ABRAHAM Vs. PHILIPOSE

JUDGEMENT

(1.) THESE appeals arise out of the liquidation of a limited liability company which was carrying on business under the name and style of Malankara Industrial and Mercantile Co. Ltd. , Triuvella. The object with which the company was started was to manage a tea estate belonging to the company and to trade in tea. The company went into voluntary liquidation after succeeding in selling its estate for an unexpected price of over three lakhs of rupees. A liquidator was appointed for distributing the assets which were far in excess of the liabilities which were practically nil. The only persons who were entitled to payment were the shareholders and the promoters of the company, there being no depositors. If the persons entitled to share in the assets which the liquidator was called upon to distribute were the shareholders alone, there would have been no complication. But there is provision in the memorandum and Articles of Association of the Company for conferring special benefits on the promoters after the shareholders' claims are satisfied to a certain extent. The promoters who are 14 in number claimed that special benefit from the liquidator who thereupon applied to the court below for directions. The points on which the liquidator asked for directions were these: (1) Whether under Art. 100 of the Articles of Association of the Company, the promoters could claim the special favours reserved under that article in the absence of declaration of a dividend by the company. The extent of the benefit is mentioned therein. It must be mentioned in this connection that the 'profits' available for division are not the profits made in carrying on the business of the company, but by an outright sale for a very high price of the whole estate to manage which the company was formed. On this question the court below held that the promoters are entitled to the benefit contemplated by this claim although the condition that was alleged to have been fulfilled in favour of the shareholders had reference not to the distribution of dividend to the shareholders but of the price realised by sale of the assets of the company in their entirety. (2) The promoters of the company were originally under an obligation to purchase a certain number of shares. The company had been in existence for 32 years. In the course of that period, some of the promoters had parted with their shares in favour of third parties. Therefore, the question arose as to whether the special benefit reserved in favour of the promoters could be claimed by a promoter who had parted with all his shares in favour of third parties and did not hold any share on the date he claims such benefit. This question was answered by the lower court in the affirmative. (3) Another question on which directions were sought referred to the case of promoters who are dead. The question was whether their legal representatives or assignees of shares owned by them are entitled to the same benefit. This question was also answered in the affirmative by the court below. (4) The remaining questions dealt with shareholders whose whereabouts are not known or who were last known to have resided in enemy occupied country and shareholders who are dead but whose legal representatives have not come forward to prove their claims. The question was asked for clarification referred to the procedure to be adopted by the liquidator in dealing with such cases. The answer given by the court below was that the amounts coming under these categories must all be deposited in the Anchal savings Bank in the names of the original shareholders with details as to why the deposit is made, so that they or their assignees or legal representatives may claim the amount in due course.

(2.) IN respect of these directions given by the court below the liquidator has brought A. S. No. 237/1123 objecting to the correctness of the decision of the court below. A. S. 238/1123 is brought by an ordinary shareholder who was not expressly impleaded as a party in the court below but who on the ground of his being an aggrieved party whose interests are prejudiced by the decision of the Court below has applied for leave to appeal (CMP 789/1124) and has brought an appeal from the decision of the court below. IN fact he supports the contentions of the liquidator and therefore there is no conflict between his case and the case that is put forward on behalf of the liquidator. The liquidator is supporting the contentions of the ordinary shareholders as against the promoters of the company who are contending that they are entitled not only to distribution of the assets according to shares owned by them but also to the special benefits reserved in their favour by Art. 100 of the Articles of Association.

(3.) A number of English decisions have been cited and relied upon by learned counsel appearing on both sides. The matter is not free from difficulty and has to be considered in the light of the facts of this particular case in this connection it would be convenient to refer to the view expressed in Buckley's Commentary on Companies Act 12th Edn. (1949) P. 900. The learned author states that primarily the rule to be borne in mind in the case of companies is that dividend should not be paid out of capital. Under the guise of paying dividends, the company must not return to the shareholders any part of the money subscribed by them on their shares. Subject to this condition, the questions as to how the profit and loss account shall be made out, whether profits have been earned which are capable of being divided among the shareholders, are primarily business questions for the directors or shareholders to determine in accordance with the company's regulations. If they act honestly and in accordance with such regulations in arriving at a decision on those points they discharge all the obligations imposed upon them by the companies Act in England. The learned author also stresses the fact that the application of such an abstract proposition which appears on its face to be simple to the effect that dividend must not be paid out of capital, does in practice raise questions of the utmost difficulty in their solution. "the question what are profits and what is capital may be difficult and sometimes an almost impossible problem to solve". Reference is made to the decision of the House of Lords in devey v. Cory, (1901) Appeal Cases (477) where their Lordships "whilst expressing the view that no difficulty would arise in dealing with any particular case on its own facts and circumstances, declined to attempt to treat those questions in the abstract or to do that which the Parliament has refrained from doing, namely, to formulate precise rules for the guidance or embarassment of businessmen in the conduct of business affairs and expressly dissociated itself from the reasons given by the Lord Justice for their decision in the court below (Re National Bank of Wales, (1889) 2 Chancery 629,651)" which the House affirmed on the facts.