P L D 1977 Karachi 814 (PLP)

(Plaintiff No. 2) ... 2060 Raja Abdur Rehman (Defendant No. 1) ... 2020

2. It seems that in the beginning of 1976 differences arose between the plaintiffs on the one hand and defendant No. 1 on the other who constituted the Board of Directors. The present controversy has directly arisen out of the happenings that took place on 30th and 31st March of 1976. It is the case of the plaintiffs that on 31‑3‑`976 by duress and coercion defendant No. I compelled the plaintiffs to wash their hands off their interest in the Company by having two of his minor children defendants 2 and 4 appointed as directors in the Company although they had no share or any other interest in the Company, without convening any general or extraordinary meeting as required under the Articles of Association. They further allege that an agreement was also executed by them under threat, as also other consequential relevant letters of resignation, intimations etc. The agreement which is Annexure 'C' to the plaint in substance purports to recall the fact that the plaintiffs had agreed to retire from the Company with effect from 31‑3‑ 76 and have transferred their entire shareholdings of the said Company to the six children of defendant No. 1 who are defendants 2 to 7 herein, for a total consideration of Rs. 6,66,685.74. The plaintiffs allege that after their signatures were obtained on the agreement and other documents, a copy of the agreement was handed over to them, from which the plaintiffs learnt about the `mischief' played by defendant No. 1.

3. Upon these allegations the plaintiffs filed the present suit on 20‑4‑76 seeking a declaration that the aforesaid agreement dated 31‑3‑76 was void as having been obtained under 'threat. coercion and duress and further that the plaintiffs continued to be the shareholders, members and directors of the Company. The plaintiffs also seek similar reliefs in relation to other documents on which their signatures were allegedly obtained under coercion. Finally the plaintiffs also pray for a declaration that defendants Nos. 2 and 4 being minors are ineligible for appointment as or to perform the functions of the Director of the Company, and for an injunction to restrain the defendants from interfering with the functioning of the plaintiffs as legally elected and bona fide directors of the Company.

4. Alongwith the plaint the plaintiffs also submitted an application for temporary injunction to stay the operation and effect of the impugned agreement of transfer dated 31‑3‑76 and further to restrain defendants 2 and 4 from acting as directors of the Company. By an ad Interim order dated `‑5‑76 I had restrained defendants 2. and 4 from acting as the directors of the Company and ordered notice of the application to defendants.

5. The defendants have contested the prayer for grant of temporary injunction and have filed affidavit and documents in support of their objections. It is contended by the defendants that before the transaction in dispute, the Management of the Company had changed hands by transfer of shares on two occasions and the methodology for effecting the change adopted on the two previous occasions was substantially identical to the one adopted in the present case. According to defendant No. 1 differences arose between the plaintiffs and himself by the end of 1976 and the plaintiffs planted to oust him from the Management of the Company. When it became obvious that the parties no longer could work together, it was mutually decided that the factory and the workshop of the Company be closed down for one month, during which period accounts be settled. It was agreed that the shareholding of the parties be disposed of through bids to the highest bidder to whom The other two members would sell and transfer their shares. Accordingly an agreement dated 28‑1‑76 was executed by the parties embodying the said arrangement, and intimation about it was also sent to the principals of the Company ire Italy. It may be stated here that the plaintiffs do not deny the execution of this agreement but once again attribute the same to have resulted from a fear of maltreatment and assault at the instance of defendant No.

1. Defendant No. I further alleged that it was in pursuance of the agreement between the parties dated :28.1‑1916 that the transaction in question bad voluntarily taken place on 30‑3‑

76. According to him on this date accounts of the Company were made up and the parties gave their bids which were reduced to writing in presence of the Auditor and the Legal Adviser of the Company. The bid given by defendant No. 1 being the highest was accepted by the plaintiffs who agreed to transfer their entire shareholdings to the members of his family for the total considera tion of Rs. 68 lacs. It was further alleged that thereafter the original documents containing the terms of the bid and the record of the bids were destroyed at the instance of the plaintiffs who insisted that the ostensible figure of Rs. 6,66,665.74 be shown in the formal documents. It is stated that the Legal Adviser and the Auditor before destroying the originals retained photocopy thereof. On the same day a meeting of the directors members of the Company was held under the Chairmanship of plaintiff, No. I in which defendants 2 and 4 were appointed as directors by a unanimous resolution. Necessary intimation in Form XII oaf appointment of defendants 2 and 4 was filed with the Registrar of the Companies bearing the signature of plaintiff No.

1. On the next day vie. 31‑3‑1976, the two plaintiffs banded over their resignations In writing under their signatures which were accepted and acceptance of their resignations which were accepted and acceptance of their resignations was recorded in separate letters which were handed over to them and receipt whereof was acknowledged on the office copy, other necessary documents were signed by the two plaintiffs. On the same day the parties met in the office of the Manager. Muslim Commercial Bank Limited, Frere Road Branch, Karachi in presence of the Company's legal Adviser, its Auditor and Chief Accountant and executive member of Chambers of Commerce and Industry, Karachi, in whose presence plaintiffs were paid the agreed consideration of Rs. 68 lace but receipts were executed by the plaintiffs only for the sum ostensibly shown namely P.s. 6,66,665.74. It is alleged that the plaintiffs also signed and delivered the transfer deeds and letters of intimation of transfer, etc. to the concerned institutions and authorities. It is finally alleged that public notice about the change in the Company brought about by the sale and transfer of plaintiffs' entire share holdings and their resignations from the Board of Directors was published in to newspapers on 2‑4‑

76. Photo‑copies of all these documents have been placed on record.

6. Several affidavits were filed by the parties and a large number of documents were placed on record. Learned counsel appearing for the parties addressed elaborate and exhaustive arguments.

7. In order to show prima fade case, Mr. Khalid Anwar learned counsel appearing for the plaintiffs raised the following contentions :‑ (i) That the impugned transfer agreement dated 31‑3‑76 is void as admittedly minors were parties to the same. (ii) That the impugned agreement upon the case of the defendants themselves is a void agreement under section 23 of the Contract Act as the obvious intention was to evade public taxes by suppression of the actual consideration and by introducing minor shareholders in order to ostensibly distribute the income so as to avoid income‑tax. (iii) That the transfer of shares was ineffective in law by reason of its being contrary to section 34 of the Companies Act and Articles of Association of the Company. (iv) That the appointment of defendants 2 and 4 as directors is of no legal effect as no separate meeting of the Board of directors was held for their appointment or for amendment of the Articles of Association which prescribe the maximum number of directors to be three. (v) That defendants Nos. 2 and 4 being minors were not qualified to be appointed as directors. (vi) That the version of the events happening on 30th and 31st March, 1976 given by the defendants is belied by the documents and circum stances on record. So far as the first contention on behalf of the plaintiffs is concerned. Mr. Sharifuddin Pirzada submitted that a transaction of transfer of shares in favour of minors is not governed by the ordinary rules regarding the capacity of minors to contract and referred to certain decisions where such transfer has been hold to be valid in law. Even otherwise, counsel contended, a transfer of property in favour of minor through his guardian has been hold to be valid. In this connection he placed reliance on Subrahmanyam v. Subba Rao (P L D 1948 P C 52 ) where in a case in which the mother of the Hindu minor entered into a contract for sale of immovable property belonging to the minor, on his behalf and was held to be one which it was within her competence as guardian to enter into and that the contract was for the benefit of the minor. In Dewansingh v. Minerva Films (A I R 1959 Pb. 106) it was held that there is no bar to a minor acquiring or holding shares in a joint stock Company and where the shares of the minor are fully paid‑up and they are subject to no obligation the allotment of the shares to the minor cannot be held to be void merely because of their minority. The Dacca High Court in Ashraf Ali v. Etim Ali (P L D 1959 Dacca 625) observed that in an executed contract where the minor's part has been performed, such a contract is enforceable by a minor as it is the contract for the benefit of the minor and a dictum was laid down that such a contract in which the minor is a party cannot be enforced against the minor but that does not mean that the major party who had the knowledge of the minority of the minor contracting party, can be allowed to repudiate it. It was accordingly urged that no exception can be taken to the validity of the agreement of transfer on the ground that the beneficiary of the contract was minor. But the submission of Mr. Khalid Anwar was that defendants 2 and 4 who are also minors cannot be appointed as directors. On behalf of the defendants, on the other hand, it was submitted that there is nothing in the Companies Act disqualifying a minor from being a director, as the disqualifications of the directors are expressly provided for in the Act. A great deal of controversy was raised, on facts over the question whether defendants Nos. 2 and 4 are minors or not. The defendants contended that the parties bad a sister concern known as Khawaja Autos Ltd in which the wives of the plaintiffs were the subscribing members along with defendant No. 2 and it was further asserted that defendant No. 4 is the elder sister of defendant No.

2. Conflicting documentary evidence was produced by ‑the parties However, in my view the question whether defendants Nos. 2 and 4 are minors or not, is not very material for the present purposes. It has been shown prima facie that there is no bar in law for minors to acquire ‑shares in a company. The only relevance of the question of minority therefore relates to the functioning of the aforesaid two defendants as directors. Apart from the submission that there is no bar in the Companies Act to the appointment of minors as directors which question also requires fuller consideration so far as the plaintiffs are concerned if they fail to establish their case that they were deprived of their shareholding through duress and coercion, they will obviously have no locus standi to question the appointment of these two directors. This is so because once their interest in the company is lawfully terminated they cannot question the functioning of the company as they would be strangers having no right to interfere in the management thereof.

8. The next contention of the learned counsel for the plaintiffs relates to the allegation that the defendant No. 1 admittedly pleaded facts which ,clearly make out a case of evasion of public taxes. This relates to the allegation on the part of defendant No. 1 that the real consideration for the transac tion namely Rs. 68 lacs was suppressed and formal documents showing con sideration of Rs. 6 lacs and odd was mentioned is the impugned agreement. Mr. Sharifuddin Pirzada contended that if the case set up by the defendants is relied upon by the plaintiff for the purposes of this submission, then the plaintiffs were in pari delicto with the defendant inasmuch as the suppression was made at their instance. It was accordingly submitted that a party cannot be allowed to take advantage of his own fraud. For the present purposes therefore not much importance can be attached to this submission.

9. The next submission on behalf of the plaintiff was that in any case the transfer of shares being in breach of the mandatory requirements of section 34 of the Companies Act is ineffective in law and cannot be acted upon, Section 34 inter alia provides that it shall not be lawful fox the company to register a transfer of shares in the company unless the proper instrument of transfer duly stamped and executed by the transferor and the transferee has been delivered to the company along with the scrip. On the strength of this provision it was contended that in absence of such valid transfer deeds. the transaction was totally illegal and the shares continued to vest in the plaintiffs. It was pointed out that the share certificates were not available as they were already pledged with the I. D. B. P. and the device adopted eras to obtain letters of authority to the I. D. B. P. from the plaintiff for change of ownership in the share certificates and for handing over the share certificates to the bearer (vide documents marked R/10, R/11, R/12 and R/15). In reply the only submission on behalf of the defendants was that the consistent practice adopted by the parties on the previous two occasions for transfer of shares was as adopted in the present case. It was submitted that on 18‑9‑74 when the original directors of the R. R. Khan group sold their shareholding in the company, the procedure adopted was that only Rs. 10 lacs the face value was shown as the official consideration for the shares but in fact the amount paid was Rs. 25 lacs. On the second occasion on 6‑3‑75, the outgoing two directors were paid Rs. 38 laps through bids for their shares which works out the total value of the share capital at Rs. 89 lass (Annexure R/48). It was submitted that the plaintiff were a part to these transactions and therefore they are estopped from questioning the adoption of the same procedure so far as the transfer of their shares concerned. It is no doubt true that these facts are not denied, however, I find force in the contention in view of a decision of this Court reported as Karachi Electric Supply Corn. v. Bank of India (P I. D 1967 Kar. 144) where it was held that Articles of Association conferring upon the directors the power to transfer the shares without an instrument of transfer are ultra vices. In that case the share certificates were never produced before the Board and no change was made in them pursuant to the alleged transfer. It was held by Qadeeruddin, J. (as he then was) that some of the requirements of the transfer of shares are contained in section 34 of the Companies Act. 1913 and even if the Articles of Association confer such power upon directors to transfer shares without an instrument of transfer, such Articles would be ultra vines of subsection (3) of section 34 of the Companies Act. For the present purposes the point is therefore, in my opinion, arguable and the question as raised which requires to go to trial is as to the effect of section 34 op the impugned agreement of transfer of shares. It would be at the trial to consider also whether wilful non‑compliance of the requirements of section 34 by the transferor and the transferee has any effect on the operation of the provisions of section 34.

10. It was then contended that the alleged appointment of defendants 2 and 4 as directors on 30.3‑76 was of no legal effect as no separate meeting of Board of Directors was held and the appointment of more than three directors without amending the Articles of Association which restricted the maximum number of directors to three was illegal. I have already stated that for the present purposes this question is not material if the agreement for transfer of shares is found to be unimpeachable, as in that case the plaintiffs have no locus standi to raise the question.

11. This brings me to the consideration of the rival versions of the parties as regards the events that took place on 30th and 31st March, 1976. Very elaborate arguments were addressed by the learned counsel at the bar. It Is however, axiomatic that at this stage it is not competent for the Court to adjudicate upon issues of fact. All that is necessary for the plaintiffs to establish is a prima facie case by which is meant an arguable case or a serious question to go to trial. Unless the factual controversies are acquired into open evidence led by the parties, it is difficult to arrive at a conclusion as to which bide is stating the true facts, As stated earlier, the plaintiffs allege that they were forced without free‑will to execute the impugned agreement and other documents after being subjected to threat and coercion. The events described by the plaintiffs were spread over two days during which apparently they were tree to move about and were not under any restraint. Apparently the plaintiffs being directors of a business concern, cannot be readily accepted to be ignorant and helpless persons. The nature of the threat given to them has not teen disclosed and for the present except the oral allegation of the two plaintiffs, primp facie there is nothing on record to support the allegations. A large number of docu ments appear to have beta signed by the two plaintiffs on the two days. Above all it is also admitted that on 28‑1‑76 the plaintiff executed an agreement which substantially supports the version of the defendant No. 1 to the effect that the parties had agreed to Fettle the accounts and through bids dispose of the factory to one or two of the directors. The plaintiffs contend that even this agreement was obtained under duress and that a complaint with police was lodged in this regard. However, no copy of the police complaint has been placed on record and in any case despite the lapse of more than three months no proceedings were taken in any Court of Law to challenge the agreement. 1t seems that the plaintiffs received the consideration mentioned in the agreement for the transfer of shares. On the other hand, the defendant's allegations that a huge suns of Rs. 68 lacs was paid as consideration for transfer of shares but receipts were only obtained for Rs. 6,66,665.74, is yet to be established. The records of the Muslim Commercial Bank Limited were summoned and have been placed on the file. It was endeavoured on behalf of the defendants to show that the consideration paid under the table was camouflaged by keeping the amount in excess of the consideration shown in a agreement, in Short Notice Deposits in the name of relations and persons associated with the plaintiffs. A great deal of argument on both sides was devoted to the entries in the account books maintained by the bank for the two days. It was attempted to be shown on behalf of the plaintiffs that there is no evidence of any amount paid in excels of the sum mentioned in the impugned agreement. On the other hand, on behalf of the defendants it was attempted to be shown that the amounts were received and kept in the form of Short Notice Deposits in the names of persons other than the plaintiffs. At this stage, however, it is neither possible nor necessary to determine this question. This method adopted for making the alleged payment of such a huge amount to say the least, was very extraordinary and ingenious. It is not clear how a responsible officer of the nationalized Bank went out of the way to permit and be a party to an arrangement which tended to suppress the real facts from coming to the notice of the public authorities. But again this is the question which can be enquired. into at the trial. In any case I am unable to hold that there is prima facie evidence of the defendant having paid the huge consideration of Rs. 68 lacs. On the other hand, the fact of transfer was notified through public notice in the newspapers on 2‑4‑76 and yet for reasons which are not clear, no exception was taken or notice given challenging the validity of the agreement until the filing of suit on 20‑4‑76. 12, Taking into account the rival contentions of both sides, on the whole the impression formed is that the Impugned agreement does not represent the true facts. Whether it will be possible for the parties to establish the case set up by each party would depend upon the even adduced at the trial. Also it has to be seen to what extent the agreement does not represent true facts.

13. However, the important question is of the balance of convenience. The subject, of litigation in final analysis is the business carried on by the Khawaja Auto cars Limited, which is a running concern. The result of granting injunction would be to restore the plaintiffs as directors of the,, company and directly involve there in the management of the affairs of" the company. The apprehension expressed by the counsel for plaintiffs in his arguments is that if the present state of affairs is allowed to continue as it is, they will be exposed to the injury of harassment by the creditors. In reply it was contended that since tine company is a limited liability company, the apprehension is groundless as the shareholders will not be personally liable for the debts of the company. Besides all authorities from whom credit facilities were obtained by the company have been notified that the plaintiffs have ceased to be shareholders and the banks have released them of their liability. In Marghub Siddiqi v. Humid Ahmad Khan (1974 S C M R 519) their Lordships of the Supreme Court have emphasized the need in a case for grant of temporary injunction of the consideration of question of balance of convenience or irreparable loss and observed that as injunction is not to be granted only on tae basis that a prima facie case exists but it Is incumbent upon the Court to take into account the other questions. Guided by this dictum of law and having regard to the facts and circum stances of the case as stated above, I am of the confirmed view that the balance of convenience in this case lies against the grant of temporary injunction as prayed for. However, in order to protect the interests of the plaintiffs it would be necessary, in my view, to put the defendants on terms.

14. In the result while refusing to grant the injunction as prayed, I , would however, restrain the defendants from effecting any change to the constitution of the Board of Directors and from transferring the shares. Additionally the defendants Nos. 1, 2 and 4 shall furnish accounts of the business carried on by the company for the period commencing from 1‑4‑76 to 31‑5‑77 within one month from the date hereof. Also the said defendant shall furnish monthly accounts of the income received and the expenditure incurred by the company and file the same by 10th day of each succeeding month. Copy of the accounts shall be furnished to the plaintiffs. The application is disposed of in terms of the above. The rule issued earlier stands discharged and substituted as above. S. A. H. Order accordingly.