Silva, J : " It has to be borne in mind that the liquidator should not be considered the alter ego of the errant employerHe is an officer of court whose functions are regulated by the provisions of the Companies Act and the orders made bythe winding-up court from time to time0. Hire Purchase Co. Fernando [] 2 NLR John and Others v. Coir Yarn and Textiles Ltd. Re Oak Pitts Colliery Co. Ayerst v. Construction Ltd. Roberts Petroleum Ltd. Bernard Kenny Ltd. Mahenthiran with N. Sivendran for accused-petitioner.
Sripavan, S. Weerakoon, Commissioner of Labour S. Silva, J. The accused-petitioner has filed this appeal from the judgmentdated By that judgment theProvincial High Court upheld the order dated The relevant facts are briefly as follows : The appellant is anincorporated company subject to the Companies Act, No. On The liquidationproceedings are in progress and no order of dissolution has beenmade.
In the meanwhile, a person claiming to have been anemployee of the company whose services were wrongfully terminated,instituted proceedings in the Labour Tribunal against the company,for relief. The company was absent and unrepresented before theLabour Tribunal. It appears that learned President of the Labour Tribunal was awareof the liquidation proceedings since he directed that a copy of theorder be served on the liquidator. The order directs the company todeposit the said sum with the Asst.
Commissioner of Labour, ColomboNorth, on or before The liquidator who received a copyof the said order sent letters dated Commissioner of Labour, Colombo North,informing him that the award against the company has been notedand that disbursement can be made only from the assets that arerealised, according to the Companies Act.
There was no responseto these letters but the company was prosecuted by the Commissionerof Labour for an offence under section 40 1 q of the IndustrialDisputes Act for failing to comply with the order made by the LabourTribunal.
The liquidator appeared in the Magistrate's Court in response tothe summons and counsel submitted that proceedings cannot becommenced in the Magistrate's Court against the company exceptwith the leave of the District Court that has made the winding-up Sri Lanka Law Reports [] 1 Sri L.
Learned Magistrate called for written submissions from the partiesand by his order, decided to continue the prosecution against thecompany.
In revision, learned Provincial High Court Judge upheld thatorder notwithstanding a specific submission made by State Counselrepresenting the Hon'ble Attorney-General that he has no objectionto relief being granted to the petitioner. Learned Judge has madea reservation that the liquidator should obtain the sanction requiredto appear in the Magistrate's Court and to make payment of theamount ordered by the Labour Tribunal. For this purpose the Mag-istrate was directed to afford reasonable time to the liquidator.
Submissions before this Court were one-way. In view of the fact that the same issue has come up forconsideration in other applications, we decided to hear submissionsof both counsel and to set down reasons for the order that we proposeto make.
The specific issue that comes up for consideration is whethera prosecution could be instituted for an offence under section 40 1 g of the Industrial Disputes Act in the Magistrate's Court against acompany in respect of which a winding-up order has been made inliquidation proceedings, without the leave of the District Court thatmade the winding-up order. Section of the Companies Act, No. Fernando, ,. A workman whose services hadbeen terminated prior to an order for winding-up made an applicationto the Labour Tribunal against the company after such order had beenmade.
The liquidator was named as the 2nd Respondent to theapplication. Regarding the bona fide interest, it must be noted that the inter se relationship between the plaintiffs and the beneficial owner, which the Plaintiff seeks to represent, may involve a case of deceit, fraud, inability, or incapacity.
The Court of Chancery in the matter of Forrest vs. The matter may involve ulterior motive when the action is prompted by family hostilities. The Clean Hands Doctrine is significant to establish a successful claim under a derivative action, since the remedy under such a suit places its reliance on equity.
As an equitable invention , the derivative action cannot be used to do injustice. The principle has been applied in cases of acquiescence by the plaintiff shareholder in the wrongdoing of which he later complains and in cases where the plaintiff has been regarded as the puppet of outsiders whose interests are opposed to those of the company.
The requirement of clean hands does not apply to personal action. The debate regarding whether a minority shareholder can bring a derivative suit has also seen various angles with different evolutions as per the facts and circumstances. However, when such an action was brought by a minority shareholder the question whether in fact the company was controlled by the alleged wrongdoers should first be determined before the derivative action itself was allowed to proceed.
Procedural difficulty may arise. However, very rightly stated, if a wrongdoing prevails, it must be looked into and not be dismissed because the right person did not approach the Court. There is another reason why the fraud and ulterior motive involved is overrated.
Even if a derivative suit is successful, the proceeds of the suit go to the corporation and not to the shareholder who brought the suit. With the transparency and accountability measures present in the Companies Act, it is not easy to bypass these procedures and create an incentive of getting the profits through the suit.
Treating the case of derivative action as an exception with a bona fide interest is important. If the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed and the shareholder will be allowed to sue on behalf of the Company if he is bringing the action bona fide for the benefit of the Company for wrongs to the Company for which no other remedy is available.
For corporate governance to be effective, derivative suits are significant and an important measure for the shareholder to assure his or her rights. However, the company law in India still lacks clarity and is in dire need to give statutory recognition to these derivative actions. Section of the Companies Act allows for the initiation of a class action suit by a member or a depositor only on behalf of the members or depositors of a company. The internet and procedure behind all these are different.
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