Shares of a losing co -- Asset or liability?

Shares of a losing co -- Asset or liability?
Krishan Mahajan

Are the shares of a losing private company, which has not been paying any dividend since its inception, assets or liabilities? The Supreme Court has issued notice to the Food Corporation of India (FCI) and the State of Kerala on this issue. The notice has been issued in the context of an application by one C. C. Lonappan for being declared a pauper by the civil court in Kerala so that he does not have to pay the court fee of over Rs one lakh to pursue his appeal against the decree passed in favour of the FCI.

Pending a decision by the apex court the January 11, 2000 judgment of the Kerala high court has been stayed. The Kerala high court had held that by not mentioning the shares of a losing and non-dividend paying company in the list of assets annexed to the application for being declared as indigent, Lonappan had suppressed relevant facts. Accordingly it had dismissed his application for being declared a pauper by rejecting Lonappan's plea that non dividend paying shares of a losing company were liabilities and not assets.

In the appeal before the apex court, Baby Krishnan, counsel for the petitioner Lonappan, pointed out that the petitioner had bagged the loading and unloading contract of the FCI. He had obtained the contract by defeating the bid of the Workers Cooperative of the FCI itself. This set the workers union against him and hence it became impossible to carry out the contract through the same workers acting as headloaders. Ultimately the FCI gave the contract to the Workers Cooperative only. But it filed a suit against the petitioner for the damages caused to it by the alleged non performance of the contract by the petitioner.

The trial court passed a decree of about Rs 10 lakhs against the petitioner. The petitioner appealed against this decree and filed an application for being declared an indigent under Order XXXIII of the Civil Procedure Code. Such a declaration would have enabled the petitioner to pursue his appeal without paying the court fee of about Rs one lakh.

In the application for being declared an indigent the petitioner had stated that his assets are three shirts worth Rs 200 and four dhoties worth Rs 320. Hence his total assets were Rs 520. FCI and the Kerala government contested this. The Kerala government filed the report of the district collector. This report showed that the petitioner was running with fourteen others a chit fund company in Thrissur district called Sangamam and that his annual income was Rs 24,000. In response the petitioner stated that his paid up share capital in the company was Rs 7,000 and that since its inception the company was a losing one since it had not been paying any dividend. However, as the managing director of the company he was given by the company an annual allowance of Rs 12,000 in 1996, Rs 15,600 in 1997 and Rs 19,200 in 1998.

The division bench of Kerala high court, consisting of Justices P. K. Balasubramanyan and D. Sreedevi, pointed out that the reply of the petitioner did not state as to why he had not disclosed these facts in the application for being declared a pauper. Further the reply did not mention that this was a bona fide omission. With this reasoning the division bench dismissed the application for being declared a pauper.

Senior advocate K. Sukumaran pointed out to the Supreme Court bench of Justices D. P. Wadhwa and Ruma Pal that the Kerala high court had completely misapplied the tests under the Civil Procedure Code. The petitioner had stated that he had not mentioned the allowance received as a managing director or the shares of the losing and non dividend paying company since none of these would have enabled him to pay the court fee of Rs one lakh. The test laid down by several high courts was two fold: one whether the omission was intentional and second whether the inclusion of the property omitted would make any difference on the question of pauperism. The proper procedure is to return the application and then find out whether the inclusion of the omitted property would affect the position of the petitioner as a pauper.

This was indicated by rule 5 of Order XXXIII C.P.C. itself. This rule stated that no application shall be rejected if even after the inclusion of the value of the property disposed of by the applicant before the filing of the pauper-application, the applicant would still be entitled to be an indigent person. What the Supreme Court decides would determine the access to justice for many in the middle class?