Seneviratne v. Seneviratne and Another
SENEVIRATNE AND ANOTHER
WANASUNDERA, J., VICTOR PERERA, J., AND COLIN-THOMF, J.
S.C. APPLICATION 14/81.
C.A. APPEAL NO. 46/74(F).
D C. COLOMBO 1556/SPL.
MAY 25, 1982.
Companies Ordinance, sections I53A, B, D. Winding-up – Deadlock amongDirectors – Winding up order appropriate – Impossibility of ordering one'shareholderto purchase shares of others.
The petitioner, first respondent and second respondent were brothers andshareholders in a company called ‘Kadirana Mills Ltd.' duly incorporated underthe Companies Ordinance.
The -first respondent was-sole .Managing Director while the second respondentwas a Director and Secretary,
The petitioner made' an application in terms of section 162(b) of the CompaniesOrdinance to wind up the Company.
The District Judge found that there was no mismanagement or oppression butthere was disharmony among the brother shareholders and as a result there wasa complete deadlock and the Directors could not function and business had cometo a complete standstill.
On these findings the District Judge ordered a winding-up declining to makeorder that the shares of the petitioner and second respondent be purchased bythe first respondent.
On appeal by :the first respondent the Court of Appeal reversed the order ofthe District Judge.
The petitioner appealed to the Supreme Court seeking restoration of the DistrictJudge's order.
That as the business of the Company could not be Carried on and was not'being carried at the times material to the proceedings, a winding up orderwould not be prejudicial to the interests of any one member or members.
Since there were only three shareholders no order that- the first respondentpurchase shares of the' other two shareholders could' be made under section153(B) or (C) without violating prohibition regarding minimum number ofshareholders prescribed in Section 29 of the Companies Ordinance or withoutviolating the Company’s own Articles of Association.
Case referred to:
Sri Lanka Law Reports
(1982) 2 S L R.
(1) Re Antigen Laboratories Ltd. (1951) 1 A.E.R. 110.
APPEAL from Judgment of the Court of Appeal.
M. Kanakaratnam with C. Selvarajah for the appellant.
H.L. deSilva, S.A.. with K. N. Choksy, S.A., and H. Soza for the respondents.
Cur. adv. vult
May. 26, 1982.
VICTOR PF.RF.RA, J.
The petitioner had made an application on the 3rd March 1972to the District Court of Colombo in terms of section 162(6) of theCompanies Ordinance (Chap. 145) to have the ‘Kadirana Mills Limited’a duly incorporated private Company wound up on the grounds urgedin his petition. The 1st respondent a Director who was also the soleManaging Director at the time and the 2nd respondent the otherDirector who was also the Secretary of the Company took part inthe proceedings. The 1st respondent objected to the Company beingwound up while the 2nd respondent supported the petitioner’sapplication. After a lengthy inquiry in which the petitioner, the 1strespondent and the 2nd respondent gave evidence, the District Judgearrived at the conclusion that no acts of oppression or mismanagementwere proved. However, he found that there had been disharmonyand dissension among the three shareholders who were brothers, andthat there was a complete deadlock as a result of which the shareholdersor the Directors could not function and that the affairs and businessof the Company had come to a standstill. On the basis of thesefindings the Court held that it was just and equitable that theCompany be wound up and made order accordingly.
During the course of the proceedings in the District Court the 1strespondent invoked the provisions of section 133(D) of the CompaniesOrdinance (in terms of the amendment No. 15 of 1964) and calledupon the Court instead of making a winding up order to order himto purchase the interests or shares of the petitioner and the 1strespondent. The Court declined to make this alternative order as itheld that no case of oppression was made out as contemplated insection 153A or any mismanagement as contemplated in section 153Bhad been established. It further held if it made such an order, therewould be only one member left and the Company as such wouldcease to exist..
SC 'A' Senevirame v.’1 Seneviraine and Another (VictdhPerktra,:J-.j423
, <— ’*•'
The 1st respondent appealed against this order to the 'Court ofAppeal. The Court of Appeal by its order dated 24th November1980 reversed the order of the District Court. The petitioner hasappealed to this Court from the order of the Court of Appeal andsought to have the order of the District Court restored.
At the hearing before us, the findings of the District Judge onthe facts were..not canvassed. The decision that it was just andequitable to wind up the Company too was not challenged. It wascontended for the petitioner that there should have been a writtenapplication for relief as provided for by the provision^ of section153A or section 153B before a Court could act in terms of section153D. It must be noted that the amending Act No. 15 of 1964introduced these sections under the heading ‘Prevention of Oppressionand Mismanagement’ and sought to provide alternative remedies towind up in cases of oppression and mismanagement in sections 153Aand 153B. It provided clearly as to who could make such applicationsfor relief under these sections and also for the, orders a Court couldmake on such facts bejng established to its satisfaction. In regard tosuch applications in the case of Re Antigen Laboratories Limited (1)Rosburgh, J. held that a petitioner seeking relief under section 210of the Companies Act of 1948 (which is almost identical wjth. section153A of Act No. 15 of 1964) ought to state in the prayer of thepetition in clear terms the. general nature of the relief sought so asto leave no doubt as to what the petitioner requires the Court to do.
The present case was not such an application but an applicationfor a winding up order. But at some stage of the proceedings theCourt had been invited to act under section 153D which reads as follows:-
“Notwithstanding the provisions of Part V of this Ordinanceat any stage of the winding up proceedings in respect of aCompany where a Court is of opinion that to wind , up theCompany would be prejudicial to the interests of amen^erof the Company, it shall be lawful for the Court to act .undersection 153A or 153B in like manner-as if an application; >nasbeen -made toi Court under either- of- those-sections;
This section clearly contemplates a situation in winding up proceedings,where the Court could be called to make an order it would havemade in an application for the alternative remedies though theapplication -was for winding up. Section 153D made it lawful for a
Sri Lanka Law Reports
(1982) 2 S.L.R.
Court where an application had been made for winding up of theCompany, to order the alternative remedy if the Court formed theopinion that to wind up the Company would ‘be prejudicial to theinterests of a member of a Company’. This was not a considerationthat a Court had to be guided by in disposing of an applicationunder section 153A or 153B and therefore a Court could not berestricted to considerations that arise in such applications.
.In section 153A provision is made for any member or membersto complain to Court that the affairs of the Company are beingconducted in a manner oppressive to any member or members(including the member or members with the complaint) and if theCourt is of the opinion that the affairs of the company are beingconducted in a manner oppressive to any member or members andto wind up the Company would unfairly prejudice such member ormembers, it could make an order to remedy the matters complainedof. The principal consideration here is the interests of the oppressedmember or members and the Court by its order eliminates theoppression complained of.
In section 153B provision is made for any member or membersto complain to Court that the affairs of the Company are beingconducted in a manner prejudicial to the interests of the Companyor that it is likely that the affairs of the company will be conductedin such a manner. The Court has to decide upon the order bestsuitable to remedy or prevent the matters complained of or apprehendedconsidering the interests of th$ Company.
Under both sections the Court endeavours by its orders to securethe continuity of the existence of the Company to enable it tofunction properly and to carry on its business by removing the sourcesof oppression or by regulating the management of the affairs of theCompany. But under section 153D the Court is dealing with anapplication for winding up which need not necessarily be only onthe ground of oppression or mismanagement but also on other groundssuch as the failure of the objects of the Company, a completedeadlock jn management or other facts which justify a Court formingthe view that it is just and equitable to order a winding up. In aproceeding initiated for the winding up of a Company the Court willeither make an order that the Company should be wdund up or thatthe petition should be dismissed. But section 153D, enables a Courtinstead of acting in this manner to consider and determine an
SCSeneviratne v. Sentvirame and Another (Victor Perera, 1.)425
alternative remedy as though such a remedy had been applied for.When this section is invoked the Court will have to form the furtherOpinion that to wind up the Company would be “prejudicial to theinterests of a member of the Company". The consideration of eliminatingoppression by giving relief to the oppressed does not arise as themember here referred to is not necessarily an oppressed memberunlike in section 153A. Therefore in winding up proceedings, ifsection 153D is invoked, the grounds for an application for reliefunder sections 153 A or 153B are not a pre-requisite for the Courtto grant relief. However, it will be necessary to lead some positiveevidence in regard to the nature of the interest of the particularmember in order to ascertain whether such interest would be prejudicedby a winding up of the Company.
As this aspect of the matter had not received due considerationin the District Court and in the Court of Appeal. 1 have examinedthe evidence to ascertain the interests of each of the three membersand the prejudice, if any, that one of such members would suffer if -a winding up order is made. As far as the petitioner is concerned,he had merely been a shareholder who did not take an active interestin the management of the Company and had not received anydividends from 1960 to 1971. He could not be prejudiced by awinding up order and it would be in his interests to obtain such anorder. The 2nd respondent was a Director and the Secretary. From1959 to 1970 he had received the same amount by way of Director’sfees and bonus as the 1st respondent totalling to Rs. 70,750/-. Hetoo received no dividends after 1960. The 1st respondent howeverwas a joint Managing Director with his brother Ivan till Ivan’s deathin 1952. From 1952 he functioned as the sole Managing Director forwhich he was paid a salary of Rs. 16,200/- from 1963 to 31.3.1972.From 1942 when he was only 42 years of age, he had been payinghimself a retiring gratuity of Rs. 3,600/- per yeiar as according to hisevidence he had intended to retire from the Office of ManagingDirector. After the Mills, where the sole business was then beingcarried on, were destroyed by a fire in November 1971, the businessof the Company had come to a standstill. The Mills were neverreconstructed thereafter. A sum of Rs. 275,000/- paid by way ofcompensation by the Insurance Corporation had been deposited with.,the Provisional Liquidator appointed in 1972. According to the 1strespondent the other assets such as the vehicles had. become of nouse for the Company’s business. Of the only other assets of theCompany there are three houses in Negombo, one is occupied by-
426Sri Lanka Law Reports(1982) 2 S.I..R.
the 1st respondent himself and the other two houses were being usedby the 1st respondent, but no rents have been credited to theCompany at any time. The totality of the evidence led shows thatthe Company had not been functioning from 1971, no business ofthe Company in terms of its Memorandum is being carried on. thesubstratum of the Company is gone and each of the three membersis adversely affected for want of the proper utilization of the assetsof the «Company<-the deterioration of the assets and the absence ofa proper accounting of rents and the Company bas ceased to be aprofitable undertaking.
In the light of this evidence the Court could not form an opinionthat an order to wind up the Company would be prejudicial to theinterests of any one of the members even the 1st respondent, Awinding up order would be beneficial to the interests of all the.members of the Company under these circumstances. The fact that.-the 1st respondent had stated in evidence that he had devoted theentirety of his time in managing the affairs of the Company duringthe time the business of the Company was being carried on, is mua relevant consideration as the business could not be carried on andwas not being carried on at the dates mentioned in these proceedings.
The other matter that was raised at the argument of this appealwas whether the Court of Appeal was correct in ordering the I strespondent to purchase the interests of the petitioner and 2ndrespondent considering the particular circumstances of this case. In1972 when the winding up application was made there were only' three registered shareholders, the petitioner and the two respondents.According to the Articles of Association of this Company (P2) byClause 2 the business of the Company had to be carried on by theManaging. Director under the direction of the Board of Directorsandsubject to the control of general meetings. According to Clause2 (a) the number of Directors of this Company was fixed at aminimum of two. According to Clause 46(a) the sea! of the Companyshall not be fixed to any instrument except, in the presence of twoor more Directors. Therefore a purchase of the shares of the petitionerand the 2nd’respondent by the 1st respondent even though it is byan order of Court, would result in the Company which by law musthave at least two shareholders having only one shareholder and oneDirector. The District Judge quite correctly therefore had no alternativebut to order that the Company should be wound up. Section 29 ofthe Companies Ordinance, under the heading “Reduction of Number
SCStneviratne v. Stneviratne and Another (Victor Perera, J.)427
of Members below Legal Minimum” with a side note reading"prohibition carrying on business with fewer than seven or in thecase of a private Company two members" provided that every personwho is member of a Company, where the number of its .membershad been so reduced for more than six months while the number isso reduced during the time it carries on business after the said sixmonths will be personally liable for the payment of the entirety ofthe debts of the Company and is liable to be so sued. No doubtthe Company continues to exist and becomes liable to be wound upunder section 162(4) but the Company does not become liable andit is unable to function as a Company in terms Of its Articles ofAssociation. The alternative remedy provided by sections 153A, 153Band 153E seems to imply that a Company should not merely remainin existence, but should also have the capacity to function legally interms of its own Articles and thereby to carry on business as aCompany and answerable for its liabilities. If the Company merelycontinues to exist in an imperfect state but is unable to function andto carry on business binding on the Company, the Court would notbe justified in granting the alternative remedy.
Therefore the only order that could properly be made in this caseis the Company should be wound up. The order of the Court ofAppeal is therefore set aside. The appeal is allowed with costs.
WANASUNDERA, J. – I agree.
COLIN-THOME, J. – I agree.