077-NLR-NLR-V-54-CEYLON-TEXTILES-LTD.-et-al-Appellants-and-CHITTAMPALAM-GARDINER-et-al-Respond.pdf
Ceylon Textiles Ltd. v. Gardiner
313
1952Present: Pulle J. and L. M. D. de Silva J.CEYLON TEXTILES LTD. et al., Appellants, andCHITTAMPALAM GARDINER et al., Respondents
S. G. 504—Z>. G. Colombo, 365/S
Companies Ordinance, Ho. 51 of 193S—Section 162 (6)—JPublic Company—Windingup by Court—Deadlock—Perverse use of voting power—“ Just and equitablecause ”—Scope of functions of Court.
Where an application to Court was made under section 162 (6) of theCompanies Ordinance for the winding up of a public company on the groundof a deadlock in the management and conduct of the company’s affairs owingto disputes between the directors and the agents and secretaries of the companyand between the directors inter se—
Held, that the constitution of a public company generally made it possiblefor disputes to be resolved in a domestic forum or at the worst in a court of law.Only if it was impossible to arrive at a solution by such means would a Courtpronounce a winding up order. The embarrassment caused by conflicts betweendirectors and the possible delays inevitable in litigation in achieving theirresolution do not necessarily lead to the conclusion that a company should bewound up under section 162 (6) of the Companies Ordinance.
Observations on perverse and oppressive use of voting power as a groundfor winding up a company.
A
iiPPEAL from an order of the District Court, Colombo.
H. V. Perera, Q.C., with N. Nadarasa, for the appellants.—The questionis whether, in the circumstances found by the trial Judge in this case,the order for the winding up of the Ceylon Textiles Limited should havebeen made. Under section 162 (6) of the Companies Ordinance, No. 51of 1938, a company may be wound up by the Court if the Court is ofopinion that it is “just and equitable” that the company should bewound up. The words “ just and equitable ” do not mean “ wheneverthe Court thinks it reasonable ”. They are words of limitation. Theparticular sets of circumstances which fall within the “just and equitable”clause have not been laid down, buE the categories are three :—first,where the substratum of the company has disappeared; secondly,where an individual or group with a majority of shares makes a perverseuse of the majority power; and thirdly, when'there is a deadlock.These categories are not illustrative but nearly exhaustive. EnglishCourts have refused to give relief in cases falling outside these categories—Re Anglo-Continental Produce Co. Ltd. 1
The state of deadlock must be complete to justify an order for windingup. Mere interruptions or disputes, which can be resolved by resortto the domestic forum or by the ordinary processes of Court, do notconstitute a complete deadlock—Re Yenidje Tobacco Co. Ltd. 2 ; ReAmerican Pioneer Leather Co. 3. See also Re Eastern Telegraph Co. Ltd. 4
(1939) A. E. R. 99.a (1918) 1 Ch. 556.
(1916) 2 Ch. 426.4 (1947) 2 A. E. R. 104.
LIV.
2J. X. B 24036-1,593 (1/53)
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Ceylon Textiles Ltd. v. Gardiner
and Me Taldua Rubber Go. Ltd. 1. The mere fact that there may be adeadlock in the future is insufficient. There must be a present deadlockincapable of solution. In the present case the deadlock, if it did in factexist, was remediable.
With regard to the question of unconscionable use of majority votingpower, it is submitted that the trial Judge has misapplied the words of ,Lord Clyde’s judgment quoted in Loch v. John Blackwood1 2. Wherethere is an illegality for -which there is no adequate remedy availableeither under the Articles of Association or through the ordinary processesof Court then only is an order of winding up made. Winding up byorder of Court is only the last resort. See Re Langham Skating RinkCo. 3 ; Re Cuthbert Cooper 4 ; Re Anglo-Continental Produce Co. Ltd.(supra).
S. Jayawickreme, -with E. R. S. R. Coomaraswamy, for the 1st to 7thpetitioners respondents.—It is implicit in the contract that the businessof the' company shall be carried on in a particular way, that is,in accordance with the Articles of Association in this case. If the threeconditions set out in Lord Clyde’s judgment, quoted in Loch v. JohnBlackioood (supra), are not complied with, then clearly it is “ just andequitable ” that the company should be wound up. Where improprietyfalls short of perversity the Court must examine three matters, viz.,what the impropriety is ; the nature and degree of impropriety ; andthe impact on the business concerned. In the present case, for instance,the failure of banks to honour cheques owing to disputes must havehad an impact on the business. Oppression of a minority is a sufficientground for a winding up order. In regard to the suggestion that thedomestic forum is the proper place where a shareholder should go insuch circumstances, it is submitted that, where a full investigation isnecessary, the Court should order winding, up—Palmer’s Company Law,19th ed., p. 378 ; Me Peruvian Amazon Co. 5
Deadlock is nothing more than a conflict of the dominant interests.The Court must investigate the question of propriety and not merelythe question of legality. The Court must look into the relationshipbetween the parties in an action.for winding up. Deadlock arose whenChellappah wanted a particular thing done in a particular way. Thereis ample material to show that a deadlock exists and that it would continueto exist due to the conduct of one person, that is Chellappah. Theonly remedy is to separate Chellappah from the company, and the onlylegal way to do this is by winding up the Company.
H. V. Perera Q.C., in reply.—The one and only ground for a windingUp in the present case is deadlock. The need for a full investigationof the company’s affairs is not by itself a ground for winding up. Inthe case of Me Peruvian Amazon Co. (supra) there was already a voluntarywinding .up. In the present case there was no abuse of voting power.The fact that a wrong view is taken is not deadlock—Me Cuthbert Cooperand Sons Ltd. (supra). Lack of commercial probity and efficiency ”
1 (1946) 2 A. E. B. 763.3 (1877) 5 Ch. D. 669.
2 (1924) A. O. 783.1 (1937) 2 A. E. B. 466.
5 (1913) 29 T. L. B. 384,
Ti. Jr. D. DE SIEVA J.—Ceylon Textiles Ltd. v. Gardiner
SIS
is not deadlock. The words of Lord Clyde’s judgment are not applicableto the facts of the present case. The phrase “ just and equitable ”must not be taken out of its context. The cases show that these wordsmust be taken in conjunction with the fact that a company is a self-governing body. With regard to the carrying on of a business “ ultravires ” see In re Crown Bank *.
Cur. adv. vult.
December 9, 1952. L. M. D. de Silva J.—
This is an appeal from an order made by the learned Additional DistrictJudge of Colombo dated the 7th March, 1951, by which he allowed anapplication for the winding up by Court of the Ceylon Textiles Limited,a public company incorporated in 1942 under the Companies Ordinance,No. 51 of 1938. The application was made under section 162 (6) ofthis Ordinance on the grounds—
that there was a complete deadlock in the management and conduct
■of the company’s affairs, and
that a full investigation of the company’s affairs was necessary.
The second ground was not pressed seriously either in the Court below orbefore us. Section 162 (6) is to the effect that “ a company may bewound up by the court if the court is of the opinion that it is just andequitable that the company should be wound up ”. After having heardthe arguments addressed to us we feel it would be useful before proceedingto consider the facts to ascertain the scope of the functions of the courtunder this section, that is to say, in what circumstances a court ought toorder winding up under the section.
The rights of shareholders are very limited and, generally, the remedyof shareholders dissatisfied with the management of a company, such asthe one under consideration, is to replace an existing board of directorsby one more acceptable, either by a special resolution, if a three-fourthsmajority is obtainable for the purpose, or at an annual general meetingor series of annual general meetings. Apart from this right there arecertain statutory rights given to shareholders in very exceptional circum-stances, one of which is the right given by the section under which thepresent application is being made. But it has to be remembered thatthe effective working of a company demands that internal disagreementsbetween shareholders among themselves, between shareholders anddirectors and among directors between themselves are matters essentiallyfor solution and settlement in a domestic forum. Indeed in general allthe internal questions which arise in the course of the working of a companyare matters for discussion and solution in such a forum. They are mattersin which the Courts rarely interfere. If such questions could be broughtup without restriction or limitation in review before the Courts manyevils would result. Litigation could clog the effective working of acompany. Moreover the Courts would be called upon to decide whetherthe judgment of directors or groups of directors was sound, a function1 L. R. (1890) 44 Oh. 634 at p. 646.
316L. M. D. DE STLVA J.—Ceylon Textiles Ltd. v. Gardiner
which they would properly be reluctant to exercise, particularly as theymay be called upon to review decisions taken upon purely commercialmatters. James L.J., in the case of In re Langham Skating Rink Com-pany 1 (which incidentally was an application for winding up) made theremark, “ It really is very important to these companies that the Courtshould not, unless a very strong case is made, take upon itself to inter-fere with the domestic forum which has been established for the manage-ment of a company In our view that remark made in 1877 still holdsgood though the statute law relating to companies has been considerablyaltered.
The language of section 162 (6) is on the face of it extremely wide. Butupon a review of the decisions it appears to us that so far the Courts haveacted under this subsection only in three classes of cases.
First, where an individual or group holding a majority of shares whichensures for him or them a controlling interest have used the overwhelmingpower so possessed perversely, that is, for example, to do what they arelegally entitled to do in a perverse and oppressive manner. For instance,a director with such power may use it to pack the board and vote anunconscionable sum as remuneration for himself. That would be aperverse using of voting powerr In such instances the courts would notnormally be able to give relief in ordinary proceedings as the acts, thoughperverse, have been done under cover of legality. They are instanceswhere a •winding up under section 162 (6) is called for.
Secondly, where the substratum of the company has for one reason oranother disappeared. We need not dwell here on this class of case as itis not contended that such a thing has happened in the case before us.
Thirdly, where there is a deadlock. In the decided cases the deadlockhas been complete. In fact no deadlock can truly be called a deadlockunless it is complete but the word “ complete ” serves to direct attentionto the true nature of the deadlock that must be shown to exist before aliquidation can be ordered. It must be complete not only at any givenmoment but it must appear reasonably that no remedy can be hoped forby recourse to the courts or otherwise.
In the case of The Anglo-ContinentalProduce Co., Ltd.? Bemiett J. heldin an application under section 186 (6) of the Companies Act, 1929 (whichis identical with the section of our Companies Ordinance under whichthe application is made) that the petitioners to succeed must establishthat the facts bring them “ within any one of the decided cases as towhat is just and equitable ”. We feel the same reluctance as BennettJ. to extend the scope of the grounds under which an application can bemade under the section in question although we are not altogether surethat one may not have to do so in an extreme case. Be that as it may,it is clear that no grounds emerge from the facts of this case for an exten-sion. Indeed the only ground upon which the application was basedwhich has been pressed is the ground of deadlock. Argument has alsobeen addressed to us with regard to the perverse use of voting poweralthough it was not a ground in the application. These grounds will bedealt with later. It is convenient at this stage to consider the facts.
1 (1877) 5 Oh. D. 669.3 (1939) 1 A. E. B. 99.
L. M. D. DE SILVA J.—Ceylon Textiles Ltd. v. Gardiner
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The facts are fully and accurately set out in the judgment of the learnedDistrict Judge. We do not agree with all the inferences of fact he drawsfrom them. It appears to us, however, that even if a view as favourableas possible to the respondents were taken of the facts, no case of dead-lock or of the perverse use of voting power is made out and that, there-fore, the order for the winding up of the company has been wrongly madeby the learned District Judge with regard to whom we would like to saywith all respect that he could not have had the advantage of the fullargument that has taken place before us.
Ceylon Textiles Limited for the winding up of which the petitionerspray is a public company. The original shares were of the par value ofRs. 100,000 divided into 10,000 shares of Rs. 10 each but it is now Rs.300,000 divided into 30,000 shares. All the shares have been issued andfully paid up. Of these the appellants hold more than half, namely,15,158 shares. The principal object of the company was and is the carry-ing on of a business as dealers in textiles and piece goods of every descrip-tion. Senator Gardiner is a life director and chairman of the company.On 31st August, 1944, one John Chellappah was appointed managingdirector. In June, 1945, the managing director was replaced by JohnChellappah and Company Limited who were appointed agents and secre-taries for ten years with effect from 1st April, 1945, on an annual fee ofRs. 18,000 and a commission of 10 per cent, on the net profits.John Chellappah & CompanyLimited isa privatecompany
in which John Chellappah,the formermanagingdirector,
holds a controlling interest.It could be regarded as the
learned Judge observes asa domesticconcernof John
Chellappah. John Chellappah remained a director of Cejdon TextilesLimited after he ceased to be its managing director. Differences arosebetween John Chellappah and the other directors which reached a climaxin the year 1949. They appear to have commenced with an objectionby Chellappah to the investment of Rs. 200,000 out of a total capital ofRs. 300,000 in the purchase of shares in two firms, namely Cargills Limitedand Millers Limited. Later Chellappah appears to have pressed for a saleof these shares when a profit could have been made by a sale, apparentlyapprehensive that the value of the shares would falllater (as they in-fact did)and further because he thought that the money used for the purposes of thebusiness would bring in a higher return. The other directors, in particularSenator Gardiner, did not agree to Chellappah’s proposal and thedispleasure which arose must have been aggravated By the fact thatSenator Gardiner was Chairman of the Boards of Directors of Cargillsand Millers. The learned District Judge has found “ no doubt SenatorGardiner and the other directors honestly believed that the retention ofthese shares was beneficial to the company ’ ’. There is no sufficient reasonto disagree with this finding but, however that be, the foundation for thesubsequent unpleasant events which took place appears to have been laid.Matters came to a head in 1949 and on the 7th September of that yearthe Board of Directors passed a resolution making five specific complaintsagainst the agents and secretaries, namely,
“ (a.) They did not take steps to have the company’s cheques counter-signed by J. R. Thampapillai as ordered by the directors ;
2*J. V. B 24036 (l/53>
318L. M. D. DE SILVA -J.—Ceylon Textiles Ltd. ®. Gardiner
They did not open a current account in the Bank of Ceylon and
operate on it as ordered by the directors ;
They did not famish replies to Mr. Kamil's questions regarding the
remittance of Es. 100,000 to Bombay ;
Th ey acted in an arbitrary manner in suppressing certain resolutions
forwarded by one of the directors, Mr. Kamil, for inclusion inthe agenda for the meeting of August regarding independentaudit; and
They do not summon monthly meetings of the directors
every third Wednesday of the month as decided by thedirectors. ”
The resolution proceeded further to state that the agents and secretarieswere not acting in the best interests of the company and as theircontinuance was detrimental to the progress of the company called uponthem to hand over the account books, &c., to J. R. Thampapillai, anotherdirector, on or before 10th September. The one dissentient to this resolu-tion was Chellappah. On the same day Thampapillai was appointedmanaging director and one Gnanakoon was appointed secretary witheffect from 7th September, 1949.
On this decision of the board John Chellappah & Company should havesurrendered the books and other documents of the company and ceasedto function as agents and secretaries. If they had a grievance thatthey had been wrongfully dismissed that was a matter, which, if notsatisfactorily adjusted, might have formed the subject matter for anaction for wrongful dismissal. The refusal of John Chellappah and Com-pany (which was virtually John Chellappah himself) to surrender officecannot be justified but it does not, even when combined with other-factswhich will shortly be stated, afford good ground for an order for windingup.
It is scarcely necessary to consider the charges made against John Chell-appah & Company in any detail but as a great deal of evidence has beenled, and as the learned District Judge has made certain observationsregarding them, we will deal with them shortly.
The first charge was that John Chellappah and Company “ did nottake steps to get the company’s cheques countersigned by J. R. Thampa-pillai as ordered by the Board of Directors ”. The cheques of the com-pany were signed by the* agents and secretaries and one of the directors andit was decided in June, 1949, that the director should be a director otherthan John Chellappah, namely, J. R. Thampapillai. This decision wasunderstandable—indeed desirable. In a number of instances John Chell-appah & Company failed to carry out this instruction. John Chellappahsays that in all but one instance the failure occurred on cheques for whichThampapillai had made a requisition. This is not an acceptable excuse.It is not suggested however that John Chellappah has been guilty of anyact of dishonesty either in this or in any other matter. It nevertheless. deserved the condemnation passed by the learned District Judge.
Xj. M. D. DE SILVA J.—Ceylon Textiles Ltd. v. Gardiner
319
The next charge was an alleged failure to open an account in the Bankof Ceylon as ordered by the directors. This decision of the directors was-taken because the Bank of Ceylon appeared to afford better credit facili-ties than the company enjoyed at the moment. John Chellappah saysthat the cash balance did not permit the opening of such an account asthere was already an unpaid overdraft from the Eastern Bank and weagree with the learned District Judge that this charge cannot be supported.
The third charge relates to a failure on the part of John Chellappah &Company to furnish replies to a questionnaire with regard to a remittancein 1947 of a sum of Rs. 100,000 to Bombay. This relates to a transactionwhere in the course of purchasing textiles in Bombay the Indian ExchangeControl Regulations appear to have been infringed. It would appearthat this money was remitted to purchase textiles and that in the courseof the transaction a stun of Rs. 26,500 was expended in buying exportlicences in breach of Indian Regulations, a sum of Rs. 1,000 in brokeragefees and the balance utilised in paying for textiles. The price was againpaid in Colombo by way of complying with the Indian Exchange ControlRegulations with money loaned by the agents and secretaries to the com-pany as these regulations appear to have required such payment. Themoney expended in India for the purchase was by some private arrange-ment returned to Ceylon and Ceylon Textiles did not in fact pay twiceover for the same goods. This circumlocutory process must have led the-other directors to believe that not only the Indian Exchange Regulations.but the Ceylon Exchange Regulations had been violated. John Chell-appah’s position in Court in his evidence and in the argument before uswas that the practice of purchasing export licences contrary to IndianRegulations was largely resorted to by the trade and was known to theother directors. It is suggested by counsel that he refused to give any•details because it would have led to a prosecution of a person or personswho aided him in India and that the person who prepared the•questionnaire, a fellow director by the name of Ramil, was also a dealerin textiles and a hostile competitor. This deliberate violation Of theExchange Control Regulations of India is something which cannot be ex-•cused. But to say the least, it is doubtful whether the other directorsreally took a serious view of this transaction because in their resolution of'7th September, 1949, dismissing John Chellappah & Company from theposition of secretaries they appointed Gnanakoon as the secretary.Gnanakoon is a son-in-law of Chellappah and had been employed by thelatter in Bombay to put through the transaction, and must have been"the person most directly connected with the breach of the Exchange‘Control Regulations.'
The next charge relates to the failure on the part of the agents andsecretaries to summon monthly meetings of the Board of Directors. At ameeting held on the 14th January, 1949, the board decided “ that monthly-statements of sales and expenditure made up as correctly as possible-Should be tabled at monthly meetings ”. It was argued in spite of this•decision monthly meetings of the board had not been summoned regularly.It is doubtful whether the decision worded in the form quoted above could3>e read as a directive to the agents and secretaries to summon monthly
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L. M. I>. DE SILVA J.—Ceylon Textiles Ltd. v. Gardiner
meetings. If emphasis is laid on the preparation of monthly sales andexpenditure the decision may be interpreted to mean that these state-ments should in the normal course of business be tabled at monthlymeetings. It was undoubtedly taken for granted that the board wouldmeet monthly and that is quite a different matter from saying that thedecision amounted to a directive failure to comply with which was anact of disobedience. What might properly be regarded as a directiveon this point is a resolution of the board passed on the 21st June, 1949,
“ that monthly meetings be held monthly and as far as possible on thethird Wednesday at 9.30 a.m. after consulting the convenience of theChairman It was not suggested at the argument in appeal that ifthis resolution was the only clear directive there was no substantial com-pliance with it. Nevertheless the learned District Judge held that thischarge was made out on Senator Gardiner’s evidence that prior to 21stJune it had been pointed out to the agents and secretaries by the Boardthat monthly meetings should be convened.
The most that can be said to arise upon these charges was that theagents and secretaries were behaving badly and not functioning as theyshould have done.
-Upon the dismissal of the company, John Chellappah addressed arequisition signed by himself and five other shareholders to the Boardof Directors requesting that an extraordinary general meeting be heldto pass certain resolutions the object of which was to reinstate JohnChellappah & Company as Managing Agents and Secretaries and toremove all the directors other than the life director from the Board.The requisition was made on the 10th October, 1949, and asked for ameeting on the 22nd of that month. The directors correctly took theview that the nature of the resolutions required a special resolution andfixed the meeting for the 30th November. John Chellappah requestedthe board to postpone this meeting and this request was complied with.On the 16th November, John Chellappah and his fellow requisitionistsagain requested the board to summon a meeting on or before the 30thNovember and contended that no special resolution was necessary. Theboard persisted in its opinion and fixed an extraordinary general meetingfor the 22nd December. John Chellappah then by a notice dated the25th November convened an extraordinary general meeting to be held onthe 3rd December presumably on the ground that as the Board of Directorshad failed to comply with a lawful requisition he had a right to do sounder section 112 (3) of the Ordinance. Thereupon three of the directorsThampapillai, TCa.mil and Ernst of the Ceylon Textiles Limited institutedaction No. 22165 in the District Court of Colombo in which, among otherthings, they asked for an interim injunction restraining John Chellappahfrom holding or taking part in the meeting convened by him for the 3rdDecember. On the following day the court issued the injunction. Itwas. addressed to John Chellappah but it was not served upon him. TheChairman, Senator Gardiner, arrived at the time and place fixed. Thefiscal’s process server was also there. John Chellappah was not therebut his proxy holder was present. The enjoining order was read bySenator Gardiner to such shareholders as were present but 15 or 20
Li. M. 13. DE SILVA J.—Ceylon Textiles Ltd. v. Qardiner
321
minutes later after Senator Gardiner had left the shareholders proceededto hold a meeting at which they purported to re-appoint John Chellappah& Company as Agents and Secretaries, to pass a vote of no-confidencein the Board of Directors, to dislodge the existing directors except thelife director and to substitute for them John Chellappah and his son A.Chellappah.
The absence of John Chellappah on the 3rd December appears to havebeen an evasion of the enjoining order issued by the Court. This evasionis again conduct which is blameworthy.
It is now conceded by learned counsel for the appellants that the re-solution passed at this meeting of the 3rd December was of no effect fortwo among possibly other reasons. First, because a special resolutionwas necessary to displace the Board of Directors and no such resolutionwas passed ; secondly, because even if it is assumed that the directorswere in default in not summoning a meeting, the conveners of the meetingof the 3rd December did not before they summoned a meeting themselveslet the time required by law under section 112 (3) to elapse. It is alsoto be remembered that an injunction had been issued restraining theholding of the meeting. Chellappah, his son A. Chellappah and the CeylonTextiles Limited, however, instituted action No. 22326 of the' DistrictCourt of Colombo against the three directors Ernst, Kamil and Thampa-pillai the 1st, 2nd and 3rd defendants respectively in the action andSenator Gardiner praying for a declaration that the 1st, 2nd and 3rddefendants had ceased to be directors of the company, that John Chell-appah and his son were duly elected directors, and for an order requiringthe 1st, 2nd and 3rd defendants to hand over the management of thecompany. They also asked for an injunction restraining them fromacting as directors and an enjoining order was in fact issued on the 25thJanuary, 1950. Thereafter Messrs. Ernst, Ka.mil and Thampapillai re-frained from functioning as directors. It is clear that the attempt todislodge the old directors was ineffective in law and that an injunctionshould not have issued but, however that be, the fact that Chellappahwent to Court immediately after the meeting of 3rd December indicatesthat he desired to obtain covering sanction from Court for the decisionstaken at the meeting of 3rd December, 1949.
Subsequent to this there are two matters which deserve mention.On 1st February, 1950, Chellappah (who was a director in any case)entered the business premises of the company for the purpose of examiningits books. He says that the examination revealed a number of irregulari-ties and towards evening he decided that the premises should not beleft in charge of the Secretary, Gnanakoon. He then attempted toclose the premises when Gnanakoon with the help of one or two rowdiesthrust him out. On the 2nd February, 1950, Chellappah forcibly re-entered the premises and this re-entry was the subject of a prosecution forhouse-breaking. The learned District Judge mentions these events aspart of the narrative but makes no comment on them. Chellappah saysthat his action with regard to re-entry was prompted by the belief thatirregularities were being committed and this belief receives some support
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L. M. D. DE SILVA J—Ceylon Textiles Ltd. v. Gardiner
from the evidence of Mr. N. de Costa a member of a firm of charteredaccountants who examined the hooks of the company at the request of"the provisional liquidator. We are unable upon this material to saythat what Chellappah did on both occasions was prompted by a desire-to take the business into his exclusive control and not by a desire toprotect it.
The evidence led in the Court below discloses a great deal of recrimi-nation between Senator Gardiner and Chellappah. The undue impor-tance attached to this has somewhat blurred the essential point in thiscase, namely, whether there was a deadlock such as was necessary inlaw to sustain an order for winding up. The learned District Judge-has expressed certain views on the accusations made by Senator Gardinerand Chellappah against each other but we do not think it necessary togo into them in detail. As an instance we would refer to the accusationmade by Senator Gardiner that John Chellappah & Company inducedhim to sign a contract of service for 10 years and that he signed it withoutrealising that it was for 10 years. This is somewhat curious. Senator-Gardiner’s position appears to be that the contract was unduly favour-able to Chellappah & Company and in his evidence he expresses dis-content with Chellappah on that ground. Senator Gardiner also accusesChellappah of having resisted the payment of dividends with the object ofdepressing the price of shares in order to buy them up himself. The-learned District Judge has held “ this charge of deliberately depressingthe share of this company levelled against Chellappah has no basis what-soever ” and we have no reason to think that the learned District Judgeis wrong.
The course of events since the 7th of September, 1949, appears with-out doubt to have been turbulent and the unfortunate turns which theytook must have impaired the efficient working of the company. Butin spite of this it is clear from the evidence that the company is prosperousand doing well. It might have done even better but for the unfortunate-events which we have recapitulated. But however turbulent theseevents might have been and however violent the disputes that have takenplace they are not incapable of being resolved. The machinery of theCourts can be invoked in the cases already filed or in others to restore toeffective authority the directors entitled to function and to give reliefagainst recalcitrant agents and secretaries.
The appellants cited to us certain cases on the question of deadlock-They all relate to private companies which it is possible, for the reasonthat they were private, to deal with on the same footing as partner-ships in so far as the question of winding them up arose. Learnedcounsel on both sides were unable to cite to us a case in which a publiccompany had been wound up under the corresponding section of theEnglish Act. Such cases, if they can arise at all, are bound to be rarebecause the constitution of a public company generally makes it possible-for disputes to be resolved in a domestic forum or at the worst in a courtof law. In the decided cases, as it appears to us, it was the impossibilityof arriving at such a solution that led the Courts to pronounce a winding
L. M. D. DE SILVA J.—Ceylon Textiles Ltd. v. Gardiner
323
up order. The embarrassment caused by conflicts between directors andthe possible delays inevitable in litigation in achieving their resolutiondo not in our opinion necessarily lead to the conclusion that a companyshould be wound up under section 162 (6) of the Companies Ordinance,No. 51 of 1938. A case which we do not have to consider in which suchan order may be justified is one where such conflicts and embarrassmentare shown to exist, and it is further established that owing to lack ofmeans of solution they will continue indefinitely so as to make businessimpossible or at any rate to the serious detriment of the company. Itis not the case here that the matters of disagreement between SenatorGardiner and Chellappah and their respective supporters will, for lackof means of solution, be of such a permanent character as either to bringthe business of the company to a standstill or to cause irreparable damageto the shareholders.
In re Yenidje Tobacco Company Limited x, a private company withonly two shareholders was under consideration. An application forwinding up the company was consequently treated on the same principlesas an action for dissolution of partemship by one partner against another. 'A deadlock was alleged. Warrington JL.J. said, “ I am prepared to saythat in a case like the present, where there are only two persons interested,where there are no shareholders other than those two, where there areno means of overruling by the action of a general meeting of shareholdersthe trouble which is occasioned by the quarrels of the two directors andshareholders, the company ought to be wound up if there exists such aground as would be sufficient for the dissolution of a private partnershipat the suit of one of the partners against the other ”. Before disposingof the case, Warrington L.J. dealt with an article of the company whichprovided for reference to arbitration in the event of disputes arising.He found that this article did “ not provide the means of getting rid ofthe difficulties which are encountered in the present case There issome indication here that a Court should not hold that a deadlock hasarisen if some means other than a winding up exists for the resolution ofdifficulties that may have arisen.
It appears from the argument in the case of Cooper and Sons Limited 3that the Court was asked ,cto exercise its general equitable jurisdiction ”under section 168 of the Companies Act, 1929. Commenting upon certaingrievances which were urged as grounds for an order for winding upSimonds J. (as he was then) though he does not say in so many wordsappears to indicate that if “ appropriate relief in appropriate proceedings”was available in respect of them such grievances would not influencehim to make an order for winding up.
The respondents in the Court below and before us relied strongly uponthe judgment of the Privy Council in Loch and another v. John Blackwood,Limited3. That case makes no pronouncement upon the question ofdeadlock and relates to the perverse and oppressive use of voting powerby those holding a majority of votes. When this was pointed out the1 (1916) 2 Ch. 426.3 (1937) 1 Ch. 392.
(1924) A. C. 783
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L. M. X>. DE SILVA J.—Ceylon Textiles Ltd. v. Gardiner
respondents sought to suggest that in the case before us also there hadbeen attempts perversely to use voting power and that successful attemptswould occur in the future. In the case of Cuthbert Cooper & Sons Ltd. 1the petitioners were confined to the grounds stated in the petition andperverse use of voting power is not one of such grounds in this case.But as the learned Judge has made .some observations upon the usethat John Chellappah may make of voting power we will examine thearguments adduced.
Learned counsel for the' respondents argued before us that thecircumstances surrounding the ineffective meeting of 3rd December,194=9, indioate an attempt to use voting power perversely and oppressively.We do not think so. However misguided they were their actions cannotfairly be described as a perverse or oppressive use of voting power.
The fact that a majority through the medium of legal forms persistentlyuse overwhelming voting power perversely and in oppression of a help-less minority will influence a Court in favour of making an order forwinding up. An exhaustive statement of the cases in which the courtswill wind up a company on such grounds would be difficult to makeand no such statement has been attempted—but the general nature ofthe grounds is evident from the decided cases. Thus in the case referredto a public company was formed to carry on the engineering business ofone John Blackwood, deceased, which to all intents and purposes was thedomestic concern of the sister of the deceased, one Mrs. MacLaren, anephew named Rodger and a niece named Mrs. Loch. What was calledthe McLaren group had a majority of six votes which were persistentlyused to the detriment of the minority. They omitted to hold generalmeetings or submit accounts or recommend a dividend in spite of the factthat the business was prosperous. Their whole aim was to keep 'theminority in ignorance of the state of the business with the object ulti-mately of buying them out at an undervalue. This was a perverse use ofvoting power.
We have attempted to obtain a report of the case of Baird v. Lees re-ferred to by the Privy Council with approval in the case just referred to.Lord Clyde there said, “ I have no intention of attempting a definitionof the circumstances which amounts to a ‘ just and equitable ’ cause.But I think I must say this. A shareholder – puts his money intoa company on certain conditions. The first of them is that the businessin which he invests shall be limited to certain definite objects. The secondis that it shall be carried on by certain persons elected in a specified way.And the third is that the business shall be conducted in accordance withcertain principles of commercial administration defined in the statute,which provide some guarantee of ■ commercial probity and efficiency.If shareholders find that these conditions or some of them are deliberatelyand consistently violated and set aside by the action of a member andofficial of the company who wields an overwhelming voting power, andif the result of that is that, for the extrication of their rights as share-holders, they are deprived of the ordinary facilities which compliance with1 (1937) 2 A. E. It. 466 at p. 469.
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•the Companies Acts would provide them with, then there does arise, inmy opinion, a situation in which it may be just and equitable for the courtto wind up the company Although we have not been able to obtainverification from the report it is fairly clear that the violation of theconditions referred to by Lord Clyde was committed by a member andofficial who wielded overwhelming voting power and used such votingperversely to keep himself in office while violating the conditions referredto. In that case “ appropriate relief in appropriate proceedings ” doesnot appear to have been available to other shareholders. No such groundsexist in this case. In the first place John Chellappah has only 34 per cent,of the shares (and votes). At the meeting of the 3rd December he appearsto have commanded a majority. On this petition he and the othersopposing winding up command a majority of votes. But these majoritieswere commanded presumably by John Chellappah persuading others tosupport him on the particular questions which arose. Persuasion ofthis character is legitimate. It was addressed to the merits of particularquestions. John Chellappah might have been right or wrong on theviews for which he has found support but he has not formed a block whichuses a majority of votes perversely in the same sense as that word isused of directors who by commanding a majority of votes keep themselvesin office and vote themselves unconscionable amounts as remuneration.
John Chellappah has in fact not been successful up to now in achievingthe objects in respect of which he commanded majorities. The resolutionsof the meeting of 3rd December were for the reasons already stated in-effective. For this reason the respondents were constrained to pleadbefore us that although in the past voting power has not oppressed aminority, it will do so in the future. It was contended before us that it isprobable that at the next annual general meeting John Chellappah willcommand the same degree of support among shareholders as he has doneon this petition and will be able to place on the board, directors of hiachoice. This might happen ; but if it does it could not be called a perverseuse of voting power. Then it was argued that there will be a deadlockbecause John Chellappah was likely to quarrel with the other directorseven though they be of his choice because in the past it is alleged he hasdone so. The allegation is that Ernst and Kamil were of Chellappah’schoice and that Chellappah has quarrelled with them. We find it entirelyimpossible to make a judicial forecast as the one we are asked to makeand we feel quite unable to sustain an order for winding up on the groundof deadlock on the kind of probabilities that we are asked to assume forthe future. We are of the opinion that no deadlock such as would justifya winding up order has been established.
For the reasons given we would allow the appeal, set aside the decreeentered by the learned District Judge, and dismiss the petitioners’ appli-cation. The petitioners will pay costs in both courts.
Pulle J.—I agree.
Appeal allowed.