1991 PLP 589 (CLC)

12. Subsection (1) of Section 178 clearly shows that the Directors of a Company have first to fix the number of elected Directors of the Company not later than thirty-five days before the convening of the general meeting at which Directors are to be elected. Mr. Khalid Anwar contends that the Directors should have first fixed the number of the elected Directors of the Company at a meeting of the Board of Directors. In this regard it may be pointed out that although there can be no cavil with the said contention, but, at the same time, nothing can be spelt out from Section 178 to indicate that the number of Directors could not be fixed otherwise then at a meeting of the Board of Directors. Reference may also be made in this regard to Section 196 of the Companies Ordinance, subsection (2) whereof enumerates the powers which can be exercised by the Board of Directors of a Company by means of a resolution passed at their meeting and fixation of the number of Directors is not included as one of such functions to be performed by the Board of Directors by means of a resolution at its meeting. Reference to the copies of documents filed alongwith the counter-affidavit of petitioner Iqbal Alam shows that vide notice of meeting issued by the Secretary of the Company dated 18-7-1989 (Annexure E-5) the number of Directors to be elected at the next extraordinary general meeting scheduled for 10-8-1989 had been shown as four. A copy of the letter addressed by the Secretary to petitioner Iqbal Alam and respondent Masood Alam dated 2-8-1989 (Annexure E-6) shows that after issuance of the notice dated 18-7-1989, besides petitioner Iqbal Alam, respondent Masood Alam alongwith Muzaffar Alam, A.H. Kazim and Imran Alam had sent applications notifying their intention to contest for the election of Directors at the said meeting. Admittedly, it was only subsequently that vide letter dated 2-8-1989 respondent Masood Alam raised an objection regarding the validity of the meeting scheduled for 10-8-1989 without a prior resolution of the Board of Directors in regard to the fixation of the number of Directors to be elected at the said meeting. The documents, reference to which has just been made by me, clearly show that the number of Directors originally fixed with the consent of all the parties concerned was four. Consequently, in my opinion, the first requirement of Section 178 regarding fixation of the number of Directors to be elected at the next general meeting had been met in the present case. However, Section 178 further requires that such number of Directors be fixed not later than thirty-rive days before the convening of the general meeting at which the Directors are to be elected. Mr. Mohsin Tayabally has argued that the requirement of minimum thirty-rive days which should elapse between the fixation of the number of Directors and the holding of the general meeting for their election is not mandatory but only directory, and consequently, if a clear thirty-five days' notice in regard to the election of the Directors was not given by the Secretary of the Company, the meeting scheduled for 10-8-1989 would still have been valid. In my opinion, the controversy has no bearing on the real point in issue since the meeting scheduled for 10-8-1989 was not held on account of the interim injunction granted by this Court vide its order dated 10-8-1989. However, as far as the fixation of the number of Directors by the parties is concerned, the same appears to be four, according to the original understanding between the parties. Merely because the number of Directors was fixed less than thirty-five days before the convening of the general meeting would not reduce the entire exercise to a nullity. It is also pertinent to point out that as is evident from Section 178 of the Companies Ordinance, once a number of Directors is fixed in accordance with the provisions of the said section, the same cannot be altered except with the prior approval of a general meeting of the Company. Consequently, fixation of the number of Directors as three at the meeting of the Board of Directors held on 7-8-1989 in the, absence of petitioners Iqbal Alam and Muzaffar Alam apparently was in violation of the provisions of Section 178 as the same was done only by two of the Directors of the Company in absence of the other two and without prior approval of a general meeting of the Company. Consequently, I am inclined to agree with Mr. Mohsin Tayabally that the number of Directors to be elected at the next general meeting is four.

13. The next contention of Mr. Khalid Anwar is that after the expiry of his term as Chairman on 27-7-1989, respondent Masood Alam still continues to be the Chairman of the Company as his successor has not yet been appointed. Learned counsel- has further argued that there was no provision analogous to Section 177 of the Companies Ordinance in regard to the retirement of Directors in the repealed Companies Act, 1913. However, in Kailash Chandradut v. Jogesh Chandra Majundar (AIR 1928 Cal. 868), when a question arose, whether the Directors after the expiry of their term as Directors could continue to act as such till such time as new Directors were elected, it was held that the existing Directors could continue to function as such till a general meeting was held to elect the new Directors. Basing his arguments on the dictum laid down by the Calcutta High Court in this case, Mr. Khalid Anwar has argued that notwithstanding the absence of any specific provision in this regard in the Companies Ordinance, respondent Masood Alam could still continued to be the Chairman of the Company till such time as the new Chairman was appointed. I find no force in the argument. In the case decided by the Calcutta High Court it came to the said conclusion because the Articles of Association of the Company provided that the Directors should be elected annually at a general meeting. Consequently it was concluded that so long as the general meeting of the Company was not held for election of the Directors, the Directors elected at the previous general meeting would continue in office. The Calcuatta High Court clearly could not envisage a situation where the Company could continue to work without its Directors till such time that new Directors were elected at the general meeting. The facts of the present case are, therefore, clearly distinguishable. In the present case, a complete answer to the controversy is provided by Article 82 of the Articles of Association of the Company. The said Article provides as follows:- "

82. The Directors may elect a Chairman of their meeting and determine the period for which he is to hold office, but if no such Chairman is elected, if at any meeting the chair is not present within ten minutes after the appointed for holding the same or is unwilling to act as Chairman, the Directors present may choose one of their number to be Chairman of the meeting."

14. Article 82 therefore shows that if no Chairman is elected or if at any meeting the chair is not present or the Chairman is unwilling to act as such, the Directors present may choose, one of their members to be the Chairman of the meeting of the Board of Directors. Admittedly, the term of the office of the Chairman expired at the end of three years after respondent Masood Alam had been appointed as such on the 28th July, 1986. In my opinion, Masood Alam cannot continue to act as Chairman of the Board of Directors and till such time as a new Chairman is appointed, a Chairman will have to be elected by the Directors at each meeting of the Board of Directors.

15. Turning now, to the case of the petitioners in J. Misc. Application No.81/89, which, as pointed out earlier, has been filed under sections 305 and 309 of the Companies Ordinance, 1984, the relevant factual position may first be stated as follows:

(i) That although the company was incorporated as a private limited company but in reality it is controlled by two brothers namely petitioner Iqbal Alam and respondent Masood Alam. (ii) Although the shareholding of the said two brothers in the company is not the same but the equity controlled by them is in the ratio of 40% and 60% respectively. (iii) Four Directors of the company are to be elected at a general meeting, which has not yet been convened. (iv) The term of three years for which respondent Masood Alam had been appointed as Chairman expired on 27-7-1989 after which for each meeting of the Board of Directors a Chairman has to be elected. (v) Both the parties have made allegations against each other in regard to misappropriation of the funds of the company, which, however, require to be substantiated by documentary proof.

16. I would now like to examine the case law referred to by both the learned counsel. The first case referred to by Mr. Mohsin Tayabally is the case of Ladli Prasad Jaiswal v. The Karnal Distillery Co. Ltd. (P L D 1965 SC 221) decided by the Supreme Court. The factual position obtaining in this case may be described in the words of Hamoodur Rehman, J., the learned Judge who delivered the judgment of the Supreme Court, as under:

"We have come to the conclusion that the company with which we are concerned was in substance a partnership, for, its shareholders were only the members of the family of Kishori Lal and no outsider was interested. Under the unanimous resolution of the 16th October, 1945, the appellant was made a permanent Director and Chairman of the Board of Directors and he was to have an equal voice in the management of the affairs of the company. Indeed, no decision could be taken to bind the company which was not arrived at unanimously by all the three directors of the company who together formed the quorum for a directors' meeting. In these circumstances, since the trial Court has found that the resolution of the 28th of March, 1946, which purported to remove the appellant from the directorship of the company was an illegal resolution and this finding has not been reversed by the Letters Patent Bench which has proceeded upon the assumption that the resolution was illegal, it clearly follows that the appellant was wrongfully excluded from participation in the management of the affairs of the company and indeed a deadlock was thereafter created by the refusal of the other directors to allow him to participate in the management. The subsequent conduct of the other co -directors and the appellant leaves no room for doubt that feelings had become so embittered that conciliation was now well-nigh impossible. They were determined to exclude the appellant completely. Indeed, they had gone even to the extent of forfeiting his shares and selling them to others." In the above background it was observed by the learned Judge as follows:

"Now in the case of a 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 would entitle a partner to have a 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 have been regarded as just and proper grounds for dissolving a private limited company. Thus, in the case of In re: Yenidji Tobacco Company Limited (1916) 2 Ch.426, this principle was applied in England in the case of winding up of a private limited company and the winding up order of the company made by a learned Single Judge was upheld on appeal, as it was proved that the two directors of the company were not on speaking terms, that the so-called meetings of the Board of Directors have been almost of a farce or comedy and no business which deserves the name of business in the affairs of the company could be carried on. The Master of the Rolls Lord Cozens-Hardy observed that in affirming the order he had treated it as a partnership, although it was strictly not a partnership, for, according to him, precisely the same principles ought to apply to a case like this where in substance it is a partnership in the form or guise of a private company. Similarly Warrington Lord Justice took the view that 'the company ought to be wound up if there exists such a ground as would be sufficient for the dissolution of a private partnership at the suit of one of the partners against the other.' Such grounds existed in that case and so the winding up order was held to be just and equitable."

17. In Messrs Nagina Films Ltd. v. Usman Hussain and others (1987 C L C 2263) a Division Bench of this Court comprising of Ajmal Mian and Mohammad Mazhar Ali, JJ., while dealing with a similar situation, after examination of a number of cases on the subject, enumerated the following principles for the guidance of the Courts:

(i) That in a particular case the principles of dissolution of partnership may be applied if the apparent structure of -the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. (ii) That generally the exclusion of a partner from the management of the firm, existence of a state of deadlock between the partners or justifiable lack of confidence in the management have been regarded as just and proper grounds for dissolving a private limited company. (iii) That when the members of a company had entered into membership of the company on the basis of personal relationship involving mutual confidence or an understanding as to the extent to which each of the members was to participate in the management of the company, exclusion of any member from the management in breach of the above understanding would entail the grant of winding up petition. (iv) That if a Company is floated by more than one family or several friends and relations in the absence of agreement for active participation of the members who are sought to be excluded from the management, the principles of dissolution of parthership cannot be liberally invoked but in the case of agreement for the active participation in the management by all the members of all the groups, the exclusion from the management of any group will attract the application of the principles of dissolution of partnership of a firm. (v) That in case where a family partnership is converted into a private limited company, the Court will be more inclined to apply the principles of dissolution of a private partnership firm in case any member of the family is excluded from the management of the Company by the other members of the family holding majority shares. (vi) That simpliciter the factum that some Directors had preponderating voting power and have not allowed the other share-holders to join in the management of the Company is no ground to wind up the Company. (vii) Where one Director purports by means of irregularities to acquire complete control of the company and to exclude other Director/or Directors from the management, it may be just and equitable that the Company be wound up. (viii) That the ground just and equitable is not controlled by the grounds preceding to the above ground in Section 162 of the Act and is also not confined to cases in which there are grounds analogous to those mentioned earlier. (ix) That the position of a Director and a partner is analogous if the appointment of a Director is for a fixed period otherwise he can be removed by any extraordinary resolution under section 86-G of the Companies Act. (x) That in the absence of anything to the contrary in a partnership deed every partner is entitled under the Partnership Act to share the management of the firm but a shareholder generally in a company in the absence of a pre-incorporation agreement/understanding cannot claim any right to manage the company. (xi) That if a shareholder brings a petition for winding up of a company, the Court will inter alia consider the factum whether majority of shareholders and large number of creditors are opposing the petition. (xii) That while considering a petition for winding up the ground of lack of probity must be against the interest of the Company itself and on behalf of the Company and not in relation to the public exchequer. (xiii) That there is a marked distinction between a private partnership firm at will, of which dissolution can be sought by a partner as a matter of right and a private limited company, of which winding up cannot be obtained by a shareholder without any recognised justifiable ground."

18. It is pertinent to point out that in this case a shareholder of the company holding 25 per cent of the total shares therein had sought winding up of the company on the ground that he had been excluded from participation in the management of the affairs of the company. The order of the learned Company Judge granting the petition was upheld by the learned Division Bench.

19. The third case cited by Mr. Mohsin Tayabally has been reported as Muhammad Shabbir Khan v. Muhammad Anwar (1988 C L C 1955). In this case also under somewhat similar circumstances, on a petition filed by the petitioner, who held two thousand out of three thousand shares in a private limited company known as M/s. Welcome Agencies (Private) Limited, the company was ordered to be wound up.

20. Mr. Khalid Anwar has, however, invited my attention to the case of Kruddson Ltd., Karachi (P L D 1972 Karachi 376) wherein Tufail Ali A. Rahman, C.J. declined to order winding up of the company on a petition filed by two of the directors of the company holding 600 shares in the company out of a total of 6,782 shares on the ground of their systematic exclusion from any say in the affairs of the company and deprivation of proportionate share of its profits for personal aggrandizement of another director. The observations made by the learned Judge, which appear at pages 387 and 388 of the report, may be reproduced as follows:

"

14. Neither in principle, therefore, nor on authority, am I persuaded that a private limited company is required to be wound up whenever a shareholder wishes that it should be, as would be the case in a partnership at will when one of the partners desires the dissolution of the firm. If that had been the intention of the Legislature nothing would have been simpler than to have provided that a private Company is to be wound up upon notice to that effect being given by any shareholder or -to have used other language comparable to the provisions of section 43 of the Partnership Act.

15. In none of the cases to which I have referred was an order of winding up made on the ground, simpliciter, that one of the shareholders desired such an order. In each of them there was a ground such as a deadlock in the management, a justified lack of confidence in those who were managing the Company or conduct on their part calculated to deprive a minority of their due share in the profits or management of the Company. Indeed, in some cases, a winding up order was refused when grounds were urged which did not, in the opinion of the Court, made it just and equitable to wind up the Company; obviously in these cases if the wishes of the petitioning shareholders sufficed, an order of winding up would have been made. I think that the true position is that a private limited company is to be treated as a partnership firm in the sense only that such circumstances as would justify the dissolution of a firm under section 44 of the Partnership Act on the ground that it was just and equitable to order a firm to be dissolved would also justify the winding up of a private Company. In the Supreme Court case of Ladli Prasad, for example, each of the three directors had equal voting power in the company and decisions were to be taken only unanimously, in these circumstances, the resolution purporting to remove one of them was held to be illegal and the relations between the three were found to be so embittered that there was truly a deadlock."

21. In my opinion, the facts of the case decided by Tufail Ali. A Rehman, CJ. are clearly distinguishable inasmuch as that the application for winding up had been made by two persons holding only 600 shares out of a total of 6,

782. Therefore, it was observed by the learned Chief Justice that a winding up order cannot be passed merely on the ground that one of the shareholders desired such on order. In the present case, the application for winding up has been made by the directors who control forty per cent of the equity in the company and have hitherto fore had equal share in the management of the affairs of the company. It is also crystal clear that the respondents now intend-to assume full control of the management of the company as an attempt was made by the respondents to reduce the number of directors to three. Under the circumstances the apprehension in the mind of the petitioners that they would be deprived of their share in the management of the company appears to be fully justified. However, the circumstances of the case show that there is a complete lack of confidence of the parties in each other and their feelings are so much embittered that the possibility of any reproachment between them appears to be remote. The ratio in which the shares are respectively held by the petitioners and the respondents requires a complete harmony in running of the affairs of the company otherwise there is bound to be a deadlock in the management. Even the election of new Chairman in view of the equal number of directors of the company may not be possible. There is no doubt that the company came into existence on account of the close relationship and mutual understanding between the parties, three out of them, viz. the two petitioners and the respondent No.2, being brothers. Consequently any attempt on the part of the respondent No.2 to assume exclusive control of the management of the affairs of the company is bound to result into bitterness and lack of confidence between the parties. Admittedly it was a family partnership which was subsequently converted into a company. Therefore, in view of the circumstances enumerated above, the same principles would apply as are applicable for dissolution of a partnership firm. The cases cited by Mr. Mohsin Tayabally in my opinion, are fully attracted to the facts of the instant case. I am, therefore, of the view that it would be just and equitable that the company is wound up. I have also considered other alternatives as the Companies Ordinance, 1984 vests the Company Court with ample powers to pass an order other than that of winding up of the company if the circumstances so require. However, as I have pointed out earlier, the circumstances of the present case only justify passing of a winding up order, subject, however, to the following conditions.

22. In the result, J. Misc. Application No.81 of 1989 is granted and the said company is ordered to be wound up. However, this order shall take effect after the expiry of two months during which time, both the parties shall have an option to either purchase the shares of the other party or bifurcate the company on the terms to be mutually agreed between the parties. In case the parties fail to come to any understanding in this regard the company shall be wound up as earlier directed. In that case the Official Assignee shall act as Official Liquidator with all the consequential powers under the Companies Ordinance, 1984. J. Misc. No.51/89 for the reasons enumerated herein is dismissed. In any case, it has become infructuous. A.A/1-149/K Order accordingly.