In Supreme Court of India
Seth Mohan Lal & Anr.
Grain Chmaber Ltd., Muzaffarnagar & Ors.
Date of Judgement
15 November, 1967
The respondent company was formed for carrying out definite business that communicates with the give-and-take of commodities that included ‘gur’. The Articles of Association of the company made it obligatory for all the members in the company to partake in the company’s business transactions. The company’s transactions were carried out constructed on the 1913 Companies Act which didn’t contain any prohibition against in going of a director into transactions with company. The Act was amended in 1936 which prohibited directors from entering into transactions with the company, this didn’t altered the Company’s mode of operation. The appellant company had entered into a transaction with the respondent and had made massive deposits in financial terms to the account of the respondent in reverence to the transaction. The Indian government had on February 15, 1950 issued an order that forbids any person from entering into transactions on ‘future’ in gur or make or receive payments relating to any futures after the held date. The appellant filed a petition against winding of the company following their resolution to resolve all outstanding transactions before the closing day at the principal rate.
Contentions Raised by Petitioner
- By virtue of the notification dated February 15, 1950, all outstanding transactions in ‘futures’ in gur became void.
- the resolution dated March 14, 1949, which permitted the company to enter into transactions in ‘futures’ in gur was invalid since the directors who took part in the meeting were disqualified under 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.
- The resolution dated February 15, 1950 was not passed in the interests of the company and the resolution amounted to repudiation of the contracts by the company.
- 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.
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.
The plea made by the petitioner that there was frustration of the contracts, and on that account the Company was liable to refund all the amounts which it had received, had no substance. The Court held that the outstanding contracts were not at all mattered by the Government Order. Obligation 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 goods, 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 didn’t lead to frustration of the contracts. Newly made contracts were forbidden but settlement of the outstanding contracts by disbursement of differences was not prohibited, nor was delivery of gur in fulfilment of the contract and receipt thereof at the due date by the Company forbidden. The difficulty which was arisen by the Government orders in transporting the goods needed to meet the contract was not an impossibility contemplated by section 56 of the Contract Act leading to frustration of the contracts.
The Court further held that Company was running an extensive business in “futures” in gur, but the Company was formed not with the only objective of carrying on business in “futures’ in gur alone, but in numerous other commodities and supplies as well. The Company had an immovable property and liquid assets of the total worth of Rs.2, 54,000. There was no evidence that the Company was incapable of paying its debts. “As per the Section 162 of the Indian Companies Act, the Court may make an order for winding up a Company if the Court is of the outlook 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 reasonable that a Company should be wound up, the Court will consider the interests of the shareholders as well as of the creditors. Substratum and objectives of the Company is said to have disappeared when the objective for which it was incorporated has substantively failed, or when it is impossible to carry on the business of the Company except at a loss, or the surviving and possible assets are deficient to meet the existing liabilities.” In the case the objective for which the Company was incorporated has not substantively failed, and it cannot be contended that the Company is not in the position to carry on its business except at a loss, nor that its assets were deficient to meet its liabilities. After a thorough investigation and reports made by the Court it said that there were no creditors to whom debts were payable by the Company. The appellants had, it is real and proper that filed suits against the Company in respect of certain gur transactions on the basis that they had entered into transactions as third parties but later those suits were dismissed. The business corporation of the Company was 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 holds, and put in motion the objectives for which it was incorporated. Further it was held that because of the stretched out litigation held, the Company’s business has come to a stand-still but it will not be a valid ground to put issue an order of winding up against the Company. Considering all the circumstances and evidences on the primary level at the existed dates of the petition in the Court it was determined that no such case was made out under which the Company should be wound up and the Supreme Court agreed with the High Court that no such case is made out.
Hence, the appeal was dismissed.
Edited by Chiranjeeb Prateek Mohanty
Approved & Published – Sakshi Raje