OJA/14/1993 1/26 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL No. 14 of 1993 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HONOURABLE MS.JUSTICE H.N.DEVANI ========================================= = 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================= = AMBALAL J.DOSHI & 2 - Appellant(s) Versus BHARAT TRADERS, & 1 - Opponent(s) ========================================= Appearance : MR MEHUL S SHAH for Appellant(s) : 1 - 3.MR SURESH M SHAH for Appellant(s) : 1 - 3. NOTICE SERVED for Opponent(s) : 1, OFFICIAL LIQUIDATOR for Opponent(s) : 2, MR JS YADAV for Opponent(s) : 2, ========================================= = CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MS.JUSTICE H.N.DEVANI Date : 08/10/2008 OJA/14/1993 2/26 JUDGMENT CAV JUDGMENT (Per : HONOURABLE MS.JUSTICE H.N.DEVANI) 1. This appeal arises out of the judgement and order dated 28th April, 1993 passed by the learned Company Judge in Suit No.2 of 1979, whereby the suit has been decreed in favour of the respondent No.1 – original plaintiff. 2. The facts stated briefly are that the plaintiff firm consisted of two partners, Rajendra Sheth and Harish Himmatlal Sheth, who were members of the first defendant Company i.e. M/s Shri Bharat Hand-Weaving Mills Pvt. Ltd. (the Company). Shri Himmatlal Sheth and Shri Harish Sheth were also Directors of the said Company. The defendants No.2 to 6 belonged to the group of the defendant No.2 - Shri Ambalal G. Doshi and according to the plaintiff, they were all members of the Company. Shri Himmatlal Sheth and Shri Ambalal G. Doshi had promoted the Company and were running the business of the Company. In substance, the Company had two groups of shareholders, led by Shri Himmatlal Sheth and and the other led by Shri Ambalal G. Doshi. 3. According to the plaintiff, an arrangement had been arrived at between both the groups pursuant to which, a meeting was held between the parties on 24th September, 1973 in the office of M/s Singhvi & Company, Accountants & Auditors, and it was decided that the group of Shri Ambalal G. Doshi should take over the management of the Company from the group of Shri Himmatlal H. Sheth, OJA/14/1993 3/26 JUDGMENT and for that purpose, as a part of an overall agreement, it was agreed by Shri Himmatlal Sheth, that the shares held by him and the members of his group would be transferred to Shri Ambalal G. Doshi and the members of his group at the face value of Rs.31/- per share and the shares had in fact been transferred at the aforesaid face value as per the said arrangement and the agreement had been acted upon between the parties. 4. The plaintiff firm was acting as the sole selling agent of the Company and it was agreed that the plaintiff firm shall cease to act as such sole selling agent and shall terminate the agency agreement with effect from 30th September, 1973. According to the plaintiff, it was agreed between the parties that the outstanding amount standing to the credit of the plaintiff firm in the books of the Company as on 30th September, 1973 had to be paid in the manner indicated in the said arrangement and Shri Ambalal G.Doshi and his group undertook personal liability to pay the said amount in equal installments within a period of six months, with interest at the rate of 15% per annum. 5. It was further the case of the plaintiff that it was agreed between the parties, that Shri Himmatlal Sheth be authorized to recover the outstandings of the Company and to credit the amount of such recovery when made towards the amount standing to the credit of the plaintiff firm and M/s Bharat Stores. However, if such outstandings were recovered directly by the Company, it would be paid over immediately towards the repayment OJA/14/1993 4/26 JUDGMENT of the amount due to the plaintiff firm and M/s Bharat Stores. According to the plaintiff, it was specifically understood that credit was to be given of those amounts of the outstandings, which were in fact recovered by Shri Himmatlal H. Sheth. 6. It was also agreed that an option be given to Shri Himmatlal Sheth to purchase finished stocks of the Company as on 30th September, 1973 and the amount of such stock was to be adjusted towards the amount due to the plaintiff firm. The plaintiff firm exercised such option and purchased the available stock as on 30th September, 1973 for an amount of Rs.8,770=50 and the said amount was given credit towards the amount due and payable to the plaintiff firm by the Company. 7. It was also the case of the plaintiff that, on 9th October, 1973, the Company also wrote a letter to the plaintiff firm acknowledging the liability to pay the amount standing to the credit of the plaintiff firm in the books of accounts of the Company by six equal monthly installments. It was the say of the plaintiff that the amount standing to the credit of the plaintiff firm in the books of accounts of the Company was to the tune of Rs.25,706=74 inclusive of the amount of Rs.10,000/- paid as deposit by the plaintiff firm as per the agency agreement. The said amount was arrived at after giving credit for the amount of the value of the stock purchased by the plaintiff firm on 29th September, 1973. It was the case of the plaintiff that, an amount of Rs.25,706=74 with interest at 15% per annum was due and payable by the defendants to the plaintiff OJA/14/1993 5/26 JUDGMENT firm. That, the defendants No.2 to 6 had undertaken a personal liability for repayment of the said amount to the plaintiff firm. That, it was because of the fact that the defendants No.2 to 6 had undertaken a personal liability that Shri Himmatlal Sheth and members of his group had agreed to transfer the shares belonging to them in the Company to the second defendant and the members of his group. That, as a part of the arrangement and because of the said arrangement, Shri Himmatlal Sheth and the members of his group had agreed to handover the management of the Company to the second defendant and the members of his group. As the defendants had failed and neglected to make payment for the same, the plaintiff had given notice dated 1st January, 1974 through their advocate to all the defendants making a demand for the amount then due according to the monthly installments. In response to the notice, the defendant had given a reply, which according to the plaintiff was false and got up. The plaintiff, therefore, instituted a suit in the Court of the learned Civil Judge (S.D.), at Rajkot, which came to be numbered as Special Jurisdiction Suit No.63 of 1974. The appellants herein were the original defendants No.2, 3 and 5 in the said suit. Another suit also came to be instituted against the Company by M/s Bharat Stores. 8. The appellants had filed written statement disputing the claim of the plaintiff. It was the case of the appellants that the accounts of the Company had been written under the management and chairmanship of Shri Himatlal Sheth who was the father of the partners of the plaintiff firm. OJA/14/1993 6/26 JUDGMENT That, all accounts were not correctly written. Certain amounts had wrongly been credited and debited in the account books. According to the appellants the suit of the plaintiff was premature, as the same was instituted before making recoveries of all the book debts belonging to the company as per the arrangement dated 29th September, 1973. That, as per the letter dated 9.10.73, the plaintiff was only entitled to execution of promissory notes for the amount that may be due to the plaintiff. Hence, the plaintiff could not have filed a suit for a money decree and that only a suit for specific performance of contract could be filed. That, the accounts were still not settled hence, the suit was not maintainable. 9. On behalf of the plaintiff firm, Shri Harishkumar Himmatlal Sheth had been examined , whereas on behalf of the defendants, Shri Ambalal Doshi had been examined as witnesses. Documentary evidence was also produced, of which the most relevant documents are the agreement/minutes of meeting dated 29th September, 1973 and the letter dated 9th October, 1973 purportedly written by Shri Ambalal G. Doshi on behalf of the Company. 10.Subsequently, the Company went into liquidation on 21st June, 1976, hence, the suits were brought over to the High Court and came to be numbered as Suit No.2 of 1979 and Suit No.3 of 1979. Both the suits were heard together and decided by a common judgement and order dated 28th April, 1993, whereby Suit No.2 of 1979 was decreed in favour of the plaintiff, whereas the Suit No.3 of OJA/14/1993 7/26 JUDGMENT 1979 was dismissed. 11.Heard Mr.S.M.Shah, learned advocate for the appellants and Mr.J.S.Yadav, learned advocate for the respondent No.2, Official Liquidator. The respondent No.1 was initially represented by learned advocate Mr.D.D.Vyas, however, subsequently the learned advocate has withdrawn his appearance. Thereafter, despite service of notice, there is no appearance on behalf of the respondent No.1. 12.Mr. S.M. Shah, learned Advocate for the appellants has advanced the following submissions: (i) During the pendency of the suit the Company had gone into liquidation, however, the Liquidator had not been joined as a party to the suit, hence the impugned judgement and decree stands vitiated. (ii) The suit was instituted in respect of the alleged dues of the plaintiff for the loans advanced from time to time to the Company, however, the so called loans had not been proved and no evidence had been led to prove such loans despite the fact that the said claim was disputed in the suit. The learned Judge had failed to appreciate that the copy of the account books, ledger, purported to have been audited by the Auditor is not proof of the so called loans. The account books are not primary evidence of loans and unless primary evidence in respect of the loans is produced and the account book entries are proved by leading necessary OJA/14/1993 8/26 JUDGMENT evidence, there is no evidence about the dues in respect of which the suit was filed. Merely because the plaintiff had produced a certified extract of the account books of the Company bearing the verification of the Chartered accountant, the same could not have been accepted as sufficient proof of the so called loans. (iii) The entire claim of the plaintiff was based upon the document Exhibit-61. However, despite the fact that the appellants have disputed their liability, the Chartered Accountant in whose presence the document Exhibit-61 was executed has not been examined to substantiate the case of the plaintiff. (iv) Referring to the document Exhibit 61, it was pointed out that the same is primarily in the nature of Minutes of the Meeting of the Directors of the Company, held on 24th September, 1973. As per clause (1) of the said document two Directors of the Company along with one Rajendra Sheth had decided to resign after the preliminary transfer of shares etc. had been completed. Under the second clause, Shri Ambalal G. Doshi had undertaken to purchase through himself or through his nominees, the entire block of shares held by the Shri Himatlal Sheth group at the initial value of Rs.31/- per Share. It was submitted that insofar as clauses (1) and (2) are concerned; the same had already been acted upon. That, insofar as the present case is concerned the relevant part of the document is contained in clause (3) thereof, whereby it has been agreed that the loans standing in the name of M/s OJA/14/1993 9/26 JUDGMENT Bharat Stores and M/s Bharat Traders as on 30th September, 1973 would be paid as provided thereunder. It was pointed that under the said clause the loan should exist in the account books on the said date i.e. on 30th September, 1973, to contend that there is nothing on record to show any such outstanding loan on that date. (v) The directors had signed the document Exhibit 61 in their capacity as directors and not as individuals. Four directors were present during the meeting which was held for working out the entire dues of the Company, and not merely the repayment of loan to the plaintiff (vi) As per clause (3) of the document Exhibit-61, the loan was to be recovered as provided there under. Firstly, Shri Himatlal Sheth was empowered to recover all book debts belonging to the Company and in case the Company recovered such book debts, the same were to be directly given against the repayment of the loan. Secondly, Shri Himatlal Sheth had been given an option to purchase the finished stocks as on 30th September, 1973 against the said dues. It was submitted that it is an admitted position that Shri Himatlal Sheth had exercised the option and purchased stock worth Rs.8,770/-. It was contended that under the document Exhibit-61, there was complete obligation upon Shri Himatlal Sheth to recover the book debts of the Company. However, he does not appear to have taken proper steps under sub- clause (a) of the document. It was submitted that OJA/14/1993 10/26 JUDGMENT firstly the amount was to be ascertained, from which the amount recovered under sub-clauses (a) and (b) of clause (3) were to be deducted and the remaining amount was to be paid under sub-clause (c). It was contended that the Company was liable for repayment of only the balance loan and it was incumbent upon Shri Himatlal to recover the book debts towards repayment of loan. It was contended that the said Shri Himatlal Sheth has not been examined as a witness; hence, nothing has been brought on record to show as to what steps had been taken under sub-clauses (a) and (b) of clause (3) of the document. It was accordingly urged, that the decree cannot be sustained as the debt has not been proved. (vii) As per the document exhibit 62, which is in the nature of a communication written by Shri Ambalal Doshi on behalf of the Company, the company was liable to pay the actual amount payable to the plaintiff under promissory notes in six equal installments. It was submitted that Shri Ambalal Doshi had taken all actions in his capacity as director of the Company and as such there can be no individual decree against him or the present appellants and that individual property could not have been held liable. Referring to the provisions of Section 25 of the Contract Act, it was submitted that the agreement in question was void, as the same was without consideration inasmuch as the agreement did not provide for any consideration for the liability to be taken over. OJA/14/1993 11/26 JUDGMENT (viii) It was further submitted that interest has been awarded at the rate of 15% per annum whereas the Code of Civil Procedure, 1908, provides for payment of interest at the rate of 6%, hence even the interest part requires to be interfered with. 13.Mr.J.S Yadav learned Advocate for the Official Liquidator submitted that the date of winding up of the Company was 21st June 1976. That the suit was filed in 1979, without leave of the Court, hence in view of the provisions of section 446(2)(a) of the Companies the suit itself was not maintainable, and the decree was liable to be set aside on that count alone. 14.Dealing with the first contention, namely that despite the fact that the Company had gone into liquidation during the pendency of the suit, the Liquidator had not been joined as a party respondent, thereby vitiating the decree, the record of the case indicates that notice had been issued to the Liquidator in the proceedings of the suit and on behalf of the Liquidator, on several occasions time was sought for filing reply. However, no reply has come on record. Hence, it does not appear as if the suit proceedings have gone on without notice to the Liquidator. 15.As regards the contention that the suit was not maintainable as the permission of the Company Court had not been obtained as envisaged under section 446(2) (a) of the Companies Act, the same is de hors the record of the case, which shows that the Company Court had OJA/14/1993 12/26 JUDGMENT granted permission to continue the proceedings of the suit on condition that the plaintiff deposits expenses of the Official Liquidator within the time stipulated in the said order. 16.As is apparent from the facts noted hereinabove, the entire claim of the plaintiff is based upon the so called agreement Exhibit-61 dated 24th September, 1973, and the subsequent letter dated 9.10.73 Exhibit-62, hence the controversy involved in the present case revolves round the interpretation of the said documents. The agreement dated 24th September, 1973 reads as under: “We the following Directors of M/s Shree Bharat Handweaving Mills Pvt. Ltd., Rajkot met to-day on 24th Sept., 1973 at 4-30 p.m. in the Office of M/s Sanghvi & Co., Accountants & Auditors and following decisions were arrived at:- (1) Shri Himatbhai H. Sheth & Shri Harish H. Sheth, the two directors of the Company decided to resign alongwith Shri Rajendra H. Sheth after the preliminary transfer of Shares etc. has been completed. (2) Shri Ambalal G. Doshi undertook to purchase through himself or through his nominees the entire block of Shares held by Shri Himatlal H. Sheth group at initial value of Rs.31/- per Share. The price for the Share will be paid on the date of transfer of the Shares but not less OJA/14/1993 13/26 JUDGMENT than 30 days. (3) The loan standing in the name of M/s Shree Bharat Stores and Bharat Traders as on 30.9.73 will be paid as under: - (a) all the book debts belonging to the company will be recovered by Shri Himatbhai H. Sheth or if it is recovered by the Company, the same will be directly given against the repayment of the loan. (b) Shri Himatbhai H. Sheth will be given an option to purchase the finished stocks as on 30.9.73 against the above dues. (c) The balance loan will be paid by Shri A.G. Doshi group in equal instalments within a period of six months @ of interest 15% and this loan will be secured by necessary charge of the company’s property. Regarding the mortgage for the security of the loan Shri A.G. Doshi and Shri H.H. Sheth will mutually decide. Partners of M/s Bharat traders, Rajkot have agreed to cancel their selling agency agreement as from 30-9-1073. Letter to obtain accordingly.” 17.The aforesaid document has been signed by (1) Ambalal G. Doshi, (2) Himatbhai H. Sheth, (3) Harish H. Sheth and (4) Gunvant M. Joshi. OJA/14/1993 14/26 JUDGMENT 18.The document Exhibit 62 is in the nature of a communication dated 9.10.73 whereby Shri Ambalal Doshi has on behalf of the Company admitted that upon cancellation of the plaintiff’s agency with effect from 1.10.73, an amount of Rs.36,700/- standing to their credit or whatever is actually shown to the credit of the plaintiff as per the books of accounts are payable by them to the plaintiff under promissory notes by way of six installments and that the first installment would start from 1.11.73. 19.On a plain reading of the aforesaid document Exhibit-61, it is apparent that the Directors of the Company had met on 24th September, 1973 and taken the decisions stated therein. The first decision was that two of the Directors along with Shri Rajendra H. Sheth had decided to resign after preliminary transfer of Shares etc. had been completed. The second decision was that Shri Ambalal G. Doshi was to purchase the entire block of shares held by Shri Himatbhai H. Sheth group, either through himself or through his nominees at the initial value of Rs.31/- per share. It appears to be an admitted position that both the aforesaid decisions have been acted upon and completed. The third decision, which is most relevant for the purpose of the present case, is as regards the manner in which the loan standing in the name of the plaintiff as on 30.9.1973 was to be paid. The manner indicated is in three stages. The first stage is that all the book debts belonging to the Company were to be recovered by Shri Himatbhai Sheth or if they were recovered by the Company, the same were to be directly given against OJA/14/1993 15/26 JUDGMENT repayment of the loan. The second stage was that Shri Himatbhai was given an option to purchase the finished stocks as on 30.9.1973 against the said dues. Admittedly, Shri Himatbhai had exercised the option and purchased finished stock worth Rs.8,770.50. The third and most important stage is that the balance loan was to be paid by Shri A.G. Doshi group in equal installments within a period of six months with interest at the rate of 15% per annum. The said loan was to be secured by necessary charge on the property of the Company. 20.It may be pertinent to note that the amount payable to the plaintiff is not quantified in the said document. However, within a short period thereafter, i.e. on 9.10.1973, Shri A.G. Doshi has vide Exhibit-62 admitted that upon cancellation of the plaintiff’s agency with effect from 1.10.73, an amount of Rs.36,700/- standing to their credit or whatever is actually shown to the credit of the plaintiff as per their books of accounts are payable by them to the plaintiff under promissory notes by way of six installments and that the first installment would start from 1.11.73. Thus, by the subsequent document Shri A.G. Doshi has admitted a liability of about Rs.36,700/- or whatever is standing to the credit of the plaintiff in their books and has also promised to pay the same through promissory notes by way of six installments. As per the said document, the first installment would commence on 1.11.73. 21.A conjoint reading of the documents Exh.61 and 62 would show that vide agreement dated 17.9.73 it was OJA/14/1993 16/26 JUDGMENT agreed between the parties that the balance loan would be paid by Shri A.G. Doshi group in equal instalments within a period of six months @ of interest 15%. The subsequent document quantifies the amount to the certain extent and indicates that the intention of the parties is that the first installment would commence from 1.11.73. Hence, the entire amount standing to the credit of the plaintiff was to be paid within six months by way of six equal installments, the first installment becoming due on 1.11.73. Thus, the entire amount was required to be paid within six months i.e., by 1st May, 1974. The suit was filed thereafter, in June, 1974. 22.As regards the interpretation of the clauses of the agreement Exhibit-61, the learned Company Judge recorded the following findings: “A plain reading whereof clearly indicates that Shri Himmatbhai H. Sheth on his own was to try for recovery of book-debts and likewise, the Company i.e. defendant No.1 was also to do so. In either event, whatever be the recovery, it was to be applied towards repayment of loan which is the subject matter of this agreement. It is, therefore, not possible to accept the case tried to be putforth by the defendants that unless the book-debts are recovered by the said Shri Himmatbhai Sheth, he can have no claim against all or any of the defendants.” “18. Otherwise also, even if the Company were not OJA/14/1993 17/26 JUDGMENT wound-up, it being the debt due to the Company the suit will have to be filed in