easy to recover by the company itself, resulting in its inability to carry on its business, and therefore the liquidator is placed under the necessity of employing various forms of coercive process which in the initial stages, and until the successful completion thereof, involve considerable and` continuous expenditure and delay, whereas recovery generally follows some time after the conclusion of the proceedings. Debtors who willingly pay up the amounts due from them to the liquidator are ordinarily a rare phenomenon. It is then said that the liquidator in declaring a dividend and paying out amounts totalling Rs. 9,777 to a number of creditors has overlooked the claims of certain other creditors, some of whose debts had yet to be proved. The liquidator explained that he had sufficient funds in hand to cover the amount payable to the latter category of creditors at the rate at which the others had been paid. Nothing has been adduced to support the allegation of partiality in respect of this proceeding which, so far as I can see, was carried through in a bond fide manner. Then it was urged that in calling the meeting of the creditors to take place at Karachi instead of at Lahore, the liquidator was deliberately trying to embarrass those of the creditors who were at Lahore and, by virtue of their numbers, would have had a strong say in regard to the confirmation of his appointment. The liquidator has explained that in terms of money, the largest amount of debts was due‑to persons in Karachi ; the sums, due to the larger number of creditors in Lahore were comparatively much smaller. As the evidence stands, I can see no ground for concluding that 'there was any deliberate attempt by the liquidator of the nature suggested, when he fixed the meeting of the creditors to be held at Karachi. There is no doubt that the great bulk of the debts due by the company is due to persons in Karachi. At the same time, the conduct of the petitioner himself has, in this respect, been equivocal. When the meeting was summoned at Karachi, he took steps to obtain an order of this Court to stop it ; when subsequently the liquidator called ‑a meeting at Lahore, the petitioner used the same method to prevent that meeting also from being held. It does not lie in his mouth to attribute any mala fides to the liquidator in regard to the calling of the first meeting at Karachi. Then there was a matter of certain shares in the Indian General Navigation Company which the peti tioner had bought from the company before the liquidation for a certain sum. After the company went into liquidation, it became necessary for Abdus Salam to sue for a declaration in respect of the transfer of those shares to him. It seems that he took the assistance of the liquidator who is a lawyer by profession, for the drafting of his plaint, and the liquidator prepared a draft which, however, was not in the terms of the plaint as finally instituted. Abdus Salam had made the liquid ator a party to this case initially, but later had his name struck out with the avowed object of obtaining an ex parte decree against the other party which was a company resident in India. During the pendency of the suit, the liquidator applied to be made a party in the case but his application was refused. I do not see any sign of partiality for or against Abdus Salam in the activities of the liquidator in connection with this case. It seems that as a result of Abdus Salam having consulted him when the plaint was being prepared, the liquidator became aware of the interest of the company in the transaction, and that the liquidator was of the opinion that the price at which Abdus Salam had bought the shares was unreasonably low, and he considered it his duty, therefore, to resist the confirmation of the transfer in Abdus Salam's favour which was being sought. For the other side it was contended that the price paid was the market price. However that may be, it seems to me that the action' of the liquidator can be defended on the ground that it was strictly bona fide, and in the best interest of the company. Lastly, it was urged than since a number of the shareholders, holding the bulk of the' shares, were now opposed to the liquidator anal considered that without his replacement, affairs in the liquidation could not move properly, it is necessary for the beneficial winding‑up of the company that another liquidator should be appointed. There is some force in this point, but I do not think that I would be justified in acting upon the mere expression of opinion by an irregularly‑called meeting of the shareholders held under the chairmanship of one of their number, for taking the action sought. Since I propose to make an order in this case for the calling of a creditors' meeting in proper form, where the share holders can no doubt make their opinions heard and felt, I do not think it is necessary for me to take any formal steps for obtaining the views of the body of shareholders, as a whole. The legal objection taken to the validity of the appoint ment of the liquidator and the legality of his acts is based on the contention that the liquidation has throughout been regard ed as "a member's voluntary winding‑up" to which the provisions of sections 208 and 208‑A to 208‑B of the Act are applicable. In order that a voluntary winding‑up should qualify for the description "members' voluntary winding‑up", it is necessary, as will appear from a reference to section 207 of the Act, that a declaration should have been made prior to the passing of the special resolution for the voluntary winding‑up, by the directors of the company or a majority of them, to the effect that they have made a full inquiry‑ into the affairs of the company and that their opinion is that the debts of the company can be paid in full within three years from the com mencement of the winding‑up. Because no such declaration was made in the present case, it is urged that the voluntary winding‑up was bad ab initio and, therefore, the appointment of the liquidator was bad and the 'continuance of the voluntary liquidation is illegal. Authority for this statement was sought to be found in a recent judgment of the East Punjab High Court, published as John, Vasica v. Janda Rubber Works (AIR 1950 East Punjab 188). That was a case in which an order of a Single Judge of the East Punjab High Court had been obtained, whereby he directed that the voluntary winding‑up of the company should continue subject to the supervision of the Court, the power being derived from section 221 of the Act. In that case also, it had been found that subsections (1) and (2) of section 207 of the Companies Act had not been complied with, and it was held that "the present winding‑up cannot properly be called a members' voluntary winding‑up and subsection (3) of section 207 must, therefore, apply". In the discussion of the legal consequences following from this conclusion, it was observed as under:‑ "If a voluntary winding‑up is bad in so far as it does not conform to the provisions of section 207, then the appoint ment of the liquidator himself is bad and a fortiori the continuance of the voluntary liquidation with Mr. Chawla as the voluntary liquidator." This observation was made with reference to the contention that an order for supervision under section 221 can only be made where there is a valid winding‑up. However, the learned Judge who delivered the judgment went to say that "the attack on the winding‑up was not so much with the object of proving that it was invalid but that had a false affidavit stating that all formalities, required under section 207, Companies Act, had been gone through, not been filed the Court would not have passed the order of continuation of the voluntary winding‑up under the supervision of the Court". And in the next sentence, the learned judge stated it as his opinion that this was a proper pleading that fraud had been committed on the Court. It is necessary' to draw attention to these matters, in order to show that the observation to the effect that failure to comply, With the provisions of section 207 would make a voluntary winding up bad in law, was not necessary for the final decision On examination of the provisions of section 207, it would appear, speaking with great respect, that Those provisions do not have the effect of either validating or invalidating any actions of a' company. The precise effect of the provisions of section 207 is to divide all voluntary windings‑up, which are commenced under section 203, into two categories, namely, members' voluntary windings‑up and creditors' voluntary windings‑up. If a certain condition is satisfied, namely, that a declaration of solvency has been made by the directors, the winding‑up qualifies for the description "members' winding‑up", but if this condition is not satisfied, the winding up will be classed as a creditors' winding‑up. It would thus appear that no winding -up commenced, as provided by section 203, can be rendered bad by reason of anything appearing in section 207, and, there fore, speaking with great respect, I feel compelled to express my dissent from the view of the learned Judge of the East Punjab High Court, on which the learned counsel for the petitioner has relied for his contention. Regarding the liquidation as a creditors' voluntary winding -up, the question, which arises, is whether the failure to comply with section 209‑A of the Act and to take proceedings for the appointment of a liquidator under section 209‑B invalidates the appointment of the liquidator. On this point, learned counsel for the liquidator has produced authority before me which satisfies me that appropriate action in this case will be to require the liquidator to call a creditors' meeting, as provided by sec tion 209‑A. The authorities, on which Khwaja Nazir Ahmad, has relied, are In re Light of Asia Insurance Co., Ltd., (A I R 1941 Cal. 30), and G. R. Deo. v. F. Karim (A I R 1946 Nag. 196). In the former case, exactly the same error, as has been committed in this case, was made in the winding‑up of the company in question, vii., that the provisions of sections 209 and 209‑A to 209‑H had been overlooked. The question was raised what should happen to the winding‑up in those circum stances. It was observed that by section 209‑A, the company and its directors and officers became liable to penalties by reason of their default, but nothing was said as to the validity of the winding‑up, and reference was made to Halsbury's Laws of England, Hailsham edition, Volume V, page 761, where it was observed that in such cases orders have been made by Courts confirming the appointment of the liquidator, subject to the creditors' approval of the liquidator, as expressed either by a meeting or by a notice in writing. The learned Judge of the Calcutta High Court accordingly directed that a meeting of the creditors should be held and notices of the meeting should be sent to all the creditors forthwith and should be advertised in the prescribed manner, and that at the meeting, the directors of the company should cause a full statement of the company's affairs to be laid before the creditors, who would consider, inter alia, the question of nomination of a liquidator under section 209‑B. In the interim, the liquidator already appointed was directed not to proceed with the winding‑up beyond performing certain administrative acts, such as receiving premiums. In the Nagpur case also, the position was precisely the same as here, and there also the view expressed in Halsbury's Laws of England was accepted and applied. It was stated that when a creditors' meeting was eventually called, it would be open to the meeting to nominate a liquidator and appoint a committee of inspection, etc. In support of the view taken, the learned Judges of the Nagpur High Court expressed the opinion that an omission to convene a creditors' meeting, as provided by section 209‑A, is only an irregularity which can be cured and not an illegality which vitiates the resolution winding‑up the company. With these observations of the learned Judges of the Calcutta High Court and Nagpur High Court, I am in respect ful agreement, and I would add only that the matter could be viewed in another light, as one relating to the true construction of the terms of section 209‑A, i.e., whether those terms are mandatory or merely directory. I would refer in this connec tion to section 3 of Chapter XII of Maxwell's well known treatise on the Interpretation of Statutes. Even where a statute is expressed in the terms that something shall be done or shall be done in a particular manner or form, but it fails to declare expressly what shall be the consequences of non compliance, it is not in all cases that the requirement is to be taken as a command; in various well‑defined classes of cases, it has been regarded as a mere direction or instruction, involv ing no invalidating consequence. This is so, even though the neglect to perform the acts, which are prescribed by the Legislature, may be penal. Thus, on page 379 of the ninth edition, the learned author remarks as under :‑ "On the other hand, where the prescriptions of a statute relate to the performance of a public duty and where the invalidation of acts done in neglect of them would work serious general inconvenience or injustice to persons who have no control over those entrusted with the duty without promoting the essential aims of the Legislature, such pres criptions seem to be generally understood as mere instruc tions for the guidance and government of those on whom the duty is imposed, or, in other words, as directory only. The neglect of them may be penal, indeed, but it does not affect the validity of the act done in disregard of them." The principle has been applied in the case of companies as well, as will appear from the following extract from the same book, appearing on pages 384‑385 :‑ "And the provisions in the Companies Act, 1862, directing that a register should be kept of all mortgages and charges on the property of the company and imposing penalties on any of the company's officers who contravened them, were direc tory so as not to affect the validity of unregistered mortgages." It seems to me that on the principles thus enunciated, the requirements of section 209‑A of the Companies Act, not with standing that they are covered by a penal sanction, should be held to be directory, and not mandatory, in a case like the present. I accordingly decline to remove the liquidator as desired by the petitioner, but for the purpose of rectifying the omission, which has been made, in the light of the provisions of section 209‑A of the Companies Act, I make the following direction :‑ I direct that the liquidator shall call a meeting of the creditors for the purposes of section 209‑A of the Companies Act on the 16th of December, 1951. The notices shall be issued by the liquidator and will state that they have been issued under the instructions of this Court. Drafts of the notice and proxy forms to be approved by the Court, as usual. The meeting shall be presided over by S. Zafrulla, M.L.A., Advo cate, and shall be held in the office of the Bank at No. 136 Anarkali, Lahore. The liquidator shall be present, and shall present a full statement of the position of the company's affairs together with a list of the creditors of the company and the estimated amount of their claims. At this meeting or any adjourned meeting, the creditors shall proceed to take appro priate action as required by sections 209‑B and 209‑C of the Act. In the special circumstances of this case, I make no order as to costs. The remuneration of the chairman will be decided on receipt of his report of the proceedings. For the present, the liquidator is restrained from taking any independent action in furtherance of the liquidation except such administrative acts of a simple nature, e.g., receiving and crediting money in the Bank, as may be necessary, and otherwise under the orders of the Court. *Note.‑This includes prima facie all persons who, were creditors of the Bank on the date of the passing of the winding- up resolution; if there be any such persons to whom the liquidator does not propose to send notice, he will state the name and the details of the debt, together with his grounds for the action proposed in a proper application, and the Court will make orders after hearing the person affected as well as the parties in the present application. A.H. Order accordingly.