Companies Act Case Law Mohan Lal Vs Grain Chamber Ltd

PETITIONER:
MOHAN LAL & ANR.

Vs.

RESPONDENT:
GRAIN CHAMBER LTD., MUZAFFARNAGAR & ORS.

DATE OF JUDGMENT:
15/11/1967

BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
SIKRI, S.M.

CITATION:
1968 AIR 772 1968 SCR (2) 252
CITATOR INFO :
RF 1976 SC 565 (29)
ACT:
Sugar (Futures & Options) Prohibition Order,1949-
Notification making order applicable to gur-Company settling
outstanding contracts in “futures” in gur at rate
prevailing on the day previous to notification-Validity-
Frustration-Contract Act, s. 56.
Indian Companies Act, 1913, ss. 18, 86F, 861, 91B,Regulation
94 Table A–Directors doing transactions with company-
subsequent discovery of disqualification-Applicability of
Regulation-Winding Substratum when can be said to have
disappeared.

 

HEADNOTE:
The respondent-company, registered under the Indian
Companies Act 1913, was formed for the purpose of carrying
on the business of an exchange in various commodities
including gur and started its business in 1931. The Articles
of Association of the Company provided that no person
could remain a member of the company who was found not to be
doing any transaction or business through the company. The
Board of Directors of the company on March 14, 1949, passed
a resolution sanctioning transactions in ‘futures’ in gut.
All the directors present at the meeting were, those who
carried on business in ‘futures’ in gut with the company
and did after March 14, 1949 carry on that business. The
company’s business was devised on the basis of the Companies
Act, 1913, as Originally enacted, when there was no
prohibition against a director entering into transactions
with the company. Even after the Amendments to the
Company’s Act by Act 22 of 1936 which imposed
disqualification on directors entering into transactions
with their companies, the modus operandi of the business
of the company continued to remain the same as it was
previously.
The appellant-company qualified for membership of the
respondent company and entered into dealing with it in
‘futures’ in gut and deposited large amounts with the
respondent in respect of their transactions. On February
15, 1950 the Government of India issued a notification
amending the Sugar (Futures & Options) Prohibition Order and
made it applicable to ‘futures’ and Options in Gur. By that
order no person could, after the appointed day, enter into
‘future’ in gur or “pay or receive or agree to pay or
receive any margin in connection with any such futures.” The
Board of Directors of the respondent on February 15, 1950
resolved to settle outstanding transactions at the
prevailing rate on the closing day of February 14. 1950.
The appellants then filed a petition for winding up of the
Company. The High Court dismissed the petition.
In appeal to this Court it was contended that: (i) by
virtue of the notification dated February 15, 1950, all
outstanding transactions in ‘futures’ in gut became void
(ii) the resolution dated March 14, 1949, which permitted
the company to enter into transactions in ‘futures’ in gut
was invalid since the directors who took part in the meeting
were disqualified under ss. 861(1)(h) and 91-B of the Indian
Companies. Act, 1913, as amended by Act 22 of 1936 and the
company had not incorporated in its Articles Regulation 94
of Table A, which validated acts done by directors when
disqualifications attaching to them were subsequently
discovered; (iii) the resolution dated February 15, 1950 was
not passed in the interests of the company and the
resolution amounted to repudiation
253
of the contracts by the company; and (iv) by reason of the
notification by the Government the substratum of the company
was destroyed and no business could be carried on by the
company thereafter.
HELD: No Case was made out for winding up of the company.
(i) The notification prohibiting transactions in ‘futures’
in gut operates only prospectively. The prohibition imposed
against payment or agreement to pay or receive margin is
made in connection receipt or agreement and the expression
‘such’ futures’ means transactions in futures to be entered.
into on or after the date if the notification.No express
provision has been made to invalidate outstanding
transactions in ‘futures’ and there are clear indications in
the terms of the notification which show a contrary
intention. [259 A-D]
(ii) The resolution dated March 14, 1949 cannot be
challenged in view of Regulation 94 of Table A. By the
operation of s. 18 of the Companies Act the Regulation must
be deemed to be incorporated in the Articles of Association
of the CompanY.The Regulation was not expressly excluded by
the Articles; it was not excluded by implication,because,
it was not inconsistent with any other express provision in
the Angeles. There is no evidence that the directors were
aware of the disqualification which would be incurred by
entering into transactions with the company without the
express sanction of the directors and by the subsequent
discovery of such a disqualification the resolution was
not rendered invalid. [262 C-G]
Section 91-B imposes a prohibition against a director voting
on any contract or arrangement in which he is “directly or
indirectly concerned interested”. By passing a resolution
that the company shall commence or “. By passing a in gur
the directors were not voting on a contract or business in
futures. in gur the directors were not voting on a
contract or arrangement in which they were directly
concerned. [262-H-263 B]
(iii) In passing the resolution dated February 15, 1950, the
Board of Directors acted, in the light of the situation
prevailing then, as prudent businessmen for the protection
of the interests of the company and its members. Since,
after the notification. no reverse transaction to protect
the company against loss, if a member failed to pay margin,
was possible, the company had to devise effective means to
settle the outstanding transactions. The resolution did not
put an end to outstanding contracts; it merely fixed the
rate at which transactions were to be settled on the due
date, the possibility of any fresh transactions in futures
so long as the notification remained in force being
completely ruled out. The contracts, if they were to be
settled by payment of differences, could still be settled on
the due date at the rates fixed and it was open to the
appellants 10 deliver goods’ under the contract if they
desired to do so. Imposition by the Central Government of a
prohibition by its notification dated March 1, 1950,
restraining persons from offering and the Railway
administration from accepting for transportation by rail any
gur except with the permit of the Central Government does
not lead to frustration of the contracts. [263 C-H; 265
C–D]
(iv) In the present case the object for which the company
was incorporated has not substantially failed and it cannot
be said that the company could not carry on its business
except at a loss nor that its assets’ were insufficient to
meet its-liabilities.Primarily the circumstances existing’
at’ the date of the petition must be taken into
consideration for determining whether a case is made out for
holding that it is lust and equitable that the company
should be wound up [266 C, D]
LISup. C1/68–2
254

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 114 and
115 of 1965.
Appeals from the judgment and decree dated May 7, 1958
of the Allahabad High Court in Special Appeals Nos. 46 and
48 of 1952.
N.D. Karkhanis and J.P. Aggarwal, for the appellants (in
both the appealS).
Shanti Bhushan and B.P. Maheshwari, for the respondents
(in both the appeals).
The Judgment of the Court was delivered by
Shah, J. The Grain Chamber Ltd,, Muzaffarnagar, a
Company registered under the Indian Companies Act, 1913 with
a share capital of Rs. 1,00,000 divided into 1,000 shares of
Rs. 100 each, was formed for the purpose of carrying on
business of an exchange in grains, cotton, sugar, gut,
pulses and other commodities. By Art. 5 of its Articles of
Association nO person or firm could remain a member of the
Company who was found not to be doing any transaction or
business through the Company for a continuous period of six
months. By Art. 46 it was provided that a member of the
Company who owned 10 shares of the Company in his own name
or in the name of the firm of which he was a proprietor or
partner may be elected a director of the Company. By Art.
51, until otherwise fixed, the quorum in the meetings of
directors was to be four.
In the years 1949 and 1950 the Company was carrying on
business principally in “futures” in gut. The method of
carrying on business in “futures” was explained as follows
by the parties to the dispute in an agreed statement
submitted before the Company Judge. The transactions for
sale and purchase of gut have to be in the units called
‘Bijaks’ of 100 maunds. The buyer and the seller who are
members of the Company negotiate transactions of sale and
purchase in gut through their respective brokers and then
approach the Company. The Company enters into. two
independent contracts whereby the Company is the purchaser
from one and is the seller to the other at rates agreed upon
between the seller and the buyer. The seller has therefore
to sell to the Company a specified quantity and the buyer
agrees to purchase the same quantity from the Company under
an independent contract. For the due performance of their
contracts, the buyer and the seller deposit with the Company
rupee one per maund as Sai and annas eight per maund as
Chook–‘margin’. If there is a rise in the price, the
Company calls upon the seller to pay the difference, and if
he fails to deposit the difference demanded. the Company
enters into a reverse transaction with a purchaser
255
at the current rate of the day and squares up the
transaction of sale. the. purchaser is also entitled to
withdraw from the Company the profits he has made consequent
On the rise in price. If the seller is adjudged an insolvent
or for any other reason is incapable of performing his
obligations, the buyer remains unaffected, Even if the
Company is unable to recover anything from the seller, it
has still to pay to the buyer the profits earned by him.
Similarly if there is a fall in the price, the buyer has to
make good the difference. If on the day fixed for delivery
of goods the parties intend to settle the transaction by
paying and receiving the difference, the Company fixes the
rate at which the transaction is to be settled and the
transaction is settled at the rate fixed by the Company.
Both the buyer and the seller send bills known as “Dailies”
setting out the amounts paid and received according to the
rates fixed.
On March 14, 1949, the Board of Directors of the Company
passed a resolution sanctioning transaction of business in
“futures” in gur for Phagun Sudi 15 Samvat 2006 (March 4,
1950) settlement. On August 9, 1949, Seth Mohan Lal and
Company purchased one share of the Company and qualified for
membership.They commenced dealing with the Company in
“futures” in gur.By December 1949 Seth Mohan Lal and
Company-who will hereinafter be called ‘the appellants’-had
entered into transactions with the Company which aggregated
to 1136 Bijaks of sale of gur for the Paush Sudi 15, 2006
delivery. The appellants also claimed that they had entered
into sale transactions in 2137 Bijaks in the benami names of
five other members.In January 1950 there were large
fluctuations in the prices of gur’, and in order to
stabilise the prices, the directors of the Company passed a
resolution in a meeting held on January 7, 1950, declaring
that the Company will not accept any settlement of
transaction in excess of Rs. 17/8/- per maund. The sellers
were required to deposit margin money between the prices
prevailing on that date and the maximum rate fixed by the
Company. The appellants deposited in respect of their
transactions Rs. 5,26,996/’14/-as margin money. They
claimed also to have deposited amounts totaling Rs. 7 lakhs
odd in respect of their benami transactions.
In exercise of the powers conferred by s. 3 of the
Essential Supplies (Temporary Powers) Act 24 of 1946, the
Government of India issued a notification on February 15,
1950, amending the sugar (Futures & Options) Prohibition
Order, 1949, and made it applicable to “futures” and options
in gur. By that Order entry into transactions in “futures”
after the appointed day was prohibited. On the same day the
Board of Directors of the Company held a meeting and
resolved that the rates of gur which prevailed at the close
of the market on February 14, 1950, viz.,
256
Rs. 17/6/- per maund be fixed for settlement of the
contracts of Phagun delivery.It was recited in the
resolution that five persons including Lala Mohan Lal,
partner of the appellants, were present at the meeting on
special invitation.In cl. 2 of the resolution it was
recited that as the Government had banned all forward
contracts in gur it was resolved to take the prevailing
market rate on the closing day of. February 14, 1950, which
was. Rs. 17/6/per maund for Phagun delivery and to have all
Outstanding transactions of Phagun delivery settled at that
rate’.
Entries were posted in the books of account of the
Company on the footing that a11 outstanding transactions in
futures in gur were settled on February 15, 1950. In the
account of Mohan Lal & Company an amount of Rs 5,26,996/14/-
stood to the credit of the appellants. Against that amount
Rs. 5,15,769/.5/were debited as “loss adjusted”, and on
February 15, 1950, an amount of Rs. 11,227/9/- stood to
their credit. Similar entries were posted in the. accounts
of other persons who had outstanding transactions in gur.
On February 22, 1950, the appellants and their partner
Mohan Lal filed a petition in the High Court of Judicature
at Allahabad for an order winding up the Company. Diverse
grounds were set up in the petition. The principal grounds
were that the Company was unable to pay its debts, that it
was just and equitable to wind up the Company, because the
directors and the officers of the Company were guilty of
fraudulent acts resulting in misappropriation of large
‘funds, and that the substratum of the Company had
disappeared, the business of the Company having been
completely destroyed.
On February 23, 1951, another petition was filed by the
appellants and their partner Mohan Lal for an order winding
up the Company.. It purported to raise certain grounds which
it was, submitted had not been raised in the first petition
and which had arisen since the first petition was
instituted. In the second petition it was averted that by
virtue of the notification issued by the Government, the
forward-contracts in gur had become void and the appellants
were entitled to be repaid all the amounts deposited by
them, that the outstanding’ contracts. stood. rescinded, and
the Company having paid out large sums to its directors and
other shareholders was not in a position to meet its
liability to the appellants.
Brij Mohan Lal, J., held that the Company was not unable
to pay its debts and that it was not just and equitable to
wind’ up the Company on the grounds set out in the petition.
Orders passed by Brij Mohan. Lal, J.’, dismissing..the
petitions were confirmed by the’ High’ Court ‘of Allahabad
in its appellate jurisdic-
257
tion. With certificates granted by the High Court, these
two appeals have been preferred by the appellant’s and their
partner Mohan Lal.
The High Court held that by the notification dated February
15, 1950, the outstanding transactions of “futures” in gur
did not become void; that in. fixing the rate of settlement
by resolution dated February 15, 1950, and settling the
transactions with the other contracting parties at that rate
the directors acted prudently and in the interests of the
Company and of the shareholders, and in making payments to
the parties on the basis of a settlement at that rate the
directors did not commit any fraudulent act or misapply the
funds.of the Company; that the case of the appellants that
apart from the transactions entered into by them in their
firm name, they had entered into other transactions benami
in the names of other firms, and that the Company had mala
fide settled those transactions with those other firms was
not proved; and that the Board of Directors was and remained
properly constituted at all material times and no provision
of the Companies Act was violated by the directors trading
with the Company.
Counsel for the appellants contended (a) that by virtue
of the- Notification issued by the Central Government on
February 15, 1950, all outstanding “futures” in gur became
void; (b) that the resolution dated March 14, 1949, was void
because there was no quorum at the meeting of the Company;
(c ) that their solution dated February 15, 1950 by the
Board of Directors was not passed in the interests of-the
Company but to serve private interests of the directors; (d)
that the Company having. repudiated the outstanding
contracts, it was bound to refund the deposits received from
the members; and (e) that in any event, the substratum of
the Company ceased to exist, and the Company could not after
the Government Notification carry on business in gur.
In support of his contention that by the order isued by
the Central Government on, February 15,1950, the outstanding
transactions in futures in gut became void, counsel for the
appellants relied’ upon a press-note issued by the
Government of India relating to the amendments made in the
Sugar (Futures and Options) Prohibition Order, 1949. In the
press-note apparently it was stated that all transactions in
,futures” in sugar, gur, gur shakkar, and rab made before
the commencement of the order or remaining to be fulfilled’
shall be void and not enforceable by law. The
interpretation of the order depends not upon how the
draftsman of the press-note understood the notification, but
upon the words used therein..The relevant clauses of the
Order, after the amendment, ,read as follows:
” 2′ (d) Futures in sugar and gur mean
any agreement relating to the purchase or sale
of sugar or gur on
258
a forward basis and providing for delivery at
some future date and payment of margin on such
date or dates, as may be expressly or
impliedly agreed upon by the parties.
2(e) ‘margin’ means the difference
between the price specified in an agreement
relating to the purchase of or sale of sugar
and gur and the prevailing market price for
the same quality and quantity of sugar or gut
on a particular day.
2(f) ‘Option in sugar or gur’ means an
agreement for the purchase or sale of a right
to buy or a right to sell or a right to buy
and sell, any sugar or gut in future and
includes a teji-mandi and teji-mandi in any
sugar.
3. On or after the appointed day no
person shall–
(a) save with the permission of the
Central Government in this behalf or of an
officer authorised by the Central Government
in this behalf, enter into any futures in
sugar or gur, or pay or receive or agree to
pay or receive any margin in connection with
any such futures.
(b) enter into any option in sugar or gur.
4. Any option in sugar or gur entered
into before, the appointed day and remaining
to be performed. whether wholly or in part
shall be void within the meaning of the,Indian
Contract Act, 1872, and shall not be
enforceable by law.”
By cl. 3(a) all persons are prohibited, save with the
permission of the Central Government in that behalf from
entering into “futures” in sugar or gut: the clause also
prohibits receipt or payment of, or agreement to pay or
receive any margin in connection with any such futures. The
clause in terms operates prospectively. Clause 3(b)
prohibits options in gut and sugar, and el. 4 expressly
invalidates options in sugar and gut entered into before the
appointed day and remaining to be performed whether wholly
or in part. The contrast between the provisions relating to
“futures” and “options” is striking. While imposing a
prohibition on options, the Central Government has also
expressly provided that all outstanding options shall be
void. No such provision is made in respect of outstanding
“futures”. Counsel for the appellants however commended
that when the Central Government imposed a prohibition
against payment or receipt or agreement to pay or receive,
any margin in connection with the outstanding “futures,” the
“futures” were also prohibited. But the prohibition imposed
against payment or receipt, or’ agreement to
259
or receive margin is made in connection with such
futures,pay and the expression such futures means “futures”
of the like or similar kind previously mentioned,i e
transactions in “futures” to be entered into on or after
February 15, 1950. If it was intended by the Central
Government to declare void outstanding transactions in
“futures”, the Central Government would. specifically have
imposed a prohibition against payment or receipt of,or
agreement to pay or receive, margin in connection with.
all”futures”. A transaction in “future” in gur may be
settled by payment of margin or by actual delivery, and the
Order does not prohibit the settlement of the transaction by
specific delivery of goods. If the plea for the appellants
be accepted, the Central Government may be attributed a
somewhat singular intention of permitting outstanding
futures in gur to be carried out by giving and taking actual
delivery of goods contracted for, but not by payment and
receipt of margin.if it was intended to invalidate
transactions in futures which were outstanding on February
15,1950, an express provision to that effect could have been
made.No such provision has been made, and there are clear
indications in the terms of the notification which show a
contrary intention. Prohibition against payment or receipt
of margin money under, transactions entered into after
February 15,1950 is not redundant: it was enacted presumably
with a view to maintain control over the transactions made
with the sanction of the Central Government.
But, said counsel for the appellants, the resolution
dated March 14, 1949, which permitted the Company to enter
into transactions in “futures” in gut was invalid, because
the directors who took part in the meeting were disqualified
under ss. 861(1) (h) and 9lB of the Indian Companies Act,
1913, and the Company could not retain money paid in
pursuance of unauthorised transactions, It was resolved
unanimously in the meeting of the Board of Directors
convened on March 14, 1949, that forward transactions in gut
for Phagun Sudi 15, Samvat 2006, i.e., March 4, 1950 “may be
started according to the rules” laid down therein. It was
said that the resolution which authorised transactions of
“futures” in gur in the manner in which the Company was
carrying on its business entailed disqualification of the
Directors and as the Directors were disqualified there was
no quorum and no proper resolution and therefore all
transactions entered into and any payment made pursuant to
that resolution were invalid and the Company was bound to
refund the amounts paid by the appellants from time to time.
The Company had 11 directors: out of these 9 directors were
carrying on business with the Company. It appears that at
the meeting dated March 14, 1949 all the directors present
were those who carried on business in “futures” in gur with
the Company, and did after March 14, 1949,
260
carry on that business. Under the Indian Companies Act,
1913, as originally enacted, there was no prohibition
against a director entering into transactions with the
Company, and on that footing the scheme of the Company’s
business was devised. Under the Articles…of Association
no person could remain a member of the Company who was found
not to’ be doing any transaction or business :through the
Company continuously for six months, and a person could be
elected a director if he held 10 shares in his own name or
in the name of the firm of which he was a proprietor or a
partner. A director of the Company had therefore to hold
ten shares and had to carry on business with the Company.
If he ceased to do business for a period of six months he
ceased to be a member of the Company, and on that account
ceased also to be a director of the Company. The Articles of
Association prescribed diverse contingencies in which a
director was to vacate his office, but carrying on business
with the Company was not made a ground of disqualification
The Company had started business in the year 1931. In
1936, several important amendments were made in the Indian
Companies Act 1913. By s. 86F which was incorporated by Act
22 of 1936, it was provided:
“Except with the consent of the directors,
a director of the company, or the firm of
which. he is a partner or any partner of such
firm, or the private company of which he is a
member or director, shall not enter into any
contracts for the sale, purchase or supply of
goods and ‘materials with the company,
Section 861 enumerated the Conditions or situations in
which the office of’ director was vacated.- Insofar as the
section is material it provides:
“(1) The office of a director ‘shall be vacated if__
(h) he acts in contravention of section 86F.
Section 91B which was inserted by Act 11 of 1914 as modified
by Act 22 of 1936 by the first sub-section provided:
“No director shall, as a director, vote on
any contract or arrangement in which he is
either directly or ‘indirectly concerned or
interested nor shall his presence ‘count for
the purpose of forming a quorum at the time of
any such vote;and if he does so vote his vote
shall not be counted :”
261
After the amendment of the Indian Companies Act by Act 22 of
936, the Rules of the Company were not modified and the
Company apparently carried on business in the same manner in
which it was originally carrying on its business. It
appears that the directors were oblivious of the
requirements of s. 86F and of the provisions of s. 861 and
s. 91B, and the modus operandi of the business continued to
remain the same as it was previously. On the terms of s.
86F(1) all directors of the Company were prohibited, unless
the directors consented thereto, from entering into
contracts for the sale, purchase or supply of goods and
materials with the Company. On behalf of the Company it was
urged that by the resolution dated March 14, 1949, the
directors resolved generally to sanction all transactions of
the directors for the sale and purchase in commodities in
which the Company carried on business, and on that account
notwithstanding the prohibition contained in s. 86F, the
directors did not vacate their office. Counsel for the
appellants urged that the consent of the directors
contemPlated by s. 86F is consent in respect of each
specific contract to be entered into and no general consent
can be given by the directors authorising a director or
directors of the Company to sell, purchase or supply goods
and materials to the Company. Such a general resolution
without considering the merits of each individual contract
would, it was urged, amount to repealing the provisions of
s. 86F. Strong reliance was placed upon the judgment of the
Bombay High Court in Walchandnagar Industries Ltd. and
others v. Ratanchand Khimchand Motishaw(1).
It is not necessary for the purpose of this case to
decide whether in any given set of circumstances a general
consent may be given by the Board of Directors, to a
director or directors to enter into contracts for sale or
purchase or supply of goods and materials with the Company
so as to avoid the prohibition contained in s. 86F of the
Indian Companies Act, for, in our view, the resolution dated
March 14, 1949, cannot be challenged in view of Regulation
94 of Table A which, for reasons to be presently mentioned
must be deemed to be incorporated in the Articles of
Association of the Company.
Regulation 94 of Table A in the First Schedule is not
one of the obligatory regulations which is to be deemed by
s. 17(2) of the Indian Companies Act 1913 to be incorporated
in the Articles of Association. Section 18 provides:
“In the case of a company limited by
shares and registered after the commencement
of this Act, if articles are not registered,
or, if articles are registered, insofar as the
articles do not exclude or modify the
regulations
(1) I.I.R. [1953] Bom. 623,
262
in Table A in the First Schedule those regulations shall, so
far as applicable, be the regulations of the company in the
same manner and to the same extent as if they were contained
in duly registered articles.”
The respondent Company is limited by shares and was
registered after the commencement of the Indian Companies
Act, 1913: the Company has adopted special Articles of
Association, but there is no Article which excludes or
modifies Regulation 94 of Table A, and by the operation of s.
18 of the Act that Regulation must be deemed to apply in the
same manner and to the same extent as if it was contained in
the registered articles of the Company. We are unable to hold
that because the Company has not incorporated regulation 94
of Table A in its Articles of Association, an intention to
exclude the applicability of the regulation to the Company
may be inferred. Regulation 94 of Table A is not expressly
excluded by the Articles of the Company that is common
ground. It is not excluded by implication for it is not
inconsistent with any other express provision in the
Memorandum of the Articles of Association. It, therefore.
follows that Regulation 94 must be deemed to be incorporated
in the Articles of Association of the Company. That
Regulation provided:
“All acts done by any meeting of the
directors or of a committee of directors, or by
any person acting as a director shall,
notwithstanding that it be afterwards
discovered that there was some defect in the
appointment of any such directors or persons
acting as aforesaid. or that they or any of
them were disqualified, be as valid as if every
such person had been duly appointed and was
qualified to be a director.”
There is no evidence that the directors were aware of the
disqualification which would be incurred by entering into
contracts of sale or purchase or supply of goods with the
Company without the express sanction of the directors.By the
subsequent discovery that they had incurred disqualification,
because they had entered into contracts with the Company for
sale or purchase or supply of goods,the resolution passed by
them is not rendered invalid.It is in the view we have taken,
unnecessary to decide whether s. 86 of the Indian Companies
Act 1913 also grants protection to acts done by directors who
are subsequently discovered to be disqualified.
Section 91B imposes a prohibition against a director
voting on any contract or arrangement in which he is either
directly or indirectly concerned or interested. But the
directors of the Company are not shown to have voted on any
existing contract or
263
arrangement. At the meeting dated March 14, 1949, they
resolved that the Company shall commence business in
“futures” in gur according to the rules set forth in the
resolution. Thereby the directors were not voting on a
contract or arrangement in which they were directly or
indirectly concerned or interested.
It must then be considered whether the resolution of
February 15, 1950, was passed by the Board of Directors with
a view dishonestly to make profit for themselves and for
others who were purchasers, and to cause loss to the
appellants. In the light of the situation prevailing on
February 15, 1950, in our judgment, the Board of Directors
acted, in passing the resolution, as prudent businessmen for
the protection of the interests of, the Company and the
members. Since the promulgation of the sugar and Gur
(Futures and Options) Prohibition Order, 1950, if any member
of the Company failed to pay the margin, the Company could
not enter into a reverse transaction. That was prohibited.
Whereas the outstanding transactions were valid, a very
important sanction which the Company could impose against
the member who failed to pay the margin became ineffective.
It was therefore necessary in the interest of the Company to
devise an effective scheme for settlement of those
transactions. Again in view of the imposition of severe
restrictions by the Government on transport of gut by rail
or by mechanised transport, it was well-nigh impossible for
the members to give or take delivery of gut. It was
therefore resolved that all outstanding contracts shall be
settled at the rate prevailing on the evening of February
14, 1950. It may be recalled that on January 7, 1950, the
Board of Directors had resolved, because the prices of gur
were spiraling that all outstanding transactions in gut will
be settled at the rate of Rs. 17/8/’- per maund whatever may
be the price ruling at the date of settlement. The
appellants had sold 1,123 Bijaks of gut at an average rate
of Rs. 12/13/9 per maund, and those transactions in
“futures” were not invalidated by the notification issued by
the Government. But since no. reverse transaction to
protect the Company against loss, if a member failed to pay
margin, was possible, the only practical way out was to
provide for settling the outstanding transactions. This the
Board of Directors did by taking the rate which was
prevailing in the evening of February 14, 1950, as the rate
of settlement of all the outstanding transactions. The
resolution, however, did not put an end to the outstanding
contracts as on February 15, 1950: the resolution merely
fixed the rate at which the transactions were to be settled
on the due date, the possibility of any fresh transactions
in futures so long as the Order remained in force being
completely ruled out. It may, be noticed that the
appellants’ representative, was present at the meeting, and
he was apparently heard. Whether or not he agreed to the
passing of the resolution iS immaterial. But we are unable
to hold that the resolution was passed with a view
264
to benefit the directors: it appears that the resolution was
passed with a view to protect the interests of the Company
and its members.
But it was urged that simultaneously large amounts were
tended to be paid to the members who had purchase contracts
outstanding, and for that purpose it was resolved to borrow
money from the Allahahad Bank and the Central Bank of India
Ltd. This, it was urged, disclosed anxiety on the pan of the
directors to appropriate to themselves the liquid funds and
to deprive the appellants of the benefit of any fall in the
prices after February 15, 1950. It is true that in the books
of account of the Company the transactions were shown to have
been settled as on February 14, 1950. But we agree with the
High Court that the entries in the books of account of the
Company were not in accordance with the resolution, and no
intimation was given to any of the members of the Company
‘that the transactions were so closed. There is no clear
evidence about the dates on which payments were made to the
purchasers in respect of their out. standing transactions.
But that in our judgment is not material. It appears from the
agreed statement flied before the Company Judge that if the
seller made a deposit to cover the rise in prices, the
purchaser was entitled to withdraw from the Company the
profit which he had made under his cross transaction. even
before the date of settlement. It was clearly contemplated
that when a seller deposited the difference between the price
at which he had agreed to sell gut, for future delivery the
ruling rate being higher than the rate at which he had agreed
to sell, it was open to the purchaser to approach the Company
and to call upon it to pay him the profit. Whether or not
this right was strictly enforced is irrelevant. It appears
from Ext. D-10 that as many as 133 persons having sale
transactions had made deposits of diverse amounts with the
Company aggregating to Rs. 36,38,932/2/9. The purchasers
under the corresponding transactions were entitled to
withdraw the profits. earned by them out of the deposits so
made. By allowing the purchasers to withdraw the amounts
which they were entitled to under the business rules of the
Company after the contracts were frozen, the directors of the
Company acted according to the rules and not contrary
thereto.
The attitude of the appellants in respect of the
outstanding contracts since February 15, 1950, has also an
important bearing. On February 23, 1950, the management of
the Company addressed a letter informing the appellants that
in the interests and for the benefit of the trade, the Board
of Directors had passed a resolution on February 15, 1950, to
settle the outstanding, transactions at the rate prevailing
in the market on February 14, 1950; That resolution, it was
stated, was for the benefit of the appellants,
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but if the appellants wanted to deliver the goods, they
should intimate the date and place on which they were
prepared to give delivery of goods according to the
outstanding contracts on Phagun Sudi 15, Sam vat 2006 in
terms of the rules and bye-laws of the Company. The
appellants denied having received this letter.’ But we are
unable to accept that denial. On March 1, 1950, the
appellants wrote a letter stating that because of the
notification issued by the’ Central Government the
performance of the contracts had become impossible, and that
the Company was liable to refund all the amounts deposited
with interest thereon, and that the illegal settlement dated
February 15, 1950, amounted to repudiation of the contracts
by the Company and those contracts stood rescinded. The
appellants apparently insisted that the transactions became
impossible of performance in view of the prohibition
contained in the notification published by the Central
Government, and contended that the resolution amounted to
repudiation of the contracts by the Company. But by the
resolution, in our judgment, there was no repudiation of the
contracts by the Company. The contracts, if they were to be
settled by payment of differences, could be settled on the
due date at the rates fixed: it was however open to the
appellants to deliver goods under the contracts if they
desired to do so.
The plea that there was frustration of the contracts, and
on that account the Company was liable to refund all the
amounts which it had received, has no substance. As we have
already held, the outstanding contracts were not at all
affected by the Government Order. Imposition by the Central
Government of a prohibition by its notification dated March
1, 1950 restraining persons from offering and the Railway
Administration from accepting for transportation by rail any
g.r, except with the permit of the Central Government from
any station outside the State of Uttar Pradesh which was
situated within a radius of thirty miles from the border of
Uttar Pradesh does not lead to frustration’ of the
contracts. Fresh contracts were prohibited but settlement of
the outstanding contracts by payment of differences was not
prohibited, nor was delivery of gut in pursuance of the
contract and acceptance thereof at the due date by the
Company prohibited. The difficulty arising by the Government
orders in transporting the goods needed to meet the contract
was not an impossibility contemplated by s. 56 of the
Contract Act leading to frustration of the contracts.
Finally, it was urged that by reason of the notification
issued by the Central Government, the substratum of the
Company was destroyed and no business could be carried on by
the Company thereafter. 11 was said that all the liquid
assets of the Company were disposed of and there was no
reasonable prospect of the Company commencing or carrying on
business thereafter.
266
The Company was carrying on extensive business in
“futures” in gut, but the Company was formed not with the
object of carrying on business in “futures’ in gut alone,
but in several other commodities as well. The Company had
immovable property and liquid assets of the total value of
Rs. 2,54,000. There is no’ evidence that the Company was
unable to pay its debts. Under s. 162 of the Indian
Companies Act, the Court may make an order for winding up a
Company if the Court is of the opinion that it is just and
equitable that the Company be wound up. In making an order
for winding up on the ground that it is just and equitable
that a Company should be wound up, the Court will consider
the interests of the shareholders as well as of the
creditors. Substratum of the Company is said to have
disappeared when the object for which it was incorporated
has substantially failed, or when it is impossible to carry
on the business of the Company except at a loss, or the
existing and possible assets are insufficient to meet the
existing liabilities. In the present case the object for
which the Company was incorporated has not substantially
failed, and it cannot be said that the Company could not
carry on its ‘business except at a loss, nor that its assets
were insufficient to meet its liabilities. On the view we
have taken, there were no creditors to whom debts were
payable by the Company. The appellants had, it is true,
filed suits against the Company in respect of certain gur
transactions on the footing that they had entered into
transactions in the names. of other persons. But those suits
were dismissed. The business organisation of the Company
cannot be said to have been destroyed, merely because the
brokers who were acting as mediators in carrying out the
business between the members had been discharged and their
accounts settled. The services of the brokers could again
be secured. The Company could always restart the business
with the assets it possessed, and prosecute the objects for
which it was incorporated. It is true that because of this
long drawn out litigation, the Company’s business has come
to a stand-still. But we cannot on that ground direct that
the Company be wound up. Primarily, the circumstances
existing as at the date of the petition must be taken into
consideration for determining whether a case is made out for
holding that it is just and equitable that the Company
should be wound up, and we agree with the High Court that no
such case is made out.
The appeals fail and are dismissed with costs. One hearing
fee.
Y.P. Appeal dismissed
Y.P.
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