ASSOCIATE INDUSTRIAL ENGINEERS Vs. P A JABBAR SAHIB

JUDGEMENT

(1.) THESE two appeals are against an order of KRISHNASWAMI nayudu, J. , passed on an application in the course of liquidation of a limited company called the South Indian Industrial Engineering Syndicate Ltd. , gudiyatham. The company was registered on 12th March, 1946, with a nominal capital of Rs. 30 lakhs divided into three lakhs of ordinary shares of Rs. 10 each out of which there was an issue of fifty thousand shares. In and by an agreement dated 10th April, 1946, a firm known by the name of Messrs. Associate industrial Engineers was appointed as managing agents of the company for a period of twenty years on terms and conditions set out therein. The company obtained a certificate for the commencement of the business on 30th July. Very soon thereafter misunderstanding arose between P. V. Padmanabha Naidu, the managing partner of the Associate Industrial Engineers, and some of the directors of the company of whom the most prominent was one P. A. Jabbar Sahib. He filed two criminal complaints against Padmanabha Naidu. On 1st October, 1946, Mr. Oates, one of the partners of the managing agency firm wrote to the directors of the company stating that he had severed his connection with the firm and that the firm had been dissolved. Thereupon the board of directors resolved on 6th October, 1946, that in view of the criminal cases pending against Padmanabha Naidu and the nonreceipt of the audit report and the dissolution of the managing agency firm, the business and all monies and other transactions of the company by the managing agents be suspended till the final decision of the disputes. Subsequently, on 11th November, 1946, two of the directors were constituted as a committee to carry on the business of the company. On 29th November, 1946, this committee filed a complaint against padmanabha Naidu for wrongfully withholding the delivery of account books and records of the company. On 6th January, 1947, two shareholders filed a petition in this court for winding up of the company but it was dismissed. On 12th april, 1947, the committee of directors instituted a suit in the Court of the district Munsif, Vellore, (O. S. No. 151 of 1947), against the partners of the managing agency firm for a declaration that the managing agents were lawfully suspended as per resolution dated 6th October, 1946, and for an injunction restraining them from interfering or causing obstruction in the management of the company. This suit was decreed by the District Munsif on 29th June, 1948. But on appeal the learned Subordinate Judge of Vellore held that the resolution of the 6th October, 1946, was ultra vires and invalid but granted a permanent injunction restraining the managing agents from interfering in the affairs of the company. By order of this court dated 6th December, 1949, the company was directed to be wound up. The two main grounds in the petition for winding up were (1) that the company defaulted in filing the statutory report and in holding the statutory meeting under Section 162 (2) of the Companies Act; and (2) that it did not commence business within a year of its incorporation

(2.) IN May, 1950, Padmanabha Naidu on behalf of the Associate industrial Engineers, the managing agency firm, filed a claim before the official Liquidator who had been appointed in the winding up proceedings. The claim was made up of three items as follows (1) A sum of Rs. 1, 705-9-6 alleged to be the amount advanced by the managing agency firm to the board of directors of the company; (2) A sum of Rs. 49, 400-5-0 being the amount of office allowance payable to the managing agency firm from 1st March, 1947, to 6th december, 1949, as per the terms of the agreement, and (3) A sum of Rs. 25, 000 as damages for premature termination of the managing agency agreement IN accordance with the directions of the learned Judges sitting in Chambers, KRISHNASWAMI NAYUDU, J. , the Official Liquidator, after notice to the concerned parties, made an enquiry and allowed the claim in its entirety. The members of the committee of directors then made an application to the learned Judge in Chambers for setting aside the order of the Official liquidator allowing the claim preferred on behalf of the managing agents. Before the learned Judge there was no dispute as regards the first item of Rs. 1, 705-9-6. The learned Judge disallowed the second item and allowed only a sum of Rs. 10, 000 in respect of the third item. IN the result he held that the managing agents would be entitled to a sum of Rs. 11, 705-9-6. Against this order of the learned Judge the managing agents have filed O. S. A. Nos. 32 of 1951. O. S. A. No. 20 of 1952 is by the committee of directors. IN this judgment the managing agency firm will be referred to as the appellant and the committee of directors as the respondentsto understand the basis of the claim of the appellant it is necessary to set out the material terms and conditions of the managing agency agreement, Exhibit P. 2. They are as follows :- Clause (1) : The said appointed of the managing agents shall be initially for a period of 20 years from the date of these presents notwithstanding any change in the constitution or in the name and style of the said firm, its successors and assigns; Clause (3) : The managing agents shall be entitled to the following remunerations :- (a) An office allowance for the first six months from the date of these presents a sum of Rs. 800 (eight hundred) per month; for the next six months thereafter at the rate of Rs. 1, 200 (one thousand two hundred per month; and thereafter at the rate of Rs. 1, 500 (one thousand five hundred) per month; with a provision to increase this allowance, from time to time as the business increases, at the discretion of the directors to a maximum of Rs. 5, 000 (five thousand) per month, provided however that the salaries of the staff and other expenses for the business of the company shall be borne by the company and shall not be included in the said office allowance (b) The managing agents shall also be entitled to a remuneration of ten per cent. of the annual net profits of the company as defined by Section 87-C (3) of the INdian Companies Act provided however that the managing agents agree to waive such portion or the full amount of their remuneration of 10% on the said annual net profits, as may be necessary in any year, in which the said annual net profits of the company are not sufficient for declaration of at least six per cent dividend on the paid up share capital of the company (c) The abovesaid remuneration shall be paid by the company to the managing agents during the period of their appointment, namely 20 yearsclause 8 : Except in the case of the managing agents being found guilty of fraud or gross negligence or in cases where the law provides, the managing agents shall not be liable to be discharged from their office or be liable to indemnify the company or any one else fro any acts or omissions does by them in the discharge of their duties as managing agents of the company. IN all such cases, the company shall indemnify the managing agents for any loss or damage suffered by them Clause 9 : The managing agents shall also be entitled to be indemnified for loss or damage that they may suffer by reason of failure or default or breach of any of the conditions herein on the part of the said company The second item of claim is made up of two amounts (1) Rs. 1, 560 as office allowance due from 1st March, 1947, to 9th April, 1947, at the rate of Rs. 1, 200 per month, and (2) and amount of Rs. 47, 840 being such allowance for the period from 10th April, 1947, to 6th December, 1949, at the rate of Rs. 1, 500 per month This item is expressly founded on clause 3 (a) of the agreement. Prima facie the appellant appears to be entitled to the amount of this item. The company was wound up only on 6th December, 1949, and the amount is claimed in respect of a period anterior to this date. The claim was resisted by the respondents mainly on the following grounds (a) that the suspension of the managing agent by a resolution of the company dated 6th October, 1946, was proper and therefore the appellant was not entitled to any remuneration or office allowance thereafter; (b) that the managing agency firm had ceased to exist when it must be deemed to have been dissolved by one of the partners severing his connection with the firm; (c) that the winding up of the company was due to the negligence, default and mismanagement of the managing agentsbefore the Official liquidator, apart from these grounds which were contained in the affidavit filed by the respondents in answer to the claim, certain other legal objections were also raised. These objections are founded on the provisions of the INdian companies Act. The learned Judge held that the resolution of the 6th October, 1946, purporting to suspend the managing agency was ultra vires and invalid. He further held that notwithstanding the retirement of one of the partners, Mr. Oates, the managing agency firm must be deemed to have continued and therefore there had been no lawful termination by the company of the services of the managing agents. The learned Judge also found that the winding up was not brought about by the negligence and default of the managing agents in carrying out their duties and that therefore the managing agents had not disentitled themselves to any compensation for the termination of the contract. These findings were not challenged by the learned counsel for the respondents before us. But the learned Judge disallowed this item of claim because in his opinion the amount specified as office allowance was not in the nature of a minimum remuneration, that the managing agents would be entitled to be paid office allowance only so long as the company functioned and that the managing agents were prevented from being in charge of the company Learned counsel for the appellant contended that the amount referred to in clause (3) of the agreements as office allowance is really in the nature of minimum remuneration. IN the alternative he contended that he would be entitled to the amount claimed as office allowance. Both sides relied on certain provisions of the INdian Companies Act which we shall now set out. Section 87-C of the Act in so far as it is material runs as follows " (1) Where any company appoints a managing agent after the commencement of the INdian Companies (Amendment) Act, 1936, the remuneration of the managing agent shall be a sum based on a fixed percentage of the net annual profits of the company, with provision for a minimum payment in the case of absence of or inadequacy of profits, together with an office allowance to be defined in the agreement of management; (2) Any stipulation for remuneration additional to or in any other from than the remuneration specified in sub-section (1) shall not be binding on the company unless sanctioned by a special resolution of the company. " *