1991 PLP 1225 (MLD)

MALIK MUHAMMAD QAYYUM, J.--Ijaz Ahmad Chatha respondent No. 1 and his wife Mst. Rakhshinda Ejaz, respondent No. 2 were holders of 2,100 and 1,386 fully paid-up shares in M/s. Hilbro (Private) Ltd. (appellant No. 1), which is a company incorporated under the Companies Ordinance, 1984. On 10th August, 1987, the Board of Directors of the appellant-Company passed a resolution that as the respondents have been indulging in activities prejudicial to the interest of the Company their shares be taken over by Muhammad Ashraf, Chief Executive of the Company at the existing break-up value and the shares so taken over be offered for purchase to the members of the Company failing which the Chief Executive was authorised to purchase the same at break up value. Proceeding on the basis of this resolution the shareholding of the respondents was forfeited and their names were removed by the company from the Register of shareholders. They thereupon filed an application under section 152 of the Companies Ordinance, 1984 for the rectification of the Register of Members of the Company which was allowed by the learned Single Judge of this Court on 5th December, 1989 which order has been assailed by the Company and its Chief Executive who have been arrayed as the two appellants in this appeal.

2. It was contended by the learned counsel that as the respondents resorted to fraudulent activities detrimental to the interest of the Company, therefore, the appellants could treat the contract as envisaged by the Memorandum and Articles of Association of the Company in so far as it related to the respondents, as voidable and further that the Board of Directors of the Company was competent to expel the respondents if the cause of their removal was sufficient. So far as the objectionable activities attributed to the respondents are concerned, it was stated that they started the same business as conducted by the Company and even adopted the same name for their partnership business. It was further argued that the respondents exported abroad spurious products by labelling the name of the Company. Trade mark and insignia owned by the company was also utilised by them. Reliance has also been made by the learned counsel on section 31 of the Companies Ordinance to contend that a member is required to be faithful and be bound to the Memorandum and Articles of Association of the Company.

3. The first question which arises for consideration is as to whether the fully paid-up shares of a shareholder in a company can be forfeited by it. The answer to this question depends upon the terms ad conditions incorporated in the Memorandum and Articles of Association which operate as a contract between the shareholders in terms of section 21 of the Companies Ordinance, 1984. There is no specific provision in the Companies Ordinance, 1984 which prohibits a Company from forfeiting the shares of its members. Consequently, if the Articles of Association which constitute a contract between the members and the Company as also between the members inter se, provide for forfeiture on the happening of certain events or failure of the shareholders to perform their obligation, the Company can validly exercise the power and forfeit the shareholding. The question was considered by the Calcutta High Court in the case of Calcutta Stock Exchange Association Ltd. v. S.N. Nundy & Co. I L R 1 Cal. 235 and also by the Indian Supreme Court in Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. A I R 1964 S C 250 and Naresh Chandra Sanyal v. The Calcutta Stock Exchange Association Ltd. A I R 1971 S C 422 wherein the provisions enabling the Company to forfeit the shares were held to be ultra vires of the Indian Companies Act. It may however, be noticed that forfeiture may not be permissible where it results in any reduction in the share capital. This distinction was noticed in the case of Naresh Chandra Sanyal v. Ramani Kanto Roy 49 C W N 502 and is also recognised by the English Law (See Halsbury's Laws of England, Fourth Edn., Vol. 7, para. 421). In the present case, however, as there has been no reduction in the share capital, this question does not arise for consideration.

4. The learned counsel for the appellants was asked to point out any specific provision in the Articles of Association enabling the Company to forfeit or take over the shares compulsorily of a shareholder but he was unable to do so. From a perusal of the Articles it is quite evident that there is no such power contained therein. In Madhava Ramachandra Kamath v. Canara Banking Corporation Ltd. A I R 1941 Madras 354 it was observed that the provisions of Articles of Association form contract between the members and the shareholders and in the absence of any power appearing therein, a member could neither be expelled from the company nor could his share be transferred to another person.

5. The learned counsel for the appellants, however, submitted that though the Company was incorporated as a Private Ltd. Company but it was more in the nature of a partnership as all its members belong to one family and it was a family concern. On these premises it was argued that a partner can be expelled from the partnership by other partners if he acted contrary to the interest of the firm. The principle that it is open to a Court to lift, pierce or rent veil of incorporation and to determine the true relationship between the parties is correct as held by the Supreme Court in the case of The President v. Mr. Justice Shaukat Ali P L D 1971 S C

585. There is also no cavil with the proposition that in the case of a private Company, where the members belong to one family, the concern may be treated more or less as a partnership and the same principles as are applicable to a partnership may be made applicable for winding up such a Company (See Ladli Prasad Jaiswal v. The Karnal Distillary Co. Ltd. P L D 1965 S C 221). But these principles hardly advance the case of the appellants and have no applicability here. According to section 31 of the Act, a member can only be expelled by the other partners from the partnership if there be specific provisions in the contract to that effect. In the present case, the contract is reflected by Memorandum and Articles of Association of the Company which as already indicated, do not confer any power on the Directors or other shareholders to either forfeit the shares of a member or to expel him from the Company. In this view of the matter, even on the principles contained in the Partnership Act, 1932, the appellants could not expel the respondents from the Company. For the foregoing reasons, this Intra-Court Appeal has no force. It is dismissed in limine. A.A./H-207/L Appeal dismissed.