1983 PLP 162 (CLC)

(13) Whether the plaintiff was fully aware of the accounts and the position of the business and assets in Burma ? If so, what is the effect? (14) Whether the defendants are not accountable to the plaintiff at Karachi ? (15) Whether the Government of Burma have nationalised the Company, its properties, each in hand? If so, when and what is its effect? (16) Whether the Government of Burma is a necessary party? (17) Whether the relief claimed in para. 14(c), if granted, would con travene the Foreign Exchange Regulation, both in Burma and Pakistan? (18) Relief. The parties have led their evidence and have agreed that Issues Nos. 1 and 2 may be tried as preliminary issues. I have, therefore, heard Mr. Muhammad Ali Saeed, Mr. Iqbai Kazi and Raider Ali Pirzada for the parties.

3. The defendants have challenged that the suit for accounts as framed is not :maintainable. 1n order to appreciate this contention it would necessary to refer to such facts which are proved on record. Ahmed Abdul Karim Brothers Ltd. was incorporated and registered in 1935 in India with its registered Office at Bombay. It opened branches in various cities of India as well as in Burma. The branch at Burma was not registered as an indepen dent Company but it was carrying on business as branch Office of Ahmed Abdul Karim Brothers Ltd. After the death of Ayub Abdul Karim the plaintiff alongwith his brothers and sisters inherited the share under a will. It has been established through evidence that the plaintiff was a shareholder alongwith his sister Mst. Rabia. Although the plaintiff has pleaded that the defendants father had purchased the shares as benami but on the basis of the evidence on record it is proved that shares in the name of plaintiff and Mst. Rabia were registered jointly in their name. After the Partition of India the shareholders migrated to Pakistan from time to time and on 13th September, 1951 the company was declared evacuee in India and was taken over by the Custodian. The assets and management of the company in India passed into the hands of the Custodian but the branch at Rangoon continued to function under the supervision of the directors. Mr. Muhammad Ali Saeed, the learned counsel for the plaintiffs has contended that as the company had been taken over in India by the Custodian the directors ceased to be directors of the company and if they carried on business at Rangoon after 18-9-1551 which otherwise they could not do legally, the defendants did so at their risk and in fiduciary capacity to the shareholders. He has further contended that after the company ceased to exist a director could not deal with the business assets and properties of the company. A company can cease to exist either by widing up or by operation of law. In the present case the evidence is that the Custodian had taken over the company in India. The plaintiff has stated that the company is not carrying on business and has ceased to exist. The defendants have not made any effort to controvert it. In respect of the assets and business in India the defendants had tiled claim and compensation was awarded to them. Ho never in respect of business carried on in Rangoon it seems that defendants had taken steps to save it and wanted it to be registered as an indep-3ndznt company which was not granted. The defendants did not disclose to the authorities at Rangoon that in India the company bad been declared as evacuee. The defendants had made certain representations at Rangoon that business was carried on from Karachi. The defendants were making all efforts to save the property and business in Rangoon and in that regard they even made such representa tion to the Government authorities at Burma. However on 19th October, 1963 the company was nationalised in Burma and taken over by the Govern ment without any compensation.

4. The status of the company's Office at Rangoon was not that of a company incorporated in Rangoon but a branch Office of a foreign company registered at Rangoon for which permission to carry on business was granted by the Government of Burma. It would not be correct to presume that once the company was taken over by the Custodian in Bombay, the company was wound up and therefore business at Rangoon stood completely closed down and did not require any winding up under the Companies Act. In either situations the rights and liabilities of the parties were to be governed in the same manner as between the shareholders and directors. The company's business, assets and properties could not be converted into a common property in which the plaintiff had definite share. Even if the company had ceased to exist in India or that the Rangoon branch has completely severed its relationship from the registered Office, it cannot be denied that it continued to carry on business at Rangoon. This business or operation at Rangoon could be treated as a business of an unregistered company. In cases of unregistered company winding-up proceedings are permissible under law. Such a company may be wound-up if the company is dissolved or has ceased to carry on business or is carrying on business only for the purposes of winding-up its affair or if the company i5 unable to pay its debt or if the Court is of the opinion that it will be just and equitable that the company be wound-up. Some of the grounds were available for winding-up of the company and such action could be initiated either by shareholders or a creditors or by the company itself. It is true that if a foreign company having its Office registered in another country ceases to exist then such registered Office in a foreign country cannot claim its independent entity as it drives its corporate existence from the parent company. But it does not mean that as the parent company has ceased to exist branch Office should be deemed to have been closed and wound-up. This can be done only by winding-up proceeding. Paamer on Company Law, Volume I, 22nd Edition, para 84-10, p. 1020 relying on the judgment of Megarry, d, In re: Compania Ma Rabello Sani Nicholas S. A. ((1973) 75 Ch. 91) observes as follows :- `As is evident from Magarry, J's statement ..a foreign company may vibe wound-up under these provisions even though it did not have an established or, indeed, any place of business in Great Britain ; it is sufficient that it carried on business here. Normally, the existence of assets in this country or the presence here of persons claiming as creditors is sufficient indication of a business having been carried on by the dissolved company in Great Britain." It was further observed in paragraph 83-11, "A foreign company which has been carrying on business in Great Britain, but has ceased to do so, may be wound up as unregistered company even if it has been dissolved according to its own law of incorporation."

5. In Pakistan section 271(3) of Companies Act provides that where a company incorporated outside Pakistan which has been carrying on business in Pakistan ceases to carry on such business it may be wound up as an unregistered company, notwithstanding the fact that it has been dissolved or otherwise ceased to exist as a company under the law under which it was incorporated. The Law in India and Burma does not seem to be different. In the case of V. S. R. M. Chettyar Firm v. J. Hormasji anti others (I L R 8 Rang. 658) it was held that under section 270, Companies Act the Court has jurisdiction in a proper case to order the winding-up of a partnership association or company under section 271, if and only if, at the time When the petition for winding up is presented it consists of more than seven members. A somewhat wider view was taken. In re : Strauss & Co. (A I R 1937 Bom. 15) where it was held that High Court has jurisdiction to wind-up an unregistered foreign company irrespective of the number of its members under sections :?70 and

271. In Pakistan by virtue of section 271(3) any foreign company which has been carrying on business here ceases to carry on business can be wound-up irrespective of the number of its members. This winding up order can be passed even if it has been dissolved or ceased to exist under the Laws under which it was incorporated. It is therefore, clear that the company at Rangoon could have been wound-up.

6. Gower in his book Principle of Modern Company Law, 4th Edition at page 748 has elucidated as follows :- "the fact that the foreign company had already ceased to exist under its personal law is no bar to an English winding-up order. Indeed, the fact that it has been dissolved is one of the grounds on which an order may be made, the other being in ability to pay its debts and that winding-up is just and equitable." It has further been observed that "A winding-up order may be made even though the company never had a place of business in this country provided that there are asses to administer and persons subject, or at least submitting to the jurisdiction who are concerned or interested in the prop-.r distribution of the assets. Furthermore, for the purpose of invoking the winding-up jurisdiction it is irrelevant whether the foreign company is incorporated or not. As we have seen, it is recognised, even in the case of English associa tions, that winding-up under the Act may be the most convenient method of liquidation whenever any considerable body of persons is involved, irrespective of whether their association was registered under the Act."

7. Gower has concluded with these words "winding-up is, therefore, the ultimate remedy of both creditor and member. This, as we have seen, is true also of English companies but with foreign company its role is even more important, for it may after all be the only available remedy"-

8. Having determined the status of business at Burma and the remedy available in law will examine the contentions of the learned counsel for the plaintiff. Mr. Muhammad Ali Sayeed the learned counsel for the plaintiff has contended that the voluntary act of the defendants to carry on the business at Rangoon has created a fiduciary relationship between the plaintiff and the defendant and they are, therefore, liable to account for the profits. In this regard the learned counsel for the plaintiff has heavily relied on the observations made by Finn in his book Fiduciary Obligations. In para. 23 following observation has been made :- "Where a person has his interest served by another, but has not himself agreed with that other the powers and duties to be exercised and discharged for his benefit, one finds reasons emerging for Equity's intervention. If, in addition, he has not the general right to say how they are to be exercised and discharged for his benefit then the need for equity's supervision becomes compelling. Here is a func tionary who, within the limits of his powers and duties, is independent of and not controlled by the person for whose benefit he acts. In this independence this freedom from immediate control, lies the final and decisive characteristic of the fiduciary office."

9. It is, therefore, to be seen whether any fiduciary relationship existed between plaintiff and defendants, The defendants have been described as directors whereas the plaintiff claims to be the member of the company holding shares jointly with other persons.

10. It is well established that the directors by virtue of their position are only in a fiduciary relationship with the company and not with his share holders. Finn in para. 20 has expressed his view on this well-accepted rule in the following words :- "By their statutory contract the company and its shareholders agree as a general rule that designatee powers are to be entrusted to the board alone. By virtue of this arrangements a legal relationship is created between the board and the company, but it would seem no correspon ding legal. relationship let alone a fiduciary one is created between the board and the shareholders. This is somewhat mystifying. As will be seen the Courts have imposed some equitable duties on the directors when taking decisions which affect the right of shareholders inter se. There is now a need and felt one for the Courts to recognise that there is both a legal and a fiduciary relationship between the board and the shareholders, at least when certain powers are exercised." Mr. Kazi the learned counsel for the defendant No. I has referred to the case of Macaura v. Northern Assurance Co. Ltd and others (1925 A C 619) where it was held that :- "Now shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound-up."

11. A company has its independent legal and separate entity from the shareholders. The company and the members are bound to observe all the provisions of memorandum and article which confer right and duties upon them. A shareholder by virtue of the articles is bound by the resolution of the majority and legally obliged to accept it provided it has been passed in accordance with the law and the articles. These rights are known as corporate membership rights. In contract distinction to these corporate rights there are individual rights as well which are enjoyed by every member. These rights are the rights conferred upon member by virtue of the contract with the company as contained in articles and the same cannot be withdrawn or taken away except by law or with the consent of the shareholders. If such individual member's right is infringed the shareholder has a right to agitate for its protection in the Court of law. A member can sue to enforce his individual right to which he is entitled under the Articles or the statute. To name few, he may sue the company to enter his name in the register of members, restrain the company from excluding his name from membership to restore his name if wrongfully removed, to allow him right of vote to pay the dividend only declared and return his capital on winding-up.

12. Mr. Pirzada has referred to the leading case of Ross v. Harbottle (67 E R I 89) for the proposition that the shareholders cannot sue the directors. The refusal of the Court to interfere in the management of the company as laid down in this case is based on the principle that the majority has the right try decide how the affairs of the Company shall be conducted. The rule laid down by this case has been followed for more than one reason which has given practical advantages. Any action by the company itself prevents multiplicity of action. If shareholders were permitted to sue it may entail in succession of actions by innumerable plaintiffs. This case illustrates the principle to respect the will of the majority. The rule has been more aptly ex plained in Macdougall v. Gardiner ((1876) 1 Ch. D 13) by Mollish, J. in the following words :-- "In my opinion, if the thing complained of in a thing which in substance the majority of the company are entitled to do, or if some thing has been done irregularly which the majority of the company are entitled to do regularly, or if some thing has been done illegally which the majority of the Company are entitled to do legally, there can be no use in having litigation about it the ultimate and of which is only that a meeting has to be called, and then ultimately the majority gets its wishes."

13. This rule will not apply where the majority cannot cause such illegality or irregularity sanctioned by an ordinary resolution Burland v. Earl ((1902) A C 83) and Edwared v. Halliwell ((1950) 2 A E R 1064).

14. The adverse result of the rule laid down in Ross v. Harbottle would have been to completely throw the minority into the bands of majority and even the protection given to the minority may have been frustrated. There fore, certain exceptions have been recognised and the shareholders can institute proceedings as plaintiffs. Gower has summarised these situations in the following manner :- "(i) When it is complained that the company is acting or proposing to act ultra vises. (ii) When the act complained of, though not ultra vises the company, could be effective only if resolved upon by more than a simple majority vote i. e. where special or extraordinary resolution is required and (it is alleged) has not been validly passed. (iii) Where it is alleged that personal rights of the plaintiff shareholder have been infringed or are about to be infringed at any rate if the wrong to the plaintiff could not be rectified by an ordinary resolution of company. ' (iv) Any other case where the interests of justice require that the general rule requiring by the company, should be disregarded."

15. Mr. Pirzada, the learned counsel for the defendant No. 2 has referred to Dr. Satya Charan v. Rameshwar Prosad (AIR 1950 F C 133) where it was held that directors are the only persons who can file proceedings but if the directors are wrongdoers majority of the shareholders can .take action and sue in the name of the company. Similar observation has been made in A I R 1,955 S C

74. This establishes. that merely because there are some irregularities or illegalities in the conduct and management of the company by the directors, which can be rectified by the majority, the shareholders do not ipso facto have a right to sue. It entirely depends upon the nature of action and the right the shareholder seeks to assert as all actions by shareholder are not barred. Palmer in Company Law, 22nd Edition, has observed that "if a director has been negligent or has committed some breach of his duty towards the company be is prima facie liable in an action by the Company. It was further observed that "under the rule, of Ross v. Herbottle only the company, but not minority shareholders are entitled to sue the directors in negligence, breach of trust unless the case falls within one of the established exceptions to that rule".

16. The directors owe duty to the company. They do not owe any contractual or fiduciary duty to the shareholders, in the management of the company, Penningtion in Company Law, third Edn. at page 527 observes :- "Directors owe no contractual or fiduciary duty to members of their company and it is extremely doubtful whether they owe them any duty at common Law to take case in the management or the com pany's affairs."

17. The shareholders by virtue of the statutory contract have certain rights as provided under Law or by articles. This individual right does not travel to the extent of claiming accounts from the directors which they are even otherwise bound to present in terms of the articles. In the present case the defendants have filed balance-sheet for the relevant years and, therefore the plaintiffs are not entitled to take any action unless they establish that a fraud has been committed upon the minority. Mr. Muhammad Ali Sayeed, the learned counsel has referred to the case Niaz Muhammad v. Government of Went Pakistan and others (1969 S C M R 219), where following observation was made : - "It is only when the relationship of the plaintiff and the defendant is of such a nature that there may be a liability to render account that a suit for rendition of account can he maintained. Such a liability exists when there is a fiduciary relationship or a contractual or statutory responsibility to render account exists. The plaintiff has to establish that the defendant is liable to account to him for no decree for accounts can be passed if the liability to render accounts is not established." It is, therefore, clear that before a plaintiff seeks an action he must establish that the defendant is liable to render account to the plaintiff. This liability can arise under the law or contract or fiduciary relationship which may develop between the parties. Considering the facts and nature of the present case the rule laid down by the Supreme Court does not apply because the defendants are not under any statutory or contractual liability to render accounts to the plaintiffs. A reference has been made to In re: Coomber (1911) 1 Ch.D 723; where Moalton, J. observed as follows :- "Fiduciary relations are of many different types they extend from the relation of myself to an errand boy who is bound to bring me back my change up to the most intimate and confidential relations which can possibly exists between one party and another where the one is wholly in the hands of the other because of his infinite trust in him. All these are the cases of fiduciary relations and the Courts have again in cases where there has been fiduciary relation, interfered and set aside acts which between persons in a wholly independent position, would have been perfectly valid. Thereupon in some minds there arise the idea if there is any fiduciary relation whatever any of these types of interference is warranted by it. They concluded that every kind of fiduciary relation justifies every kind of interference. Of course that is abused. The nature of the fiduciary relation must be such that it justifies the interference. Even if for argument sake it-may be admitted that there existed some fiduciary relationship, between the plaintiff and defendants being the shareholders and the directors of the company then in view of the articles and the statute the relationship was not of such a nature which may render the defendants liable to give accounts to the plaintiff. 18, Mr. Pirzada's next contention is that as the entire claim of the plaintiff is based on a will under which executors have been appointed the plaintiff has no locus standi to file a suit and it should have been file by the executors. In this regard reference has been made to Order XXXI, rule 1, C. P. C. which provides that where property is vested in trustee executor administrator and the contention is between the beneficiaries and third person the executors shall represent the beneficiaries in all suits concerning properties vested in the executors. In cases where executors have been appointed under the will the beneficiaries cannot represent the estate till such time the executors or the administrators have exhausted the power and distributed the properties in terms of the will. There is no evidence to show that the administrator have so far not exhausted their power under the will therefore no finding in favour of the defendants can be given.

19. The next contention of the learned counsel for lei defendant is that the plaintiff is relying upon the will dated 12th July, 1934 which recites that the testator was a Memon and according to the custom Hindu Law will apply to him. The learned counsel has referred to A I R 1930 Born. 191 ; A I R 1935 Bom. 417 and A I R 1934 Mad. 504 ; to support his contention that the plaintiff in respect of the will is to be governed by the Hindu Law. He, therefore, contended that as Hindu Law was applicable the plaintiff was required to obtain a probate of the will and as probate has not been obtained his suit is not maintainable. In this regard a reference has been made to A I R 1960 S C 1471. The learned counsel for the plaintiff' in reply has contended that firstly the suit is not based on a will and secondly the plaintiff is suing as a shareholder and as there is a fiduciary relationship existing between the plaintiff and the defendants he is entitled to file a suit. The learned counsel further contended that in view of the West Pakistan Muslim Personal Law (Shariat) Application Act, 1962 Muslim Personal Law shall apply to all Muslims. He has, therefore, contended that it was not necessary for the plaintiff to obtain a probate of the will. After promulgation of the said Act in spite of custom and usage, where parties are Muslims all questions regarding will shall be governed by Muslim Personal Law (Shariat). The Muslim Personal Law in its application to Muslims overrides custom and usage in respect of matters specified in section 2 of the said Act. The Muslim Personal Law shall govern the Muslim and as Muslims are not required to obtain a probate of the will the bar imposed by section 213 of the Successions Act is not applicable to Muslim wills. This contention has, therefore, no force.

19. The next contention of Mr. Pirzada is that the defendants Nos. 3 and 5 have died during the pendency of the suit and, therefore, the cause of does not survive against the legal heirs and they cannot be called upon to render accounts. In this regard reference has been made to the case of Mercantile Co-operative Bank Ltd., v. Messrs Habib & Co. and others (P L D 1967 Kar. 755). In this case the plaintiff had filed suit for recovery of specific amount on the ground that the defendant who was auditor of the plaintiff bank during the relevant period acted negligently in the discharge of his duty as auditor which enabled the Manager of the Bank to misappropriate the assets of the Bank. In the plaint there was no allegation of fraud misappropriation or dishonesty by the auditor. Nor was it alleged that as a result of his negligence any benefit accrued to the estate. The claim was thus for unliquidated damages based on the negligence of the defendant in performance of his duty. The -defendant died and it was held that cause of action did not survive.

20. The next case relied upon is Pushottam Vasudeo v. Ramkrishna Govind (A I R 1945 Bom. 21) where it was held that when an agent dies without rendering account the legal heirs cannot be called upon to render account in the technical sense in which an agent will be liable to render. In a, suit for accounts the plaintiff has to first establish that the defendant is an accounting party. After it is established the defendant is required to prove what amounts he has received and what expenses he has incurred on behalf of the plaintiff. If the defendant dies then it seems unjust and inequitable to burden his legal heir to render accounts to the plaintiff. This would be practically if not impossible, very difficult. In such circumstances the burden is cast on the plaintiff to prove all items of amounts which he claims. In such cases the plaintiff has to prove his entire claim and the legal representative cannot be asked to render accounts. Reference can be made to I L R 44 Mad. 214 -1921 Mad.

407. A more appropriate case of Maharaja Bahadur Singh v. Basunte Kumar Roy (18 I C 376) and Sasi Sekhareswar v. Hajirannisa (A I R 1918 Cal. 276). In the later case a suit for accounts was originally filed against the agent and after his death during its pendency it was allowed to be continued against the legal representative. It was held that after the death of the agent the burden of proof which originally lay on the agent shifted to the plaintiff. It is thus settled that a suit for accounts can be continued or filed against the legal representatives of the deceased but they cannot be called to render accounts. This is for the plaintiff to prove the amounts received and spent by the deceas ed. Where the legal heirs of a defendant liable to render accounts are brought on record the burden shifts on the plaintiff who must prove that each item was actually realised by the deceased and it was not paid to the plaintiff. The legal representatives will be entitled to lead evidence to rebut the allegations of the plaintiff. The amount so proved can be realised from the estate of the deceased. This liability of the legal representatives shall, however, be limited to the extent of the estate of the deceased in their hands. This suit, therefore, on this contention can be fail.

21. The other objection taken by the learned counsel for the defendant is that as the plaintiff hold share in joint name with his sister Rabia he can not sue without joining her as a party to the suit. The plaintiff has admitted to hold shares jointly with the legal heir of his father. Mr. Pirzada has referred Maghanmal Mantonmal v. Pahlojrai and others (A I R 1928 Sind 16) where it was held that a salt by one of the joint promisor is not maintainable.

22. Section 2(13) of Companies Act while defining private company provides that where two or more persons hold one or more shares in a private company jointly they shall be treated as a single members. In this regard reference has been made to section 45 of the Contract Act which provides that a promise to two or more persons unless there is something to show that the intention of the parties was otherwise is only a joint promise made to them and can be enforced by the promises jointly. In this regard reference can be made to A I R 1960 Cal.

187. The joint shareholders are jointly treated as a single member and therefore if any action is taken it should be by them jointly or the others may be impleaded as defendants.

23. The learned counsel for the defendants finally contended that in view of the settlement in Suit No. 235/55 the plaintiff has no right to claim accounts. In Suit No. 235/55 the plaintiff, defendants Nos. 2, 3, 4 and 5 were parties to it. By this compromise the parties had intended to settle their family dispute. Although it is provided that this compromise has nothing to do with the assets of Ahmed Abdul Karim Bros. Ltd. it has been agreed that balance-sheet of the company from 1951 shall be accepted as between the parties as correct on the assurance that not more than Rs. 2,000 were trans ferred from Burma to Pakistan. It was further provided that the settlement had nothing to do with the claims of the parties in the Claims Deptt. in respect of assets of the Company. By this compromise every attempt was made to exclude the company froth its operation. The conditional statement regarding acceptance of accounts can only be a bar against the plaintiff if the condition has been satisfied. Nothing has been urged to show that the defendant have satisfied this condition and, therefore, this objection is not tenable.

24. Issue No. 2.-The admitted position is that the Company was registered in Bombay and had its branch at Rangoon. It owned four immov able properties and business at Rangoon. Al! the directors are residing within the jurisdiction of the Court. The learned counsel for the plaintiff relying on Bilasrai Joharmal and another v. Shwndraryan Sarupchand and another (AIR 1944 P C 39) has contended that as the defendants are residing within the jurisdiction, the Court has jurisdiction to pass a decree. In this case the trust pro perty, a hospital, was situated outside the jurisdiction of the Court but the trustees were residing within the jurisdiction. It was held that in equity Court may pass order relating to property outside jurisdiction but it cannot administer such property.

25. It is not every action where mere presence of the defendants within the jurisdiction of the Court vests the Court with jurisdiction to pass a decree in respect of properties situate outside the jurisdiction. The account relates to a company which has its branch office at Rangoon. All the records of business were at the material time at Rangoon except the copies of the balance sheets which are available at Karachi and have been filed in Court. In 1963 the Government of Burma took over the company and the entire record and properties are in its possession. In the circumstances even by obedience of the defendants no effective order can be passed. In the present suit no fiduciary relationship between the parties has been established nor the defendants are liable to render accounts. In these circumstances the Court will have no jurisdiction to interpose its authority on the defendants in respect of matters and properties which are situated outside the jurisdiction of the Court which are not in the control and possession of the defendants and are in possession of a person which is not a party to the suit. In the absence of any fiduciary relationship between plaintiff and defen dants and there being no equity between the parties arising from contract, fraud or trust the Court cannot exercise its jurisdiction in personam in the matter particularly when partly the claim relates to claim in which foreign immovable properties are also involved. In view of my finding on both the issues the suit is dismissed. S. Q. Suit dismissed.