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Full Case Details
J.C. SHAH, J. – The Grain Chamber Ltd., Muzaffarnagar, a Company registered under the
Indian Companies Act, 1913 was framed for the purpose of carrying on business of an
exchange in grains, Cotton, sugar, gur, pulses and other commodities. In the years 1949 and
1950 the Company was carrying on business principally in “futures” in gur.
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. 17-8-0 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. 5,26,996-14-0 as
margin money. They claimed also to have deposited amounts totalling Rs. 7 lakhs odd in
respect of their benami transactions.
In exercise of the powers conferred by Section 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 and 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., Rs. 17-6-0 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 Clause 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 Rupees 17-6-0 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 all
outstanding transactions in futures in gur were settled on February 15, 1950. In the account
of Mohan Lal and Company an amount of Rs. 5,26,996-14-0 which stood to the credit of the
appellants. Against that amount Rs. 5,15,769-5-0 were debited as “loss adjusted,” and on
February 15, 1950, an amount of Rs. 11,227-9-0 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 of 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.
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 jurisdiction. With certificates granted by the High Court, these two
appeals have been preferred by the appellants 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 the 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 malafide settled those transactions with those other firms were not proved; and
that the Board of Directors was and remained properly constituted at all material times and no
provision of the Company Act was violated by the directors trading with the Company.
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. It was said that all the liquid assets of the Company were disposed of
and there was no reasonable propsect of the Company commencing or carrying on business
thereafter.
The Company was carrying on extensive business in “futures” in gur, but the Company
was formed not with the object of carrying on business in “futures” in gur 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 carringout 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 standstill. 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.
