Winding up on the just and equitable ground: In re German Date Coffee Company (1882) and Seth Mohan Lal v. Grain Chambers, Muzaffarnagar (1968)

German Date Coffee is where the failure of substratum doctrine comes from, and it is a case in which the petitioners won against a solvent company and a large majority of members who wanted to carry on. Seth Mohan Lal is the Supreme Court's statement of the same doctrine for India, and it is a case in which the petitioner lost. Learn the definition from the Indian case and the illustration from the English one, and you can argue either side of a substratum problem.

Both are decisions on the just and equitable ground, which is now s. 271(g) of the Companies Act 2013 as enacted: a company may, on a petition under s. 272, be wound up by the Tribunal "if the Tribunal is of the opinion that it is just and equitable that the company should be wound up." Winding up is by the Tribunal or voluntary (s. 270), and the other grounds in s. 271 as enacted include inability to pay debts, a special resolution of the company, acting against the sovereignty and integrity of India, and conduct of the affairs in a fraudulent manner.

One amendment must be noted. The Insolvency and Bankruptcy Code, 2016 substituted s. 271, and the substituted section omits inability to pay debts as a ground of winding up by the Tribunal — that subject having passed to the Code — while keeping the special resolution, sovereignty, fraudulent affairs, five-year default and just and equitable grounds, re-lettered (a) to (e). Under the substituted section the just and equitable ground is s. 271(e). State whichever version the question calls for, but do not mix them.

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# Part I — In re German Date Coffee Company

The company was registered on 16 February 1881 with a capital of £100,000 in £1 shares. Its memorandum stated the objects to be, among others:

1. to acquire, purchase, use, exercise and vend certain inventions for manufacturing from dates a substitute for coffee, for which a patent has or will be granted by the Empire of Germany to Thomas Frederick Henley, and to acquire any other patents granted to him by that Empire;
2. to make and use those inventions or any improvement or modification;
3. to carry out an agreement of 16 February 1881 — under which the Date Coffee Company sold to Hillier, for £50,000 in cash and shares, the rights it had;
4. to manufacture and sell the preparations;
5. to grant licences;
6. to obtain patents for improvements or extensions;
7. to acquire any other inventions for the above or cognate purposes;
8. to import and export all descriptions of produce for the purposes of food, and to acquire or lease land and buildings, steam-engines and the like, in connection with those purposes or otherwise.

What happened. The intended German patent was never granted, and the appeal against the refusal had been tried and had failed. The company instead purchased a Swedish patent and established works in Hamburg, where it made and sold coffee from dates without a patent.

Many shareholders withdrew on learning that the German patent could not be obtained — the holders of 27,000 shares, more than a quarter of all the shares, had their names removed from the register on the ground that they had been deceived by a statement in the prospectus that the patent had already been obtained. The large majority of those who remained wished to continue, and the company was solvent.

Two shareholders petitioned to wind it up, within a year of incorporation.

Affirming Kay J: the substratum of the company had failed, it was impossible to carry out the objects for which it was formed, and it was just and equitable that it be wound up, although the petition was presented within a year from incorporation.

Where the memorandum shows a main or dominant object, and that object has become impossible, the substratum of the company has failed and it is just and equitable to wind it up, even though the company is solvent and a large majority of the members wish to continue. General words in an objects clause do not save the company: they must be read as ancillary to the dominant object and cannot be used to turn a company formed for one purpose into a company carrying on another.

The dominant object

Kay J, whose reasoning the Court of Appeal adopted, held it beyond question that the German patent could not be obtained, and that on the memorandum "the acquisition of a German patent and working under it was the main and principal object of the existence of this German Date Coffee Company. Any other thing in the memorandum, if there by any, seems to be subsidiary and auxiliary only to that object of working a German patent." The substratum, "the main object of the company, to which all other objects are merely subsidiary and auxiliary", had "completely failed", so that carrying on the proposed business would be beyond the purposes of the company, and the wish of the minority who declined to be involved in a business not contemplated by the memorandum was to be respected.

On the Swedish patent the answer was withering: "It seems almost ludicrous to imagine that the German Company, a company formed for the purpose of carrying on business in Germany, can say that it has taken any steps towards the accomplishment of that object by obtaining a Swedish patent for the same invention."

Baggallay LJ — impossibility is the test

He took the principle from In re Suburban Hotel Company to amount to this: "if you have proof of the impossibility of carrying on the business contemplated by the company at the time of its formation, that is a sufficient ground for winding up the company." The real contemplated object here was the manufacture of date coffee in Germany under a German patent, and "in the contemplation of all parties the granting of the letters patent in Germany for the working of this invention was the basis of the company." As to the wide words in clause 8, they "must be regarded as ancillary to the purport of the scheme for which the company was formed."

Lindley LJ — general words are not a trap

His statement of construction is the one to quote, and it applies to the memorandum generally, not only to winding up:

"General words construed literally may mean anything; but they must be taken in connection with what are shown by the context to be the dominant or main objects. It will not do under general words to turn a company for manufacturing one thing into a company for importing something else, however general the words are."

He added the caution about timing that the case is also authority for: the petition was presented within a year, and "the Act of Parliament gives the company a year to see whether it can get to work or not", so a court should be careful before winding up so early. Here the impossibility was already established, and the order stood.

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# Part II — Seth Mohan Lal v. Grain Chambers, Muzaffarnagar

The Grain Chamber Ltd., Muzaffarnagar, registered under the Indian Companies Act, 1913, was formed to carry on the business of an exchange in grains, cotton, sugar, gur, pulses and other commodities. In 1949 and 1950 it was carrying on business principally in futures in gur.

• 14 March 1949 — the Board sanctioned business in futures in gur for the Phagun Sudi 15 Samvat 2006 settlement (4 March 1950).
• 9 August 1949 — Seth Mohan Lal and Company bought one share, qualified for membership, and began dealing.
• By December 1949 the appellants had entered into transactions aggregating 1136 Bijaks of sale of gur for the Paush Sudi 15 delivery, and claimed a further 2137 Bijaks in the benami names of five other members.
• January 1950 — prices fluctuated wildly. To stabilise them the directors resolved on 7 January 1950 that the company would not accept any settlement in excess of Rs 17-8-0 per maund, sellers to deposit margin money. The appellants deposited Rs 5,26,996-14-0, and claimed to have deposited about Rs 7 lakhs more on the benami transactions.
• 15 February 1950 — the Government of India, under s. 3 of the Essential Supplies (Temporary Powers) Act 24 of 1946, extended the Sugar (Futures and Options) Prohibition Order, 1949 to futures and options in gur, prohibiting entry into futures transactions after the appointed day. The same day the Board resolved that all outstanding Phagun delivery transactions be settled at the closing rate of 14 February, Rs 17-6-0 per maund. Entries were posted accordingly; against the appellants' credit of Rs 5,26,996-14-0, Rs 5,15,769-5-0 was debited as loss adjusted, leaving Rs 11,227-9-0.
• 22 February 1950 — the appellants petitioned the Allahabad High Court to wind the company up, on the grounds that it was unable to pay its debts and that it was just and equitable to wind it up.

The appeals failed and were dismissed. No case for winding up was made out.

This is the most useful single sentence in the Indian law of winding up:

"Substratum of the Company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the Company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities."

Three limbs, and a petitioner needs only one. Note also the court's statement of whose interests are weighed: "In making an order for winding up on the ground that it is just and equitable that a Company should be wound up, the Court will consider the interests of the shareholders as well as of the creditors."

Applying the three limbs:

| Limb | Finding | |---|---| | Object substantially failed | No — the company was an exchange in several commodities, and the object had not substantially failed | | Business impossible except at a loss | No | | Assets insufficient for liabilities | No; and on the view taken there were no creditors to whom debts were payable by the company — the appellants' suits on the benami transactions had been dismissed |

Two further arguments were rejected, and both are useful.

The organisation was not destroyed. The business organisation could not be said to have been destroyed merely because the brokers who mediated between members had been discharged and their accounts settled: "The services of the brokers could again be secured. The Company could always restart the business with the assets it possessed, and prosecute the objects for which it was incorporated."

The standstill was the litigation's fault. The company's business had come to a standstill because of the long drawn out litigation, "But we cannot on that ground direct that the Company be wound up."

The date of assessment. The court laid down the timing rule expressly: "Primarily, the circumstances existing as at the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is just and equitable that the Company should be wound up".

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| | German Date Coffee | Seth Mohan Lal | |---|---|---| | Objects | One dominant object — a German patent — with ancillary general words | A commodities exchange in several named commodities | | What happened | The patent was refused, finally and unappealably | A single line of business, futures in gur, was prohibited by executive order | | Solvency | Solvent | Solvent; no creditors | | Majority's wish | To continue | To continue | | Result | Wound up | Not wound up |

The distinction is the width of the object. A company built on one patent has nothing left when the patent fails. A company incorporated to run an exchange in grains, cotton, sugar, gur and pulses loses one commodity and keeps its purpose. That is why the first question in any substratum problem is always a question of construction of the memorandum, not of the company's current trading.

1. Start with the statutory ground. Say which version of s. 271 you are applying, and note that the Code moved inability to pay debts out of the section.
2. Give the three-limb definition from Seth Mohan Lal verbatim. It organises the whole answer.
3. Use German Date Coffee for limb one, with Lindley LJ on general words and Baggallay LJ on impossibility.
4. State the two propositions that make the doctrine strong: solvency is no answer, and the wish of the majority to continue is no answer, because the objection is that the members subscribed for a different undertaking.
5. State the two propositions that make it weak: the circumstances are judged at the date of the petition, and a business that could be restarted with the company's existing assets has not lost its substratum.
6. Note the one-year point from Lindley LJ where a petition comes very early in a company's life.

In a problem question, read the objects clause first and identify the dominant object; ask whether what has failed is that object or merely one means of pursuing it; check solvency and creditors, but do not treat solvency as decisive; and fix the facts as they stood when the petition was presented.