GULAMHUSEIN AND TWO OTHERS V. COHEN AND TWO OTHERS

062-SLLR-SLLR-1995-2-GULAMHUSEIN-AND-TWO-OTHERS-V.-COHEN-AND-TWO-OTHERS.pdf


CA
Gulamhusein and Two Others v. Cohen and Two Others
365
GULAMHUSEIN AND TWO OTHERS
v.
COHEN AND TWO OTHERS
COURT OF APPEAL.
S. N. SILVA, J. (P/CA)
RANARAJA, J.
A. 224/94 WITH CALA 90/94.
C. COLOMBO 3794/SPL.
MARCH 21,30, AND APRIL 1, 1995.
Injunction – Dispute between two sets of shareholders – Interim Injunction -Rights of Parties – Matters to be considered in granting an Interim Injunction.
The 1st and 2nd Plaintiff Respondents, Nationals of United States of Americaestablished a Company called G. M. Inc. based in New York. (3rd PlaintiffRespondent). The 1st and 2nd Plaintiff Respondents established a garmentfactory in Sri Lanka in collaboration with the 1st and 2nd Defendant Petitioners.For this purpose a Company bearing the same Name as the U. S. Company ofthe 1 st and 2nd Plaintiff Respondents was registered in Sri Lanka – G. M. (Pvt)Ltd., Colombo. The two sets of shareholders of the Sri Lankan Company are the'Cohens’ (1-2 Plaintiffs) from U. S. A. and Gulamhuseins (1-2 Defendants fromSri Lanka. The only other share holder is one W.
The ‘Cohens’ sought to pass a resolution to remove the ’Gulamhuseins’ asDirectors, and for this purpose an Extraordinary General Meeting was summoned.An Interim Injunction was sought and obtained by the ‘Cohens’ to restrain theGulamhuseins from obstructing and interfering with the business operations of theCompany.
Held:
District Court has not considered the primary question whether the Plaintiffshave established prima facie that they can have the Defendants removed asDirectors upon a resolution in terms of S. 185(2) of the Companies Act. Inconsidering the question, whether the Plaintiff can have the Defendants removedas Directors, the matter of the respective share holdings is the materialconsideration. The Plaintiffs have taken a contradictory stand on this matter.
The Plaintiffs came to court on the basis that they can have the defendantsremoved as Directors at the E. G. M. to be convened. If so, they should establishprima facie a right to have the Defendants removed on the basis of a superiorshareholding or on other grounds, on the basis of which they can establish thatthe resolution for removal would probably be passed.
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The question with regard to balance of convenience and equitableconsideration have to be considered in the light of the established fact that theDefendants have been Directors of the Company and have been in control of itsaffairs from the inception.
APPLICATION in Revision from the Order of the District Court of Colombo.
Cases referred to:
Bandaranaike v. The State Film Corporation -1981 – 2 SLR 287.
Hubbard v. Vosper 1972 1 All ER 1023, 1029.
Richard Perera v. Albert Perera – 67 NLR 445.
Gamage v. Minister of Agriculture and Lands – 76 NLR 25,43, 44.
Yakaduwe Sri Pragnarama Thero v. Minister of Education-71 NLR 506,511.
Ceylon Hotels Corporation v. Jayatunga – 74 NLR 443, 446.
Dutches of Argyll v. Duke of Argyll-1967 1 Ch. 302,331,332.
Monson v. Tussauds Ltd., -1894 1 QB 671 CA.
Romesh de Silva, PC., with Harsha Amarasekera and Kushan de Alwis forDefendant Petitioners.
K. Kanag Iswaran, P.C., with Anil Tittawella for Plaintiff-Respondents.
Cur. adv. vult.
July 01,1995.
S.N. SILVA, J.
The above action has been filed by the three Plaintiff-Respondentsin view of a dispute between the two sets of share holders of the 3rdDefendant-Petitioner Company (Giorgio Morandi (Pvt) Ltd. Sri Lanka).The 1st and 2nd Plaintiff-Respondents, being Nationals of the UnitedStates of America (U.S.A.) have established a Company by the nameof Giorgio Morandi Inc. based in New York. The New York company isthe 3rd Plaintiff-Respondent. This Company is engaged in thebusiness of supplying readymade garments to businessestablishments in the U.S.A. The 1st and 2nd Plaintiff-Respondentsdecided to establish a garment factory in Sri Lanka in collaborationwith the 1st and 2nd Defendant-Petitioners. For this purpose aCompany bearing the same name as the U.S.A. Company of the 1stand 2nd Plaintiff-Respondents, was registered in Sri Lanka. The twosets of shareholders of the Sri Lanka Company are the “Cohens" (1stand 2nd Plaintiffs) from the U.S.A. and "Gulamhuseins” (1st and 2nd
CA Gulamhusein and Two Others v. Cohen and Two Others (S. N. Silva, J.)367
Defendants) from Sri Lanka. The only other shareholder is oneWijekoon. The Company established a modern and well-equippedgarment factory at Hanguranketha. It appears that the factory hasbeen in production from early 1990.
The dispute in its essence is one as to the control of the Sri LankaCompany. From its inception, till 11.2.94, the date of the interiminjunction granted in the above action, the “Gulamhuseins" were incontrol. The interim injunction effectively removed them from controland since then “Cohens” have been in control. Several suggestionsfor an amicable settlement were made but they did not materialize. Inview of these attempts at settlement the hearing and disposal of thisapplication and appeal has been delayed.
The above action (No. 3749) was filed by the “Cohens” on 14.7.93and is the earliest in a series of actions now pending in the DistrictCourt of Colombo and appeals and applications pending before thisCourt. This action was filed on the basis that the “Cohens” andWijekoon have a majority of shares in the company. A resolution willbe moved to remove the ‘Gulamhuseins’ as Directors, in terms ofsection 185(1) of the Companies Act No. 17 of 1982. That, specialnotice has to be given of the resolution in terms of section 185(1) andunder section 138, twenty-eight days should lapse from the datenotice is given of the resolution for the Extraordinary General Meeting(E.G.M.) of the Company, to be convened. The principal relief is adeclaration that the 1st and 2nd Defendant-Petitioners(Gulamhuseins) are not entitled to intervene in the business andoperations of the Company till the conclusion of the E. G. M.requisitioned by the Plaintiffs to remove them as Directors. An interiminjunction was sought to restrain the 1 st and 2nd Defendants andtheir servants and agents from obstructing and interfering with thebusiness operations of the Company till the final determination of theaction. Learned District Judge by his order dated 11.2.1994 which ischallenged in these proceedings has granted to the Petitioners theinterim injunction referred to above on the basis that the Plaintiff-Respondents deposit a sum of Rs. 10,000/- as security.
The grounds of challenge of the Defendant-Petitioners are that thelearned District Judge has not considered the rights of parties in
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relation to the relief sought in deciding to grant the interim injunction.That, the interim injunction has been granted without a dueconsideration of applicable legal principles. The Plaintiff-Respondents based their arguments on the premise that the 3rdDefendant Company was set up with the dominant participation ofthe Plaintiff-Respondents and there have been fraudulent shareallocations on the basis of which the Defendant-Petitioners gainedeffective control of the Company. That the interim injunction shouldbe in force until the E. G. M. is held to remove the 1st and 2ndDefendant-Petitioners from the control of the Company.
The above action (No. 3749) has a narrow ambit. The final reliefsought by way of a declaration and the interim injunction relate towhat the 1st and 2nd Defendants are not entitled to do in thebusiness and operations of the 3rd Defendant Company “until theconclusion of the Extraordinary General Meeting requisitioned by thePlaintiffs to remove the 1st and 2nd Defendants as Directors of the3rd Defendant Company”. The basis of the action is that a specialnotice of twenty-eight days should be given in terms of section 138 ofthe resolution to remove the directors under section 185(2). Thereforethe entire span of the action should ordinarily be this period oftwenty-eight days. However by a strange twist of events, the interiminjunction has continued in operation without the E.G.M. beingconvened from 11.2.94 upto date and the affairs of the Companyhave been controlled by the Plaintiffs by virtue of the interiminjunction during this period. It appears that these events are theresult of a web of other cases filed by the parties and a deep seateddispute as to their respective share holdings. There are four othercases as far as I could gather from the papers filed. Case No. 3757has been filed on 28.7.93 by the “Cohens” against the“Gulamhuseins” and certain others challenging the validity of theallotment of shares made on 15.7.93 to the “Gulamhuseins”, theappointment of 3 new directors and the E. G. M. convened for20.8.93 by the Company Secretary who is said to have beenremoved. Case No. 3758 has been filed by the "Gulamhuseins"against the “Cohens” on 29.7.93 challenging the validity of theappointment of the Company Secretary and the E.G.M. convened bythat Secretary scheduled for 2.8.93. Case No. 3761 has been filed bythe “Gulamhuseins” against the “Cohens" on 5.8.93 to restrain them
CA Gulamhuseirt and Two Others v. Cohen and Two Others (S. N. Silva, J.)369
from selling, mortgaging and leasing the property of the company, inparticular the land, buildings and equipment at Hanguranketha. CaseNo. 3800 has been filed by the “Cohens” against the “Gulamhuseins”and Wijekoon, by way of summary procedure for the rectification ofthe register of members of the company in terms of section 113 of theCompanies Act.
It appears that Wijekoon who was with the “Cohens” when theabove action was filed switched sides after summons was issuedand sold his shares to the “Gulamhuseins”. Then the “Cohens”alleged that Wijekoon had not paid for his shares. Learned DistrictJudge in his order has referred to these matters but has finally arrivedat a decision in favour of the Plaintiffs on the basis of the conduct ofthe Defendants. He has observed that if the Defendants wereconfident of defeating the resolution for their removal as directors,they would not have obtained an enjoining order in case No. 3758restraining the E. G. M. being convened on 2.8.93.
Learned District Judge has also commented on the allocation ofshares in a sum of Rs. 200,000/- each to the 1st and 2nd Defendantsafter summons was issued in the case. On this material he appearsto have come to the conclusion that the Plaintiffs have establishedprima facie that the resolution for the removal of the 1st and 2ndDefendants as directors could be passed. Learned District Judgehas relied on the averments in paragraphs 24, 25 and 26 of the plaintwhich state that damage has been caused to the company by acts ofmismanagement of the Defendants. He has observed that theDefendants have not adduced any evidence to contradict theseaverments except to deny them. It is to be noted that theseaverments have not been supported with the evidence even by thePlaintiffs. In the result there are allegations of mismanagement by thePlaintiffs and a denial of these allegations by the Defendant. In theabsence of evidence it would not be possible to make an observationagainst the Defendants on the basis of these allegation.
It is thus seen that the learned District Judge has not consideredthe primary question whether the plaintiffs have established primafacie that they can have the Defendants removed as directors upon aresolution in terms of section 185(2) of the Companies Act. Learned
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District Judge has observed that there is conflicting evidence withregard to the respective shareholdings in the company. This conflictis apparent. The Plaintiffs came into Court on the basis that thePlaintiffs together with Wijekoon command a majority so as to removethe Defendants as directors upon a resolution in terms of section185(2). When confronted with evidence of a transfer of his shares byWijekoon, the Plaintiffs changed their position and contended that theshare allocation to Wijekoon is wrongful. In considering the questionwhether the Plaintiffs can have the Defendants removed as directorsthe matter of the respective shareholdings is the materialconsideration. Plaintiffs have taken a contradictory stand on thismatter. Therefore the learned District Judge was clearly in error whenhe came to a finding in favour of the Plaintiffs solely on the basis ofthe conduct of the Defendants as referred to above. The conduct ofthe Defendants in obtaining an interim injunction in case No. 3758cannot be considered as evidence of a numerically higher shareholding by the Plaintiff. It appears that the interim injunction has beenobtained in case No. 3758 on the basis that the appointment of theCompany Secretary is illegal and that such a Secretary cannotconvene a E.G.M. The Plaintiffs have urged a similar ground withregard to the other Secretary and the E. G. M. convened by thatSecretary, in case No. 3757 filed against the Defendants. Thereforelearned District Judge could not have drawn an inference solely onthe basis of one case and ignored another case filed by the otherparty. Similarly, the allocation of shares after summons was issued isnot a circumstance on which an inference could be drawn in favourof the Plaintiffs as to their strength to remove the Defendants, asdirectors at the E.G. M.
The matters to be considered in granting an interim injunction havebeen crystalised in several judgments of this Court and of SupremeCourt. In the case of Bandaranaike v. The State Film Corporation (,).Soza, J. summarised these matters as follows:
“In Sri Lanka we start off with a prima facie case that is, theapplicant for an interim injunction must show that there is aserious matter in relation to his legal rights, to be tried at thehearing and that he has a good chance of winning. It is notnecessary that the plaintiff should be certain to win. It is
CA Gulamhusein and Two Others v. Cohen and Two Others (S. N. Silva, J.)371
sufficient if the probabilities are he will win. Where however theplaintiff has established a strong prima facie case that he hastitle to the legal right claimed by him but only an arguable casethat the defendant has infringed it or is about to infringe it, theinjunction should not be granted (Hubbard v. Vosper,2)). If theprobability is that no right of the plaintiff will be violated or thathe will suffer no wrong such as the law recognises then theinjunction will not issue – See for instance the case of RichardPerera v. Albert Perera (3) and Gamage v. The Minister ofAgriculture and Lands(4). The case as a whole should be takeninto account and the relative strength of the cases of the plaintiffand the defendant assessed (Hubbard v. Vosper {supra)).
If a prima facie case has been made out, we go on andconsider where the balance of convenience lies – Yakaduwe SriPragnarama Thero v. Minister of Education(S). This is tested outby weighing the injury which the defendant will suffer if theinjunction is granted and he should ultimately turn out to be thevictor against the injury the plaintiff will sustain if the injunctionwere refused and he should ultimately turn out to be the victor.The main factor here is the extent of the uncompensatabledisadvantage or irreparable damage to either party. As theobject of issuing an interim injunction is to preserve the propertyin dispute in status quo the injunction should not be refused if itwill result in the plaintiff being cheated of his lawful right orpractically decide the case in the defendant’s favour and thusmake the plaintiff's eventual success in the suit if he achieves it,a barren and worthless victory – See Bannerjree.
Lastly as the injunction is an equitable relief granted in thediscretion of the Court, the conduct and dealings of the parties(Ceylon Hotels Corporation v. Jayathunga) (6) and thecircumstances of the case are relevant. Has the applicant comeinto court with clean hands? – See Dutches of Argyll v. Duke ofArgyll(7). Has his conduct being such as to constituteacquiescence in the violation of infringement of his rights as theCourt of Appeal in England found in Monson v. Tussauds Ltd.(8)or waiver of his rights to the injunction?”.
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It is seen that the principal question to be considered is whether theplaintiffs have made out a prima facie case that there is a seriousmatter in relation to their legal rights to be tried at the hearing of theaction and that they have a good chance of winning. In this case theplaintiffs have come into court on the basis that they can have theDefendants removed as directors at the E. G. M. to be convened. Ifso they should establish prima facie a right to have the Defendantsremoved on the basis of a superior share holding or on other groundson the basis of which they can establish that the resolution forremoval would probably be passed. The other questions with regardto balance of convenience and equitable considerations have to beconsidered in the light of the established fact that the defendantshave been directors of the company and have been in control of itsaffairs from the inception. It is clear from the foregoing analysis thatthe learned District Judge has not addressed himself to thesematters. In the circumstances I allow this application and set asidethe order dated 11.2.94 granting to the Petitioners an interiminjunction as prayed for in paragraph C of the prayer to the petition.The case is referred back for a fresh inquiry into the application forthe interim injunction as made by the Plaintiffs. Considering the factthat the Plaintiffs have been in control of the affairs of the companyand its business operations for a period of more than one year andfour months and the need to avoid an undue change of the affairs ofthe company which may have an adverse impact on its businessoperations I grant to the Petitioners an enjoining order as prayed forin paragraph ‘d’ of the prayer to the plaint to be operative for a periodof 14 days pending the conclusion of the inquiry into the applicationfor the interim injunction. Any extension of the enjoining order may beconsidered according to law by the District Court. The application isallowed. I make no order for costs.
DR. RANARAJA, J. -1 agree.
Application allowed.
Interim Injunction set aside.
Enjoining Order issued.