057-SLLR-SLLR-2003-V-2-SHAW-WALLACE-AND-HEDGES-LTD-v.-NIRMAL-FERNANDO-AND-OTHERS.pdf
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SHAW WALLACE AND HEDGES LTDv
NIRMAL FERNANDO AND OTHERS
COURT OF APPEALAMARATUNGA, J. ANDBALAPATABENDI, J.
A. 1097/2001
C. NEGOMBO 2397/SplNOVEMBER 12, 2002
Companies Act, sections 57(2), 264 and 270 – Application to wind up compa-ny – Order made – Liquidator appointed – Claim made by alleged creditor toliquidator – Who is a creditor for the purpose of liquidation 7 – Civil ProcedureCode, section 5 – Who is a judgment creditor – Ex parte decree provisional innature – Is it a decree capable of execution?
A company “B” issued certain fully paid redeemable preference sharesof that company to the judgment creditor petitioner "S" company. When thecompany failed to redeem the said shares the “S” company-petitioner institut-ed action in the District Court and claimed a certain sum with interest.
In this action ex parte decree had been entered.
K.J. Company made an application to wind up company “B”. the DistrictCourt made order to wind up the said company and have a Liquidator appoint-ed. The Liquidator thereafter called upon all creditors of “B” company to sub-mit their claims. When the “S” petitioner company submitted its claim for a cer-tain sum due to it in terms of the District Court judgment, the Liquidatorinformed the petitioner “S” company, that the petitioner “S” company cannot betreated as a creditor for the purpose of the liquidation.
The petitioner contends that the Liquidator ought to have treated the peti-tioner as a creditor of “B” company.
Held:
The Judgment and decree obtained by the petitioner was an ex partedecree which is of a provisional nature.
The B company has filed papers to vacate the ex parte order and theinquiry into that is still pending. Therefore it necessarily follows that theex parte decree has not become a decree capable of execution andaccordingly the petitioner company is not a judgment creditor.
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Shaw Wallace and Hedges Ltd v Nirmal Fernando & others
(Amaratunaa. J.)
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Ex parte judgment by the very provisional nature given to it by the pro-visions of the Civil Procedure Code is not a final judgment between theparties, and so long as it remains a provisional judgment, a person inwhose favour it has been given is not a person who has become a cred-itor by virtue of a judgment.
A holder of redeemable preference shares remain even if the date fixedfor redemption has passed, a holder of redeemable preferential sharesand therefore a contributor until his rights are cyrstalised into a validdecree.
APPLICATION in revision against the order of the District Court of Negombo.
Gomin Dayasiri with M.E. Wickremasinghe for judgment creditor-petitioner
K. Kanag-lswaran P.C., with Suresh Perera and Dilshani Wijewardana for liq-uidator-respondent
Prasanna Jayawardena for creditor intervenient-petitioner-respondent.
Cur.adv.vult
30 May, 2003
GAMINI AMARATUNGA, J.
This is an application to revise the order of the learned District 01Judge of Negombo refusing the petitioner’s application for a direc-tion to the liquidator-respondent that the petitioner is a judgmentcreditor of a company t'o be wound up.
The detailed facts relevant to the present application are asfollows. In 1986, a company named Bonaventure Textiles (Lanka)Limited has issued 30,000 fully paid redeemable preference sharesof that company to the petitioner Shaw Wallace and HedgesLimited. When the company has failed to redeem the saidredeemable preference shares on the due date the petitioner has 10instituted action No. 8328/M in the District Court of Negomboclaiming Rs. 60 million with interest at 30% and costs. In this actionex parte decree had been entered on 2/12/1996 for Rs. 60 millionwith interest at 30%.
On 5th February 1997, Kay Jay Agencies Limited has madean application to the District Court of Negombo, bearing No.2397spl to wind up the company named Bonaventure Limited. The
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District Court has made order to wind up the said company and interms of section 270 of the companies Act has appointed theLiquidator respondent company to conduct the winding up pro- 20ceedings. Thereafter in terms of winding up rules the Liquidator hascalled upon all creditors of Bonaventure Ltd to submit their claims.
By its letter dated 11th September 1997, the petitioner has submit-ted its claim to the Liquidator for a sum of Rs. 85,766,000.00 due. to it in terms of the judgment in D.C. Negombo case No. 8328Spl.ln response to this claim the Liquidator by his letter dated31/05/2000 has informed the petitioner that the petitioner “cannotbe treated as a creditor for the purposes of this liquidation".
Upon receiving this communication from the Liquidator thepetitioner has filed an application in the District Court of Negombo 30seeking inter alia directions to the liquidator to treat the petitioneras a creditor of the said Bonaventure Limited and to pay the peti-tioner the amount decreed in its favour in D.C. Negombo case No8328 M. After both the petitioner and the Liquidator filed writtensubmissions the learned District Judge has made order dated22/06/2001 refusing the petitioner’s application. This revision appli-cation is to have that order revised. The petitioner has also filed anapplication for leave to appeal against the said order.
In his short order the conclusion given by the learned DistrictJudge for refusing the application of the petitioner was that under 40the provisions of the Companies Act a holder of preference shareshas no right to obtain money for those shares on the judgmentobtained by him. He has further stated that a holder of preferenceshares cannot circumvent the provisions of the Companies Act byvirtue of an ex parte decree obtained by him. However the learnedJudge has not referred to specific provisions of the Companies Actrelevant to his conclusion and the legal principles relevant andapplicable to the interpretation of those provisions. Therefore theconclusion of the learned Judge is not supported by reasons.
However it appears to me that there is a much more funda- somental matter which goes to the very root of the petitioner’s appli-cation made to the District Court. The petitioner’s application to theDistrict Court, marked P1 and produced with this revision applica-tion has been made on the basis that the petitioner is a judgmentcreditor of Bonaventure Limited. The judgment and decree obtained
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by the petitioner in District Court Negombo case No. 8328/M was anex parte decree which is of a provisional nature. The person againstwhom an ex parte decree has been entered is entitled to make anapplication to the Court which entered the decree within 14 days ofthe service of the ex parte decree on him to purge his default and tohave the decree set aside. If such an application is made within theperiod of 14 days and if the Court, after inquiry, is satisfied that thedefendant had reasonable grounds for his default the Court has toset aside the judgment and decree and permit the defendant to pro-ceed with his defence from the stage of the default.
On the other hand if the defendant on whom an ex partedecree has been served fails to make an application within 14 daysto have it set aside the ex parte decree becomes a decree capableof execution. Even if an application has been made within 14 days,if such application is dismissed by Court then again the ex partedecree becomes a decree capable of execution. In terms of section5 of the Civil Procedure Code a judgment creditor means any per-son in whose favour a decree or order capable of execution hasbeen made. The learned President’s Counsel for the liquidator inhis written submissions dated 25/06/2002 has submitted that theholder of an ex parte decree is not a judgment creditor and accord-ingly the petitioner cannot claim the status of a judgment creditor.
Whether the Bonaventure Limited has filed an applicationwithin time to have the ex parte decree set aside and if so what wasthe outcome of that application is very relevant in consideringwhether the ex parte decree has become a decree capable of exe-cution making the petitioner a judgment creditor. The. applicationmade by the petitioner to the District Court and the revision appli-cation and the accompanying affidavit are conspicuously silent onthis aspect. In the written submissions filed on behalf of theLiquidator dated 25/06/2002 it is specifically stated thatBonaventure Limited has filed papers to vacate the ex parte orderand the inquiry into that application is still pending in the DistrictCourt of Negombo. There is no denial of this position in the writtensubmissions filed by the petitioner dated 2/12/2002. Instead it hasbeen stated in the said written submissions that the Liquidator hav-ing appeared in Court within 14 days from the receipt of judgmentP1 (ex parte judgment) has made an application under section 264
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of the Companies Act to stay further proceedings in that matter andthe proceedings have been accordingly stayed.
On this basis the petitioner has submitted that in view of thisthe ex parte judgment and decree still stand valid and accordinglythe petitioner is a judgment debtor. However if the inquiry to setaside the ex parte judgment and decree is still pending, then it nec-essarily follows that the ex parte decree has not become a decree 100capable of execution and accordingly the petitioner is not a judg-ment creditor. If the petitioner was dissatisfied with the decision ofthe District Court to stay the inquiry the petitioner should haveobtained permission from Court to proceed with the inquiry.Therefore it is quite clear that the petitioner is not a judgment cred-itor within the meaning of the law.
The next question is whether the petitioner is a creditor? Inorder to show the petitioner is a creditor the petitioner has cited thefollowing passage from Pennington’s Company Law (5th Edition)page 843.no
“A creditor is a person who could enforce his claim against thecompany by an action of debt and a person cannot petition asa creditor when he merely has a right of action against thecompany for unliquidated damages for breach of contract, tortor for the restitution of money or property to him in equity. Butif such person obtains judgment against the company for anascertained sum of money, the judgment itself creates a debtand he is then able to petition.”
This passage, in my opinion refers to a final judgment bywhich the rights of the parties have been determined. But an ex 120parte judgment, by the very provisional nature given to it by the pro-visions of the Civil Procedure Code is not a final judgment betweenthe parties and so long as it remains a provisional judgment a per-son in whose favour it has been given is not a person who hasbecome a creditor by virtue of a judgment. Therefore a holder ofredeemable preferential shares remains, even if the date fixed forredemption has passed, a holder of redeemable preferentialshares, and therefore a contributor until his rights are crystalizedinto a valid decree.
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Shaw Wallace and Hedges Ltd v Nirmal Fernando & others
(Amaratunaa, J.);
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If the petitioner, not being a judgment creditor or a creditor,remains the holder of redeemable preferential shares what are hisrights with regard to his redeemable preferential shares? Section57(2) of (he Companies Act states that “The redemption of prefer-ence shares under the provisions of this section may be effectedsubject to such terms and in such manner as may be provided bythe articles of the company.” The share certificate issued byBonaventure Limited to the petitioner company has been producedalong with the Liquidator’s written submissions marked “A”. It statesthat 30,000 redeemable preference shares issued to the petitionerare issued subject to the Memorandum and Articles of Associationof the company. Articles 5(B)(1)(b) of the Articles of the companywhich sets out the rights available in respect of preference sharesstates as follows:
"On a liquidation or return of capital (otherwise than onredemption in accordance with the provisions of paragraph(2) below) the assets of the company available for distributionamong the members shall be applied in repaying to the hold-ers of the Preference Shares the amount paid up thereontogether with a premium of Rs. 1990/- per Preference Sharein priority to any payment to the holders of any other class ofshares in the capital of the company.”
This Article clearly sets out Preference Shareholder’s rightswhen the assets available for distribution among members on awinding up are considered. If a preference shareholder obtains ajudgment on the basis that he is the holder of redeemable prefer-ence shares not redeemed on the due date and on that accountclaims that he is entitled to recover the value of his preferenceshares as a debt due from the company then he is in the positionof a creditor of the company and would be in a position better thanthat of a preference share holder on liquidation. This would enablehim to circumvent the provisions of the Articles of the company sub-ject to which the preference shares have been issued to him and itwould in turn be contrary to section 57(2) of the Companies Actquoted above. If a preference shareholder is allowed to circumventthe Articles of Association subject to which he has obtained hisshares by resorting to the process described above it would enable
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him to circumvent the provisions of the companies Act in an indirectway. He is not entitled to do this.
I have earlier referred to the conclusion given by the learnedDistrict Judge for refusing the application of the petitioner. I havealso stated that the learned Judge has not given his reasons. Forthe reasons stated above in this judgment I have come to the sameconclusion. In the circumstances I do not see any reasons to inter-fere with the learned District Judge’s order dated 22/06/2001. Iaccordingly dismiss this revision application with costs in a sum ofRs. 20,000/- payable to the Liquidator-respondent. In view of thisjudgment I also refuse leave to appeal and dismiss the leave toappeal application bearing No. CALA Application 249/2001.
BALAPATABENDI, J.I agree.
Application dismissed.
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