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April 3, 2004

 

Misconduct of directors is good ground for winding up of a company

Appellate Division (Civil Jurisdiction)
Civil petition for leave to appeal No. 1382 of 2002
Nahar Shipping Lines Limited and another
Vs
Mrs. Homera Ahmed
Before Chief Justice Mainur Reza Chowdhury, Mr. Justice
Mohammad Fazlul Karim, Mr. Justice Syed JR Mudassir Husain
and Mr. Justice Abu Sayeed Ahamed
Date of Judgement: 12.03.2003


Background
Mainur Reza Chowdhury, CJ: This civil petition for leave to appeal is directed against the judgement passed by the Company Bench of the High Court Division in Matter No. 151 of 1997. The respondents as petitioners filed an application under section 233 of the Company Act 1994. The facts stated in the petition under section 233 of the Companies Act 1994 was that the petitioner company Nahar Shipping Lines Limited was incorporated as a Public Limited Company in July 1979. Fifty thousand (5000) fully paid up shares were issued at the time of incorporation, out of which 500 shares were issued to Mr. Md. Ashraf Ahmed, the late husband of the respondent No. 1 and 500 each to the two daughters, Mrs. Rehana and Shahana Ahmed making a total of 1,500 shares. Ashraf Ahmed, Mrs. Rehana Ahmed and Mrs. Shahana Ahmed were amongst the first Directors of the company. The remaining 3,500 shares were issued to the respondent No. 2 of the company Mr. Mohammadullah, and his family member. The respondent no. 2 until his death in 1995, was a Director and the Chairman of the company. The present respondent No. 3 Mrs. Syeda Sirajun Nahar was the Managing Director; time to time new shares were issued and family friends of Mr. Mohammadullah own 9,200 shares i.e. 79.67% while the family of Mr. Ashraf Ahmed were allotted 2,800 shares being 23.33%.

The company was shown to have in balancing loss. The company was insolvent throughout its life. The respondent therefore questions as to why the company was kept alive by the majority shareholders. Soon after the death Mohammad Ashraf Ahmed one of the minority shareholders, Mr. Murshed Hussain, a friend of Mr. Mohammadullah sold his shares to the two families in the proportion 70.30. Eventually as it appears from return filed with the Registrar Joint Stock Companies was 4,600 of the issued shares of 17,000 shares belonged to the family of Mr. Ahmed which was about 27.06% and the family Mohammadullah own 11,400 shares i.e. 67.06%. Remaining 1000 shares i.e. 5.86% of the 17,000 issued shares was held by Mr. Moqbul Ahmed, who was not a party in aforementioned matter No. 151 of 1997. After the death of Mr. Ashraf Ahmed, the majority shareholder provisionally appointed Mr. Aslam Ahmed, the elder son of late Mr. Ashraf Ahmed as an Executive Director of the company.

However, at a meeting of the directors held on 8 August 1987 the Board of Directors resolved to dismiss Ashraf Ahmed who was petitioner No. 4 before the entire company matter from his position as director. But by that time he had opportunity to observe the business of the company thoroughly and knew how much business it was and should be doing. The Executive Director of the company realised that the company was not declaring all its income in the accounts and raised various issues regarding the signing 1986 accounts. He specifically noticed that the flraft account 1996 did not include approximately Tk. 23 lacs of freight that were of the company is return from Chittagong Branch and which had been deposited in the company's Bank Account. Further Tk. 8 lacs were shown on the balance sheet as expenditure without jurisdiction. Further other expenditures were grossly exaggerated on the profit and loss accounts, and had no relationship with the trading results of the company. The effect of the draft accounts as prepared by the majority shareholders, showed that the company had made a loss of over Tk. 31 lacs. According to the adjustments to the draft accounts the loss should have been in the region 17 lacs. Mr. Ashraf Ahmed was not provided with or given access to the company's books and records to verify the authenticity of the draft accounts. His insistences on getting access to them led to his dismissal as the Executive Director in 1987.

After the dismissal of Ashraf Ahmed as the Executive Director, no further information about the company was provided to the petitioners of the company matter; they were not allowed to participate in the affairs and management of the company, no dividends or profits were paid to them. In that situation they filed an application to wind up the company on 14 June 1988 being Matter No. 24 of 1988. In the context of those proceedings, the company court granted an injunction restraining the company from creating any further liability. It came to the notice of the petitioners that BSRS had agreed to accept Tk. 55 lacs in full as final settlement of 1.9 crores. The application to wind up the company was heard and the court dismissed it on 17 July 1990. The High Court Division pointed that the main reason for the dismissal was that the company was still a going concern and that mismanagement of the company by the majority was not a ground for the just and equitable winding up by the company.

Deliberation
The High Court Division after considering the facts and circumstances and evidence of Mr. A M Chowdhury, FCA who under the instruction of Ashraf Ahmed held deposed after examining certain documents that the projection shows significantly higher income then the audited accounts. The High Court Division after referring to the section 233 of the Companies Act 1994 observed that these sections are equivalent to section 459 and 461 of the English Companies Act, 1985, Section 397 of the Indian Companies Act, 1956 and Section 53 and 260 of the Australian Companies Act, 1989. An analysis these equivalent provisions give an useful insight into the Bangladeshi section 233 and helps to understand its meaning and construction, particularly, as this is a noble provision and as its application is not as developed in the other jurisdictions.

The High Court Division was of the opinion that words of section 233(1) to consider in the context of the case were : "affairs of the company" and "powers of the directors". The High Court Division considered the provision of section 233 of the Company Act, section 459 of the English provision based upon "unfairly prejudicial" of the conduct and decisions of the English Court referred to in the judgement and section 397 of the Indian Company Act and Section 260 of the Australian legislation. English Court Re. BSB Holding Ltd. IBCLC (1996) 155, it was held that the words "unfairly prejudicial" were wide and general and the circumstances in which they apply cannot, therefore, be exhaustively categorised. Mrs. Justice Arden delivered the judgement that case analysed the guidelines set out in the case by Neil LJ in Re Saul D Harrison & Sons PLC (1995) 1 BCLC 492 guidelines include :

1) The words "unfairly prejudicial" are general words and they should be used flexibly to meet the circumstances of the particular case.
2) The section giving relief should not be allowed to become an instrument of oppression nor to stifle managerial decisions.
3) The relevant conduct of commission and omission must relate to the affairs of the company of which the petitioner is a member.
4) Prejudicial conduct means causing prejudice or harm to the relevant interest.
5) Unfairness can arise out of a breach of the petitioner's legal rights, i.e. those in the memorandum and articles of association or arising out of the fiduciary duties of directors, or the petitioner's legitimate expectations.
6) Serious mismanagement of a company business can constitute unfairly prejudicial conduct.
7) Directors exceeding their powers or exercising them for some illegitimate or ulterior purpose would allow a shareholder to complain.

Under the Australian legislation, section 260 provides a remedy against any person involved in the affairs of the company. This includes the directors, majority shareholders, substantial shareholders as well as the company itself. Under this section an application must allege that "affairs of the company" being conducted in an oppressive, unfairly prejudicial, or unfairly discriminatory manner or contrary to the interests of the members as a whole. The expression "affairs of the company" is widely defined in section 53 of the Act, in relation to body corporate "affairs of the company" means:-

The promotion, formation, membership, control, business, trading, transaction, and dealings, property, liabilities, profits and the income, receipts, losses, out going and expenditure, the internal management and proceedings; and the power of persons to exercise, or to control the exercise of, the right to vote attached to shares in the body corporate or to dispose of, or to exercise control over the disposal of, such shares.

The High Court Division was of the opinion that as the Bangladeshi statue contains similar words, the situations encompassed in the Australian section 53 will also be encompassed in Bangladesh section 233. This starting point of the inquiry by the Court on an application by minority shareholder protection must be words of section 233 itself. The word "prejudice" is wider and general than the words "unfairly prejudicial" used in the English and Australian sections. The circumstances in which this will apply cannot therefore be categorised. Under the Australian section 260 relief is granted where a minority shareholder finds himself "locked-in". In Bangladesh a similar situation would entitle a minority shareholder for relief as in the instant case. Because a minority shareholder was not allowed to take part, but his investment is locked in the company and he can neither take it out nor can participate in the profit as it is in the instant case.

The section 233(10) has been considered recently in the cases Nafisa Chowdhury vs. United Food Complex 53 DLR (2001) 81 and Syed Al Nesar Ahmed vs. Nafisa Chowdhury 53 DLR (AD) (200)83 respectively. Under this section the court after hearing the evidence and the submissions, is of the opinion, on a balance of probabilities, that the applicant "has been or is being or is likely to be" prejudicially affected, it can give relief. There must be a causal nexus between the misconduct relied upon and the effect upon the applicant. The alleged conduct of commission or omission must relate to the affairs of the company. It is also to be remembered that the management of a company is entrusted to the directors, who under the law have to exercise their powers in the interest of the company as a whole.

A remedy under section 233 can be given only if the directors have acted in the breach of duty or if the company has breached any or its Articles or any relevant agreement.

Under section 233, the court can give the relief sought by the applicant or any other relief. The objective of the relief is to negate the impact of the prejudicial or other relevant misconduct on the part of the majority shareholders.

The most common relief is for the majority to buy out the minority in appropriate situations, the minority can be ordered to buy out the majority. Re-prenfeld Squash Racquets Club Ltd. (1996) 2 BCLC 184. In Bird Precision Bellows Ltd. (1984) ch. 419 it was held that the court could determine the valuation on the basis of expert evidence. The valuation has to be fair. The appropriate approach may be to take the most recent date for which reliable figures are available.

The Company Bench considered the prayer of the petitioners in the company matters for an order that their shares purchased by the delinquent majority shareholders at a price fixed by the Court. Two issues arise in this context:

(1) Whether an order on the majority to buy the minority shares is justified?
(2) If so, at what price should the sale take place?

The High Court Division after narrating the prejudicial and misconduct on part of the majority shareholders has the power in the interest of the company to direct the majority respondent to buy the shares of the minority petitioners. Accordingly the Company Bench passed the following order.

1) The Respondent Nos. 2, 3, 4 and 5 are directed to purchase jointly or several all the 4,600 shares now owned jointly by the petitioners in Nahar Shipping Lines Limited (the Shares) of 87 Motijheel Commercial Area, Dhaka for the total consideration of Tk. 7,49,12,071/- (Taka seven crore forty-nine lack twelve thousands seventy-one) only within three months from the date of drawing of this order with interest at the rate of 7.5 till realisation. The petitioners 1 to 7 are directed to sign instruments of transfer of the share in requisite form in favour of the Respondent Nos. 2, 3, 4 and 5 delivered the same to the registered address of the company.

Decision
Having considered the well reasoned and granting provision of law in the judgement of the High Court Division in the company matter, we do not find any reason to grant leave against the said judgement. The petition is therefore dismissed and the delay is condoned.

Dr. M. Zahir, Senior Advocate, Mr. Md. Nawab Ali Advocate-on-Record, for the petitioners. Mr Ajmalul Hossain, Senior Advocate instructed by Mvi Md Wahidullah, Advocate-on-Record, for Respondent Nos. 1-7. Respondent Nos. 8-13: Not represented.