[1972] 42 COMP. CAS. 1 (RAJ.)
HIGH COURT OF RAJASTHAN
v.
Edward Mills Co. Ltd., Beawar
L.N. CHHANGANI AND L.S. MEHTA, JJ.
D.B. CIVIL REGULAR FIRST APPEAL NO. 49 OF 1956 IN CIVIL
SUIT NO. 3 OF 1945
Thanchand
Mehta with Narain Chand Mehta for the Appellants.
M.B.L.
Bhargava with S.N. Bhargava and Doonghar Singh for the Respondent.
L.S.
Mehta, J.—On
July 6, 1906, Seth Guman Mal Lodha, one of the proprietors and a nominee of the
firm, Kamal Nayan Hamir Singh of Ajmer and Kunwar Ram Swarup, son of Rai
Bahadur Seth Champalal of Beawar, executed an agreement. Its relevant terms and
conditions were as follows:
“It was executed for
the purpose of establishing a cloth mill at Beawar. The concern was to be started
in the name of the Edward Mills Company Ltd., Beawar. The two parties would
invest the bulk of the money and the management would also remain in their
hands. They would keep their shares separate, which would not be of the value
of less than rupees one lakh. The rights of both the parties would be equal and
both the parties would have jointly and severally the rights of becoming
manager, chairman, secretary, treasurer, etc. These rights would be exercised
half and half by both the parties and they would be entitled to get the income
in equal shares in respect of all the commissions, salary or any other kind of
income. According to the terms of the memorandum and articles of association
the rights of the chairman and managing director would jointly be exercised by
Seth Guman Mal, proprietor of the firm Kamal Nayan Hamir Singh, and Kunwar Ram
Swarup. After the registration of the memorandum and the articles of
association in the first general meeting, Guman Mal, proprietor of the firm
Kamal Nayan Hamir Singh, would discharge the duties of the chairman and would
continue to do so for the full term of three years. During this period, Ram
Swarup would continue to act as managing director. Thereafter, Seth Guman Mal
would hold the office of the managing director and Ram Swarup would act as
chairman and that procedure would be followed in future. The work and the
rights of the secretary, treasurer and agent would be joint and would be
carried on in the joint names of the parties. All the rights which the executants
of the agreement acquired would not only be enjoyed by them till their
lifetime, but they would also devolve upon their heirs, successors and
administrators or upon those persons who might be their legal heirs and legal
representatives.”
In pursuance of the above agreement the Edward Mills Co. Ltd. was
incorporated on August 9, 1906. The substance of the agreement found place in
clause VI of the memorandum of association. It runs as follows :
“VI. Seth Guman Mal,
son of Seth Raj Mal Lodha, proprietor of the firm of Kamal Nayan Hamir Singh of
Ajmer, and Kunwar Ram Swarup, son of Rai Bahadur Seth Champalal of Beawar, or
their heirs, executors, administrators, successors, representatives or their
duly authorised agents or such other person or persons as may from time to time
be appointed by them, shall be agents, secretaries, treasurers, the chairman
and the managing director of the company, and shall not be required to vacate
the said offices until they resign of their own accord, and as a remuneration
for their services a fixed amount of Rs. 250 per month shall from the date of
commencement of the business up to the date the machinery may begin to work, be
given to them; and afterwards the said Seth Guman Mal, proprietor of the firm
of Kamal Nayan Hamir Singh of Ajmer, and Kunwar Ram Swarup, son of Rai Bahadur
Seth Champal of Beawar, shall be allowed 16 per cent. only on the net profits
of the earnings of the company as their commission. As to the way in which the
respective duties of the chairman and the managing director shall be
discharged, Seth Guman Mal and Kunwar Ram Swarup will from time to time settle
between themselves and inform the office of the company of the same.”
Articles
60 and 75 of the articles of association substantially convey the same terms
and conditions. Under article 60 of the articles of association, Seth Guman Mal
and Ram Swarup were to be appointed ex-officio directors as also the chairman
and managing directors of the company, respectively. It also provided that
their heirs, executors, etc., as appointed by them, would be able to act as
such. As to the way in which their respective duties would be discharged Seth
Guman Mal and Ram Swarup would, from time to time, decide and settle between
themselves and inform the company’s office of the same. Article 75 lays down
that Seth Guman Mal and Ram Swarup or their heirs, executors, etc., would be
the chairman and managing director of the company and would not be required to
vacate the office until they resigned of their own accord. They would get Rs.
250 per month from the date of the commencement of the business till the date
the machinery started working. Thereafter, they would get 16% on the net
profits of the company as their commission.
The
defendant No. 1 company’s business was carried on in the manner as set out
above and both Seth Guman Mal and Ram Swarup obtained commission at the rate of
16% on the net profits of the company. The commission was credited in the name
of the firm, Kamal Nayan Hamir Singh and Champalal Ram Swarup.
Seth
Guman Mal died on November 11, 1914. Thereafter, the members of the firm Kamal
Nayan Hamir Singh nominated Seth Gadh Mal Lodha as their representative and by
their letter, dated May 4, 1915, they informed the directors of the company
accordingly. The company by its extraordinary general meeting held on July 23,
1915, passed a special resolution which was confirmed in the next meeting, held
on August 16, 1916, appointing Seth Gadh Mal in place of Seth Guman Mal.
Ram
Swarup died on January 5, 1916. His younger brother, Motilal, defendant No. 2,
was appointed in his place by a special resolution of the company, which was
confirmed at the extraordinary general meting held on June 8, 1916.
Till
the end of June, 1938, Gadh Mal and Motilal acted, respectively, as chairman
and managing director of the company. The firm, Champalal Ram Swarup, defendant
No. 2, and other members of his family were adjudicated insolvent by the Bombay
High Court on July 1, 1938. Thereupon defendant No. 2, Motilal, vacated the
office of the managing director and Seth Gadh Mal Lodha remained the sole
chairman and the managing director. The adjudication was subsequently annulled
by the above court.
Gadh
Mal died on January 11, 1942. The board of directors of the company appointed Seth
Sobhag Mal Lodha on January 17, 1942, in place of Seth Gadh Mal, deceased, as
chairman and managing director of the company. This appointment was temporary
and was subject to the confirmation of the company. An extraordinary general
meeting of the company for making the appointment was convened on February 8,
1942. The meeting was held in the office of the company and Seth Sobhag Mal
Lodha first occupied the chair. Before the meeting could transact the business,
it was dissolved by Seth Sobhag Mal and his supporters left the meeting. The
rest of the shareholders continued the meeting under the chairmanship of K.K.
Bhargava, advocate, and passed a resolution appointing defendent No. 2,
Motilal, as the agent, secretary, treasurer, chairman, and managing director of
the company for a period of 20 years. It was further resolved in the meeting
that he would be entitled to get remuneration at the rate of 10% on the net
profits of the company every year and that he would also act as an ex-officio
director till he held the above-named offices.
On
an application submitted by Sobhag Mal on February 11, 1942, under section
79(3) of the Indian Companies Act, the District Judge, Ajmer, Mr. K.R. Damle,
ordered that the meeting of the company should be held on February 12, 1942,
under the chairmanship of Seth Sobhag Mal. On April 8, 1942, Motilal went up in
revision to the Court of the Judicial Commissioner, Ajmer, against the above
order of the district judge. He also made an application for interim injunction
restraining Sobhag Mal Lodha from acting as managing agent, chairman and
director, but that application was disallowed on May 8, 1942. On May 15, 1942,
the Judicial Commissioner, Ajmer, granted an interim stay of the order of the
district judge and further directed that the resolution of the extraordinary
general meeting, dated February 8, 1942, electing Seth Motilal, was to be acted
upon until further orders. On June 3, 1942, that order was made absolute and
since then Motilal, defendant No. 2, acted as the managing director, etc., of
the company.
Seth
Kanmal, one of the proprietors of the firm, Kamal Nayan Hamir Singh and father
of the plaintiffs Nos. 8 and 9, filed Suit No. 867A/1934 for partition of the
joint family property in the Calcutta High Court. By an order dated April 1,
1935, Seth Gadh Mal was appointed a receiver of the estate and joint properties
including the joint business with power to carry on the existing joint
business. On his death Seth Sobhag Mal, plaintiff No. 1, was appointed in his
place by an order, dated January 16, 1942. Thereafter, Seth Sobhag Mal Lodha
filed the present suit with the leave of the Calcutta High Court. The
plaintiffs Nos. 2 to 9 and the defendants Nos. 4 to 6 are the other proprietors
of the firm, Kamal Nayan Hamir Singh.
The
case set up in the plaint is as follows :
The
families of the plaintiffs and the defendants Nos. 3 to 6 carried on business
under the name and style of M/s. Kamal Nayan Hamir Singh. The joint family of
the defendant No. 2 also carried on the business under the name and style of
M/s. Champalal Ram Swarup of Beawar. It was decided by the two families that in
the matter of holding offices of the managing director, managing agent, etc.,
they should act through their nominees and pursuant to that decision Seth Guman
Mal of the plaintiffs’ family firm and Ram Swarup of the defendant No. 2’s
family firm were, respectively, appointed nominees and representatives of the
said firm for the purpose of managing the business of the company as chairman
and managing director. On the death of Guman Mal, Gadh Mal was nominated by the
proprietors of the firm, Kamal Nayan Hamir Singh, in his place. Similarly, on
the death of Ram Swarup, defendant No. 2, Motilal, was nominated by the firm,
Champalal Ram Swarup. At the commencement of the extraordinary general meeting
held on February 8, 1942, Seth Sobhag Mal Lodha, as chairman, directed the
secretary of the company to record the names of the shareholders who were
present. Thereupon, some of the shareholders in collusion with and at the
instigation of Motilal, defendant No. 2, and the members of his family created
pandemonium and obstructed the secretary from discharging his duties. They also
wanted to remove Seth Sobhag Mal Lodha forcibly from the chair. Thereupon Mr.
Lodha dissolved the meeting and he and his supporters left the place. The rest
of the shareholders insisted upon conducting an extraordinary general meeting
under the chairmanship of Mr. K.K. Bhargava, advocate, and passed a resolution
appointing Motilal, defendant No. 2, as the managing director and chairman.
According to the plaintiffs, this resolution being not valid is not binding
upon the company or the plaintiffs or the defendants Nos. 3 to 6 as the same
was not passed in a properly convened meeting and as no proper notice for the
purpose had been given to the shareholders. The meeting of February 8, 1942,
was not convened for altering the memorandum or the articles of association
regarding change in the commission rate. The plaintiffs further averred that
the orders passed by the Judicial Commissioner on May 15, 1942, and June 3,
1942, were without jurisdiction, null and void and were not binding upon the
plaintiffs and the defendants Nos. 3 to 6.
On
April 1, 1942, the adult members of the firm, Kamal Nayan Hamir Singh, sent a
letter to the directors of the company, informing them that they had nominated
Seth Sobhag Mal as their representative in place of Seth Gadh Mal with the same
rights and privileges. The board of directors in a meeting held on April 18, 1942,
passed a resolution appointing Seth Sobhag Mal Lodha as secretary, treasurer,
agent, managing director, etc., of the Edward Mills Company Ltd., Beawar.
Despite the above resolution, defendant No. 2, Motilal, was wrongfully in the
sole management and possession of the said company, and was not permitting the
plaintiff’s representatives to participate in the management of the company.
The
firm, Kamal Nayan Hamir Singh, received payment of half the commission from
defendant No. 1 up to December 13, 1939, and the plaintiffs and the defendants
Nos. 3 to 6 were entitled to Rs. 23,061, as their share in the commission for
the years 1940 and 1941. They are further entitled to commission from January
1, 1941, up to the date of the suit. Further, the plaintiffs are entitled to a
moiety of the commission from January 1, 1942, up to the date of the suit @ 16%
which amounts to Rs. 3,00,000.
The
firm, M/s. Kamal Nayan Hamir Singh, is a family firm having business at Ajmer
and other places in India. The deceased, Seth Kan Mal Lodha, father of the
plaintiffs Nos. 8 and 9, filed a civil Suit No. 867/A of 1934 for partition in
the Calcutta High Court and late Rai Bahadir Seth Gadh Mal Lodha was appointed
as receiver of the firm and its business by an order dated February 20, 1935.
On his death, the plaintiff, Seth Sobhag Mal Lodha, was appointed a receiver in
his place. The defendant-company could not terminate the agency of the
plaintiffs without their consent and in any case under section 87A of the
Indian Companies Act. The plaintiffs were, therefore, entitled to be associated
with defendant No. 2 in performing the duties of the chairman, managing
director, etc. In the alternative, the plaintiffs were entitled to recover from
the defendant-company a sum of rupees 5 lakhs by way of damages for wrongful
exclusion and dismissal from the offices of the managing director, etc. In the
end, the plaintiffs claimed the following reliefs :
(a) That, it may be declared that on the
death of R.B. Seth Gadh Mal Lodha, the plaintiffs’ family firm, Kamal Nayan
Hamir Singh, having appointed Seth Sobhag Mal Lodha as the nominee to act for
them and the board of directors of the defendant-company having accepted the
nomination, Seth Sobhag Mal Lodha was entitled to be in management and control
of the affairs of the defendant-company jointly with defendant No. 2.
(b) That it may be declared that the
resolution purporting to have been passed on the 8th February, 1942, at the
extraordinary general meeting of the company held by the partisans of the 2nd
defendant, who broke up the meeting, being ultra vires and invalid is not
binding on the plaintiffs and the defendant-company.
(c) That it may be declared that the
orders, exhibit F, passed by the Judicial Commissioner of Ajmer-Merwara in
respect of the resolution purport ed to have been passed by the said meeting of
the shareholders held on the 8th February, 1942, are without jurisdiction, null
and void and not binding on the parties hereto.
(d) That the defendants Nos. 1 and 2 may
be ordered to hand over the management and charge of the affairs of the 1st
defendant-company to Seth Sobhag Mal Lodha on behalf of the plaintiffs’ said
family firm in accordance with the memorandum and articles of association of
the defendant-company.
(e) That the defendants or such of them
as may be held liable may be ordered to pay to the plaintiffs and defendants
Nos. 3 and 4 Rs. 3,73,061, the commission on net profits up to the date of the
suit.
(f) That in the alternative the defendant-company may be ordered to pay to the plaintiffs on behalf of the plaintiffs’ said family firm damages to the tune of Rs. 5 lakhs for wrongful dismissal and exclusion of the plaintiffs’ nominee from the management and control of the 1st defendant.
(g) That the defendants Nos. 1 and 2 or
one or more of them may be ordered to pay the plaintiffs costs of the suit.
(h) That such further and other reliefs
as the circumstances of the case may require may be granted to such of the
plaintiffs and in such capacity as may be found to be entitled thereto against
such of the defendants as may be held liable.
The
defendants Nos. 1 to 3 contested the suit. Defence of the defendants Nos. 1 and
2 are substantially the same. According to them, Seth Guman Mal and Ram Swarup
were the promoters of the company in their individual and personal capacity.
They were agents, secretary, chairman, managing director, etc., in their
individual and personal capacity and not as the nominees or representatives of
their respective firms. The company was the sole and the final authority to
make the appointment and the right never vested in any other person or family.
The appointments of Seth Gadh Mal Lodha and Seth Motilal were not virtually by
nominations made by the respective firms, but because of the fact that the
company chose them by resolutions adopted in its extraordinary general
meetings. They did not hold the position identical to those occupied by Seth
Guman Mal and Ram Swarup. No disorder or confusion prevailed at the meeting of
February 8, 1942. There was no apprehension of breach of the peace at that
time, nor was any attempt made to remove Seth Sobhag Mal Lodha forcibly from
the chair. The shareholders made proposals for electing the chairman of the
meeting. Sobhag Mal Lodha, however, illegally insisted on occupying the chair
and, finding the majority against him, he left the meeting along with his
supporters. The meeting could not have been dissolved by Seth Sobhag Mal Lodha
under any circumstances. The shareholders were within their rights to elect the
chairman for the meeting and to proceed with the business. After Seth Sobhag
Mal Lodha had walked out, the resolution, dated February 8, 1942, was perfectly
valid and did not violate the memorandum of association or the articles of
association. The resolution of the board of directors of April 18, 1942,
appointing Seth Sobhag Mal Lodha was without jurisdiction and inconsistent with
the company’s resolution of February 8, 1942. R.S. Motilal was the only person
legally entitled to be in the sole management
and charge of the defendant-company. The defendants further pleaded that the
plaintiffs were not entitled to any damage or commission whatever. The suit
related to the appointment and dismissal by a company of its managing agent,
etc., and that matter pertained to the internal affairs of the company and as
such they were outside the purview of the court. The suit was barred by section
11, Civil Procedure Code, on account of the decision of the Judicial
Commissioner, Ajmer, and was bad for mis-joinder of the parties. Clause VI of
the memorandum of association did not operate in law to create any agreement or
contract between the company and the persons named therein and was, therefore,
not binding upon the company. There was no privity of contract between the
plaintiffs and the defendants Nos. 3 to 6 on the one hand and defendant-company
on the other and, therefore, the suit for appointment of plaintiff No. 1 as
also for the recovery of the damages was not maintainable. The suit was barred
by section 69 of the Indian Partnership Act, 1932, as the firm, Kamal Nayan
Hamir Singh, was a partnership firm and not a joint Hindu family firm and it
could not have filed a suit without registration. Defendant No. 2 also pleaded
that the plaintiffs had not come with clean hands as they themselves were
guilty of repeated breaches of the contract. On more than one occasion they
transferred shares to others in contravention of term No. 5 of the agreement
dated July 6, 1906. Seth Gadh Mal on the annulment of the attachment order did
not take the answering defendant No. 2 in the joint management of the company
in contravention of the clause 1 of the agreement and deprived him of his due
shares of the managing agency commission for the years 1937 and 1938. The
agreement between Seth Guman Mal Lodha and Seth Ram Swarup was in substance a
partnership agreement. The partnership must be deemed to have come to an end on
the adjudication of the defendant No. 2 and other members of his family as
insolvent and, therefore, no suit on the basis of the agreement could lie. The
plaintiff and the defendants Nos. 3 to 6 did not constitute the firm as there
have been many deaths in the family since 1936. In any case, the plaintiffs had
no right to bring the suit after the death of Seth Gadh Mal Lodha.
Defendant No. 3 contested
the suit on the ground that he had been wrongly impleaded and the plaintiffs
are not entitled to get any relief.
The District Judge, Ajmer,
framed as many as 31 issues. The plaintiffs examined 6 witnesses. The
defendants produced 5 witnesses. Both the parties also produced a large number
of documents in support of their respective pleas. The relevant documents have
been referred to in the paper book.
The trial court gave the
following finding :
1. That the family firm of Seth Guman Mal and that of Ram Swarup were
the promoters of the company, defendant No. 1, and the agreement, dated July 6, 1906, was executed
by Seth Guman Mal Lodha and Ram Swarup on behalf of their respective families.
2. That no partnership came into existence between
the two families and the partnership created by the agreement of July 6, 1906,
was between Seth Guman Mal and Kunwar Ram Swarup only, carrying with it the
necessary incidence and the resolution on the demises of the partners, if it
could be deemed to have continued after their deaths, stood dissolved under
section 42 of the Indian Partnership Act on defendant No. 2’s adjudication as
insolvent
3. That the provisions in the memorandum of
association and the articles of association of the company relating to the management
are merely details of the management for the purpose of carrying on business of
the company and that the company was entitled to regulate details in such
manner as it liked. Therefore, clause VI of the memorandum of association and
articles 60 and 75 of the articles of association could not be specifically
enforced and they did not give any cause of action to the plaintiffs.
4. That the company recognised the rights of the
firm, Kamal Nayan Hamir Singh, to the extent that its nomination of Seth Gadh
Mal as its representative in place of Seth Guman Mal was accepted by the
resolution, dated July 3, 1915, and July 23, 1915. Though half the commission
was credited to the firm, Kamal Nayan Hamir Singh, it would not amount to any
implied agreement entitling the firm to take part in the management of the
company.
5. That there was no rowdyism or disorder in the
general meeting of the company, held on February 8, 1942, so as to result in a
breach of the peace and that the shareholders were entitled to elect the
chairman. Seth Sobhag Mal was not justified in asserting his right to preside
over the meeting as he himself was a candidate for the office of the chairman,
etc. The meeting of the shareholders, dated February 8, 1942, therefore, was
proper and justified, appointing defendant No. 2 as chairman and managing
director.
6. That the plaintiffs are not entitled to be
associated with defendant No. 2 as agents, etc.
7. That with the institution of the suit for partition in the Calcutta High Court by Seth Kan Mal the status of the joint family, even if it was joint, was changed and thereafter as the business was carried on jointly, the firm became an ordinary partnership concern subject to the Indian Partner ship Act. As the firm was not registered, section 69 of the Partnership Act stood in the way of filing the suit without the registration of the firm.
8. That in the balance-sheet a sum of Rs.
2,015-6-6, as a moiety of the commission from January 11, 1942, is credited to
Seth Gadh Mal and the same amount to Seth Motilal. Similarly from January 17,
1942, to February 8, 1942, during which time Sobhag Mal remained chairman,
etc., half the amount of commission of Rs. 3,706-2-6 was credited to Seth
Sobhag Mal. These amounts can be recovered by the heirs of Seth Sobhag Mal or
by the firm, Kamal Nayan Hamir Singh.
Aggrieved
against the above judgment, the present appeal has been filed on behalf of the
plaintiffs.
Before
the main points raised on behalf of the appellants in the course of the
arguments are set out, it may be stated that Seth Sobhag Mal died in the course
of the pendency of the appeal. In paragraph 49 (a) of the plaint it is
mentioned that it may be declared that on the death of Seth Gadh Mal Lodha the
plaintiffs’ family firm having appointed Seth Sobhag Mal to act as nominee for
them, Seth Sobhag Mal Lodha was entitled to be in the management and control of
the affairs of the company, jointly with defendant No. 2. In the case of
personal action, i.e., in an action where the relief sought is personal to the
deceased, the right to sue will not survive to or against his representative. A
right intimately connected with the individuality of the deceased will not
survive on the basis of the well known maxim actio personalis moritur cum
persona (a personal right of action died with the person). However, if
emoluments are attached to the office, the right to sue will survive and the
suit will not abate. As has been conceded by learned counsel for the appellants
no useful purpose is likely to be served by declaring at this stage that the
deceased, Seth Sobhag Mal Lodha, was entitled to be in the management and
control of the affairs of the company jointly with Seth Motilal, defendant No.
2. We are, therefore, not required to give any finding on this aspect of the matter.
Learned
counsel for the appellants raised the following Main points in the course of
his arguments :
(1) That the resolution of the company,
dated February 8, 1942, appointing Motilal was not valid, as the general
meeting of the shareholders which had stood dissolved, was not to continue and
approve of the appointment of defendant No. 2.
(2) That section 69 of the Partnership
Act, 1932, does not apply to the case and that even if it is applicable, the
plaintiffs’ case fell within the exception provided by sub-section (3).
(3) That there was an implied agreement
between the plaintiff and the defendant-company, as the latter ratified or
acted upon the terms of the agreement, dated July 6, 1906, arrived at between
the nominees of the two firms, Kamal Nayan Hamir Singh of Ajmer and Champalal
Ram Swarup of Beawar.
(4) That the plaintiffs-appellants and
the defendants Nos. 3 to 6 are entitled for the years 1940 and 1941 to the
moiety of commission of a sum of Rs. 23,061 having not been contested by the
defendants Nos. 1 and 2 and having been wrongly rejected by the trial court.
We
may now take up the first point pressed on behalf of the appellants. Learned
counsel for the appellants has argued that by virtue of the agreement of July
6, 1906, Seth Guman Mal was appointed as chairman. After his death on November
11, 1914, Gadh Mal was appointed to the office on July 23, 1915, and that
appointment was duly confirmed by the company in its extraordinary general
meeting, held on August 16, 1915 : vide annexure “A”. On the death of Gadh Mal
occurring on January 11, 1942, the board of directors passed a resolution on
January 17, 1942, appointing Seth Sobhag Mal in his place till the appointment
was duly made by the extraordinary general meeting of the company. Thereafter,
notice, exhibit 5, dated January 22, 1942, was issued in connection with that
appointment. In pursuance of the notice a meeting of the shareholders was
convened on February 8, 1942. Owing to the pandemonium in the meeting, Seth
Sobhag Mal was constrained to dissolve it. After its dismissal Sobhag Mal and
his supporters left the place. Thereafter the remaining shareholders continued
the meeting and passed a resolution appointing defendant No. 2, Motilal, as
chairman, etc. Such a meeting conducted after its dissolution, according to the
learned counsel, was illegal, as it could not have been presided over by a
person other than Sobhag Mal and as no prior notice had been issued for the
purpose, the shareholders had also no authority to reduce the amount of the
commission to 10% from 16% payable to the chairman and managing director,
according to the terms of the memorandum and articles of association without
issuing a specific notice in respect thereto.
The
agreement, dated July 6, 1906, is the basis of the suit. That indenture was
entered into between Guman Mal, respresenting the firm, Kamal Nayan Hamir
Singh, and Ram Swarup, nominee of the firm Champalal Ram Swarup of Beawar.
According to this covenant certain arrangements had been arrived at in respect
of the management of the company which was still in embryo or rudimentary
stage, and which was incorporated subseqently, i.e., on August 9, 1906. Under
the agreement each one of the promoters was to purchase a certain number of
shares and was to pay at least a sum of Rs. 1 lakh. Both the parties, the
agreement provided, were entitled jointly or severally to the rights of
membership, chairmanship, etc., as also to equal remuneration. Whatever rights
accrued to the parties by virtue of the agreement or partnership was not
limited to their lifetime. But they devolved upon their legal representatives,
heirs, executors and administrators. Clause VI of the memorandum of association
and articles 60 and 75 of the articles of association are also to this effect.
It was that a fixed amount of Rs. 250 per month was payable to the parties as
remuneration for their services from the date of commencement of the business
up to the date of the actual starting of the work. Thereafter they were to get
16% of the net profits of the earnings of the company as their commission. This
commission was divisible between the two parties half and half. Guman Mal and
Ram Swarup took over the management after the company began to function. Guman
Mal died on November 11, 1914 (vide paragraph 9 of the plaint). After his
death, a letter was written on May 4, 1915, by the family members of the firm,
Kamal Nayan Hamir Singh of Ajmer, nominating Gadh Mal in place of the deceased.
This communication was put up before the meeting of the company. The company
made the appointment of Gadh Mal on July 23, 1915. That appointment was
confirmed by the company at its extraordinary general meeting held on August
16, 1915 (vide paragraph 11 of the plaint). Thus, after the death of Guman Mal,
Gadh Mal stepped into the shoes of the original promoter and the company
clothed him with all the rights and the powers as contained in clause VI of the
memorandum of association and articles 60 and 75 of the articles of
association. Ram Swarup died on June 5, 1916, whereupon Seth Motilal was
nominated by the members of the joint family firm, Champalal Ram Swarup, as
successor of Ram Swarup and the defendant-company passed a special resolution
which was confirmed at the extraordinary meeting of the company held on June 8,
1916 (see special resolution forming part of annexure “A”). As a result of
these proceedings, the defendant No. 2, representing his family firm, occupied
the same position as Ram Swarup as contemplated by the memorandum or articles
of association of the company : vide paragraph 12.
The
above was the position in so far as Gadh Mal and Motilal were concerned. On the
death of Gadh Mal on January 11, 1942, trouble ensued. Certain important events
took place in the firm of Champalal Ram Swarup in the year 1938. The joint
family of the defendant No. 2, Motilal, became heavily indebted. By its order,
dated July 1, 1938, the High Court of Bombay, in its insolvency jurisdiction,
adjudicated the firm, M/s. Champalal Ram Swarup, as, insolvent. On its
insolvency its property vested in the official assignee of the High Court. The
office of the managing, director of the defendant-company occupied by defendant
No. 2 on behalf of the joint family firm was vacated by virtue of article 68 of
the articles of association and section 87 of the Indian Companies Act (see
paragraph 15 of the plaint). In this context the legal position, as emerged (1)
on account of the death of Gadh Mal, and (2) by the adjudication of the
insolvency, was that the two parties lost their original characteristics.
On
January 17, 1942, a meeting of the directors was convened by Sobhag Mal. The
board of directors appointed Sobhag Mal as chairman, etc., till such time as
the appointment was duly made. A notice was issued to the shareholders of the
Edward Mills Co. Ltd., Beawar, that an extraordinary general meeting of the
company would be held on February 8, 1942, at 1 P.M. for making the appointment
of Sobhag Mal: vide exhibit 5, annexure “D”. The notice suggests three things,
namely:
1. That Seth Sobhag Mal was the representative of
the firm, Kamal Nayan Hamir Singh of Ajmer.
2. That the appointment of Sobhag Mal was ad hoc
till such time as it was duly made.
3. That for the sake of appointment, an
extraordinary general meeting of the company was necessary.
Article
72 of the articles of association provides that the permanently appointed
chairman of the company was also to be the chairman in the meetings of the
board of directors and in his absence the managing director would preside. In
the absence of both of them, the directors present would elect a chairman from
amongst themselves for the said meeting. Article 49 provides that the chairman
would preside over every general meeting and in his absence the managing
director would preside. In the absence of both of them one of the directors
present would be elected as the chairman for the time being and in the absence
of the directors or if the director present declined to preside over the
meeting, the shareholders present would choose one of their own members as the chairman
of the meeting. According to these provisions the only person who had a right
to preside was the permanent chairman and in his absence the managing director.
From
a perusal of the notice referred to above, it is clear that Sobhag Mal was not
the permanent chairman. He had, therefore, no right to preside over the
meeting. The right to appoint the chairman vested in the shareholders. Sobhag
Mal Lodha, by virtue of his temporary appointment, insisted that he had the
sole right to preside over the meeting. Since he had not been appointed as
permanent chairman, it was within the right of the general body of the company
to choose first a director to function as chairman and in his absence any one
of the shareholders could have been taken as chairman. Sobhag Mal could not
have insisted that it was he alone who could preside over the meeting and when
he was not permitted to exercise that right he unauthorisedly declared the
meeting dissolved. Sobhag Mal had no legal right to insist upon presiding over
the meeting, specially when the issue of his own appointment was under hot
discussion. The shareholders, however, went ahead with the meeting under the
chairmanship of K.K. Bhargava, advocate. The company resolved that Motilal
should be appointed chairman, secretary,: managing agent, etc., of the company
for a period of 20 years with effect from the date of the resolution and that
he was to be paid only 10% of the net profits of the company every year instead
of 16% as previously drawn by the persons concerned. It may be mentioned here
that by this time the order of adjudication had been annulled by the Bombay
High Court on April 15, 1941.
It
is settled law that when once a meeting is called, no chairman can arbitrarily dispose
of it. Its continuance or dispersion rests entirely on the will of the
shareholders. It is mentioned in the Law and Practice of Meetings by Frank
Shackleton, 3rd edition, page 69, that a chairman cannot adjourn a meeting at
his own will and pleasure without the consent of the members unless the
business for which it was convened has been concluded. That means that a
chairman has no power to adjourn the meeting at his own choice. The power of
adjournment vests in the majority of those present at the meeting. If a
chairman should vacate the chair or adjourn the meeting regardless of the views
of the majority, those remaining, even if a minority, can appoint a chairman
and conduct the business left unfinished by the former chairman: see Cates by
v. Burnett.This
point was also considered by a Division Bench of this court in Deodutt Sharma
v. Zahoor Ahmed Zaid and it was
held that:
“Once a meeting had
been properly called and it meets, the chairman of the meeting can only adjourn
it with the consent of the majority of the members....... if the chairman
adjourns a meeting contrary to the wishes of the members present and thereby
interrupts or leaves unfinished the business for which the meeting was
summoned, the remaining members can lawfully continue the business; and in the
absence of their proper chairman it is open to them to elect another chairman
to act as his substitute and continue the business and any business which was
duly notified in the notice for the meeting could be transacted to completion,
and if it is so transacted it would be valid.”
Similar
views were expressed in Stoughton v. Reynolds, in Nation
Dwelling Society v. Sykes and in
Catesby v. Burnett quoted supra. In the last case there was much opposition in
the meeting. There was considerable uproar when the chairman declared the
auditors elected and he declared the business to be closed and left the chair
and the hall. The remaining members continued the business and elected Catesby
to the chair and some new directors were also elected. The question arose,
whether the proceedings after the chairman had vacated the chair and dissolved
the meeting were valid. It was held that the proceedings were regular and that
the appointment of the new directors was valid.
The
above cases clearly established the principle that where a meeting is
unlawfully adjourned by the chairman thinking that he is not likely to succeed
in his object, the remaining members do possess the right to continue the
meeting and conduct the business left untransacted by the chairman.
Contention
of learned counsel for the appellants is that owing to the utter confusion and
disorderliness the chairman was constrained to dissolve the meeting. The
plaintiffs have given evidence to prove that there was disorderliness and
uproar in the meetting. To make out this fact the plaintiff, Seth Sobhag Mal,
who was obviously the best person to prove the circumstances in which the
meeting was dissolved, did not come forward to give evidence on the point. Under
illustration (g) to section 114, Evidence Act, the court may presume that the
evidence which could be and is not produced, would, if produced, be
unfavourable to the person who withholds it. The Judicial Committee of the
Privy Council has, in several cases, strongly condemned the practice of parties
to a suit withholding from the court the evidence which may throw light on the
point for determination: vide Murugesam Pillai v. Gnanasambandha Pandara
Sannadhi
and Ram Prakash Das v. Anand Das. Similar are
the views of their Lordships of the Supreme Court in Hiralal v. Badkulal. It appears
from the evidence of Seth Kaluram, P.W. 1, that disorder was created in the
meeting and that the shareholders were protesting against Seth Sobhag Mal being
on the chair. This disorder continued till 3 or 4 P.M. It is not clear from the
statement of this witness that there was such a disorder as to give rise to the
apprehension of breach of the peace. The witness also appeared as a witness
against Motilal in a criminal case on behalf of the prosecution. The other witness
is P.W. 3, Mithan Lal, advocate, who has stated that an objection was raised
about the election of the chairman. When the situation grew tense, the Lodha
party decided to dissolve the meeting. The witness appeared as a counsel for
Sobhag Mal in the revision petition before the Judicial Commissioner. He does
not remember the names of the shareholders who were present in the meeting. He
also does not recollect the agenda of the meeting held on February 8, 1942. He
cannot recall the names of those who were participating in the discussion on
behalf of the Beawar firm. The other witness on the point is Narain Das Mohta,
P.W. 5. He says that the supporters of Motilal began to say in the meeting that
Seth Sobhag Mal should not occupy the chair and that the meeting should elect
its own chairman. He further says that it was not possible to continue the
meeting. In the cross-examination he admits that Sobhag Mal’s sister’s daughter
was married to his son. The witness in the cross-examination admits that he was
sitting at a distance of 5 or 6 feet from Seth Sobhag Mal and that the members
appeared to be gentlemen. He then says that he inferred that there might be
violence. He also admits that he did not sit in the meeting continuously and
that he came out of the meeting after 5 or 7 minutes.
From
the nature of the above evidence, given by the plaintiff’s witnesses, it is not
made out satisfactorily that the meeting was rough and that the rowdy elements continuously interrupted it.
Defendant’s witness, Shirdhar Lal, says that no shareholder obstructed the
recording of the proceedings. Similarly the witness, Kaushal Kishore, deposes
that there was no pandemonium or apprehension of breach of peace. Another
defendant’s witness, Mahesh Dutt Bhargava, advocate, testifies that there was
no danger of any breach of the peace. To the same effect is the testimony of
Chand Mal Bajaj, who says that there was no rowdyism in the meeting.
From this evidence it is
apparent that no uncontrollable rowdyism was created in the meeting and that
Seth Sobhag Mal could not have dissolved it without the consent of the
shareholders present on the spot. In this view of the matter, the trial court
rightly held that it was the privilege and the right of the shareholders
assembled at the meeting to decide that they should continue its business.
Learned counsel for the
appellants has further urged that no proper notice in regard to the appointment
of Motilal had been issued and, therefore, the meeting could not have taken up
that question for consideration. In support of his argument he relied upon
Narayanlal Bansilal v. Maneckji Petit Mfg. Co. In that
case a company was incorporated in 1876, and its articles of association, which
was then registered, having become out of date, the directors desired to
substitute for them a new set of up to date articles. At the same time the
managing agents of the company, who had acted as such for 50 years, desired to
have an agreement with the company fixing the duration of the agency and
defining their powers. The directors convened an extraordinary general meeting
of the shareholders to pass the necessary resolution for carrying out the said
purpose. The notice convening the meeting set out necessary resolutions and was
accompanied by circular, but sufficient particulars regarding important changes
to be effected were not set out. The resolutions were passed and confirmed. In
a suit by a shareholder suing on behalf of himself and other shareholders for
declaring that the resolutions were inoperative on the ground of insufficiency
of the notice and for injunction restraining the directors from acting upon
them, it was held that the notice should have given sufficiently full and frank
disclosure of the facts and the effect of the resolutions and the agreement and
consequently the resolutions were inoperative and not binding upon the company.
In the present case the notice, annexure “D”, dated January 22, 1942, contained
that the directors appointed Seth Sobhag Mal Lodha in place of late Rai Bahadur
Seth Gadh Mal Lodha till such time the appointment was duly made. It further
incorporated that an extraordinary general meeting would be held at the
registered office of the company at Beawar, on February 8, 1942, for making the
above appointment. The notice suggested that the meeting was called for the
appointment of the chairman, managing director, etc. The directors could not
have bound the company to appoint only the person nominated by the directors and
fettered its discretion. It was within the discretion of the shareholders to
make appointment of a person of their choice for the above post. In substance,
the notice was for the appointment of chairman, managing director, etc., and
the shareholders considered the suggestion of the directors and made an
appointment of defendant No. 2, Moti Lal. Under the circumstances, it cannot be
said that the shareholders travelled beyond the agenda fixed for holding the
meeting. There was nothing wrong if the shareholders reduced the emoluments of
the managing directors, etc., while making his appointment. The Bombay
authority, under the special circumstances of this case, does not come to the
aid of the appellants. Be that as it may, it cannot be said that the resolution
passed by the company, appointing the defendant No. 2, Motilal, on February 8,
1942, was ultra vires or illegal for want of proper notice. Notice is simply an
intimation to all concerned that a particular body is going to meet at a
particular place, time and date for transacting a partilar business. Here, the
particular subject according to the notice was the appointment of a chairman,
etc. Simply because the shareholders appointed another person for the post does
not mean that the meeting went beyond the notice.
We may now switch over to
the second point raised on behalf of the appellants. It pertains to the
applicability of section 69 of the Indian Partnership Act, 1932. Learned
counsel for the appellants has argued that the agreement of 1906 was not
between the two joint family firms. The partnership agreement properly
described was between the two members of the two families and that it is
inappropriate to describe such a partnership as one between the two Hindu
undivided families. The partnership in fact was created between Seth Guman Mal
and Ram Swarup only for carrying on the business of managing agency, etc. On
the death of Seth Guman Mal and Ram Swarup, the partnership was dissolved. Even
if the partnership continued after their death, it stood dissolved under
section 42 of the Indian Partnership Act on the adjudication of the defendant
No. 2, Motilal, as insolvent. Learned counsel further urged that as the
original agreement was between 2 individuals, section 69 of the Indian
Partnership Act, 1932, would not apply to this case. According to him even if
it is held that there existed a partnership, the exception incorporated in
sub-section (3) to section 69 of the Act would apply to this case and under
this sub-section the plaintiffs are entitled to realise the property of the
dissolved firm. Another suit had been brought by Sobhag Mal and others as
partners and proprietors of Kamal Nayan Hamir Singh of Ajmer. Paragraph 33 of
the plaint mentions that the firm of M/s. Kamal Nayan Hamir Singh is a family
firm doing business
at Ajmer and at other places in India. The plaintiff No. 1 along with the other
plaintiffs or defendants Nos. 3 and 4 are the members of the said firm.
Paragraph 34 of the plaint provides that Seth Sobhag Mal is competent to file
the suit on behalf of the firm, Kamal Nayan Hamir Singh, and that with a view
to avoid all future disputes and complications all the members of the firm have
been impleaded as parties to the suit. It is also stated in paragraph 33 of the
plaint that Kan Mal Lodha, father of the plaintiffs Nos. 8 and 9, filed a suit
No. 867A of 1934 for partition in the Calcutta High Court and the late Seth
Gadh Mal Lodha was appointed receiver of the assets and business of the said
firm by an order dated February 20, 1935. On his death, the plaintiff, Sobhag
Mal, was appointed receiver in his place by the High Court, vide its order
dated January 13, 1942, a copy of which is marked exhibit 1. The agreement,
dated July 6, 1906, incorporates that Seth Guman Mal, proprietor of the firm,
Kamal Nayan Hamir Singh, Ajmer, and Ram Swarup of the firm Rai Bahadur Seth
Champalal Ram Swarup of Beawar, representing the two firms, agreed to start a
mill at Beawar. Clause VI of the memorandum of association provides that Seth
Guman Mal, proprietor of the firm, Kamal Nayan Hamir Singh of Ajmer, and Ram
Swarup, son of Rai Bahadur Seth Champalal of Beawar, would be allowed 16% of
the net profits of the earnings of the company as their commission. It further
lays down that Seth Guman Mal and Ram Swarup, their heirs, executors,
administrators, successors, representatives or the duly authorised agents or
such other person or persons, as may, from time to time, be appointed by them,
would be the chairman, etc. On the death of Guman Mal the members of the Lodha
family nominated Gadh Mal, on May 4, 1915: vide exhibit 6. In annexure “C” it
is mentioned that the deceased, Guman Mal, was a coparcener in the joint and
undivided family and was one of the proprietors of the said family firm. He
represented the said firm of Kamal Nayan Hamir Singh as a trustee thereof and
in that capacity he enjoyed powers and privileges including the right to act as
chairman, managing director, etc. Similar was the position in regard to Ram
Swarup. Ram Swarup died on June 5, 1916, and Motilal was appointed in his
place. It is also in evidence from the record that the commission earned by
Gadh Mal and Ram Swarup were credited to their respective firms. That shows
that Gadh Mal and Motilal represented the two family firms and that other
members of the firm were equally interested in the share of the commission. The
suit has been filed on behalf of the firm, Kamal Nayan Hamir Singh. A partition
suit was also filed in the High Court of Calcutta and Seth Gadh Mal was
appointed receiver of the said business and on his death Sobhag Mal was
appointed receiver in his place (see paragraph 33 of the plaint).
The
above documents suggest that the suit has been filed on behalf of the firm. On
the filing of the partition suit No. 867 A of 1934 in the High Court of
Calcutta by the deceased, Kan Mal Lodha, father of the plaintiffs Nos. 8 and 9,
the joint family firm continued carrying on business and a receiver was
appointed to manage the estate and its business. With the filing of the
partition suit, the status of the joint family underwent a change and the
business became a partnership business. Under section 69 of the Indian
Partnership Act, 1932, no suit could have been instituted unless the
partnership was registered. Section 69 of the Indian Partnership Act, 1932,
runs as follows :
“(1) No suit to enforce a right arising from a
contract or conferred by this Act shall be instituted in any court by or on
behalf of any person suing as a partner in a firm against the firm or any
person alleged to be or to have been a partner in the firm unless the firm is
registered and the person suing is or has been shown in the register of firms
as a partner in the firm.
(2) No suit to enforce a right arising from a
contract shall be instituted in any court by or on behalf of a firm against any
third party unless the firm is registered and the persons suing are or have
been shown in the register of firms as partners in the firm.
(3) The provisions of sub-sections (1) and (2)
shall apply also to a claim of set-off or other proceeding to enforce a right
arising from a con tract, but shall not affect,—
(a) the enforcement of any right to sue for
the dissolution of a firm or for accounts of a dissolved firm, or any right or
power to realise the pro perty of a dissolved firm, or
(b) the powers of an official assignee,
receiver or court under the Presidency Towns Insolvency Act, 1909, or the
Provincial Insolvency Act, 1920, to realise the property of an insolvent
partner.
(4) This
section shall not apply—
(a) to firms or to partners in firms which
have no place of business in the (State) or whose places of business in (the
State) are situated in areas to which, by notification under section 56, this
chapter does not apply, or
(b) to any suit or claim of set-off not
exceeding one hundred rupees in value which, in the presidency towns, is not of
a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882,
or outside the presidency towns, is not of a kind specified in the Second
Schedule to the Provincial Small Cause Courts Act, 1887, or to any proceeding
in execution or other proceeding incidental to or arising from any such suit or
claim”.
This
section, speaking generally, bars certain suits and proceedings as a
consequence of the non-registration of the firms. Sub-section (1) prohibits the
institution of a suit between partners inter se or between partners and the
firm for the purpose of enforcing a right arising from a contract or conferred
by the partnership Act, unless the firm is registered and the person suing has
been shown in the register of firms as a partner in the firm. Sub-section (2)
similarly prohibits a suit by or on behalf of the firm against a third party
for the purpose of enforcing rights arising from a contract unless the firm is
registered and the person suing is or has been shown in the register of firms
as a partner in the firm. Under the third sub-section a claim of set-off which
is in the nature of a counter-claim is also similarly barred. Then that
sub-section bars other proceedings. The sub-section, however, does not affect
power to realise the property of a dissolved firm. Here, according to the
plaint, the suit in substance was filed on behalf of the firm. There was,
therefore, no question of realising the property of a dissolved firm. After the
partition suit the firm began to be governed by the Indian Partnership Act. In
this view of the matter, subsection (3) of section 69 will not apply to this
case to enable the plaintiffs to file a suit without the registration of the
firm.
In
support of the above proposition a reference is made to Mst. Jatti v. Banwari
Lal. In
that case it has been held by Lord Dunedin that where a separation is effected
between brothers and the business is carried on by the brothers the business
becomes an ordinary partnership subject to the Partnership Act. In
Girijanandini Devi v. Bijendra Narain Choudhary, his Lordship,
Shah J., speaking for the court, observed that partition may ordinarily be
effected by institution of a suit, by submitting the dispute as to the division
of the properties to arbitrators, by a demand for a share in the properties or
by conduct which evidences an intention to sever the joint family ; it may also
be effected by agreement to divide the property. His Lordship has further
pointed out that merely because one member of the family severs his relation,
there is no presumption that there is severance between the other members. In
Baij Nath Prasad v. Ram Gopal Lachhmi Narayan, a Division
Bench of the Calcutta High Court comprising Costello, Actg. C.J. and McNair J.,
considered the point in issue and observed that the institution of a suit for
partition by a member of the joint family is an unequivocal intimation of his
intention to separate and that there is consequently a severance of his joint
status from the date when the suit is instituted. A decree may be necessary for
working out the results of the severance and for allotting definite shares, but
the status of the plaintiff as separate in estate is brought about by assertion
of his right to separate, whether he obtains a consequential decree or not. It
has further been laid down in that case that a joint Hindu trading family
governed by Mitakshara law carried on business in different groups at various
places in India. Subsequently, a member of the family instituted a suit for
partition and if the business of the family was still being carried on as
before without any change until final partition decree was passed, there was in
fact a contractual partnership based upon an agreement to be implied from the
conduct of the case. There is also an instructive judgment on the point in
Kesrimal v. Dalichand. In that
case Modi J. observed that before a partner of the firm can Maintain a suit to
enforce a right arising from a contract against any third party, two conditions
must be fulfilled. Firstly, that the firm should be registered, and where a
partner thereof happens to have died, a fresh or de novo registration of the
firm need not be insisted upon as a matter of law and the firm can still be
considered to be a registered one. Secondly, that the person or the persons on
whose behalf the suit is or has been brought must have been shown as a partner
in the register of firms at the time of the institution of the suit. If both
these conditions are not fulfilled, such a suit must be held to be bad and
unmaintainable and would have to be dismissed. To the same effect is the
decision of a Division Bench of the Bombay High Court in Shriram Sardarmal
Didwani v. Gourishankar alias Rameshwar Joharmal, wherein it
has been pointed out that a suit instituted on behalf of an unregistered
partnership must be immediately dismissed. In Govindmal v. Kunj Beharilal, Tendolkar
J., while dealing with section 69 of the Partnership Act, 1932, illustrated
that the provisions of section 69 are mandatory and unlike their counterpart in
England there is no power to grant to the defaulting partnership any relief
against the disability imposed by the section. The section debars an
unregistered firm from filing a suit. Its effect is that a suit by an
unregistered firm is at its inception bad, and the moment the court is
satisfied that the plaintiffs are an unregistered firm, it must treat the suit
as not having been filed and dismiss it.
There
is a recent decision of a Division Bench of the Gujarat High Court in Bharat
Sarvodaya Mills Co. Ltd. v. Mohatta Bros, wherein it
has been held that section 69 bars a suit against a third party if it is for
enforcing a right arising from a contract. Two mandatory requirements must be fulfilled
before such a suit can be instituted to enforce contractual rights of the firm
or on behalf of the firm. They are: (1) that the firm must be a registered
firm, and (2) that the persons suing are or have been shown in the register of
firms as partners of the firm. The requisite conditions will have to be treated
as mandatory conditions. Unless these two conditions are fulfilled, there would
be a fatal bar to the entire suit and it would be wholly incompetent in a court
of law.
From
the above authorities it is clear that where, as here, severance of the joint
family took place by the filing of a partition suit and when the family business continued to be conducted as before, a
contractual partnership based upon an implied agreement came into existence and
when such a partnership was formed, section 69 of the Indian Partnership Act,
1932, would govern the case and no suit could have been instituted by or on
behalf of the firm without registration.
Learned counsel for the
appellants cited Daitari Mohapatra v. Brundaban Matia . In that
case the plaintiff alleged that there was a partnership between him and the
defendant for the purpose of doing repair work to Khera Bridge in 1944, and
that the work was completed in due course on June 5, 1944. The execution of the
repair work was entrusted to the defendant and the plaintiff’s function as a
partner was to contribute certain sums of money and also to Maintain accounts.
The plaintiff further alleged that, though the work was completed on June 5,
1954, the defendant evaded paying the net sum due to him on some pretext or
other. He, therefore, brought the suit claiming a sum of Rs. 689-9-6. The
defendant pleaded that the suit was barred under section 69(3)(a) of the
Partnership Act, 1932. The High Court held that the suit was in essence a suit
for the recovery of some money due to the plaintiff on final settlement of
accounts of the partnership business between him and the defendant. Therefore,
the non-registration of the firm under the Partnership Act would not operate as
a bar to the Maintainability of the suit in view of clause (a) of sub-section
(3) of section 69 of the Act. The facts of that case are obviously
distinguishable from those of the present one, inasmuch as in the Orissa case the partnership had already been dissolved
after the completion of the work. Therefore, that case does not in any manner
help the appellants.
We may now deal with the
third point raised on behalf of the appellants regarding the liability of the
company in terms of the agreement of 1906, which was in existence prior to its
incorporation. Learned counsel for the appellants has submitted that the
agreement of 1906 was the basis of the suit. This very agreement was
subsequently ratified by the company and was acted upon by it and, therefore,
the company is liable for the suit amount. In this connection it may be pointed
out that ratification can only be by a person ascertained at the time of the
act done, i.e., by a person in existence either actually or in contemplation of
law : vide Kelner v. Baxter A contract entered into on behalf of a
company before its incorporation is not binding upon the company. After the
company comes into existence the company cannot ratify the contract entered
into prior to its incorporation. It can, of course, enter into a new contract upon
the same terms. In this connection a reference is made to In re Northumberland
Avenue Hotel Company. In that
case an agreement was entered into between W on the one part and D on the other for
an intended company to be incorporated. The company was registered on the
following day. The memorandum of association provided that the company should
carry the agreement into effect. No fresh agreement with W was signed or sealed
with the company. The company took possession of the land, expended money on
the building and acted on the agreement, which they considered to be binding on
them. The company failed to complete the building. W took out a summons to be
allowed to prove for damages against the company for the breach of the
agreement. It was held that the agreement having been entered into before the
company was in existence, was incapable of confirmation and that the acts of
the company, having evidently been done under the erroneous belief that the
agreement between W and D was binding on the company, was not evidence of a
fresh agreement having been entered into between W and the company and there
was, therefore, no agreement between W and the company and that the summons
must be dismissed. Another important case on the point in issue is in Ram Kumar
v. Sholapur Spg. and Wvg. Co. In that
case Beaumont C.J. pointed out that a company cannot be bound by a contract
entered into on its behalf before it was formed, and it is not competent to
bring a company into existence bound to enter into a contract with a third
party, the terms of which have been arranged before the company is formed. It
is for the company to consider after its formation whether it will enter into
the contract or not. A condition in a memorandum of association which is
nothing more than a detail of management for the purpose of carrying on the
business of the company, cannot be considered to be a vital condition. Learned
counsel for the appellants has submitted that there was an agreement entered
into between Guman Mal and Ram Swarup in the year 1906 when the company was not
in existence. Soon after the company was incorporated, it incorporated the terms
of the agreement in the memorandum of association and the articles of
association and the company also acted accordingly by appointing chairman and
the managing directors in accordance with the terms of the contract and it also
paid commission from time to time. It should, therefore, be assumed, the
counsel adds, that there was an implied agreement. The court does not interfere
with the internal management of the affairs of the company. The memorandum of
association does not constitute a contract between a company and a third party
who may be named therein. It is for the company to enter into a new contract
upon its formation. That being the legal position, the third contention of
learned counsel for the appellants lacks substance and is hereby repelled.
Coming
now to the last point in regard to the decree for a sum of Rs. 23,061, learned
counsel has submitted that specific issue No. 12 was framed by the trial court.
The finding on that issue runs as follows :
“The claim of the plaintiffs and the defendants
Nos. 3 to 7 for a sum of Rs. 23,061 is not denied by the defendants Nos. 1 and
2. In fact a cheque for the amount was given but it was not encashed.”
Despite this finding, the
trial court, the counsel submits, did not pass any decree on account of this
amount. Learned counsel for the side opposite contended that this amount was
not admitted by the defendants in their written statement, and as the
plaintiffs-firm is not registered, they are not entitled to obtain a decree for
the item in question. Paragraph 31 of the plaint runs as follows:
“31. That the firm of Kamal Nayan Hamir Singh
has received payment of the one-half of the commission from defendant No. 1 up
to December 31, 1939. The plaintiffs and defendants Nos. 3 and 4 are now
entitled to Rs. 23,061 on account of their moiety of the commission for the
years 1940 and 1941.”
Paragraph 21 of the written
statement filed by the defendant No. 1, Edward Mills Co. Ltd., Beawar, is in
the terms set out below :
“21. That paragraph 31 of the plaint is not admitted.
The claim advanced is vague particularly as to how the plaintiffs and
defendants Nos. 3 and 4 claimed to be entitled to any amount that may be
payable to the deceased, R.B. Seth Gadh Mal Lodha. The plaintiffs have not
stated as to how Rs. 23,061 claimed are made up.”
Paragraph 22 of the written
statement filed by Motilal is as under :
“22. That paragraph 31 of the plaint is not
admitted. The claim advanced is vague particularly as to how the plaintiffs and
defendants Nos. 3 and 4 claim to be entitled to any amount that may be payable
to the deceased, R.B. Seth Gadh Mal Lodha. The plaintiffs have not stated as
how Rs. 23,061 claimed are made up.”
From the above pleadings it
is not clear that the defendants admitted the claim of Rs. 23,061. Order 12, rule
6, Civil Procedure Code, provides :
“Judgment on admissions:—Any party may, at any
stage of a suit, where admissions of fact have been made, either on the
pleadings or other wise, apply to the court for such judgment or order as upon
such admissions he may be entitled to, without waiting for the determination of
any other question between the parties; and the court may upon such application
make such order, or give such judgment, as the court may think just.”
The use of the words “or
otherwise” without the words “in writing” which are used in rule 1 of Order 12
shows that a judgment may be given even on a verbal admission. (See In re Beeny
: Ffrench v. Sproston and Premsuk
Das v. Udairam).
Rule 6 of Order 12 is wide enough to afford relief not only in cases of
admissions made in the pleadings but also in cases of other admissions. The
object of Order 12, rule 6, Civil Procedure Code, is to enable a party to
obtain speedy judgment at least to the extent of the relief which, according to
the admission of the defendant, the plaintiff is entitled to and the rule has
been made wide enough to afford relief not only in cases of admissions made in
the pleadings but also on admission de hors the pleadings. To limit the rule to
cases where the plaintiffs accept the admission of the defendant as a whole
would be to deprive the rule of its utility : vide Tahilram v. Vassumal. Keeping in
view the finding of the trial court while dealing with issue No. 12, it is
clear that the defendants did not deny the claim of the plaintiffs for Rs.
23,061, in the course of their arguments before it. On the basis of such an
admission the trial court could have passed a decree for the said amount
irrespective of the implications of other issues framed, specially when the
claim is severable and the defendants admitted their liability in respect of
the fragment of the claim. A court has jurisdiction under Order 12, rule 6,
Civil Procedure Code, to enter a judgment for the plaintiffs to pass a decree
on the admitted claim with liberty to the plaintiffs to proceed with the suit
in the ordinary way as to the remainder of the claim.
In the result,
we partly accept this appeal and pass a decree for an additional sum of Rs.
23,061, on account of the commission for the year 1940-41 in favour of the
plaintiffs and the defendants Nos. 3 and 4 against defendant No. 1, the
company. In other respects, the appeal is dismissed. In the special
circumstances of the case, the parties are left to bear their own costs.
[1984]
55 COMP. CAS. 462 (DELHI)
HIGH COURT OF
DELHI
v.
Dina Nath Sodhi
RAJINDAR
SACHAR AND M.L. JAIN JJ.
Company Appeals Nos. 9, 11 and 30 of 1980
R.K. Talwar for the appellant.
A.N. Parekh for the respondent.
Sachar, J.—This is an appeal by the company against the order of the
learned single judge holding that it was just and equitable to wind up the
company and so ordering accordingly. Similar appeals
have also been filed by Bali (being Company Appeal No. 30/1980), who was one of
the directors of the company; another appeal (being Company Appeal No. 9/1980)
has also been filed on behalf of the directors. As most of the points are
common, this judgment will also dispose of those appeals excepting where
separate order is given with reference to the points arising in those appeals.
It may be mentioned that
broadly the shareholders are divided into two groups known as Bali group
(appellant) and Sodhi group (respondent) who had moved the application for
winding up the company.
The company was
incorporated on May 14, 1949, with an authorised capital of Rs. 5 lakhs divided
into one thousand ordinary shares of Rs. 100 and 200 cumulative preference
shares of Rs. 2,000 each. The memorandum of association was signed by the
appellant, Bali, and the respondent, Sodhi, who had initially each one
cumulative preference share. Shortly, thereafter, further preference shares
were issued making a total of 50. The dispute is as to the division of these
shares between two groups. It is also a common case that eight preference
shares are held by Sinha and Kapur, who are not apparently taking sides either
with Sodhi or Bali.
The broad fact that Bali
group holds 21 preference shares is also not disputed. That Sodhi holds four
shares in his own name and one is held by his wife is also not disputed. There
is also no dispute that four shares were held by R.C. Sodhi, the brother of the
respondent, Sodhi. There the agreement ends. According to Bali other 12 shares
were owned by and were entered in the register of members in the name of Des
Raj (4), Mulakh Raj (4) and Chandok (4). Sodhi, however, claimed when he moved
an application—C.P. No. 32/1971—that these 12 shares of Des Raj (4), Mulakh Raj
(4), Chandok (4) had been transferred in the name of his two sons, Ramesh and
Suresh, and his daughter, Savita Sodhi, respectively. Now, why C.P. No.
32/1971, under ss. 397, 398 and 403 of the Companies Act, 1956, was moved as
mentioned in the said petition was that apart from listing many other acts of
oppression against the Sodhi group, specific grievance was made that an annual
general meeting was said to have been held in December, 1969, which was invalid
as no notice had been sent to the Sodhi group. It was alleged that at that
meeting though Sodhi and Bali were said to have been re-elected as directors it
was purported to have been resolved that an extraordinary meeting be held in
April, 1970, when new elections for directors will take place. Another meeting
was also said to have been held in April, 1970, which was also invalid where a resolution was purported to have been passed
pointing out the non-co-operative attitude of Sodhi and also the poor financial
condition of the company and appointing only Bali as one of the directors.
According to Sodhi, he received intimation of these proceedings in October,
1970, when he was informed by the company that he was no longer a director.
That is why he moved C.P. No. 32/1971. He had as is usual along with the
petition moved for appointment of an administrator. The parties, however, soon
thereafter, entered into a compromise before Rangarajan J. on November 8, 1971.
The compromise was made on the statements made Sodhi and Bali followed by the
order passed by the learned judge. The same are reproduced as follows:
Sodhi stated as under:
"I and members of my
family own 21 cumulative preference shares in the company. If we are paid at
the rate of Rs. 7,500 per cumulative preference share, we are willing to
transfer those shares to Bali within a fortnight of the decision of the court
as to whether the shares owned by us are 21 as we contend or only 5 as Shri
Bali contends".
Bali
made the following statement:
"I am willing to pay
at the rate of Rs. 7,500 per each cumulative preference share held by the
petitioner & members of his family subject to this court deciding the
number of shares so held by Shri Dina Nath Sodhi and the members of his family.
According to me, Sri Dina Nath Sodhi and the members of his family own 5 shares
and not 21 as contended by him. This question alone may be decided in this and
the concerned applications by this court. Till this question is decided, I
undertake not to alienate or in any manner subject the company to any
commitment or liability except for ordinary day-to-day transactions without
taking the express orders of the court".
On
the same date the learned judge passed the following order:
"The statements of
Shri Dina Nath Sodhi and Shri S.L. Bali are recorded. Shri Bali will file a
detailed affidavit concerning the returns stated to have been filed before the
Registrar for the years ending 1966, 1967 and 1968, mentioning the details of
the shares held by the petitioner and the members of his family. He will also
cover the points mentioned in the Government's report which has been filed
today by Shri Rishikesh for Shri Davinder K. Kapur. The petitioner will also
file a detailed affidavit of shares of himself and the members of his family
and how and when they were acquired".
The matter was then heard
and disposed of by P.N. Khanna J., by his order of May 23, 1972, as follows:
"In the result, I find
that Shri Bali is not the owner of the 8 shares which previously stood in the
names of Des Raj and Mulakh Raj and that the petitioner and the members of his
family, i.e., his wife, his deceased brother, his two sons, Ramesh Sodhi and
Suresh Sodhi, and his daughter, Savita Sodhi, are the owners of 21 shares as
claimed by the petitioner. The petitioner, respondent No. 1 and respondent No.
2 shall now take steps forthwith to have the said 21 cumulative preference
shares transferred to respondent No. 1 at the agreed price of Rs. 7,500 for
each such share. The petition shall stand disposed of accordingly".
It will be noticed that in
the order of P.N. Khanna J. the direction was given to have the shares transferred
to respondent No. 1. The reference to respondent No. 1 was an inadvertent
mistake because obviously the dispute was whether shares should be transferred
to Bali, who was respondent No. 2, and that is why this mistake was corrected
by Ranga-rajan J. on October 3, 1972. This amendment made on October 3, 1972,
however, was set aside in appeal and the matter was directed to be heard by the
learned single judge again, who, however, again allowed the same amendment in
the order of May 23, 1972, of P.N. Khanna J. The company preferred Appeal No.
4/1973 against this order which was dismissed by the Division Bench by the
order of March 18, 1977, along with Company Appeals Nos. 10, 11 & 13/1972
and Company Appeal No. 8/1975. Company Appeal No. 10/1972 was preferred by Bali
against the order of May 23, 1972, by P.N. Khanna J. Company Appeal No. 11/1972
was preferred by Shakuntala Bali against the same order and Company Appeal No.
13/1972 was preferred by the company also against the same order. During the pendency
of C.P. No. 32/1971, C.P. No. 39/1973 being an application under s. 433 of the
Act was moved by Sodhi in which, apart from reiterating the allegations made in
C.P. No. 32/1971, grievance was made that Bali had created deliberate
difficulties in the payment of Rs. 1,57,500 by raising frivolous objections to
the ownership rights of these 21 cumulative preference shares held by Sodhi and
his family; there was also the grievance that Sodhi had been ousted from the
management of the company and that, therefore, it was just and equitable that
the company should be wound up. This C.P. No. 39/1973 was admitted by
Rangarajan J. on April 30, 1975. Against this, Company Appeal No. 8/1975 was
filed. All these appeals, namely, Company Appeals Nos. 10,11,13 of 1972,
Company Appeal No. 4/1973 and Company Appeal No. 8/1975, were heard and
disposed of together by a Division Bench on March 18,1977, dismissing all the
appeals.
Thereafter, the matter was
tried by the company judge on merits who framed the following issues:
(1) Whether the issue of 1,000 equity
shares of Rs. 100 each by Sri Bali to himself, his wife, daughters and minor
children, Sood and Mehta Kartar Singh, was at the back and without the
knowledge and concurrence of the petitioner and amounted to an act of
oppression?
(2) Whether the annual general meetings
held in December, 1969, and April, 1970, were, invalid as they had been held
without notice to the petitioner and the members of his family?
(3) Whether the respondents ousted the
petitioner from the board of directors of the company and brought about a
material change in its management and control?
(4) Whether the company in the present
case was really in the nature of a partnership between two groups, one of the
petitioner and the other of Bali?
(5) Whether
it is just and equitable that the company should be wound up?
(6) Are the majority of the shareholders
opposed to the winding up, and if so, what is its effect?
The
learned single judge, as already mentioned, has by his order of December 19,
1979, come to the conclusion that it was just and equitable to wind up the
company and has ordered accordingly. Against this order, Bali and the company
have filed the appeals which are being disposed of by this common order.
Issue No. 2:
This
issue relates to the validity of the meetings held in December, 1969, and
April, 1970, and the issues Nos. 1 & 3 really flow from the findings to be
given on this issue. That is why this issue is being discussed first. The
allegation is that the company is said to have held its annual general meetings
in December, 1969, and again in April, 1970, but without having sent the notice
of the meetings to Sodhi or his wife or his sons and daughters who are claimed
to be the holders of 21 shares; hence the meeting held was an invalid one. The
stand of the company and Bali was that notice through post had been sent to
Sodhi and his wife who alone were admitted to be owners of 4 shares and one in
their names, respectively. Sodhi had denied the receipt of any such notices. It
will be noticed that no notice alleged to have been issued in connection with
the meeting of December, 1969, is on record. At this alleged meeting though
Sodhi and Bali were said to have been re-elected directors, yet it was only
till April 29, 1970, when an extraordinary general meeting was directed to be
called. The December, 1969, meeting is also said to have approved of a
resolution to be moved at the next meeting cutting off the remuneration of one
of the directors. At the meeting of April 29, 1970, there was a serious possibility of the remuneration of Sodhi being stopped, which
could not be taken lightly by Sodhi. Considering this circumstance, it is
unbelievable that had Sodhi received the notice of April 29, 1970, he would not
have attended the meeting and would have allowed Bali's group to pass any sort
of resolution in the meeting of April 29, 1970. The only suggestion of Mr.
Talwar was that Sodhi did not attend because he was afraid of being outvoted
and that absence was a safer alternative. The argument is unacceptable because
the 12 shares which belonged to Des Raj, Mulakh Raj and Chandok would be more
available to Sodhi because Des Raj and Mulakh Raj (who are brothers) were his
relations (their sister being married to Sodhi's brother). Thus, we agree with the
finding of the learned single judge that no notices were sent by the company to
Sodhi and his wife who were admittedly members for the meetings held in
December, 1969, and April, 1970. Now, ss. 171 and 172 provide for the calling
of a general meeting only after giving notice for the requisite period and
containing the contents and manner of service. It is not suggested that these
requirements do not apply to the company. In the present case, our finding is
that no notices of the meeting were sent to Sodhi and his wife. There is no
excuse of accidental omission. The stand taken was that notices were sent,
which we have disbelieved. Thus, deliberately and designedly Sodhi and his wife
were not given notice for the holding of the meeting allegedly held in December,
1969, and April 29, 1970. In such circumstances it is the law that if the time
of holding the meeting and other essential particulars required by the section
are not specified in the notice, the meeting will be invalid, and all
resolutions passed thereat will be of no effect. (See Prachi Insurance Co. Ltd. v. Chaudhury
Madhusudandas [1964] 2 Comp LJ 157 (Orissa).
Now, December, 1969, meeting purported to elect directors which called April
29, 1970, meeting. The latter meeting is said to have not elected Sodhi and
instead elected Mrs. Bali in addition to Bali as directors. But all these
proceedings suffer from the infirmity of the December, 1969, meeting being
invalid and cannot confer any legitimacy on the proceedings held at the alleged
meeting of April, 1970 Any proceedings at 29th April, 1970, would be obviously
unauthorised and illegal. Though we are quite clear that not sending the
notices of the meeting to Sodhi and his wife by itself is sufficient to
invalidate the meetings, we, however, feel that we should also examine the
question of notices not having been sent to Sodhi's sons and daughter.
Admittedly, even according to the appellant, no notices for the meeting were
sent to Sodhi's sons and daughter. The reason given by Mr. Talwar that as they
were not borne on the register of members no notice was to be sent to them,
carries no conviction, because as held in Company Appeal No. 10/1972, the
shares of Des Raj, Mulakh Raj and Chandok had been transferred in the name of
Sodhi's sons and daughter since 1961, and they should have been given notice of the meetings
of December, 1969, and April, 1970. Mr. Talwar, however, made an effort to
reopen the findings, namely, that these shares which originally belonged to Des
Raj, Mulakh Raj and Chandok had been transferred in the name of the sons and
daughter of Sodhi. But we are of the view that he cannot be permitted to reopen
this issue which stands concluded by previous decisions between the parties.
Mr. Talwar, however, had sought to urge that no such finding had been given in
the previous litigation. We cannot agree. A reference to the statement of the
parties before Rangarajan J. in C.P. No. 32/1971, on November 8,1971, will show
that while Sodhi had stated that he and his family members own 21 cumulative
preference shares of the company, Bali had taken the stand that Sodhi and
members of his family only hold 5 shares and not 21. Both the parties wanted
this question to be decided by the court, and subject to this decision the
parties had agreed that if Bali pays at the rate of Rs. 7,500 per cumulative
preference share Sodhi and his family members were willing to transfer these
shares to Bali within a fortnight of the passing of the order. Rangarajan J.
had thereupon passed an order directing the parties to file there statements to
show when the shares were transferred and how and when they were acquired. A
reference to the order of P.N. Khanna J. dated May 23, 1972, in C.P. No.
32/1971 will show that the question posed before him squarely was—whether Sodhi
and the members of his family owned 5 shares as said by Bali or 21 shares as
claimed by Sodhi? Des Raj and Mulakh Raj are brothers and their sister is
married to Sodhi's brother. Des Raj, Mulakh Raj and Chandok were originally
allotted 4 preference shares each in 1951, which Sodhi claimed were his
nominees. He also claimed that the price of these shares had been paid by him.
Four shares were allotted in 1953 to Sodhi's brother. There was no dispute so
far as the 4 shares which stood in the name of Sodhi, and 4 shares which stood
in the name of his deceased brother, R.C. Sodhi, and one share in the name of
Sodhi's wife. The dispute only was with regard to the 12 shares (four each in
the name of Des Raj, Mulak Raj and Chandok). Sodhi's case was that the shares
of Des Raj were transferred in 1961 to his son, Ramesh Sodhi; shares of Mulakh
Raj were transferred to his second son, Suresh Sodhi, and the shares of Chandok
were transferred in the same year to his daughter, Savita Sodhi. Bali, however,
claimed that the shares in the name of Chandok had been transferred to him
though registration still stood in the name of Chandok. The shares standing in
the name of Des Raj and Mulakh Raj, according to Bali, were said to have been
transferred to his wife, Shakuntala Bali, on March 25, 1965. Bali purported to
produce the original share scrips (to prove) alleged endorsement of transfer
but it was in his own handwriting in favour of
Shakuntala Bali. Khanna J. by his order of May 23, 1972, held that no minute
book of the directors' meeting had been produced nor any resolution book to
show that the directors ever considered the transfer of shares standing in the
name of Des Raj and Mulakh Raj in favour of Shakuntala Bali. He also found that
right from 1961 to 1967, the annual returns sent to the Registrar of Companies
and produced from his office showed that Ramesh Sodhi, Suresh Sodhi and Savita
Sodhi (sons and daughter of Sodhi) were being shown as holding four preference
shares each which originally stood in the name of Des Raj, Mulakh Raj and
Chandok. These last three persons, Des Raj, Mulak Raj and Chandok, were not
shown as members of the company. These annual returns were signed by both Sodhi
and Bali and regularly filed with the Registrar. Bali had purported to rely on
a register of members showing that Ramesh Sodhi, Suresh Sodhi and Savita Sodhi
were not entered in the register of members and the shares still stood in the
name of Des Raj, Mulakh Raj and Chandok. Khanna J. commented that this register
remained in the possession of Bali and that it could not be given more credence
than the annual returns, which had been submitted for such a number of years
from 1961 to 1967 regularly and had been signed by Bali himself also. Argument
raised before Khanna J. that the court could not go into the ownership of the
said shares was negatived by him with the observation that the parties
themselves had made a prayer in the court that the ownership of the said shares
be determined. Khanna J. recorded a specific finding that Shakuntala Bali was
not the owner of these eight shares, which previously stood in the names of Des
Raj, Mulakh Raj and that Sodhi and the members of his family, i.e., his wife,
his two sons and daughter, are the owners of 21 shares as claimed by Sodhi. A
direction was given that the company will take steps to have the said
twenty-one cumulative preference shares transferred to Bali at the agreed price
of Rs. 7,500 for each such share. Against this order of Khanna J. of May 23,
1972, three appeals, namely—Company Appeal No. 10/1972 by Bali, Company Appeal
No. 11/1972 by Shakuntala Bali and Company Appeal No. 13/1972 by the
company—were filed. The Division Bench also posed the question: Whether D. N.
Sodhi and the members of his family held 21 shares as alleged by him or whether
they held 5 shares, as alleged by Bali? It may be mentioned that Chandok is
said to be the son of a friend of D.N. Sodhi. The Division Bench, after going
through the whole matter, also came to the conclusion that the entries relied
upon in the register of members by Bali could not prevail over the entries in
the annual returns which showed the sons and daughter of D.N. Sodhi as the
holders of these 12 shares. The Division Bench also agreed with the finding of
Khanna J. that the claim of Bali that 8 shares held by Des Raj and Mulakh Raj were transferred to Bali's wife and that the 4
shares held by Chandok were transferred to him was unacceptable. They have
recorded a finding that right from December 30, 1961, to December 29, 1967, in
every annual return the two sons and daughter of D.N. Sodhi were being shown as
holding 4 preference shares each and that Des Raj, Mulakh Raj and Chandok were
not shown as members of the company holding shares. The Bench has given a
specific finding that "it is thus clear from them that Shri Bali and Shri
Sodhi, who were the only directors in 1960 and 1961, accepted and approved the
transfers and reported the same to the Registrar of Companies in the aforesaid
annual returns. This gives rise to a strong presumption of fact that the
transfers were duly effected by the execution of transfer deeds and the same
was accepted by the board of directors by passing a resolution in that behalf.
There is nothing on record which rebuts the said presumption". An argument
was also raised before the Division Bench that Smt. Shakuntala Bali was not
bound by the decision of P.N. Khanna J. This was negatived and it was held that
Shakuntala Bali was represented in Company Petition No. 32/1971, before Khanna
J. wherein it was agreed by the parties that the decision be given with regard
to these 21 shares and, therefore, Shakuntala Bali was bound by the decision
given by Khanna J. In this view of the matter it is futile for Mr. Talwar to
seek to reopen the findings with regard to 21 shares being held by Sodhi and
the members of his family. We may note that the learned single judge in appeal
has again gone into the matter and came to an identical conclusion (though we
feel that it was not necessary to do so in view of the finding given by Khanna
J. and upheld by an earlier Division Bench in Company Appeal No. 10/1972). We,
therefore, do not consider it necessary to go into this aspect as this matter
is concluded on the principle of res judicata and cannot be reopened in these
proceedings between the parties and must remain immune from attack here. It
has, therefore, to be held that Sodhi and his family members were the owners of
21 shares of the company. Admittedly, no notice was sent to the sons and
daughters of Sodhi and the claim of Bali that notices were sent to Sodhi and
his wife has to be disbelieved by us. The result is that the alleged meetings
said to have been held on April 29, 1970, as well as the earlier meeting of
December, 1969, were not validly called and held. At the meeting of April 29,
1970, Sodhi, who was purported to have been elected as director in December,
1969, meeting, was not elected and in his place Mrs. Shakuntala Bali was
instead elected. On issue No. 2, therefore, it has to be held that the meetings
held in December, 1969, and April, 1970, were invalid, as they were held
without notice to D.N. Sodhi and members of his family. Thus, it comes to this
that Sodhi and his family who were entitled to attend the meetings, being
members were never given
notice of the meetings. These meetings were, therefore, held invalidly.
Issue No. 1:
The
allotment of these 1,000 equity shares was purported to have been made in a
meeting of the board of directors held on November 12,1970. Prior to that date
the issued capital of the company was Rs. 1 lakh consisting of 50 preference
shares of Rs. 2,000 each and on the findings given earlier 21 shares of Rs.
2,000 each were held by Sodhi group; 21 shares of Rs. 2,000 each were held by
Bali group and 8 shares were held by Mehta and Kapoor. On November 12,1970, the
board of directors decided to allot one thousand equity shares of Rs. 100 each
to about 10 persons, which, apart from allotment of 20 shares each to one P.L.
Sood and K.S. Mehta, the rest were given to Bali and his family being his wife
and daughters and sons. Case of the respondent is that these shares were
invalidly allotted because there was no properly constituted board of
directors. The further claim was that in fact no money was received on
allotment and the said allotment was merely a sham one. Bali, however, claimed
that about 60% of the face value of the shares had been received and out of the
said amount over Rs. 55,000 had been paid in terms of a compromise decree
against, claims against the company. Now, it is clear that the allotment of
November 12,1970, was made by the board of directors consisting of Bali and his
wife. The validity of the said act will depend upon if Mrs. Bali had been
elected validly as a director of the board. As mentioned before she was elected
as a director at a meeting which was said to have been called and held on April
29, 1970. As, however, held under issue No. 2 that the meeting of April 29,
1970, was called without notice to Sodhi and his group and, therefore, any
proceedings held therein and in pursuance of the said meeting can have no
validity. Thus, the election of Mrs. Bali as a director is invalid because she
was. elected at a meeting of the general body called in April, 1970, which
itself was invalidly called. The allotment of these 1,000 shares was made by a
board of directors consisting of Mrs. Bali, who, as mentioned above, was
invalidly elected. Now, the allotment of shares in a joint stock company made
by an irregularly constituted board of directors is prima facie invalid. Vide
Changa Mai v. Provincial Bank Ltd., ILR [1914] 36 All 412. It is beyond dispute
that a director invalidly appointed cannot, in the absence of a provision in
the articles of association, bind the shareholders unless the defect is unknown
at the time. Vide Sardul Singh v. King Emperor, AIR 1927 Lah 797(2).
A
meeting of directors is not duly convened unless due notice has been given to
all directors and the business put through at a meeting not duly convened is invalid and any business or resolution passed
at such an invalid meeting would itself be invalid. Vide Halsbury's Laws of
England, vol. 9, p. 46, and approved by the Supreme Court in Parmeshwari Prasad
Gupta v. Union of India [1974] 44 Comp Cas1. Reference in this connection may
also be made to the observations made in Needle Industries (India) Ltd. v.
Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743, 844 (SC),
which is as follows:
"The meeting of 2nd
May, 1977, was unquestionably illegal for reasons already stated. It must
follow that the decision taken by the board of directors in that meeting could
not, in the normal circumstances, create mutual rights and obligations between
the parties".
As the said allotment was
made by a director who was purported to have been elected at an invalid
meeting, the said action lacked in validity. Mr. Talwar, however, sought to
invoke s. 290 of the Companies Act to say that any act done by or purported to
be done by a director is valid notwithstanding that it may afterwards be
discovered that his appointment was invalid by any reason of defect or
disqualification. The argument is that it is only subsequently during the
present proceedings that it has been found that the meeting of April, 1970,
which elected Mrs. Bali as director was invalid, and, therefore, the act of
Mrs. Bali as a director allotting these shares must be held to be valid in
terms of this section. We cannot agree. Now, s. 290 is based on the rule culled
out from Turquand' s case [1856] 25 LJ QB 317; 6 E & B 327, which, as
reproduced in Morris v. Kanssen [1946] 16 Comp Cas 186; [1946] 1 All ER Rep.
586; [1946] AC 459 (HL), is to the effect that "persons contracting with a
company and dealing in good faith may assume that acts done within its
constitution and powers have been properly and duly performed, and are not
bound to inquire whether acts of internal management have been regular".
But this rule is not applicable to the present case. The reason is that this
section which is equivalent to s.143 of the English Companies Act, 1929, and
s.180 of the Companies Act, 1948, cannot apply to a transaction where a
director or a de facto director invokes the rule so as to validate a
transaction which was in fact irregular and unauthorised. The justification for
this rule is that normally the wheels of business will not go smoothly unless
it may be assumed that all is in order which appears to be in order. But the
maxim has its proper limits as explained in Morris' case [1946] 16 Comp Cas
186; [1946] 1 All ER Rep. 586 (HL), that it is a rule designed for the protection
of those who are entitled to assume, just because they cannot know that the
person with whom they deal has the authority which he claims. This is clearly
shown by the fact that the rule cannot be invoked if the condition is no longer
satisfied, i.e., if he who would invoke it is put upon his inquiry. He cannot
presume in his own favour that things are rightly done if inquiry that he ought to make might tell
him that they were wrongly done. What Mr. Talwar seems to urge is that even
though Mrs. Bali was elected at a meeting which was invalid yet her acts should
be held to be valid because it could not be assumed that Bali or Mrs. Bali knew
about the infirmity in the election of Mrs. Bali as a director. A similar plea
was raised in Morris' case [1946] 16 Comp Cas 186; [1946] AC 459; [1946] 1 All
ER Rep. 586, wherein it was said in dealing with the invalidation attaching to
the election of Morris as follows (at pp. 196,197 of 16 Comp Cas and at p. 593
of [1946] I All ER):
"For
here Morris was himself proporting to act on behalf of the company in a
transaction in which he had no authority. Can he then say that he was entitled
to assume that all was in order? My Lords, the old question comes into my mind:
Quis custodiel ipsos custodes? It is the duty of directors and equally of those
who purport to act as directors, to look after the affairs of the company, to
see that it acts within its powers and that its transactions are regular and
orderly. To admit in their favour a presumption that that is rightly done which
they have themselves wrongly done is to encourage ignorance and condone
dereliction from duty. It may be that in some cases, it may be that in this
very case, a director is not blameworthy in his unauthorised act. It may be
that in such a case some other remedy is open to him, either against the
company or against those by whose fraud he was led into this situation, but I
cannot admit that there is open to him the remedy of invoking this rule and
giving validity to an otherwise invalid transaction. His duty as a director is
to know; his interest, when he invokes the rule, is to disclaim knowledge. Such
a conflict can be resolved in only one way".
As
explained in Morris' case [1946] 16 Comp Cas 186,194; [1946] 1 All ER Rep. 586,
591 this section clearly indicates that "this deals with slips or
irregularities in appointment, not with a total absence of appointment, and
still less with a fraudulent usurpation of authority". "It has been
held that, notwithstanding the provisions of s.180 if the directors are not
properly appointed, according to the articles of association, or if they
continue to act without re-election they cannot allot shares, make valid calls,
forfeit shares or appoint directors". See George Browne on Companies, 42nd
edition, page 720. The sale by a director with defective appointment cannot be
upheld unless the purchaser was held to have acted bona fide and the court
cannot come to the assistance of a purchaser who purchases a share without good
faith. Now, in the present case, on the findings it has been found that the
April 29, 1970, meeting at which Bali and Mrs. Bali were elected directors was
invalid not having been called properly. Later on, this board of directors
allotted the shares in November, 1970. The details of the allotment of 1,000 shares made to various parties in
pursuance of the decision taken by the Board on November 12, 1970, shows that
340 shares each were allotted to Mr. Bali and Mrs. Shakuntala Bali. The other
allottees are the sons and daughters of Mr. & Mrs. Bali. Mr. Bali and Mrs.
Bali, therefore, being the major beneficiary of the action of the board of
directors in allotting these 1,000 shares, cannot invoke the rule that even if
the meeting which elected the directors was invalid, the purported action of
allotting the shares could be and should be upheld on the ground that the
invalidity of the election of director was discovered afterwards and was not
known earlier. On the finding already given that notice of the meeting of April,
1970, was deliberately not given to Sodhi's group, the inference is
irresistible that there was no good faith or question of want of understanding
so far as the invalidity of the meeting of April, 1970, was concerned. Bali had
himself called the meeting and if he did not, as we have found, give notice of
the same to Sodhi group he cannot plead good faith. This is again seeking to
invoke the rule in Tnrquand's case [1856] 25 LJ QB 317; 6 E & B 327, but it
is well settled that a party who seeks to uphold a transaction which is illegal
like in the present case where the allotment of shares is by a board of
directors invalidly elected, the same cannot be upheld unless the party seeking
the assistance of the courts acts bona fide. An innocent purchaser will be
protected but the court will never come to the assistance of a purchaser who
purchases the shares without good faith. Acting bona fide is considered to be
essential to uphold the transaction in all cases in which the principle of s.
290 of the Companies Act can be invoked. See observations in Albert Judah Judah
v. Ramapada Gupta, AIR 1959 Cal 715, para. 81; [1960] 30 Comp Cas 582, at p.
626. In the present case, as the overwhelming majority of these one thousand
shares were allotted to Bali, Mrs. Bali and their children, the question of
even suggesting of their having acted bona fide does not arise. Mr. Talwar
again repeated the apparently innocuous suggestion that the company was even
willing to allot the same number of shares to the Sodhi group and this would
show the bona fide of Bali group that they did not want to exclude Sodhi. But
this suggestion cannot conceal the real motive behind the allotments made on
November 12, 1970, in such a clandestine manner by having a meeting held
without giving a notice to Sodhi. Mr. Talwar also sought to urge that the
company required funds and it was for this reason that this allotment of 1,000
shares was made. The suggestion was that it was in pursuance of agenuine need
that these additional shares were allotted and not because of any mala fide
motive. An innocent and apparently genuine posture was adopted by suggesting
that the company was willing to give equal number of shares to Sodhi if he was
so interested. But, by adopting such a seemingly harmless posture at this stage, the initial infirmity in
the validity of having deliberately called a meeting in April, 1970, without
giving notice to Sodhi cannot be wiped out. If, as is now suggested by Mr.
Talwar, the purpose was to raise additional funds it is not understood why
Sodhi and his group were not called at that meeting. Had notice been issued to
them and they had not attended or if they had attended but opposed the
allotment of shares and the company was in a position to show that it required
funds for its expansion, the allotment might have been held to be valid
notwithstanding the opposition of Sodhi and his group because in that case the
court would examine the main motive behind the allotments and if it came to the
conclusion that the main motive was to raise additional funds for the benefit
of the company, the allotment would be valid notwithstanding that an incidental
purpose may have been to increase the strength of Bali group. And thus because
Sodhi and his group would also have been offered similar amount of shares the
charge of lack of bona fide may not have been able to stick against Bali. As
stated in Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp Cas
179 (SC), by Das J. (p. 203): "It is well established that directors of a
company are in a fiduciary position vis-a-vis the company and must exercise
their power for the benefit of the company. If the power to issue further
shares is exercised by the directors not for the benefit of the company but
simply and solely for their personal aggrandisement and to the detriment of the
company, the court will interfere and prevent the directors from doing so. The
very basis of the court's interference in such a case is the existence of the
relationship of a trustee and of cestui que trust as between the directors and
the company".
In
the present case, the motive was clearly to deprive Sodhi and his group of
parity with Bali and to openly facilitate the overwhelming control of Bali
against the existing position which had been continuing for decades. The
benefit of s. 290 is thus not available to Bali in the circumstances of this
case and we, therefore, uphold the finding of the learned single judge on this
issue.
Issue
No. 3:
This
issue really stands concluded by our finding earlier that the meetings in December,
1969, and April, 1970, were invalid. That they were called without notice to
Sodhi group and that 1,000 extra shares were issued without involving Sodhi in
this decision making is also established. It is apparent that all this was done
with the main, if not sole, purpose of excluding Sodhi from the control and
management of the company. That Sodhi was undoubtedly associated right from the
incorporation in 1949 to April, 1970, even on the showing of Bali group is
without any challenge. This is in fact
admitted by Bali in the purported notice allegedly issued for the meeting of
April 29, 1970. In the explanatory statement it is clearly stated that Sodhi
and Bali have been directors since 1953. Bali, by calling an invalid meeting
and changing the control of the company, was doing so with the sole motive of
excluding Sodhi from the management and the action was not a bona fide one.
Now, it is well settled that "directors are not entitled to use their
powers of issuing shares merely for the purpose of maintaining their control or
the control of themselves and their friends over the affairs of the company, or
merely for the purpose of defeating the wishes of the existing majority of
shareholders and that if the power to issue shares was exercised from an improper
motive, the issue was liable to be set aside and it was immaterial that the
issue was made in a bona fide belief that it was in the interest of the
Company". The fact that by the issue of shares the directors succeed also
or incidentally in maintaining their control over the company or in newly
acquiring it, does not amount to an abuse of their fiduciary power. What is
considered objectionable is the use of such powers merely for an extraneous
purpose like maintenance or acquisition of control over the affairs of the
company. "So far as authority goes, an issue of shares purely for the
purpose of creating voting power has repeatedly been condemned". See
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.
[1981] 51 Comp Cas 743 at pp. 809-812; AIR 1981 SC 1298, paras. 107, 108.
Here the only motive was to
exclude Sodhi from the management with which he was associated, right from the
beginning. This was an oblique and extraneous purpose divorced from the considerations
of the benefit of the company. The issue of these shares for the benefit of
Bali and the ouster of Sodhi was an act of personal aggrandisement by Bali to
completely control the company and thus bring about a material change in the
management of the company. This issue is found against the appellant. We would
affirm the finding on this issue.
Issues
Nos. 4 & 5:
Issues Nos. 4 and 5 should
be dealt with together because Mr. Parekh's contention that it is just and
equitable that the company should be wound up rests on the only ground that
this company is really in the nature of a partnership and the principles which
are applicable for dissolution of a partnership should also apply in the
present case. The facts found show that the company was started in 1949 with an
authorised capital of Rs. 5 lakhs divided into 100 ordinary shares of Rs. 100
each and 200 cumulative preference shares of Rs. 2,000 each. Originally both
Bali and Sodhi held one cumulative preference share and were signatories to the
memorandum of association of the company. Prior to December, 1969, there were
50 cumulative preference shareholders of Rs. 2,000 each. Out of these on the
finding mentioned above 21 shares belonged to Sodhi group and 21 to Bali group.
Both Sodhi and Bali have remained directors right up to April, 1970. Bali in
his evidence given in C.P. No. 32/1971, on November 24, 1971, though he
purported to claim that he was in-charge of the company in all respects and was
looking after all details of the company had to admit that both he and Sodhi
were getting Rs. 1,000 per month in addition to car allowance, though he
mentioned that the remuneration to Sodhi was stopped in 1961-62. This statement
was modified by him in his evidence on September 29, 1971, to say that no remuneration
was credited to Sodhi's account after July 1, 1967. But then this stood
contradicted by his further statement that the balance-sheet for the period
ending June 30, 1970, showed that a sum of Rs. 2,10 ,575.64 was for
remuneration not paid to Sodhi. He could not say as to how much was due to
Sodhi and how much was due to him. Sodhi's case was that he had not been taking
in cash the remuneration which was being credited to his accounts by the
company. The books of the company which had all the time been with Bali support
the stand of Sodhi that Rs. 1,000 as remuneration and car allowance was being
credited to his account. The bald statement of Bali that no work was done by
Sodhi after 1958, from which time, according to him, differences cropped up between
the two is unbelievable. This is more so when the reference is made to RW1/25,
a letter dated April 20, 1968, written by Bali to Sodhi requesting him to
contact the senior counsel for a case and income-tax appeal which is fixed
against them before the Income-tax Tribunal. He had also asked him to look
after some proceedings in the High Court. This would show that though the
relations may have deteriorated but the fact nevertheless remained that both of
them, i.e., Sodhi and Bali, were carrying on the business of the company
jointly. It is, therefore, not correct for Bali to take the stand that Sodhi
stood excluded from the business of the company since 1958. The fact that both
Bali and Sodhi were in control of the company in an equal manner right from the
beginning is supported by the record itself and the clear admission made by
Bali himself. Apart from any other material reference may be made to the
explanatory statement issued under s. 173(2) of the Companies Act when Bali is
stated to have called a meeting on April 29, 1970. It is clearly mentioned
therein that from the year 1953 the company had been providing for the
remuneration of two directors at Rs. 1,000 per month. The company was also
paying their house allowance, company's transport and amenities were also
sanctioned. The statement further goes on to say that as the business of the
company does not permit such a burden the same be reduced to one director to be
entitled to these emoluments subject to profits in the working years. The statement specifically
mentions that company had in the previous years since 1953 only two directors,
namely, Bali and Sodhi, and had been providing remuneration to them. Thus, the
association of Sodhi with the company right from 1953 up to 1970 is admitted by
Bali himself. It is only at the said meeting of April 29, 1970, that Sodhi was
dropped as a director and Mrs. Bali was instead said to have been elected as a
director. We have already held that this election was invalid because it was
called without issuing proper and legal notice. The argument based on Sodhi
playing no part in the running of the company prior to the controversy erupting
seriously in 1970 is clearly against the facts and admissions of Bali himself
and cannot be accepted. That for the day to day functioning of the board of
directors it necessitated the presence of Sodhi is also clear from the said
explanatory statement because his non-attendance at the meetings is being made
a grievance for the reason to have only one director in future. Whatever the
merits of this allegation against Sodhi be, the facts at least stands
established that it was clearly understood that the management of the company
was to be run jointly by Sodhi and Bali and was in fact run for all these years
on an equal participation of responsibility as well as the enjoyment of equal
remuneration and other benefits. On the basis of these findings, Mr. Parekh's
contention is that this is a case which falls within the ratio laid down in
Ebrahimi v. Westbourne Galleries Ltd, [1972] 2 WLR 1289; [1973] AC 360 (HL),
entitling the respondent to claim that it is just and equitable that this
company should be wound up. Now, under s. 433(f), a company may be wound up by
the court if the court is of the opinion that it is just and equitable that the
company should be wound up. Lord Wilberforce in the said judgment at page 496
finally buried the controversy that the words "just and equitable"
were to be interpreted so as only to include matters ejusdem generis as the
preceding clauses of the section". The words 'just and equitable' are a
recognition of the fact that a limited company is more than a mere judicial
entity, with a personality in law of its own: that there is room in company law
for recognition of the fact that behind it, or amongst it, there are
individuals with rights, expectations and obligations inter se which are not
necessarily submerged in the company structure, "(at p. 500 of [1972] 2
All ER and at p. 1297 of [1972] 2 WLR)". The 'just and equitable'
provision does not, as the respondents suggest, entitle one party to disregard
the obligation he assumes by entering a company, nor the court to dispense him
from it... But 'the just and equitable' provision nevertheless comes to his
assistance if he can point to, and prove, some special underlying obligation of
his fellow member(s) in good faith, or confidence, that so long as the business
continues he shall be entitled to management participation, an obligation
so basic that, if broken, the conclusion must be that
the association must be dissolved, (at p. 501(b) of [1972] 2 All ER and at pp.
1297-98 of [1972] 2 WLR). No doubt the fact that a company is small or a
private company is not enough but if on the superimposition of other
considerations that the association was formed because of personal relationship
involving mutual confidence and an agreement or understanding that all the
shareholders will participate in the conduct of management and that if
confidence is lost he cannot take his stake out and go elsewhere would be a
proper case to invoke the just and equitable clause. In the present case,
serious allegations of bad faith against Bali have not only been made but quite
some have been proved in so far as they show the effort of Bali to exclude
Sodhi from the management of the company, though it is now settled that:
"To confine the application of the just and equitable clause to proved
cases of mala fides would be to negative the generality of the words".
(See Ebrahimi's [1972] 2 All ER 492, 502(d); [1972] 2 WLR 1289, 1300.
Mr. Talwar had sought to
urge that it was not shown successfully that the conduct of Bali had been so
objectionable and so inequitable that the company should be wound up. This
argument assumes that unless there was a series of mala fide acts showing lack
of probity, a company, even if it is in the image of partnership, should not be
wound up. But this plea was negatived in Ebrahimi's case where it was said by
Lord Cross that: "it is not a condition precedent to the making of an
order under the sub-section that the conduct of those who oppose its making
should have been 'unjust or inequitable' (at p. 503(g) of [1972] 2 All ER and
at p. 1301 of [1972] 2 WLR). As a matter of fact Ebrahimi's case specifically
approved Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426, which was a case of
two equal share directors, between whom a state of deadlock came into
existence, but it was emphasised by Lord Cozens-Hardy M.R. that: "whether
there is deadlock or not... 'the circumstances are such that we ought to apply,
if necessary, the analogy of the partnership law and to say that this company
is now in a state which could not have been contemplated by the parties when
the company was formed...' " (at p. 497 of [1972] 2 All ER and at p. 1295
of [1972] 2 WLR). The reason why an order was made was as explained by Lord
Cross as, "the reason why the petitioner succeeded was that the court
thought it right to make the order which it would have made had Mr. Rothman and
Mr. Weinberg been carrying on business under articles of partnership which
contained no provision for dissolution at the instance of either of them.
People do not become partners unless they have confidence in one another and it
is of the essence of the relationship that mutual confidence is maintained. If
neither has any longer confidence in the other so that they cannot work together in the way originally contemplated, then the
relationship should be ended—unless, indeed, the party who wishes to end it has
been solely responsible for the situation which has arisen" (p. 1302 of
[1972] 2 WLR).
"They were equal
shareholders in a limited company; but the court considered that it would be
unduly fettered by matters of form if it did not deal with the situation as it
would have dealt with it had the parties been partners in form as well as in
substance": vide Ebrahimi's case (p. 1302 of [1972] 2 WLR).
Mr. Talwar's argument that
there were no outstanding liabilities against the company and that there were
good prospects of the company carrying on profitably is equally of no avail because
in a case like the present, where the company is in substance a partnership, it
is accepted that:
"...in a case like the
present we are bound to say that circumstances which would justify the
winding-up of a partnership...by action are circumstances which should induce
the court to exercise its jurisdiction under the 'just and equitable clause and
to wind up the company". Vide Yenidje's case [1916] 2Ch 426,432 (Ch D).
Nor would the consideration of present profits, much less consideration of probable
future profitability prevent the winding-up because again as said in Yenidje's
case (at p. 432 of [1916] 2 Ch), "whether there would be such profits made
in circumstances like this or not, it does not seem to me to remove the
difficulty which exists, which is contrary to the good faith and essence of
this, that the parties formed the scheme of a company managed by these two
directors which should be worked amicably, and it would not justify the
continuance of the state of things which we find here". Nor is it
necessary for claiming relief under 'just and equitable' clause that the
petitioner must prove oppression by majority, though in the present case there
is ample evidence of the serious devices adopted by Bali to exclude Sodhi,
because as Lord Cross said in Ebrahimi's case [1972] 2 All ER 492,505(e);
[1972] 2 WLR 1289, 1303: "But the jurisdiction to wind up under section
222(f) continues to exist as an independent remedy and I have no doubt that the
Court of Appeal was right in rejecting the submission of the respondents to the
effect that a petitioner cannot obtain an order under that sub-section any more
than under section 210 unless he can show that his position as a shareholder
has been worsened by the action of which he complains".
Of course, if the
petitioner who relies on "just and equitable" clause is the one
responsible for the breakdown of confidence between him and the other party, he
cannot invoke this clause. Nothing has been shown in the present case that
Sodhi had in any way acted as to justify the action of Bali to resort to the
action of removing him. What makes the action of Bali indefensible is that the
whole thing was done in such a secret manner; further, Sodhi has been able to
show that the nature of the company and the
business and the understanding was that the company would be carried on in such
a manner that both of them, i.e., Sodhi and Bali, would participate in the
management in equal manner and that it was never contemplated that either of
them would be excluded from participation thereof.
In this connection we may
note that in Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976]
46 Comp Cas 91 (SC), the principles applied in Ebrahimi's case [1972] 2 All ER
492; [1972] 2 WLR 1289; [1973] AC 360 (HL), had been approved. Though on merits
it was found that it was not a case where winding-up could be ordered, the
Supreme Court in p. 100 specifically stated that the principles laid down in
Ebrahimi's case and Yenidje's case [1916] 2 Ch 426; [1916-17] All ER 1050 (Ch
D), are sound principles depending upon the nature, composition and character
of the company, though it cautioned that the principles, good as they are,
their application in a given case or in all cases, generally, creates problems
and difficulties. It recognised that, in a given case, principles of
dissolution of partnership may apply squarely if the apparent structure of the
company is not the real structure and on piercing the veil it is found that in
reality it is a partnership and that when shareholding is more or less equal
and there is a case of complete deadlock in the company on account of lack of
probity in the management of the company and there is no hope or possibility of
smooth and efficient continuance of the company as a commercial concern, there
may arise a case for winding-up on the 'just and equitable ' ground. (See Hind
Overseas case [1976] 46 Comp Cas 91,104, 105 (SC)). The principle of law is,
therefore, not in doubt.
In the present case, the
manner of functioning of Bali cannot be said to commend itself to a proper,
just and straightforward dealing. There is first the unjustifiable denial of
ownership of 21 shares of Sodhi group when C.P. No. 32/1971 was filed.
Strenuous effort was made to deny the ownership of Sodhi group notwithstanding
the statement in annual returns which were submitted under the signature of
Bali showing the sons and daughters of Sodhi to be the holders of shares which
originally belonged to Des Raj, Mulk Raj and Chandok. Even a purported register
of members was produced by Bali which both Khanna J. and the appellate court
found to be suspicious. The endorsement made on the shares belonging to Chandok
in the handwriting of Bali were also commented adversely. Even after the
agreement had been made before Rangarajan J. on January 8, 1971, and after the
decision by Khanna J. and the appellate Bench (Co. Appeal No. (10/1973),
execution of the transfer of the shares in the name of Sodhi's children was
strongly resisted.
The conduct of Bali for
quite some time had been to exclude Sodhi from any further participation in the
management which found its climax when he
called the meeting in December, 1969, and April, 1970, without issuing notice
to Sodhi, his brother and to the other shareholders. In his evidence he
purported to deny that any remuneration was credited to the account of Sodhi
but had to admit that the books do show this fact. The company being such a
small company, out of 50 preference shares, 42 are held by 2 groups of 21 each.
Both Sodhi and Bali have been in the control of management till 1970 when Bali
made an attempt to oust Sodhi from management. This action shows that Bali was
destroying the basis which was the foundation of the company. It is not a case
where in the normal case Sodhi is being outvoted. Relations between the two are
at worst. There is no allegation which each is not willing to believe against
the other. In that state of affairs the business of the company can hardly be
attended to. On the basis of all the factors we can find no fitter case than
the present one for winding up this company.
Now, why in the Supreme
Court case, winding up was not ordered was because it was found as a fact that
though the company was formed first with R.P.J. and A.C. Datta, yet the latter
was an employee of V.D.J. The entire finance was arranged by V.D.J. A.C. Datta
resigned soon thereafter and 19 shareholders came in (9 by R.P.J. and 10 by
V.D.J.) but R.P.J's shares were 1,875 and V.D.J's were 3,125. V.D.J's guarantee
to the bank for overdraft was over Rs. 40 lakhs and he had a stake of Rs. 53
lakhs as against the stake of Rs. 18 lakhs by R.P.J. It was also found that
R.P.J. served like an employee on a monthly salary and had been working
directly under the supervision and control of V.D.J. It was on this ground that
the Supreme Court refused to hold that the company was in substance a
partnership or in the image of a partnership. That case is obviously
distinguishable.
In a case where there were
only two shareholders each of whom was a director, one holding a single share and
the other, the remainder of issued capital, i.e., 1,501 shares, and the latter
having usurped the whole powers of the company, the former, though holding one
share, successfully petitioned for a winding-up order. (See Gore-Browne on
Companies, 42nd edition, page 908, footnote 87). Another ground on which an
order under this paragraph may be made is when there is complete deadlock in
the management of the company's affairs. The deadlock, must, however, be one
not capable of resolution under the articles, e.g., by the company in general
meeting. In certain circumstances, where a company is virtually a partnership
and disputes occur between the members, which, if they were partners, would
justify the dissolution of their partnership, the company may be wound up under
this paragraph. Where, for example, a company was in substance a partnership,
and one director had irregularly sought to acquire control and exclude the
other director, a winding-up order was made.
(See Gore-Browne page 907, footnote. 80-83). All the circumstances justifying
the winding up of the present company, are present in this case and we hold
accordingly.
Mr. Talwar had sought to
urge that as the earlier petition under ss. 397 & 398 had been filed, i.e.,
C.P. No. 32/1971, but no relief for winding up had been claimed, the present
application for winding up is barred on the principles of res judicate or at
least on the principles of O.2, r.2, CPC. The argument being that before an
order can be passed under s. 397, the court has to come to a conclusion that
the company's affairs are being conducted in a manner prejudicial to public
interest and that to wind up the company would unfairly prejudice such members
but otherwise the facts would justify the winding-up order on the ground that
it was just and equitable that the company should be wound up. Therefore, so
runs the argument, that when the earlier application—C.P. No. 32/1971—was filed
under ss.397/398, grounds for asking for winding up under "just and
equitable" clause existed and since the winding up was not sought, the
respondents cannot now ask for winding up. This argument obviously assumes as
if reliefs under ss. 397 and 433 are the same and, therefore, an application
under s. 433 would be an abuse of the process of the court if winding-up was
not sought in an earlier application under s.397. The argument is
misconceived". The relief that could be granted under s. 397 and that
which could be granted under s. 433 are different. The proceedings are distinct
and separate, and one does not depend upon the other even though the ground
urged for winding up may be that it is just and equitable, which is no doubt a
ground which should be established to sustain the petition under s. 397 also.
The fact that such a ground is common is no bar for the prosecution of this
petition under s.397. (See [1973] 43 Comp Cas 244 (Mad), Official Liquidator v. N. Chandranarayanan).
It is not necessary that every time a
petitioner moves an application under s. 397/ 398, he must also ask for the
relief of winding up. It is possible and indeed in many cases it is not only
desirable but is also not in the interest of the petitioner and other members
that the relief of winding up may be asked because it may be out of proportion
to the relief that may satisfy the petitioner and give him full justice. The
confusion in Mr. Talwar's argument is that he makes the requirement of an
existing situation enabling a winding up order to be passed being necessary
condition when granting a relief under s. 397/398 as equivalent to the
petitioner having deliberately abstained from asking for such a relief which
was available. This is unacceptable because satisfying the condition required
by s. 397 does not mean that if the relief of winding up was not sought earlier
but the petitioner subsequently feels that the circumstances justify the
winding up, he is debarred from asking for that relief. No principle or
authority has been cited in support of this
extreme contention urged by Mr. Talwar, which is repelled.
The next contention was
that the learned judge should have decided the matter only on the allegations
made in C.P. No. 39/1973 and it was not permissible to refer to the allegations
made in the earlier application—C.P. No. 32/1971. Apparently the suggestion was
that as in C.P. No. 39/1973, the grievance was made that Bali had created
difficulties in the payment of Rs. 1,57,500 for the alleged purchase of shares
from Sodhi in terms of order of P.N. Khanna J., this was the only ground
available to Sodhi, and that any controversy about the 21 shares belonging to
Sodhi could not be the subject-matter of decision in C.P. No. 39/1973 and could
not be relied upon for the purpose of deciding whether to order winding up or
not. The argument is misconceived. When the application is moved for winding up
on the ground that it is just and equitable to do so especially for the reason
that the company is in substance a partnership, it is inevitable that the other
details as to how many shares belong to each party and what has been the
history of the company must necessarily figure in any determination. Therefore,
the fact whether Sodhi has been ousted or not would very much form a part of
the necessary determination of C.P. No. 39/1973, even on the basis of
allegations as it stood in this very application alone. But that apart, this
plea that the matters which were not mentioned in the Company Petition No.
39/1973, alone must be considered and the matters referred to in C.P. No.
32/1971, cannot be relied upon in C.P. No. 39/1973, has already been rejected
in an earlier judgment in C.A. No. 8/1973, decided on March 8, 1977. In that
case, the Bench, though it accepted that the petitioner in a winding up is
confined to the complaint set forth in a petition and cannot be allowed to rely
on allegations not made therein, nevertheless observed that the petitioner had
expressly stated in paragraph 12 of C.P. No. 39/1973, that he craves a
reference to the various applications made by the respondents and the applicant
and further craves a reference to rely upon the record of C.P. No. 32/1971, at
the time of hearing of the application. The Bench interpreted this to mean that
the petitioner instead of stating the various facts and allegations again in
the present petition—C.P. No. 39/1973—asked for permission to refer to all the
facts and allegations which have already been set out in the earlier
applications and petition and further that all the parties were parties in the
earlier application and, therefore, there cannot be said to be any element of
surprise. It, therefore, overruled the objection that Rangarajan J. was not
justified in referring to the facts and circumstances mentioned in the earlier
petition, C.P. No. 32/ 1971. We, therefore, feel that this argument is
foreclosed to Mr. Talwar by the decision in C.A. No. 8/1973, apart from the
fact that as mentioned above we find no merit and substance in the same. The
argument is, therefore, rejected.
Mr. Talwar then made a
reference to s. 557 of the Act which provides that in all matters relating to
winding up of a company, the court may have regard to the wishes of the
creditors and/or contributories of the company and when ascertaining the wishes
of contributories, regard shall be had to the number of votes which may be cast
by each contributory. This argument is apparently with reference to the
application —C.A. No. 66/1979—dated January 25, 1979, moved by one Narinder
Bakshi during the pendency of C.P. No. 39/1973, before the single judge. In the
application it was claimed that the applicant was a shareholder holding one
cummulative preference share; of Rs. 2,000. A list of 50 cummulative preference
shareholders and 1,000 equity shareholders was attached along with the
application. It was stated that the majority of the shareholders were opposed
to the winding up and that the attitude of Sodhi in insisting upon winding up
was unreasonable. The application also mentioned that one Jaidev Chandok who
was said to be associated with the company in a joint venture in A-Block
Development Scheme had invested good part of money and was also interested that
the company should not be wound up, for otherwise, it may affect the venture in
which he was 1/3rd partner. On this basis, a suggestion was given based on s.
443(2) of the Companies Act which provides that where a petition is presented
on just and equitable grounds the court may refuse to make an order of winding
up if it is of the opinion that some other remedy is available to the
petitioner and that they are acting unreasonably in seeking to have the company
wound up instead of pursuing the other remedies. The remedy which was put forth
as an alternative remedy in para. 13 was to the effect that the applicant was
prepared to purchase the shares of all the dissenting shareholders at a proper
and reasonable price and that for this purpose a form of chartered accountants
of repute or a valuer may be appointed to work out the value of shares and
after hearing the parties the value of the shares be approved. This suggestion
was supported by one Mr. Dhera Singh, who elaborated it by his affidavit of
March 5, 1979. Thus after the valuer had determined the value of shares, the
court was also to determine the interest of Sodhi in the shares and payment for
that to be made by the company. But Sodhi and his family members were only in the
first instance to be allowed to withdraw the value of 9 shares by completing
the formalities which were listed as delivering the share scrips of Sodhi or
indemnification by Sodhi against the claim by Mehta, the legal heirs of Sodhi's
deceased brother, who all should state that they have no objection to payment
to Sodhi of the value of four shares. About eight shares presently standing in
the name of Shakuntala Bali the court may adjust the proportionate value
between the registered holders on the one hand and sons and daughter of Sodhi
on the other and the proportion can be withdrawn by Sodhi on giving an
undertaking from his sons, Des Raj and Mulak Raj, relinquishing these shares.
In similar manner, the value of shares between Chandok and Sodhi's daughter was
to be apportioned. No wonder these proposals were rejected out of hand by Sodhi
then; the time gap has not made them any the more attractive. The reason is
obvious. This proposal places a cloud and a serious one on the finding which
had already been obtained from P. N. Khanna J. (as upheld by a Division Bench)
that Sodhi and his wife had 9 shares and that his two sons and daughter were
the owners of 12 shares which at one time stood in the names of Des Raj, Mulak
Raj and Chandok in the books. This proposal which again seeks to put a cloud on
the title of the shares obviously could not have been made seriously and no
reasonable person could expect Sodhi to fall for it and his counsel, Mr.
Parekh, repeated the rejection, and we can hardly fault him for this attitude.
It should also be seen that this application—C.A. No. 66/1979—was moved by
Narinder Bakshi, holder of one cumulative preference share. But he was
allegedly allotted one preference share at a meeting of November 12, 1971, and
is supported by one Dhera Singh, who also was allotted 50 shares after the same
meeting. Now, these allotments were made in 1971, after Sodhi had been excluded
illegally by an invalid meeting called in April, 1970. We have already held
that the meeting which was called on April 29, 1970, was an invalid meeting;
the allotment of 1,000 shares on November 12, 1971, by an illegal board could
not confer any validity, and, thus, application by such shareholders can,
therefore, hardly be considered to be an application by the contributories
because the very claim of being a shareholder is not only in doubt but has been
held by us to be of no consequence. The emphasis by counsel, Mr. Talwar and Mr.
Veda Vyasa, of the interest of one Jaidev in a joint venture is hardly of any
consequence because he cannot claim to control the rights of the respondents by
the mere fact that he has a joint venture in the company. Whatever his rights
are, will be taken note of and his rights protected under law even if the
company is ordered to be wound up.
Section 557 of the Act is
equivalent to s. 346 of the English Companies Act. The argument that if the
majority of the creditors oppose the making of a winding-up order, that is an
end of the matter was negatived and it was emphasised that though the court may
and will have regard to the fact, it does not mean that the court has no
function to perform. Vide Re Vuma Ltd. [1960] 1 WLR 1283; [1960] 3 All ER 629.
Further, 'that even if the majority of the creditors opposed the winding up the
circumstances existed to the contrary, the court has full discretion in the
matter' was reiterated in Re P. & J. Macrae Ltd. [1961] 1 All ER 302;
[1961] 31 Comp Cas 424, where it was stated that if a majority of creditors
have given reasons to oppose a petition for winding up, then prima facie they
are entitled reasonably to expect that their wishes will prevail. However it
was emphasised that "But I am certainly not prepared to accept the view
that the bare fact of the opposing creditors being in a majority is of itself sufficient,
still less conclusive. So to hold would be to leave the court with virtually no
judicial function to perform, and to take away from it the discretion which the
words of the Act plainly confer.
In the present case, the
special circumstances against any such claim being considered on the basis of
C.A. No. 66/1979 are overwhelming. We have already mentioned that this
application is moved by persons who have become shareholders after 1971 on the
basis of an illegal meeting and invalidly elected board of directors. Their
claim, therefore, to interfere in the working of the company cannot have
weight. The averment of Jaidev Chandok having some interest by an alleged joint
venture in the company can hardly give him any right to control the right of
the applicant if law permits him to claim the winding up. The plea of Mr.
Talwar to treat this as an alternative remedy in terms of s. 557 or s. 443(2)
is, therefore, no bar to the order of winding up being passed.
Another objection raised by
Mr. Talwar was to the effect that C.A. No. 118/1973 was moved by Sodhi to
execute the order of P.N. Khanna J. for payment of Rs. 1,57,500 and that was an
alternative remedy available to Sodhi in terms of s. 443(2). Now, during the
course of hearing before the single judge, C.A. No. 118/1973 was withdrawn. Mr.
Parekh's contention being that as there is no such application on record, there
is no question of any alternative remedy of execution of P.N. Khanna J.'s order
standing in the way of the order of winding up being made. Mr. Talwar, however,
countered by saying that as the remedy was sought but as Sodhi withdrew C.A.
No. 118/1973 it means that the alternative remedy which was available was
deliberately wasted by him and he cannot now ask for winding up and take
advantage of his own fault. It is true that if we had come to the conclusion
that seeking execution of P.N. Khanna J.'s order in the circumstances is a
proper alternative remedy available to Sodhi which would have given him full
justice, we might decline the none too pleasant relief of winding up. But the
facts here do not support the claim of Mr. Talwar. In C.P. No. 32/1971, an
order had been passed by P.N. Khanna J. on May 31, 1972, holding that Sodhi and
his group had rights over 21 shares and directing Bali to pay Rs. 1,57,500 to
Sodhi in terms thereof. If this order had been accepted by Bali by depositing
Rs. 1,57,500 in lieu of the transfer of these shares and if in spite of this
Sodhi had insisted upon an order of winding up, his action may have fallen
within the ambit of s. 443(2) of the Act and Sodhi may not be able to establish
his right to claim winding up of the company. Here, however, what happened was
that Bali never accepted the order but went up in appeal, but without any
success. After P.N. Khanna J. had decided the matter in favour of Sodhi,
Shakuntala Bali filed a suit in this court being Suit No. 135/1973, claiming
that she was not bound by the decision with regard to 8 shares to which she
laid claim but which had been held in favour of Sodhi. Even after the Division
Bench had decided (in C.A. No. 8/1975), by its order of March, 1977, Shakuntala
Bali persisted in the suit and the same has been dismissed by Kapur J. on March
5,1980, wherein he has held that Shakuntala Bali was bound by the earlier litigation
which had rejected her claim that these 8 shares belonged to her. This would
conclusively show the attitude of Bali and his group that they were not
accepting that the shares which had been found by the Division Bench to belong
to Sodhi and his group did in fact belong to them and that they were liable to
pay Rs. 1,57,500. Even when C.A. No. 118/1973 was moved for execution, Bali and
his group did not accept their liability but challenged the right of Sodhi to
execute it. It is worthy of note that none excepting Bali claimed any interest
in shares. Neither the legal representatives of Sodhi's brother, nor Des Raj,
Mulk Raj or Chandok disputed that the shares which once stood in their names
belonged now to Sodhi's family. In these circumstances, if Bali was genuine and
the company was not colluding with him (and it is difficult to make any
distinction between Bali and the company at that point of time when Sodhi had
been excluded, the company was being controlled by Bali and his wife or his
nominee directors), the easiest course for him was to deposit the amount of Rs.
1,57,000 in court and call upon Sodhi to either give him the shares on
indemnification and letter of authority for those shares from the concerned
persons. But he chose to avoid this course by all stratagems. This clearly
establishes that there was no intention at all on the part of Bali to carry out
his part of the bargain in terms of the direction of P.N. Khanna J. In that
view, even if C.A. No. 118/1973 was to be pursued by Sodhi, it would have been
a futile and time consuming process. This course could hardly be called another
remedy. This is for the reason that alternative remedy must be one which should
be able to give relief to the person seeking the winding up of the company. No
doubt at one stage Sodhi had agreed to sell his shares in 1971 for Rs.
1,57,500. He may have thought that instead of entering into a long litigation
he may as well sell his shares and get out of a situation which was daily
becoming unbearable. If at that time Bali had reciprocated the gesture, then,
it may have been an argument that other remedy was available to Sodhi. But once
the battles had been joined, the whole picture underwent a change. In that
view, it is now too late in the day for Mr. Talwar to suggest that instead of
winding up the company, Sodhi should be relegated to the remedy for claiming
that amount. Too much water has flown under the bridge. A period of a decade
has passed. The parties have fought bitter litigation. We may, however, note
that we did ask Mr. Parekh, the counsel for Sodhi, whether the earlier bargain
with some modification could be carried out. But he expressed his inability by
pointing out that, in the interval, the assets have mounted up and he is
hopeful that in winding up proceedings, the applicant will get much more than
he can by the transfer of shares, apart from the uncertainty of valuation and a
serious apprehension of further round of litigation. We may also note that Mr.
Talwar had urged that originally Sodhi had stated that he was to get nothing
out of the company and that is why he was claiming winding up, and that his
present stand is contradictory. But this cannot be held against Sodhi because
this was his understanding in 1971 when the agreement was arrived at, but, after
a period of a decade, to foist on an unwilling party the old, and that too
uncertain, bargain would be unjust. The conduct of Bali in not accepting it at
that time and fighting it out to the end must cast serious doubt on this
seeming approach of reasonableness now being shown by Bali. We cannot, in the
circumstances, take any objection to the caution and reluctance of Sodhi to
place any trust in Bali, considering all that has happened. It is true that no
person can take advantage of his own wrong, but withdrawing C.A. No. 118/1973,
in the circumstances, was possibly an act of prudence because pursuing it would
have again involved Sodhi in multifarious litigation. He was, therefore, well
content in seeking, if he could, his remedy in winding up and hoping that he
would be able to get sufficient part of the assets from the winding up court.
We cannot find this conduct of Sodhi to be in any way unreasonable.
As a result of the above,
we affirm the judgment of the learned single judge and dismiss the appeals with
costs. One set of fee.
[1936]
6 COMP. CAS. 32 (BOM.)
Peninsular Life Assurance Co., In re.
WADIA,
J.
C.K. Daphtary for the
Applicant
M.C. Setalvad for the
Official Liquidator
Wadia, J.—This is an application by Balubhai Khimchand, contributory
No. 27, for rectification of the share register of the company by deleting 200
out of the 250 shares standing against his name, and for an order that in the
list of contributories settled by the Court he may be shown as the owner of 50
shares only. The company was compulsorily wound up by an order of this Court
dated 12th November, 1934, and the Official Liquidator was appointed liquidator
of the company. The application is made under Section 184 of the Companies Act
of 1913, which provides that notwithstanding the winding-up order the Court
shall settle a list of contributories, with power to rectify the register of
members in all cases where rectification is required in pursuance of the Act.
Section 184 thus incorporates Section 38, under which, inter alia, if the name
of a person is fraudulently or without sufficient cause entered in the register
of members of a company, the person aggrieved, or any member of the company,
may apply to the Court for rectification of the register. On an application
under that section the Court has power to decide any question relating to the
title of the aggrieved person to have his name omitted from the register, and
generally to decide any question necessary or expedient to be decided for
rectification of the register. The exercise of the jurisdiction given by this
section is discretionary, having regard to the person who is the applicant
before the Court, and to all the facts and circumstances of the case.
The list of contributories
of this company was filed on 28th February, 1935. No other contributory except
Balubhai Khimchand appeared on the settling of the list, and the list was
settled by the order of the Court dated 28th June, 1935, except with regard to
the 200 shares standing in his name. In this affidavit dated June 28, made in
reference to the notice taken out by the liquidator on 1st April, 1935, to
settle the list, Balubhai Khimchand contended that he was the owner of fifty
shares only of the company since 1930, and that in respect of the remaining two
hundred shares being Nos. 3081 to 3280 he was the nominee of one Jivanchand
Dharamchand who was the real owner thereof, and that he had not paid any
consideration for the same. Jivanchand Dharamchand was one of the directors of
the company. Balubhai stated that he was approached by Jivanchand with a
request to sign a transfer form as purchaser of two hundred shares, and that he
agreed to do so merely to oblige Jivanchand, and the shares were transferred to
his name but on account of Jivanchand. He also alleged that the company was
duly informed about this transfer. He accordingly prays for a rectification of
the share register on the ground of his being such nominee. An affidavit was
made in reply by one Narayanrao Babacharya Kale, the Chief Superintendent of
the Office of the Court Liquidator on 24th July, 1935, stating that this
contributory, namely Balubhai, never informed the company or the liquidator
that he held the two hundred out of the two hundred and fifty shares as the
nominee of Jivanchand Dharamchand, and that he never applied previously for the
rectification of the share register until he made this application. Thereafter
inspection was taken by him of the records of the company, and he put in a further
affidavit dated July 15, which was not filed till August 2, stating that Mavji
Govindji Sheth, who was a director and the chairman of the company, and
continued to act on the strength of the two hundred shares as belonging to him,
and that these shares were wrongly transferred to his name. According to him,
therefore, the transfer of the two hundred shares to his name in the register
was invalid and void and of no effect. An affidavit in rejoinder was put in by
Mr. Kale on August 2, stating that the shares were transferred to the name of
the contributory in pursuance of letters received from his former attorneys by
the company, that the transfer was not invalid and void, and that in any event
it was not open to the contributory to raise any dispute at this stage that he
was not liable in respect of those two hundred shares.
There are thus two grounds
on which rectification of the register is applied for: (a) that this
contributory is only a nominee in respect of the two hundred shares, and (b)
that the transfer of the shares to his name is invalid and void.
The ground of his being
only a nominee was put forward by him first, but it was abandoned by his
counsel at the hearing. The company, and now the liquidator, is not concerned
with the person paying the consideration but with the person who has signed the
transfer form as purchaser and whose name is entered as owner of the shares in
the share register. Even if Balubhai Khimchand was the nominee of Jivanchand
Dharamchand in respect of the two hundred shares, the company was not informed
about it. Moreover, the shares were entered in his name with his knowledge and
consent, and prima facie he is the contributory who is liable in respect
thereof.
The second ground, namely,
that the transfer is invalid, is the only one which is now relied upon. The
form of transfer is provided for in Article 34 of the articles of association
of the company. Such a form was executed by the parties concerned on 13th
November, 1933. The upper portion has been torn off. But it is clear from what
remains that 200 shares bearing Nos. 3081 to 3280 of the company were
transferred by Mavji Govindji Sheth to Balubhai Khimchand, the contributory in
question, on 13th November, 1933. The signature of the transferor has been
attested by Jivanchand Dharamchand and that of the transferee by Ratanchand
Jivanchand, presumably the son of Jivanchand, as the address of the two is the
same. A specimen of Balubhai's signature as purchaser also appears on the
transfer form. So far as the contract between the transferor and the transferee
is concerned, it was made and executed on that date. But in the books of the
company the transfer is completed on payment of the transfer fee and making the
necessary entries in the share register. Under Article 33 of the articles of
association of the company the transferor shall be deemed to remain the holder
of the shares which he has transferred under the instrument of transfer until
the name of the transferee is entered in the register in respect thereof. A man
who executes a transfer of shares remains liable unless and until there is on
the list a transferee who is legally liable to the company. Until the
transferee's name is entered in the register, the dividends on the shares are
also payable to the transferor, for he is deemed to be the holder of the shares
until the entry is made. The entry in the register in this case was not made
till 14th April, 1934, when the transfer fee was received by the company, but
there were several letters between November 1933 and April 1934, written to the
company on behalf of the contributory by his former attorneys, insisting on the
transfer of the two hundred shares to his name. Why the entry in the share
register was delayed till then is not clear, but on the 13th April 1934, there
was a resolution issued by circular by the managing agents of the company as
follows:—
"Resolved that the 200
shares numbering from 3081 to 3280, standing in the name of Mr. Mavji Govindji
Sheth, be and are hereby transferred to the name of Mr. Balubhai
Khimchand."
Underneath the word
"passed," appear the names of the five directors, and three of them
have put their initials against their names.
It was contended on behalf
of Balubhai that the transfer was made by this resolution, and that the
transfer is invalid, as the resolution is signed by three of the directors only
and not the other two. Mavji Govindji Sheth has not signed the resolution. With
regard to Dr. Damany, one of the directors, there is an endorsement on the
resolution that the circular was presented to him, but he declined to sign it.
Under Article 111 a resolution passed without a meeting of the board of
directors is valid if it is signed by all the directors, and as this was not
signed by all the five, the resolution was invalid. On that very day, however,
viz., 13th April, 1934, a letter was written on behalf of the contributory to
the company that a considerable time had elapsed and that he was surprised at
the delay in the transferring of the shares to his name, and that if the shares
were not transferred within 24 hours from the receipt of the letter, they
should be returned to the attorneys on his behalf. The shares were transferred
in the register of shares on 14th April, on which date the transfer fee was
received by the company according to the endorsement on the transfer form.
Thereafter there was a meeting of the directors on 19th April when the circular
resolution of 13th April was confirmed, and a resolution was passed that the
two hundred shares standing in the name of Mr. Mavji Govindji Sheth be and are
hereby transferred to the name of Mr. Balubhai Khimchand. It is also stated in
the minutes of that date, in parenthesis, "transferred on 14th April,
1934." Counsel for the liquidator contended that the transfer was not
effected by any of these resolutions, and that even if there was any
irregularity in the circular resolution of 13th April, the irregularity was
cured when the resolution was ratified by the directors at their meeting of
19th April. It was held in In re Portuguese Consolidated Copper Mines, Limited:
Ex parte Badman, Ex parie Bosanquet that an irregular allotment of shares can
be afterwards ratified by the directors. On the same principle it was argued
that the irregularity in the circular resolution of 13th April was cured when
the transfer was ratified and confirmed by the directors at their meeting of
19th April. To that the answer of counsel for the contributory was that even
the meeting of the directors of 19th April was irregular on the ground that
notice of that meeting was not given to all the directors of the company. The
minutes of the proceedings of 19th April show that only three of the directors
were present. Under Article 104 even two directors can form a quorum, and under
Article 107 a meeting at which a quorum is present can exercise all or any of
the powers of the directors generally. It was however argued that no notice of
the meeting was or could have been given to the other two directors, that an
irregular resolution by circular could not be ratified by a resolution passed
at an irregular meeting, and that the transfer was also void on that ground.
The question therefore which arises for consideration is, was the transfer made
by the resolution of 13th April which was confirmed at the meeting of 19th April,
1934, or was it really made on 13th November, 1933, and completed by reason of
the registration on 14th April, 1934? It has been held in the well-known case
of Oakes v. Turquand and Harding, that (p. 350 of 2 H.L.):
"It is not the mere
fact of the name appearing upon the register which makes a person liable as a
member of the company. If he has not agreed to become a member he cannot be
made a contributory."
Balubhai Kimchand agreed to
become a member of the company on 13th November, 1933, and carried on
correspondence through his attorneys to have the transfer completed. It is true
that under Article 35 the directors may at any time in their absolute and
uncontrolled discretion and without assigning any reason decline to register a
proposed transfer of shares, but there is nothing on the record to show why the
registration was delayed till 14th April. It appears that the company received
a threatening letter from Balubhai's attorneys on 13th April, asking the
company to return the shares if they were not transferred in the register
within 24 hours, and the transfer was completed by the 14th. The agreement of
transfer was made in November 1933, and no action of the directors was
necessary to validate it, though, as I have stated before, they could in their
discretion refuse to accept the transfer. The mere delay in registration does
not justify an assumption that there was a refusal to register the transfer
before 14th April. In my opinion the irregularity, if any, of the meeting of
19th April for want of notice to all the directors does not invalidate a
transfer duly made. The transfer was registered on 14th April, and at the date
of the winding up there was upon the register a transferee who was legally
liable to the company in respect of the shares; cf. Symon's case.
I may mention here that
this point about the alleged irregularity of the meeting was taken in a letter
written on behalf of the contributory only on 9th August last when the
application was part heard. It was not taken even in the second affidavit made
by him after he had inspection of all the records of the company. But I will
deal with it since it has been raised. It has been held that prima facie due
notice must be given convening a meeting of the directors, and in default the
meeting is irregular: see In re Portuguese Consolidated Copper Mines, Limited.
But there is nothing on the record to show that such notice was not given, and
the Court cannot assume that notice was not given to Mavji Govindji Sheth
merely because there is an entry in the register of directors under date 14th
April, 1934, that he had ceased to be a director as he had sold his
qualifications shares. There is nothing to show that notice was not given to
the other director also who was not present at the meeting. It is provided by
Article 105 that it shall not be necessary to give notice of a meeting of the
directors to a director who is not in Bombay. There is nothing also to show
whether the directors who were absent at the time were or were not in Bombay at
or about the time of the meeting. It may also be mentioned that there is no
provision in the articles as to how notice is to be given. No notice may be
necessary if the absent director had knowledge of the meeting otherwise. It was
for the contributory in question to have proved to the satisfaction of the
Court that notice was in fact not given to the absent directors, and in my
opinion it is too late for him to apply that their evidence should now be
taken, when the point was not raised by him in the first instance, and there is
not even an affidavit made in these proceedings by any of them. Generally the
Court is entitled to assume that everything has been done regularly and in due
course, and there is nothing in this case against such an assumption.
It was argued on behalf of the liquidator that even
assuming for the sake of argument that there was an irregularity in the
transfer of the shares as alleged, the contributory is estopped from going
against the register. He not only assented to his name being on the register,
but insisted on its being put there, and he has acted like a shareholder. At
the meeting held before the
Commissioner on 6th October, 1934, to consider whether the company should be
wound up or not, he voted as the owner of two hundred and fifty shares,
including the two hundred in dispute. He knew that Mavji Govindji Seth also
voted as the owner of the same two hundred shares, and yet he took no
proceedings till long after the winding up to have this position cleared up.
The register is not absolutely conclusive, but it is, in my opinion, necessary
not only from the point of view of the law but as a matter of policy to see
that it is as conclusive as it can be made consistently with a proper
interpretation of the Act. In Ex parie Barret; Mosley Green Coal and Coke Co.,
In re, certain shares of a company were taken in the name of B at the instance
of C who was the real owner of the shares. Then there was a certain arrangement
made between C and the directors, not within their powers, nor confirmed by the
company, under which the shares were to be transferred into C's name. In the
subsequent winding up proceedings, however, B's name was put up as the
contributory. An objection was taken on his behalf, but without success. At p.
618, the Lord Chancellor observes as follows:
"It
is perfectly immaterial to the shareholders of the company what secret
agreement may be made between the persons who are so registered and any other
person, with regard to liability. The future subscriber has a right to look to the
register. All the other shareholders have a right to depend upon the register,
and to take the register as evidence of liability, unless that liability has
been determined in a conclusive and binding manner by transactions on the part
of the directors which are legally valid and good to bind the company."
In
my opinion, Balubhai Khimchand is as much estopped from going against the
register and disowning liability, as the company would be estopped from
questioning his title when once he was put upon the register. There may have
been dealings between him and Jivanchand Dharamchand or between Jivanchand
Dharamchand and Mavji Govindji Seth which may give him an equity to call for an
indemnity, but such dealings cannot be available to him as a shield to protect
himself from his liability. He has been treated as a shareholder and has acted
as such, and he cannot go back and deny his position. A man cannot be allowed to lie by while all appears to go on
well, and repudiate his acts when the day for meeting his liability arrives.
Counsel for the contributory argued that there could be no estoppel unless the
party who is estopped had full knowledge of his real position. I am not
satisfied that Balubhai had not the knowledge which he now says he only
obtained on looking at the records. He has been shifting his position from time
to time in order to avoid liability, but that liability is a statutory
liability under which the creditors of the company have a right to compel the
shareholders on the register to contribute to the extent of thier shares
towards the payment of the debts of the company, and it is too late for him now
to raise the dispute that he is not responsible in respect of the two hundred
shares. The contributory has failed to show that his name was entered in the
register fraudulently or without sufficient cause under Section 38(1),
Companies Act. Under these circumstances the order for rectification of the
share register ought not to be made as asked and the application must be
rejected. The contributory No. 27 is a shareholder and is liable to the
liquidator in respect of all the 250 shares of which he is the owner according
to the register. It has been held that the costs of a contest by a person
disputing his liability as a contributory and failing, must, except under very
special circumstances, be paid by such contributory: see Gower's case. There is
no reason why the ordinary rule that a party failing must pay the costs, should
not apply in this class of cases. I have heard counsel for the liquidator and
the attorney for the contributory on the question of costs. No special
circumstances have been pointed out to warrant a departure from the ordinary
rule. The contributory must pay the costs of the liquidator when taxed as
between party and party. Costs to include costs of instructions. Counsel
certified. The cost of the liquidator as between attorney and client to come
out of the assets of the company in his hands. In the event of the liquidator
being unable to recover the party and party costs from the contributory, the
same also to come out of the assets in his hands.
[1985] 58 COMP. CAS. 275 (CAL.)
HIGH COURT OF CALCUTTA
v.
Dhiresh Chandra Roy
T.K. BASU, ACTG. C.J., AND SUHAS CHANDRA SEN, J.
Appeal No. Nil of 1983 in Suit No. 654 of 1983
Mukherjee for the
Appellant.
R. Nag for the Respondent.
Suhas Chandra Sen, J.—The dispute in this case relates to the holding of the
60th and 61st annual general meetings of the Calcutta Chemical Co. Ltd., hereinafter
described as "the company". Because of various disputes and
litigations, the 60th and 61st annual general meetings of the company for the
financial years 1980-81 and 1981-82, respectively, could not be held.
Ultimately, various petitions filed in this court were disposed of by several
orders passed on August 11, 1983.
On September 9, 1983, a
meeting of the board of directors of the company was held and at that meeting
it was resolved that the 60th and 61st annual general meetings of the company would
be held on October 7, 1983, at different times. A notice was published in the
Business Standard on September 12, 1983, informing all concerned that the
annual general meetings were to be held on October 7, 1983, at the place and
time specified therein. It is the case of the appellant that on September 12,
1983, the appellant posted under certificate of posting proper notices together
with the annual reports to all the registered shareholders of the company
including the respondent, Dhiresh Chandra Roy. The appellant has produced the
certificate of posting in support of his contention in court.
It has been stated on
behalf of the respondent that the notices were posted on September 16, 1983, as
would appear from the postal endorsement on the envelope received by the
respondent. The case of the respondent is that the respondent received the said
two notices both dated September 9, 1983, on September 22, 1983. The respondent
was not given clear 21 days' notice for the meetings scheduled to be held on
October 7, 1983, as enjoined by s. 171 of the Companies Act, 1956. It has been
contended that the two annual general meetings that were held on October 7,
1983, were held disregarding the mandatory provisions of law and the
proceedings of the two meetings were clearly illegal and invalid. A suit was
filed by the plaintiff for a declaration that the two notices both dated
September 9, 1983, and the purported convening of the 60th and 61st annual
general meetings of the company were wrongful, illegal, null and void, invalid
and of no legal effect.
On October 5, 1983, Mr.
Dhiresh Chandra Roy, the respondent herein, made an application in that suit on
which an interim order was passed by R.N. Pyne, J., to the effect that the
annual general meetings due to be held on October 7, 1983, could be held but no
effect was to be given to the resolutions that might be passed in such meetings
until further order of the court. The operation of that order, however, was
stayed till October 7, 1983. On October 7, 1983, on a further application moved
on behalf of Mr. Roy before the Vacation Bench, J.N. Chaudhuri, J., inter alia,
ordered that "the annual general meeting or meetings due to be held on
October 7, 1983, could be held but no effect should be given to the resolution
or resolutions that might be passed at such meeting or meetings until further
order of this court." On November 17, 1983, the matter appeared in the
list of R.N. Pyne, J., as a new motion. After hearing both the parties, R.N.
Pyne, J., gave directions for filing of affidavits. The interim order that was
passed earlier was continued until further orders of court.
In the meantime, the two
annual general meetings of the company were duly held on October 7, 1983, and
certain resolutions were passed at those meetings. The allegation of the
appellant is that Mr. Roy, the respondent herein, took part in those two
meetings.
In this appeal, the
contention of Mr. Mukherjee, appearing on behalf of the company, is that the
two annual general meetings of the company have been held after protracted
litigations. The notices for the annual general meetings had been duly issued.
Advertisements were given in the press. According to the certificate of
posting, the notices were issued in good time. Therefore, the court should not intervene in
this matter and pass any order of stay. Mr. Mukherjee has contended that the
matter is of some urgency. The management of the company has been seriously
prejudiced by various orders of injunction passed by the court from time to
time. Dhiresh Chandra Roy owns only seven shares of Rs. 10 each. There is no
reason why the interim order should be continued.
It
has next been submitted that even if the allegations made by Dhiresh Chandra
Roy are all assumed to be true and correct, even then the respondent would not
be entitled to obtain an order of injunction.
It
has been submitted that it is not necessary to file any affidavit and the
matter can be disposed of here and now on the assumption that the allegations
made by the respondent are all true and correct.
The
only grievance of Dhiresh Chandra Roy is that the two notices both dated
September 9, 1983, were received by him on September 22,1983, and the annual
general meetings were held on October 7, 1983. The period prescribed under s.
171, however, is 21 clear days' notice. Under s. 171(2)(i), a general meeting
may be held after giving a shorter notice only with the consent of all the
members entitled to vote thereat. Mr. Nag, appearing on behalf of the
respondent, has argued that the provisions of s. 171 are mandatory. At least 21
days' notice in writing must be given to every shareholder for holding the
annual general meeting of a company under s. 171(1). A shorter notice can be
given only under the circumstances set outins. 171(2). In this case, there has
been no compliance with therequirements of s. 171(2). Therefore, the notice is
void and of no legal eflect and the two meetings that were held and also the
resolutions that were passed are of no legal consequence.
The
only question before us is a question of law and that is whether the two annual
general meetings can be said to have been lawfully and validly held in view of
the fact that Mr. Dhiresh Chandra Roy received the two notices less than 21
days before the scheduled date of the meetings. In this connection, it has to
be borne in mind that Mr. Dhiresh Chandra Roy is a resident of Calcutta. The
meetings were to be held at Calcutta and Mr. Dhiresh Chandra Roy had at least
15 clear days' notice. Moreover, advertisements were published on September 12,
1983, in a newspaper giving the particulars of the two meetings that were to be
held. It has not been shown how Mr. Roy was prejudiced by the shortness of the
individual notice. It does not appear from the facts set out earlier in the
judgment that the company was not acting bona fide. The very fact that the
company inserted an advertisement in a newspaper on September 12, 1983,
notifying the dates and the other particulars of the two annual general
meetings go to show that the company was not trying to suppress the dates of the meetings from a section of the
shareholders. It cannot also be said that the company was trying to hold
meetings on short notice with ulterior motive. The company's case is that all
the individual notices were sent under certificate of posting and the
certificate goes to show that the notices were posted in good time.
The question, therefore, is
whether s. 171(1) which lays down that "Ageneral meeting of a company may
be called by giving not less than 21 days' notice in writing" is mandatory
or not. A shorter notice can be given in the circumstances set out in sub-s.
(2) of s. 171. Section 172(3) provides:
"The accidental
omission to give notice to, or the non-receipt of notice by, any member or
other person to whom it should be given shall not invalidate the proceedings at
the meeting."
Section 172(3) makes it
abundantly clear that it is not a condition precedent to the holding of the
annual general meeting of a company that a clear 21 days' notice must be given
to each and every member of the company. The accidental omission to give notice
to any member or non-receipt of notice by any member shall not invalidate the
proceedings at the meeting. If we have to uphold the contention of the
respondent, we shall have to hold that if the notice to a shareholder is not
accidentally posted at all, the proceedings at the annual general meeting of a
company will be valid. But if the notices were posted accidentally less than 21
days before the meeting, the proceedings at the meeting will be void even
though the shareholder received the notice in good time before the meeting was
held and actually attended the meeting. If Mr. Dhiresh Chandra Roy did not
receive the notice at all, the company could have invoked the protection of the
provisions of s. 172(3) of the Act. In our opinion, such a construction would
lead to absurdity and should be avoided. We are aware of the dictum that law is
not always logic. But the court should be very slow to give a construction to a
section which would lead to absurdity and will cause injustice. We are unable
to accept the contention that a short notice served on a member will invalidate
a meeting altogether but non-receipt of the notice by a member will not have
the same effect .
In
the case of Hungerjord Investment Trust Ltd. v. Turner Morrison and Co. Ltd., ILR [1972] 1 Cal 286, one of the points that came
up for consideration was whether defect in a notice or non-receipt of a notice
calling an annual general meeting could be ratified or waived. P.B. Mukharji,
C.J., held in that case that at best this was an irregularity which could be
ratified by conduct. This judgment, which dealt with many other points, was
reversed in appeal; but the Appeal Court did not upset the learned judge's
decision on this point.
The point, that is now
being agitated before us, came up for consideration directly in the case of
Surajmull Nagarmull v. Shew Bhagwan Jalan, ILR [1973] 1 Cal 207. In that case,
this question was debated at great length. After referring to the judgment of
the Madras High Court in the case of N.V.R. Nagappa Chettiar v. Madras Race
Club [1949] 19 Comp Cas 175, A.N. Sen, J., observed at p. 293 of the report :
"These observations,
to my mind, were made in the context of the particular facts of the case and
were not intended to lay down a general proposition of law that a short notice
in breach of the provision of the Act, necessarily invalidates the meeting and
renders the proceedings void. In my opinion, the said observation should be
construed to mean that the requirement as to notice is imperative and mandatory
in the sense that any breach thereof necessarily invalidates the meeting and
invariably renders the proceedings thereof null and void. Any such
interpretation of the observations will necessarily imply that any breach of
the said requirements of the statute, if considered mandatory and imperative,
cannot be waived under any circumstances except as provided in the statute
itself. Such interpretation, to my mind, is not warranted and will be
inconsistent with the well-recognised principle of law enunciated in
Hals-bury's Laws of England (3rd Ed., Vol. XIV, p. 637, art. 1175)1 which I
have earlier quoted and to which reference has been made in the judgment of the
Madras High Court as well, and such interpretation will also be contrary to the
view expressed by the Supreme Court in the case of Narayan-das Shreeram Somani
v. Sangli Bank Ltd. [1965] 35 Comp Cas 596 (SC) to which reference has also
been made earlier."
Another aspect of the
matter was emphasised by A. N. Sen J. at pp. 302-303 of the report :
"The English courts
appear to take a realistic view of the working and management of the affairs of
the company and consider the problems of a company from a practical business
point of view. The approach of the English courts to the question of these
requirements is not generally a narrow and a legalistic one and is essentially
a realistic one from the view-point of the actual working of a company in
practice, bearing, however, in mind the requirements of justice in each case.
The approach of the English courts, to my mind, is eminently reasonable and
sound. The said approach serves the purpose for which the said provisions have
been made and at the same time promotes the cause of justice and results in
effective and proper working of the company."
Mr. Nag drew our attention
to a Division Bench judgment of the Madras High Court in the case of N.V.R.
Nagappa Chettiar v. Madras Race Club [1949] 19 Comp Cas 175. That case was
noted and dealt with by A. N. Sen J. in Surajmull's case, ILR [1973] 1 Cal 207.
That was a case decided under the Indian Companies Act, 1913. In that case,
construing s. 81(2) of the Indian Companies Act, 1913, which corresponds to s.
171 of the Companies Act, 1956, it was held that the provisions of sub-s. (2)
of s. 81 requiring not less than 21 days' notice was mandatory and it could
only be dispensed with by the agreement of all the members in the manner laid
down in the Act. It was not enough that the members present at the meeting
indicated either expressly and impliedly that they consented to or acquiesced
in shortening the period of notice. The Indian Companies Act, 1913, did not
contain a provision similar to s. 172(3). The Madras High Court did not have
any occasion to consider the implication of s. 172(3). In our opinion, in view
of the clear provisions of s. 172(3), it cannot be said that the requirements
of s. 171 are mandatory and a short notice given to any member will render the
entire meeting void and of no legal consequence even if that member has not
suffered any prejudice in any way.
Mr. Nag also drew our
attention to a decision of this High Court in the case of Asansol Electric
Supply Co. v. Chunnilal Daw, AIR 1972 Cal 19; [1972] Tax LR 1620. In that case,
the plaintiff, an employee of the company, instituted a suit, inter alia, for a
declaration that certain resolutions purported to have been passed by the board
of directors of the company as also by its shareholders were illegal, void,
inoperative and not binding on the plaintiff and also for some other reliefs.
It was not a case of shortness of notice at all. In that case, a notice was
issued on July 5, 1963, for holding an extraordinary general meeting of the
company on July 29,1963, to consider and if thought fit, to pass certain resolutions.
The resolution which was notified to be proposed at the meeting was neither
placed nor moved and accordingly not passed. On the contrary, a resolution was
passed to the effect that the plaintiff was not to be appointed store-in-charge
with effect from May 1, 1963, and further that the plaintiff had ceased to hold
office with effect from the said date. Salil Kumar Datta J. observed) at p. 27
of AIR 1972 Cal) :
"The language of the
obligation in s. 172, as already observed, clearly indicates its mandatory
nature and accordingly, the non-compliance will have the fatal consequence of
rendering the resolution void and ultra vires."
The learned judge's
observation must be understood in the context of the facts of that case. To
ensure the validity of the resolutions passed at the meeting, the company was
under a legal duty to give notice of the resolutions that were sought to be
passed. In that case, the learned judge had no occasion to go into the question
of the effect of the shortness of notice and also the implication of s. 172(3).
The point at issue and the facts of that case were entirely different. The
judgment of A.N. Sen, J., in the case of Surajmull Nagarmull v. Shew Bhagwan
Jalan, ILR [1975] 1 Cal 207, was neither cited nor considered in that case.
In the case before us, the
two annual general meetings of the company for the financial years 1980-81 and
1981-82 have been held belatedly and with great difficulty. The working of the
company has come to a standstill. The company will suffer prejudice if the
newly elected board of directors is not allowed to take charge at this
juncture. The petitioner admittedly has not suffered any prejudice in any way
from the shortness of the notice. There is no reason why the new board of
directors should not be allowed to take charge of the company and given a
chance to revive it. From a practical business point of view there is no reason
why the balance of convenience does not require that the interim order should
be continued.
It was also argued on
behalf of the respondent that the injunction was sought in aid of a legal
right. There was a clear violation of the provisions of s. 171(2) of the
Companies Act. The court was bound to grant an injunction in this case.
Reliance was placed for this proposition on the case of Fullwood v. Fullwood
[1878] 9 Ch 176. There the allegation of the plaintiff was that the defendants
were liable to action for deceit. Fry, J., observed (at p. 179):
"In such a case, the
injunction is, in my opinion, a matter of course if the legal right be proved
to exist."
But in that case the
plaintiff was prejudiced by the way the defendant was carrying on its business.
The defendant was restrained from representing that the said business was
identical with or in any way connected with, the plaintiff's business or the
goods manufactured and sold by the defendants were manufactured by the
plaintiff. The case before us is not a case of misrepresentation or deceit at
all. Mr. Roy, the plaintiff, has not suffered any prejudice or damage. A notice
was actually served upon the plaintiff. There is really no basis for issuing an
order of injunction.
It was, lastly, contended
that the order of injunction that was passed was a discretionary order and a
court of appeal should not interfere with the exercise of discretion of the
learned judge. It is true that an appellate court would not interfere with the
exercise of discretion of the trial judge solely on the ground that the
appellate court would have taken a different view of the matter had the case
been argued before it at the trial stage. It was held by the Supreme Court in
the case of Printers (Mysore) P. Ltd. v. Poihan Joseph, AIR 1960 SC 1156 at p.
1159;
"As is often said, it
is ordinarily not open to the appellate court to substitute its own exercise of
discretion for that of the trial judge : but if it appears to the appellate
court that in exercising its discretion the trial court has acted unreasonably
or capriciously or has ignored relevant facts and has adopted an unjudicial
approach, then it would certainly be open to the appellate court—and in many
cases it may be its duty—to interfere with the trial court's exercise of
discretion. In cases falling under this class, the exercise of discretion by
the trial court is in law wrongful and improper and that would certainly
justify and call for interference from the appellate court. These principles
are well established; but, as has been observed by Viscount Simon L.C. in
Charles Osenton & Co. v. Johnston [1942] AC 130 at p. 138,' the law as to
the reversal by a court of appeal of an order made by a judge below in the
exercise of his discretion is well established, and any difficulty that arises
is due only to the application of well settled principles in an individual
case".
In this case, in our view,
the order of injunction should not have been passed in favour of the plaintiff
when the plaintiff was unable to show any loss or prejudice in any manner
whatever. The balance of convenience does not require an order of injunction.
In fact, the two annual general meetings were at last held after protracted
litigations. We fail to see why the resolutions passed at the annual general
meetings will not be given effect to merely because one shareholder having
seven shares of Rs. 10 each actually received the individual notices less than
21 days in advance. There is no dispute that the notice of the meetings was
published in a newspaper in good time. There is also no dispute that the
shareholder is a resident of Calcutta. Advertisement was given in a newspaper
having circulation in Calcutta. The two annual general meetings were held at
Calcutta. There is also no dispute that apart from a highly technical legal
plea, the shareholder has not been able to make out any case of any prejudice
at all. In our view, there is no legal ground for passing an order of
injunction in this case.
Mr. Mukherjee has contended
that there is a more important reason for not passing this interim order. The
holding of the annual general meetings has been blocked by certain parties who
wanted to acquire the controlling shares of the company and litigations have
gone on for a very long time. The Companies Act, 1956, is a practical Act and
the working of a company should not be held up on trivial technicalities. Mr.
Mukherjee has contended that Dhiresh Chandra Roy having seven shares of Rs. 10
each was not really fighting his own case. We do not express any opinion on
this aspect of the matter. But, in our view, having regard to the background of
the litigations that have gone on and also having regard to the fact that at
last the two annual general meetings of the company have been held of which
notices were given to all the shareholders and also in view of the notice that
was published in good time in a newspaper, we are of the opinion that an interim
order should not have been passed restraining the implementation of the
resolutions passed at the annual general meetings that were held.
We have heard this case
without any affidavits having regard to the urgency of the matter. The factory
of the company is under lock-out. We are of the view that the respondent's case
is frivolous and without any merit and that the legal process of this court is
being abused only to frustrate the holding of the annual general meetings and
giving effect to the resolutions passed therein. We have proceeded on the
undisputed and admitted facts only. All the formalities of appeal are dispensed
with by consent of parties. The application succeeds and this appeal is
allowed. The interim order passed by the court below restraining implementation
of the resolutions is vacated. There will be no order as to costs. Mr. Nag
prays for stay of operation of this order. The prayer is refused.
T.K. Basu, Actg. C.J.—I
Agree.
[1962] 32 COMP.
CAS. 303 (CD)
PLOWMAN
J.
NOVEMBER
27, 1961
PLOWMAN J. stated the facts and continued : The
question which I have to decide is whether the allegation that the special
resolution for the reduction of capital was duly passed has been proved, having
regard to the events which happened concerning the notices convening the annual
general meeting and the omission to send the notice to those nine ;members.
Section 141 f the Companies Act, 1948, so far as relevant provides : “(1) A
resolution shall be an extraordinary resolution when it has been passed be a
majority of not less that three fourths of such members as, being entitled so
to do, vote in person or, where proxies are allowed, by proxy, at a general
meeting of which notice specifying the intention to propose the resolution as
an extraordinary resolution has been duly given. (2) A resolution shall be a
special resolution when it has been passed by such a majority as is required
for the passage of an extraordinary resolution and at a general meeting of
which not less than twenty;-one days’ notice, specifying the intention to
propose the resolution as a special resolution, has been duly given....(5) For
the purposes of this section, notice of a meeting shall be deemed to be duly
given and the meeting to be duly; held when the notice is given and the meeting
held in manner provided by this Act or the articles.”
Thus one
finds, first, that a special resolution has to be passed at a meeting of which
not less that 21 days’ notice has been duly given and, secondly, that the
notice shall be deemed ;to have been duly given if it is given in the manner
provided by the Act or by the articles; I understand that the reference to
“this Act” in section 141(5) is a reference to section 134, which , so far as
relevant, is in these terms “the following provisions hall have effect in so
far as the articles of the company do to make other provision in that behalf
:--(a) notice of the meeting of a company shall be served on every member of
the company in the manner in which notices are required to be served by Table
A, and for the purpose of this paragraph the expression ‘Table A’ means that
Table as for the time being in force...”
So far as the
company’s articles are concerned there is a group of articles, Nos. 149 to 157,
dealing with notices, but there is nothing in any of them which throws any
light on the problem I am considering.
However, Mr.
Wheeler, on behalf of the company, argued tat the situation was saved by
article 75, which is the last of a group of articles dealing with general
meetings, Article 75 reads : “the accidental omission to give notice of a
meeting to, or the non-receipt of notice of a meeting by, any person entitled
to receive notice shall not invalidate the proceedings at that meeting.”
There appears
to be no authority as to the effect of that article in the circumstance that I
am considering, althought it is a common form article in identically the same
terms as article 51 of the current Table A. The fact that it is a Table A
article means that it s validity as an article cannot be impugned. Therefore, I
have to decide the effect of that article not only unaided by any authority,
but also without having had the benefit of any argument in answer to Mr.
Wheeler’s submissions, although it is right for me to say that those
submissions were put before me in a very fair manner.
In the first
place, I am satisfied that the omission to give notice of the meeting to the
nine members in question was “accidental” within article 75. it follows form
that that the omission to give notice to the nine members did not--and I quote
the article--”invalidate the proceedings at hat meeting.” But the question
arises whether the result of this is(a) that though the proceedings of the
meeting were valid, the notice of the meeting is nevertheless still not deemed
to have been duly given for the purposes of section 141, or (b) that the notice
of the meeting is to be deemed to have been duly given for the purposes of that
section. the latter, in my judgment, is the true view It must, I think, be
implicit in article 75 that a meeting, the proceedings f which are to be taken
to be valid notwithstanding the omission to give notice to members, is to be
deemed to have been duly convened for the purposes of the articles, including
in those purposes the manner of convening the meeting. It seems to me that, in
the absence of such an implication, there would be no meeting the proceedings
of which could be validated by the articles. I say that there would be no
meeting, because it s well settled that as regards a general meeting failure to
give notice to a single person entitled to receive notice renders the meeting a
nullity.
I therefore
hold that the notice of the meeting was duly given, and that the resolution in
question was duly passed for the purposes of section 141, and therefore, the
company having satisfied me about rest of the case, I purpose to confirm the
reduction and approve the minutes, and I give the usual direction with regard
to advertisements.
Reduction
confirmed.
[1986] 60 COMP. CAS. 353 (DELHI)
HIGH COURT OF DELHI
v.
Apparels Exports Promotion
Council.
M. K. CHAWLA J.
SUIT NO. 759 OF 1984
Arun
Kumar and S. K. Kaul for the Plaintiff.
G.
L. Rawal and Sunil Aggarwal for the Defendant.
M.
K. Chawla J.—The
plaintiff, M/s. Maharaja Exports, through its sole proprietor, Ms. Sushma
Gulati, has claimed the following reliefs in her suit for declaration:
(a) A decree for declaration declaring
that the impugned notice dated April 4, 1984, issued by the defendant, M/s.
Apparels Export Pro motion Council, regarding the holding of the fourth annual
general meeting of the defendant on May 14, 1984, is illegal, invalid and
inoperative and that no annual general meeting can be held in pursuance thereof
;
(b) declaring that all the 27 members of
the existing executive committee are not entitled to hold the respective
offices in view of the judgment of Hon'ble Mr. Justice S. S. Chadha referred to
above;
(c) declaring that the 18 members of the
executive committee have retired by rotation and are not entitled to continue
in office as members of the executive committee;
(d) declaring that the 9 members of the
executive council whose names are mentioned in the impugned notice have
automatically ceased to be the members of the executive committee and are not
entitled to function as such after May 14/15, 1984 ;
(e) declaring that all the proxy forms lodged with the
council regarding the fourth annual general meeting to be invalid and illegal
particularly those on the forms other than the official forms ;
(f) declaring the fourth annual general meeting purportedly
held on May 14/16, 1984, in so far as it relates to election of 9 executive
committee members who have retired by rotation to be illegal and invalid.
In order to understand the
true scope of the plaintiff's suit, it will be relevant to keep in mind the
salient features as given in the plaint. The plaintiff is carrying on business
as manufacturers and exporters of ready-made garments of which Ms. Sushma
Gulati is the sole proprietor; that M/s. Apparel Exports Promotion Council
(hereinafter referred to as "the council") is a public limited
company registered under the provisions of the Companies Act, 1956 (hereinafter
to be referred to as "the Act"), as per the certificate of
incorporation issued by the Registrar of Companies, Delhi and Haryana; that the
defendant is also licensed under section 25 of the Act by the Central
Government; that the objects for which the defendant company has been established
are given in the memorandum of association which amongst other things includes
"to promote, advance, increase, develop export, of all types of ready-made
garments excluding woollen knitwear, garments of leather, jute and hemp, to
undertake all export promotion measures including appointment of
representatives, agents or correspondents in foreign markets to conduct
propaganda and publicity" ; that the plaintiff is a member of the
defendant council as provided under article 5(a) of the articles of association
; that the membership of the defendant is about 5,000; that as per the articles
of association of the defendant, the executive committee is to be elected to
manage the affairs of the council; that the executive committee can have
maximum 30 members besides four Government nominated members; that the
membership of the executive committee is on regional basis since the council is
an all India body ; that as per the provisions contained in the articles of
association, one-third of the elected members of the executive committee will
retire by rotation every year and the vacancy so caused shall be filled up
after the annual general meeting every year; that a member of the council is
entitled to be elected as a member of the executive committee ; that the articles
of association of the defendant authorise the defendant to frame rules and
procedure for election to the executive council; that the council framed
certain rules which were, however, challenged by certain members through a suit
filed in this court being Suit No. 873 of 1981 entitled Pramod Chopra v.
Apparels Exports Promotion Council, that the said suit was ultimately decreed
on May 19, 1983, and the impugned rules were declared to be invalid ; that the
appeal against the said single judge's judgment filed by the council also
failed ; that as far as the plaintiff understands, the council has not framed
any rules of procedure for election so far, though they were required to do so
under the amended article 48 of the articles of association.
That on April 30, 1984, the
plaintiff received a notice regarding the fourth annual general meeting of the
defendant to be held on Monday May 14, 1984, at 11 a.m. at FICCI auditorium,
New Delhi, to transact the business incorporated in the notice ; that though
the notice is purportedly dated April 4, 1984, the same is understood and
reasonably believed by the plaintiff to have been posted only on April 26,
1984. by the defendant to the various members; that this notice is totally
illegal, invalid and mala fide for the grounds mentioned in the plaint; that in
view of these grounds, it is apparent that the fourth annual general meeting
convened through the impugned notice is illegal, invalid and the defendant
cannot be permitted to hold the same. Hence, the present suit.
Along with this suit the
plaintiff also filed an application (I.A. No. 2448 of 1984) under Order 39,
rules 1 and 2, CPC, praying for the issuance of an ad interim restraint order
against the defendant from giving effect to the notice dated April 4, 1984,
which is illegal and void and from holding the annual general meeting in
pursuance thereof.
After the suit was
registered and after hearing the learned counsel for the plaintiff on the
injunction application, S.B. Wad J. passed the following order on May 11, 1984:
"I.
A. No. 2448 of 1984 :
It is stated by the counsel
for the plaintiff that no election rules laying the procedure for the election
are framed by the defendant company. The notice for the annual general meeting
purported to be issued on April 4, 1984, is actually issued on April 26, 1984.
Counsel for the plaintiff states that it was received by the plaintiff on April
30, 1984. The notice was also published in the Economic Times, Bombay, on April
29, 1984, and Delhi on April 25, 1984. Section 171 of the Companies Act
requires that at least 21 days' notice of the annual general meeting, should be
given. Prima facie there is a ground for granting ad interim order restraining
the defendant firm from holding the annual general meeting on May 14, 1984. I
order accordingly. Notice for May 16, 1984, has to be issued today."
The plaintiff preferred to
serve the defendant with the restraint order only 15 minutes before the start
of the annual general meeting. Immediately after the service of the restraint
order, the defendant rushed to the court, filed the reply to the plaintiff's
application and obtained the following order on May 15, 1985:
"Having heard the
counsel for the parties, I find that an order one way or the other will dispose
of the suit itself. The complexity of the matter is such that a full trial with
evidence of both the parties is necessary for the proper disposal of the suit.
However, considering the urgency of the matter, I order that the suit itself be
disposed of expeditiously in the month of July, 1984. Since all the
arrangements for the election are already made and a lot of expenses have
already been incurred, I direct that the election/annual general meeting shall
be held on May 16, 1984, at 2 p.m. However, the result of the election shall
not be declared till the disposal of the suit."
On the same day, the
defendants were further directed to deposit with the Deputy Registrar (0) the
ballot papers, the proxies and other relevant papers relating to the elections
within 2 days after the annual general meeting is held. The venue of the
meeting was also shifted from FICCI auditorium to Hotel Taj Palace, Sardar
Patel Marg, New Delhi. In compliance with the directions of this court, the
fourth annual general meeting has since been held. Subsequently, the defendant
approached the Division Bench in appeal (F.A.O.(OS) Nos. 59 and 60 of 1984) for
the vacation of the order restraining the defendants from declaring the result
of the election of the members of the executive committee. This appeal was disposed
of by the Division Bench on May 25, 1984, vide the following order:
"After hearing counsel
for the parties, we are of the opinion that the old arrangement should
continue, but the result of the election shall be declared. The members
declared to have been elected as directors shall not act till the decision is
given by the learned single judge. The learned single judge will hear and
decide the matter on the date fixed by him. We are not expressing any opinion
at this stage since he has not given any decision on the merits of the
controversy.
The F. A. Os. are disposed
of."
Before the defendant could
file the reply, the plaintiff was allowed to amend the plaint.
In the written
statement, the defendant took up a number of preliminary objections, inter alia,
alleging that the present suit of the plaintiff is false, frivolous and
vexatious and otherwise the same is a misuse of the process of law; that the
alleged disputes fall within the purview of the company court jurisdiction and,
as such, the suit for declaration is not maintainable; that no suit without
consequential relief is maintainable; that no suit can be brought in the name
of trading name when the same is a sole proprietorship firm; that the suit is
bad for delay and laches. On merits, the defendant admitted the correctness of
the various provisions of the articles of association under which one-third of
the elected members of the executive committee were to retire at the conclusion
of each annual general meeting and the vacancies so caused were to be filled
in. The defendant also admitted the filing of the suit by one of the members of
the council and the issuance of directions to the defendant for framing of the
rules. In compliance with the directions of the Company Law Board and also the
observations made in the judgment of this court in Suit No. 873 of 1981,
necessary amendments were carried out which ultimately resulted in the
dismissal of their appeal. The defendant also admitted the issuance of a notice
for holding the fourth annual general meeting on May 14, 1984, at FICCI
auditorium but denied the fact that the plaintiff received the notice on April
30, 1984. The notice which was posted on April 26, 1984, was strictly in
accordance with the provisions of section 53(2) of the Act and its service must
be deemed to have been effected immediately on the expiry of 48 hours from the
time of posting. In these circumstances, in law, service on the plaintiff has
been effected on April 28, 1984, which gave full 16 days' notice to the
plaintiff whereas she was entitled (only) to 14 days' notice. The defendant
also denied each and every ground mentioned in paragraph 14 of the plaint which
were made the basis for the issuance of notice and holding of the fourth annual
general meeting as illegal. The fourth annual general meeting has already been
held. The defendant also took up the objection that not only the suit is mala
fide but is also bad for delay and laches. The plaintiff has been taking an
active interest in the election of the members of the executive committee and
has been a party to signing a number of pamphlets in this behalf. Even though
the notice was allegedly served on the plaintiff on April 30, 1984, the
plaintiff intentionally filed the present suit on May 11, 1984, when May 12 and
13, 1984, were holidays being second Saturday and Sunday. Even after ex parte
injunction, the plaintiff intentionally did not serve the notice on the
defendant or on any of its officers either on May 11, 12 or 13, 1984, even
though the office of the defendant was open for making the arrangements for the
holding of the annual general meeting on May 14, 1984. The plaintiff got the
service of the notice effected only at about 10.45 a.m. on May 14, 1984, when
all the arrangements for the holding of the meeting were complete. Under these
circumstances, the plaintiff has not come to the court with clean hands and is
not entitled to the discretionary relief on this account also. It was prayed
that the suit which is a mala fide one and has been filed with the only motive of
stalling the elections deserves dismissal with special costs.
In the replication, the
plaintiff controverted the pleas raised by the defendant in the written
statement and reiterated the facts as stated in the plaint.
On the pleadings of the parties,
the following issues were framed:
1. Whether the defendant was enjoined in law to frame fresh rules for
holding elections of the defendant council after they were struck down by a
judgment of this court?
2. Whether this court
has the jurisdiction to try this suit?
3. Whether fourteen days' notice of the proposed fourth annual general
meeting of the defendant council was not served on the plaintiff in accordance
with law?
4. Whether
the defendant was bound to hold elections to all the 27 posts of executive
committee members in view of the judgment of this court in Suit No. 873 of
1981, when the articles of association and rules for election of the defendant
council were struck down? In any case, was the defendant enjoined to hold
election for at least 18 members of the execucutive committee as the annual
general meeting was being held after two years?
5. Whether the delay in the despatch of the notice shows mala fides and
oblique motives on the part of the defendant council to secure re-election of the
retiring members. If so, to what effect?
6. Whether the list of members as circulated by the defendant council
contained the names of some members from whom certain sums were still payable
to the defendant council and its effect?
7. Whether the suit of the plaintiff is bad for delay and laches and/or
otherwise the conduct of the plaintiff is such as to disentitle her to any
relief in the suit as alleged in paras 13 and 14 of the written statement?
8. Relief.
Learned counsel for the
parties agreed that the evidence in the case be allowed to be led by filing
affidavits and documents. The plaintiff filed her own affidavit while the
defendants relied upon the affidavit of Shri S. K. C. Mathur, Secretary of the
defendant council. Later on, the learned counsel for the plaintiff agreed to
produce the proprietor of the plaintiff for her cross-examination by the
learned counsel for the defendant. She was cross-examined on September 20,
1984.
I have heard the arguments
of the learned counsel for the parties and with their help gone through the
record carefully. My findings on the above issues are as follows :
Issue
No. 1 :
The onus of this issue has
rightly been placed on the plaintiff. During the course of the arguments, the
learned counsel for the plaintiff did not press this issue nor did he address
any arguments, nor refer to the various provisions of the memorandum and
articles of association of the defendant firm indicating that the defendants
were enjoined in law to frame fresh rules for holding the elections to the
defendant council after the previous rules were struck down by the judgment
dated May 19, 1983, of this court in Suit No. 873 of 1981 titled as Pramod
Chopra v. Apparels Exports Promotion Council. This issue is, therefore, decided
against the plaintiff.
Issue
No. 2 :
The objection of the
defendants is that as the disputes raised in the suit fall within the purview
of the company court jurisdiction, the present suit for declaration is not
maintainable. This objection appears to have been raised only for the sake of
raising an objection. Section 10 of the Companies Act defines the jurisdiction
of the court to entertain suits in such like matters. The definition of
"court" in clause (11) of section 2 and section 10 of the Companies
Act, 1956, dealing with jurisdiction of courts read together enables the
shareholders to decide as to which court they should approach for remedy in
respect of a particular matter. This provision does not purport to invest the
company court with the jurisdiction over every matter arising under the Act. In
view of the eloborate provisions contained in the 1956 Act in regard to
management and conduct of a company's affairs, including even important
internal matters of administration, the scope for interference by the civil
court may have become more limited, but the power has not at all been taken
away. It has been rightly observed in a case reported as R. Prakasam v. Sree
Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker) that except in
cases where the Companies Act, 1956, confers jurisdiction on the company court
or some other authority like the Central Government or the Company Law Board,
either expressly or by implication, all other disputes pertaining to a company
are to be resolved through the forum of civil court when the disputes are kept
on being resolved by them. Where wrong is done to an individual member, he can
insist, by recourse to a civil suit, on "strict observance of the legal
rules, statutory provisions and provisions in the memorandum and articles of association
which cannot be waived by a bare majority of shareholders". Similar view
was taken in a judgment reported as Panipat Woollen and General Mills Company
Ltd. v. P. L. Kaushik [1969] 39 Comp Cas 249 (Punj). While interpreting the
provisions of section 9 of the Code of Civil Proceduce vis-a-vis the Companies
Act, during the course of the judgment, it was observed as under (headnote).
"Under section 9 of
the Code of Civil Procedure, 1908, civil courts have jurisdiction to try all
suits of a civil nature excepting suits of which their cognizance is expressly
or impliedly barred. Unlike some statutes, the Companies Act does not contain
any express provision barring the jurisdiction of the ordinary civil courts in
matters covered by the provisions of the Act. In certain cases like winding-up
of companies, the jurisdiction of civil courts is impliedly barred.
Where a person objects to
the election of directors and claims a decree for a declaration that he was one
of the directors, there is no provision which bars the civil court either
expressly or by implication from trying such a suit."
In the present suit also,
besides other reliefs, the plaintiff has sought a declaration that all the 27
members of the existing executive committee are not entitled to hold the
respective offices in view of the judgment of this court and further that the
18 members of the executive committee who have retired by rotation are not
entitled to continue in office as members of the executive committee. The
judgment, referred to above, fairly and squarely applies to the facts of the
present case and there is no reason to oust the jurisdiction of this court to
entertain the present suit. Under these circumstances, this issue is decided in
favour of the plaintiff and against the defendants.
Issue
No. 3 :
This
is the most material issue, the decision of which will decide the fate of the
parties. Before the relevant facts are taken into consideration as to whether
the plaintiff was duly served with a clear 14 days' notice of the proposed fourth
annual general meeting of the defendant council, the relevant provisions of the
Companies Act have to be kept in view. Section 171(1) of the 1956 Act reads as
follows :
"A
general meeting of the company may be called by giving not less than 21 days'
notice in writing..."
Admittedly,
the defendant council falls within the categories specified in clause (6) of
section 25 of the Companies Act. In exercise of powers conferred by this
provision, the Central Government notified that under section, 171(1) the
general body meeting may be called by giving a notice in writing of not less
than 14 days instead of 21 days.
The
next relevant provision is section 53(2); It reads as under :
"Where
a document is sent by post,—
(a) service thereof shall be deemed to be
effected by properly addressing, pre-paying and posting a letter containing the
document......
(b) such
service shall be deemed to have been effected—...
(i) in the case of a notice of a meeting,
at the expiration of 48 hours after the letter containing the same is posted ;
and
(ii) in any other case at the time at which
the letter would be delivered in the ordinary course of post ;
Section 172(3) lays down
that the accidental omission to give notice to, or the non-receipt of notice
by, any member or other person, to whom it should be given shall not invalidate
the proceedings at the meeting.
Section 173 requires the
company to annex along with the notice the explanatory statements sought to be
considered during the meeting.
It is not disputed that the
date of service of notice of the general meeting and the date of the meeting
have to be excluded while counting 14 days, the period of notice prescribed
under section 171 of the Companies Act. The expression "not less than 14
days" used in section 171 (as amended by virtue of the Central Government
Notification) normally implies notice of 14 whole or clear days ; part of the
day, after the hour at which the notice is deemed to have been served, cannot
be combined with the part of the day before the time of the meeting, on the
date of the meeting, to form one day. Each of the 14 days must be a full or a
calendar day so that the notice can be said to be "not less than 14 days'
notice".
With this background, let
us now revert to the facts as have been brought out in the pleadings and the
documents, to determine if the plaintiffs have been served with 14 days' clear
notice of the annual general meeting of the defendant company or not. According
to the learned counsel for the plaintiff, on April 4, 1984, the meeting of the
executive committee of the defendant company was called to fix the date of the
fourth annual general meeting. Before the convening of this meeting, all the
formalities of carrying out the amendments as directed by the Company Law Board
had been complied with. The executive committee decided to hold the annual
general meeting on May 14, 1984, at 11.00 a.m. in the FICCI, Golden Jubilee
Auditorium, New Delhi. The office of the defendant company was required to send
along with the notice, the business relating to (i) the consideration of
accounts, the balance-sheets (which in this case was for a period of two years)
and the reports of the board of directors and auditors ; (ii) the declaration
of dividend ; (iii) the appointment of directors in the place of those
retiring, and (iv) the appointment of and the fixation of the remuneration of
the auditors. This requirement has admittedly been complied with by the
defendant company.
According to the plaintiff,
the impugned notice even though dated April 4, 1984, was posted to the
plaintiff and many other members on April 27, 1984. It was received by the
plaintiff on April 30, 1984, as is clear from the postal stamp affixed on the
envelope, exhibit P-8, which was an officially declared holiday in the area
where the plaintiff carried on business. It is also alleged that April 29,
1984, was a Sunday while May 1, 1984, was again a public holiday and,
therefore, it came to the plaintiff's notice only on May 2, 1984. This notice
did not allow clear 14 days' time before the annual general meeting and, as such, is bad and invalid
and the annual general meeting cannot be held in pursuance thereof. It is also
alleged that even if 48 hours are computed from the date of the despatch of the
notice, then April 29, 1984, being a Sunday has to be excluded and the
plaintiff must be deemed to have been served with notice only on the next date.
The service of the notice, according to the learned counsel, is not a mere
formality and the notice appears to have been posted on April 27, 1984, with a
view to avoid the presence of a large number of persons and deprive them of
their right to vote and to contest the election for the membership of the
executive committee. It is also contended that when a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the court is entitled and rather bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to and full effect
must be given to the statutory fiction and it should be carried to its logical
conclusion. If the purpose of the statutory fiction, mentioned above, is kept
in view, then, according to the learned counsel, it follows, that the purpose
of that fiction would be completely defeated if the defendant company
intentionally and wilfully defaulted in sending the notices on the date which
will deprive most of its members from exercising their statutory duty.
After
giving careful consideration to each and every point urged by the learned
counsel for the plaintiff during the course of the arguments, I do not find any
substance in the same. At the outset, it may be mentioned that in the prayer
clause, the plaintiff has not raised any grievance that she was not given 14
days' clear notice of the holding of the meeting. In sub-para (a) of paragraph
20 of the prayer clause, a declaration has been sought that the impugned notice
dated April 4, 1984, issued by the defendants regarding the holding of the
fourth annual general meeting of the defendants on May 14, 1984, is illegal,
invalid and inoperative and that no annual general meeting can be called in
pursuance thereof. Exhibit P-2 is the notice of the holding of the fourth
annual general meeting on May 14, 1984, at 11 a.m. at FICCI Golden Jubilee
Auditorium, New Delhi, to transact the following ordinary business :
(1) To consider and adopt the audited
balance-sheets and the income and expenditure accounts of the council for the
years ended December 31, 1981 and December 31, 1982, along with reports of the
auditors and the executive committee of the council.
(2) To appoint auditors of the council
to hold the office from the conclusion of this meeting until the conclusion of
the next annual general meeting and to fix their remuneration.
(3) To appoint
members to the
(a) Executive committee in place of
Shri........................who retire by rotation and is eligible for
reappointment....
Admittedly, this notice
complies with all the requirements of section 173 of the Companies Act. Prima
facie this notice cannot be said to be illegal.
On the second aspect, the
facts mentioned in the plaint are to be taken at its face value. In paragraph
14 of the unamended plaint, the plaintiff alleged that the impugned notice
dated April 4, 1984, was posted only on April 26, 1984, by the defendant to the
various members. However, in the amended plaint, the plaintiff advanced the
date of posting of the notice as on April 27, 1984, which was received by her
on April 30, 1984. Even assuming that the impugned notice was issued by the
defendant company on April 27, 1984, even then, in my opinion, the company has
complied with the provisions of section 171 of the Companies Act. In this case
48 hours will expire on April 29, 1984. Even if we exclude the date of the posting
of the notice and the date of the receipt of the notice as per the provisions
of clause (b) of sub-section (2) of section 53 of the Companies Act, even then
the notice must be presumed to have been served on the plaintiff 14 days prior
to the holding of the meeting. In the corresponding provision in the 1913 Act,
the word implied was "time" at which the would be deemed to be
delivered in the ordinary course of post.
"Ordinary course of
post" in a vast country like ours with many far-places at inaccessible
distance, where the time taken for delivery of letters varied from place to
place induced an element of uncertainty. In order to do away with this state of
affairs and to import certainty to such an important matter, as to the length
of notice of general meetings of companies, legal fiction was pressed into
service, by indicating in the 1950 Act, that the notice shall be deemed to have
been served 48 hours after posting. The words "48 hours" are meant to
make the service certain and to fix the date of service as the date on which
the said 48 hours expired. Under these circumstances, as already observed
earlier, the notice issued on April 27, 1984, will expire on April 29, 1984,
which is well within the phrase "14 days' clear notice".
This aspect can also be
looked into from another angle. Sub-section (3) of section 172 of the Companies
Act lays down that even the accidental omission to give notice to, or the
non-receipt of the notice by, any member or other person shall not invalidate
the proceedings at the meeting. The "accidental omission" means that
the omission must be not only not designed but also not deliberate. This
expression implies absence of intention or deliberate design. The word
"or" appearing in this sub-clause is of great significance. The company
has only to prove on record that they have sent the notice to its members on
the addresses furnished by them. The non-receipt of the notice, under no
circumstances, shall invalidate the holding of the meeting or the proceedings
thereof. In this case, it is the admitted case of the parties that the
defendant company did send the notice and it in fact was received by the
plaintiff. Even the non-receipt, as observed earlier, would not have made any
difference.
At this stage, it will be
relevant to mention that the learned counsel for the plaintiff is mixing up the
service of the notice of the holding of the meeting with the filing of the
nomination for the membership of the executive committee of the defendant
company. By virtue of section 257 of the Companies Act, a person who is not a
retiring director shall be eligible for appointment to the office of director
at any general meeting, if he or some other member intending to propose him
has, not less than 14 days before the meeting, left at the office of the
company a notice in writing under his hand signifying his candidature for the
office of director or the intention of such member to propose him as a
candidate for that office. Mere knowledge of the holding of the meeting is
sufficient. The plaintiff has nowhere alleged in the plaint or in her affidavit
that she was not aware of the holding of the fourth annual general meeting on
May 14, 1984. It is also not alleged that the notice of the meeting was served
on her on the night of April 30, 1984, or that she made efforts in securing the
signature of a proposer and that she was not able to contact them. On the other
hand, the defendants have placed on record the numerous advertisements which
have been appearing from time to time, in the various newspapers and in
different parts of the country, intimating the members, to intimate the change
in address, if any, latest by April 12, 1984, and to clear the annual
subscription so that they may be eligible to vote at the forthcoming annual
general meeting of the council. Such notices were issued from April 5, 1984,
till April 15, 1984. The notices for the holding of the annual general meeting
on May 14, 1984, were also advertised in the various newspapers from April 14,
1984. The defendant council also took care to publish the list of the
nominations which had been received from the members signifying their
candidature for the appointment to the office of the defendants in the fourth
annual general meeting. Furthermore, the plaintiff has been taking an active
part in the affairs of the defendant council, inasmuch as it is a party to the
issuance of posters/pamphlets opposing the candidature of Shri Mohanjit Singh
and his associates as they are alleged to have committed some malpractices,
etc. All these facts go to show that the plaintiff was fully aware of the
holding of the fourth annual general meeting on May 14, 1984, and was well
within time to have filed her nomination, if she was desirous of contesting the
election. It has nothing to do with the notice of the holding of the meeting
which too has been held to have been properly served on the plaintiff.
In view of these
circumstances, is it open to the court to extend the period of 48 hours in
order to give more time to the members enabling them to file the nominations?
The simple answer to this query raised by the learned counsel for the plaintiff
is in the negative. The Legislature in its wisdom reduced the period of 21 days
to 14 days by virtue of sub-section (6) of section 25 of the Companies Act. The
Legislature was also aware of the 14 days' notice as contemplated in section
257 of the Companies Act. It is not desirable for the courts to say that the
period of service of the notice should be reasonable. By doing this the court
will be extending the period which has purposely been limited to minimise the
scope of the mischief which used to be created in the holding of the annual
general meetings. In view of the fact that the plaintiff was fully aware of the
date of the meeting prior to the receipt of the notice, the plaintiff cannot
come forward and throw the blame on the defendant company. Taking an overall
view of the circumstances brought out on record and discussed earlier, there is
no hesitation for this court to hold that the plaintiff was duly served with 14
days' clear notice of the holding of the fourth annual general meeting of the
defendant council. This issue, therefore, is decided against the plaintiff.
Issue
No. 4 :
In order to appreciate the
scope of this issue, one has only to refer to the various dates admitted by the
parties. On October 29, 1981, the third annual general meeting was held. On
June 12, 1982, notice was issued to the members for the correction of
addresses, etc., so that the fourth annual general meeting is held within the
stipulated period. One of the members filed an application and obtained the
stay of the holding of the annual general meeting and for taking steps in this
direction, from this court on June 28, 1982. This ad interim stay dated August
25, 1982, was confirmed till the disposal of the suit. The plaintiff ultimately
succeeded in the suit and a decree was passed by S. S. Chadha J. on May 19,
1983. The respondent company preferred to file an appeal before a Division
Bench. This appeal was admitted on August 8, 1983, but they refused to vacate
the injunction. Being not satisfied with the dismissal of their miscellaneous
application, the defendant company filed a special leave petition. The order
dated May 19, 1983, was stayed by the Hon'ble Supreme Court but the court made
it clear that it would not have any effect on the Central Government (Company
Law Board) if they proposed to take any steps for the amendment of the rules.
Finally, the Company Law Board directed the defendant company to amend their
rules in order to bring them in conformity with the judgment of S.S. Chadha J.
dated May 19, 1983. On January 5, 1984, the defendant company held an
extraordinary general meeting and approved the amended rules and immediately
thereafter sought the approval of the Central Government. Within thirty days of
the Central Government's approval, the rules were submitted before the
Registrar of Companies at Kanpur and got the same approved. After having
completed the formalities, the respondent company held the executive committee
meeting on April 4, 1984, and fixed the holding of the fourth annual general
meeting for May 14, 1984. During this process, a period of two years has
expired inasmuch as the annual general meetings have not taken place for the
years 1982 to 1984.
The contention of the
learned counsel for the plaintiff is that the election be now held for all the
27 posts the holders which were to retire after the holding of the third annual
general meeting in the year 1981, in case the convening of the fourth annual
general meeting is held to be in order. It is not disputed that the defendant
council has on its board 27 elected members and four Government officials.
One-third of such directors have to retire every year by virtue of the
provisions of section 256 of the Companies Act. The plaintiff is not one of the
retiring directors. It may be that by virtue of the judgment of S. S. Chadha
J., the rules of the defendant company were held invalid and they were directed
to amend the same. At this stage, I do not propose to interpret the judgment of
S. S. Chadha J. but the fact remains that it will have prospective effect. The
defendant company cannot be held negligent or blamed for not holding the annual
general meetings. In fact, they were helpless in view of the circumstances
created by the filing of the various suits. As per the order sheet dated May
15, 1984, during the pendency of the suit, the defendant council was directed
to hold the elections of the executive committee members on May 16, 1984, at 2
p.m. but the result of the election was not to be declared. This order was
modified by the Division Bench of this court, wherein the council was directed
to declare the result of the election but the members declared elected were
required not to act till the decision of the present suit. It comes to this
that the 9 members of the executive committee have already been declared
elected. It is not denied that the fifth annual general meeting has already
been held except for the election of the executive committee members because of
the order of the Division Bench. Learned counsel for the defendant states at
the Bar that immediately after the decision of this case, they propose to hold
the election of the 9 members for the fifth annual general meeting in the month
of February, 1985, and they will hold the next annual general meeting and in
this way all the 27 members will be declared elected. For the reasons explained
above, I am not inclined to issue any directions to the defendant council for
holding the election for at least 18 members as urged by the learned counsel
for the plaintiff because this direction will not only be a harsh one, but will
also create lot of complications. The law must take its own course. Under no
circumstances, the defendant council can be blamed for not holding the annual
general meetings or electing one-third members. At this stage, I am not
inclined to grant this discretionary relief in favour of the plaintiff. Ordered
accordingly.
Issue
No. 5 :
Learned counsel for the
plaintiff in support of this issue contended that the defendant council acted
mala fide and with oblique motive to despatch the notices for the holding of
the fourth annual general meeting on a day which will deprive the members for
contesting the election for the membership of the executive committee of the
council. According to him, if the executive committee of the council had held
the meeting on April 4, 1984, and decided to hold the fourth annual general
meeting on May 15, 1984, there was no occasion for them to have despatched the
notices at such a late stage. Their intention obviously is to keep the people
in dark about the holding of the annual general meeting and deprive the
eligible members to contest the election.
Prima facie none of these
arguments has any substance. To start with, the plaintiff unfortunately has not
named the officer of the defendant company or the office bearers who could be
said to be in league for not despatching the notices within reasonable time.
Mala fides have to be alleged against some person. The defendant in this case
is the council. The particulars about the fraud or mala fides or motive are
missing. The general allegations of mala fides/motive, however strong the words
in which they are stated may be, if unaccompanied by particulars, are
insufficient to amount to an averment of the fraud or mala fides or motive of
which any court can take notice. Even otherwise, as observed earlier, section
53(2) of the Companies Act gives the right to the defendant council to serve
the members with the notice of the meeting at the expiration of 48 hours after
the letter containing the same is posted. This legal obligation has been duly
complied with by the defendant council. Furthermore, as already discussed
earlier, the council started issuing notices by citations in the various
newspapers throughout India, intimating the date of the meeting, requiring the
members to furnish their correct addresses and to send their nominations within
the statutory period. These publications continued appearing from April 5,
1984, to April 15, 1984. The defendant also started despatching the letters to
individual members supplying information about the holding of the fourth annual
general meeting. In compliance of the service of the individual notices as well
as the publication in the various newspapers, the defendant council was able to
correct the list of the members by April 20, 1984. By this time they also
started receiving the nominations for the post of executive committee members
the lists of which were published from time to time. While in the witness box,
even the plaintiff has not led any evidence showing the mala fides/motive on
the part of the defendant council to secure the re-election of the retiring
members by not sending notices. Unfortunately, she also did not mention the
name of any person/office-bearer or the member of the executive committee
alleging mala fide intention. The plaintiff having failed to furnish the
necessary particulars either in the plaint or in the form of evidence, this
issue has to be decided against the plaintiff.
Issue
No. 6:
Learned counsel for the
plaintiff has not pressed this issue and the same is hereby decided against the
plaintiff.
Issue
No. 7 :
It is the case of the
defendant that the plaintiff even after having been duly served with the notice
giving her clear 14 days, preferred to file the present suit on May 11, 1984,
when May 12, 13, 1984, were holidays for the courts, being Second Saturday and
Sunday. After having obtained the ad interim injunction on May 11, 1984, the
same was not got served intentionally immediately thereafter. The defendants
made all arrangements for the holding of the annual general meeting on May 14,
1984. Many members have reached Delhi from distant parts of the country to
attend the meeting. The plaintiff intentionally served the notice of the ad
interim injunction at 11 a.m. on May 14, 1984, whereas the meeting was fixed
for 11.30 a.m. According to the learned counsel, the plaintiff was fully aware
of the fact that the office of the defendant council was functioning on May 12,
13, 1984, as they were expected to receive proxies, 48 hours before the time of
commencement of the annual general meeting, as well as were also required to
give the inspection of the proxies as per the provisions of the Companies Act,
before the closing hours on May 13, 1984. This fact was known to the plaintiff
and she was also aware of the name of the counsel for the defendant. The
conduct of the plaintiff, according to the learned counsel for the defendant,
disentitled her to any relief in the suit.
Learned counsel for the
plaintiff, on the other hand, submits that May 11, 1984, was a Friday and 12th
and 13th being holidays, the plaintiff had no other option but to serve the
defendant with the ad interim order on May 14, 1984, which she did in the early
hours of the next working day.
The defendant cannot impute
motive or hold the plaintiff responsible for the delay or laches in the filing
of the present suit.
On a consideration of the
material on record, in my opinion, the defendant has something to say on this
aspect. As already observed, the plaintiff not only was served with a notice of
the holding of the annual general meeting but she was also aware of the annual
general meeting from other sources, including that of publication in the
various newspapers. In her cross-examination, she had also admitted that by
writing the letter, exhibit D-1, that Shri Mohanjit Singh had betrayed their
association (GEA), she meant to say that Mohanjit Singh had betrayed the
association by his entering into an agreement with another association of
garment exporters, other than the defendant council. She has also been
participating in the affairs of defendant No. 1 council by issuing pamphlets
and taking up the cause of the members of the council. If she had any grievance,
the cause of action had arisen immediately after the service of the notice of
the holding of the annual general meeting. There was no reason for her to have
delayed the action and disturb the annual general meeting at the last moment
thereby causing inconvenience not only to the defendant council but also to the
various members who had reached Delhi from distant parts of the country. Even
if she had been successful in obtaining the ex parte ad interim injunction on
May 11, 1984, it was her bounden duty to have served the officers of the
defendant council on that very day or at least on the next day, so that the
council may have taken steps either for the vacation of the ex parte ad interim
order or informing its members not to attend the meeting. She was also fully
aware of the fact that Shri G.L. Rawal, advocate, is the retainer of the
defendant council and even if she was under a wrong impression that the office
of the defendant council will remain closed on May 12, 13, 1984, an attempt
should have been made to serve on the advocate at his residence/office. No
explanation is forthcoming as to why she did not care to take steps in this
direction. The only inference that can be gathered is that she had the
intention to disturb the annual general meeting and, as such she can be held
responsible for the delay and laches for the filing of the present suit which
disentitles her to the relief claimed in the present suit. This issue is,
therefore, decided against the plaintiff.
Relief:
As a result of the above
discussion, I see no force in the suit and the same is hereby dismissed with
costs.
[1970] 40 COMP. CAS. 819 (GUJ)
Maneckchowk & Ahmedabad Mfg.
Co. Ltd., In re
D.A. DESAI, J.
Company Application No. 23 of 1968 with Company Petition No.
8 of 1969
DECEMBER: 10, 1969
Messrs.
Indequip Limited (hereinafter referred to as the petitioner) has filed this
petition under section 391(2) of the Companies Act, 1956, for sanctioning, a
scheme of compromise and arrangement between the creditors and members of
Maneckchowk & Ahmedabad Manufacturing Company Limited (hereinafter referred
to as the company) and the compromise proposed by the company in Company
Application No. 23 of 1968 and approved by the creditors and members of the company.
The company was incorporated in the year 1892 and it was manufacturing cotton
yarn and cotton textiles. For that purpose the company had set up textile mills
divided into two units described as Unit No. I and Unit No. II. Since 1913 one
Hiralal Trikamlal was its managing agent. Hiralal Trikamlal has three sons,
Manubhai, Chandulal and Linubhai, and two daughters, Shardaben and Shantaben,
all of whom are very much concerned in this petition. In 1957 the firm of
Hiralal Trikamlal & Sons was appointed as managing agents of the company.
One Gopaldas P. Parikh was appointed as a director of the company in the year
1959. Up to 1st January, 1966, Manubhai Hiralal and Chandulal Hiralal as
partners of Hiralal Trikamlal & Sons were in active management of the affairs
of the company and since that date Linubhai Hiralal along with Gopaldas P
Parikh took over the active management of the company. It appears that since
1962 the company was in financial doldrums and its losses were mounting up from
year to year. The workers of the company went on strike on 2nd April, 1968, as
their wages for nearly two months were in arrears with the result that the
company was obliged to close the mills. The first petition praying for winding
up the company was filed in April, 1968. The immovable properties of the
company were attached by the Collector at the instance of the Regional
Provident Fund Commissioner and Employees' State Insurance Corporation. The
company filed Company Application No. 23 of 1968 on 27th June, 1968, under
section 391(1) seeking directions for convening the meeting of its creditors
and members for considering and if thought fit for approving with or without
modifications a scheme of compromise and arrangement proposed by it. Before the
court gave directions on the aforementioned application, one Chandulal Hiralal
as power of attorney holder of Shardaben and Shantaben and others filed Company
Petition No.24 of 1968 on 4th July, 1968, praying for an order for winding up
the company. Two other petitions for the same reliefs were fried on 12th July,
1968, being Company Petition No. 28 of 1968 by Ambica Dyes and Chemicals and
Company Petition No. 29 of 1968 by Popular Dyestuffs and Chemical Company. On
the application filed by the company under section 391(1), the court gave
direction on 4th July, 1968, for convening meetings. The petitioners in Company
Petition No. 24 of 1968 filed Company Petition No. 35 of 1968 on 29th July,
1968, for appointment of a provisional liquidator which petition was granted by
the court and the official liquidator attached to this court was appointed as
provisional liquidator of the company and since then the provisional liquidator
is in possession of the assets of the company. The meetings of the unsecured
creditors and members of the company were held on 5th and 6th October, 1968,
and final meeting of the secured creditors was held on 9th December, 1968. The
chairman appointed by the court to preside over these meetings submitted his
report on 16th December, 1968. Thereafter the petitioner applied for and
obtained leave in Company Application No. 1 of 1969 on 13th January, 1969, to
file substantive petition under section 391(2) of the Companies Act for
sanctioning the scheme of compromise and arrangement as approved by the
creditors and members as provided by rule 79 of the Companies (Court) Rules,
1959, because the company as represented by the provisional liquidator was not
willing to file the substantive petition. The court granted leave to file this
substantive petition, whereupon the petitioner filed substantive petition on
1st February, 1969. The petition was admitted on 3rd February, 1969. The court
gave directions for advertising the petition in various newspapers and a notice
was also directed to be issued to the Central Government as envisaged by
section 394-A of the Companies Act. In the advertisement issued in the
newspapers it was stated that the court would take up this petition for hearing
on 8th March, 1969, and anyone interested in the company may come and appear
either to oppose or support the petition. The hearing of the petition had to be
adjourned from time to time as the petitioner had not submitted the latest
financial position of the company as required by the proviso to section 391(2)
of the Companies Act. The petitioner experienced difficulty in disclosing the
latest financial position of the company because the provisional liquidator was
in charge of the company and it appears that the books of accounts of the
company were not written, as also the petitioner being creditor had no access
to the books of accounts of the company. On a judge's summons taken out by the
petitioner, the court gave certain directions and appointed auditors to prepare
the statement showing the latest financial position of the company. After the
auditors submitted detailed reports disclosing the latest financial position of
the company the petition was set down for hearing.
At
the hearing of the petition Mr. R.N. Oza appeared for the Union Bank of India,
a secured creditor of the company, Mr. B. R. Shah appeared for the Employees'
State Insurance Corporation, Mr. S. N. Shelat appeared for two creditors,
namely, M/s. Atul Cotton Traders and M/s. Amarshi Damodar, Mr. C. C. Gandhi
appeared for Indian Electro Chemical Limited, Mr. R.M. Gandhi and Mr. R.P. Bhatt
appeared for the Regional Provident Fund Commissioner and Mr. S. B. Majumdar
appeared for the Textile Labour Association and they all supported the scheme.
Mr. S. B. Vakil appeared for the creditors who had filed Company Petition No.
24 of 1968 for winding up the company and for Messrs. East India Company
instructed by Messrs. Ambubhai Divanji and for Asia Electric India Private
Limited and opposed the scheme. Mr. B.J. Shelat appeared for Ambica Chemicals
and Dyes, petitioner in Petition No. 28 of 1968 and Popular Dyestuffs and
Chemicals, petitioner in Company Petition No. 29 of 1968—both of whom are the
creditors of the company—and opposed the scheme. Mr. L.T. Shah appeared for the
provisional liquidator who submitted to the orders of the court.
The
scheme as finally submitted to the court for its sanction envisages
reorganization of the share capital of the company which includes reduction of
the share capital by reducing the face value of the ordinary share of Rs. 1000
fully paid to Rs. 250 fully paid, and preference share of Rs. 100 fully paid to
Rs. 25 fully paid. The scheme also envisages increase of share capital by issue
of shares to the unsecured creditors of the company excluding the workers to
the tune of 50% of the verified claim of each unsecured creditor. The scheme
envisages dismantling and scrapping of Unit No. II of the mills of the company
and the sale proceeds to be utilised towards the payment to the secured
creditors, namely, Union Bank of India and the Regional Provident Fund Commissioner.
After Unit No. II is scrapped, the open land is to be let out to the intending
lessee which will fetch a steady income. It is proposed to restart Unit No. I
of the mills of the company. The secured creditors are to be paid in full in
the manner set out in the scheme. The balance of 50 per cent, of the claim of
the unsecured creditors are to be frozen for a period of two years and
thereafter the said claims are to be satisfied as provided in the scheme. The
dues of the workers are to be paid by certain stages. Some of the detailed
features of the scheme will be examined while considering the objections raised
by those contesting the scheme.
Before
the court accords its sanction to any scheme of compromise and arrangement, it
would normally expect to be satisfied about three important matters, namely,
(i) whether the statutory provisions have been complied with or not; (ii)
whether the class or classes have been fairly represented; and (iii) whether
the arrangement is such as a man of business would reasonably approve. As the
scheme was very vehemently contested and a number of contentions have been
raised by Mr. Vakil, these three aspects have been vigorously debated and they
will be considered while considering those objections.
Mr.
S. B. Vakil, who was the principal contender at the hearing of this petition,
contested the scheme on the following grounds:
(1) The petitioner has not satisfied the
requirement contained in the proviso to section 391(2) by not making necessary
disclosures at the proper time and it being a condition precedent to the
court's exercise of jurisdiction under section 391(2), the present petition
must fail.
(2) The proposed scheme is not a proper
alternative to an order for winding up the company in view of the fact that the
company is guilty of giving a number of fraudulent preferences in favour of the
Union Bank of India, the Regional Provident Fund Commissioner and five other
creditors which can only be investigated and avoided in winding up proceedings.
(3) The proposed scheme envisages
scrapping of Unit No. II and part of Unit No, I of the mills of the company
and, in the absence of a permission for scrapping a textile mill, it would be
illegal to sanction the scheme.
(4) The proposed scheme envisages
reorganisation of the share capital of the company, including reduction and
increase of share capital, which cannot be done without going through the whole
gamut of the procedure prescribed for the same and as it is an inseverable part
of the scheme, it would be futile to sanction the remainder of the scheme in
its mutilated form.
(5) In the absence of proper directions
for convening separate meetings of different classes of creditors and members
of the company, appropriate meetings of distinct classes of members and creditors
were not held and therefore, it is not possible to say that the proposed scheme
has been approved by requisite majority of different classes of creditors and
members.
(6) A proper statement as required by
section 893(1) and as directed by the court's order, dated 26th June, 1968, in
Company Application No. 23 of 1968 was not sent along with the notice convening
the meetings of members and creditors of the company.
(7) The meetings of creditors and
members were conducted in an irregular manner and, therefore, the votes
recorded at such meetings cannot be relied upon to show that the scheme has
been approved by the requisite majority of creditors and members.
(8) Even if it be held that the meetings
were properly conducted, in fact the scheme is not approved by a statutory
majority of creditors and members; but assuming that the other view is
possible, the court on the analysis of votes recorded at the meeting should not
exercise its discretion in favour of the scheme so as to impose it on the
dissenting members and creditors.
(9) The scheme is not commercially and
economically viable or feasible and is in fact unfair and unreasonable; the
court should not exercise its discretion in favour of such a scheme. These
grounds will be dealt with in the order in which they are set out.
Re.
Ground No. 1. Section 391(1) and (2) reads as under:
"391. Power to
compromise or make arrangements with creditors and members.—(1) Where a compromise
or arrangement is proposed—
(a) between
a company and its creditors or any class of them; or
(b) between
a company and its members or any class of them;
the
court may, on the application of the company or of any creditor or member of
the company, or, in the case of a company which is being wound up, of the
liquidator, order a meeting of the creditors or class of creditors, or of the
members or class of members, as the case may be, to be called, held and
conducted in such manner as the court directs.
(2) If a majority in
number representing three-fourths in value of the creditors, or class of
creditors or members, or class of members, as the case may be, present and
voting either in person or, where proxies are allowed under the rules made
under section 643, by proxy, at the meeting, agree to any compromise or
arrangement, the compromise or arrangement shall, if sanctioned by the court,
be binding on all the creditors, all the creditors of the class, all the
members, or all the members of the class, as the case may be, and also on the
company, or, in the case of a company which is being wound up, on the
liquidator and contributories of the company.
Provided
that no order sanctioning any compromise or arrangement shall be made by the
court unless the court is satisfied that the company or any other person by
whom an application has been made under sub-section (1), has disclosed to the
court, by affidavit or otherwise, all material facts relating to the company,
such as the latest financial position of the company, the latest auditor's
report on the accounts of the company, the pendency of any investigation
proceedings in relation to the company under sections 235 to 251, and the
like."
The
contention is that before the court can proceed to consider whether the scheme
of compromise and arrangement should be sanctioned or not, the party sponsoring
the scheme must disclose to the court by an affidavit or otherwise all material
facts relating to the company, such as, the latest financial position of the
company, latest auditor's report on the accounts of the company, the pendency
of any investigation proceedings in relation to the company under sections 235
to 251, and the like. It is undoubtedly true that before the court can accord
sanction to a proposed scheme of compromise and arrangement, between the
company and its creditors or any class of them; or between the company and its
members or any class of them, approved by a majority in number representing
three-fourths in value of the creditors or class of creditors or members or
class of members, as the case may be, present and voting either in person or,
where the proxies are allowed, by proxy, the court must be satisfied amongst
other things that company or the sponsor of the scheme has disclosed all
material facts relating to the company. The contention is that this disclosure
should be made at the time when the petition is filed under section 391(1) and
as that has not been done, the court should ignore whatever is disclosed after
the petition for sanctioning the scheme is filed under section 392(2). Sections
391(1) and 391(2) refer to two distinct stages. Whenever a compromise or
arrangement is proposed between a company and its creditors or any class of
them or between a company and its members or any class of them, the court on
the application of the company or any creditor or member of the company or in
the case of the company which is being wound up, of the liquidator, order a
meeting of the creditors or members or any class of them as the case may be.
Such an application shall be moved by judge's summons supported by affidavit to
which the proposed scheme of compromise and arrangement should be annexed. The
judge's summons can be moved ex pate unless the petition is by some one other
than the company in which case, a notice to the company has to be served. The
court may give various directions at the hearing of this summons set out in
rule 69. Once these directions are given, application under section 391(1)
would be disposed of. Nothing further is required to be done until after the
meetings directed to be convened are held and the chairman submits his report,
whereafter a substantive petition for sanctioning the scheme can be filed as
envisaged by section 391(2) and rule 79. Before the court can accord sanction
to the scheme, the petitioner or the company must disclose latest financial
position of the company and the latest auditor's report as required by the
proviso to sub-section (2). Proviso is annexed to sub-section (2) which
envisages a distinct stage from sub-section (1). The submission is that
disclosures as required to be made by the proviso should be made at the stage
of seeking directions under sub-section (1) of section 391. The submission
would stand negatived apart from anything else by the very language in which
the proviso is cast and its' location in the scheme of section 391. Firstly,
the proviso is engrafted to sub-section (2) which envisages a distinct stage
from sub-section (1); secondly, the opening words of the proviso:
"provided no order sanctioning any compromise or arrangement shall be made
by the court unless .........." would manifestly indicate the intention of
the legislature that the disclosure is to be made at the stage when the court
is called upon to sanction the scheme. If the submission had any merit in it,
it was perfectly open to the legislature to engraft the proviso to subsection
(1) and in that event, the language would be "provided no direction shall
be given for convening meeting unless". Undoubtedly that has not been
done. If sub-sections (1) and (2) of section 391 envisage two distinct stages,
namely, (i) giving direction for convening the meeting for considering the
proposed scheme and (ii) the independent stage when the court would be called
upon to consider whether the scheme should or should not be sanctioned and if
the disclosure is to be made before the court at the time when the court is
called upon to sanction the scheme, it is not possible to accept the submission
that the disclosure ought to be made at the initial stage when an application
is made under section 391(1).
Mr.
Vakil however urged that disclosure as envisaged by the proviso has to be made
either by the company or by any other person by whom application has been made
under sub-section (1) which gives strong indication that the disclosure ought
to be made at the initial stage when an application is filed under section
391(1). But as the summons under subsection (1) is to be moved ex parte,
objection can be taken about the non-disclosure at the initial stage only at
the time when the court proceeds to accord sanction to the scheme and,
therefore, the proviso is engrafted to sub-section (2). It was urged that an
application under section 391(1) can be made by a creditor or member who may
not be in possession of the latest financial position of the company a notice
to the company is made obligatory under rule 68. This notice to the company is
made obligatory because only the company would be able to disclose the latest
financial position. It is no doubt true that a compromise or arrangement can be
proposed by either a creditor or a member of the company but it is essentially
a compromise or arrangement between the company and its creditors or between
the company and its members and if the application is made by some one other
than the company it was considered desirable that a notice should be given to
the company before direction for convening the meetings are given. Merely
because a notice is to be given to the company under rule 68 before directions
are given and because the advocate of the company has to file the form of
advertisement and statement accompanying the notice as required by Form No. 35
in which order convening the meetings has to be made, it cannot be said that
the disclosures ought to be made at that stage. Mr. Vakil however urged that in
this application under section 391(1), judge's summons for seeking directions
for convening the meeting to consider the proposed scheme of compromise and
arrangement would be moved ex parte and the court would not be able to give
proper directions in the absence of material disclosures as envisaged by the
proviso and, therefore, even though the language of the proviso and its
location may apparently indicate that the disclosure has to be made at the
stage when the court is called upon to consider the scheme, for very good
reasons, the court should interpret the proviso to mean that the disclosure
should and ought to be made at the initial stage. It was urged that when an ex
parte judge's summons is moved under sub-section (1) and the court is required
to give direction for convening the meeting, the court has to determine,
amongst other things, class or classes of creditors and class or classes of
members whose meetings have to be convened and has to determine the value of
the creditors and/or members or creditors or members of any class as the case
may be, and the court would not be able to do it unless the latest financial
position including the auditor's report is disclosed to the court. It was also
urged that in order to enable the court to give proper statement under section
393(1)(a) which must accompany the notice convening the meeting so as to give
those who are to attend the meeting, the necessary information to enable them
to cast their votes intelligently, it is absolutely necessary that the
aforementioned disclosures should be made at that stage. It was very vehemently
urged that the sanction of the court to the scheme is of secondary importance,
its approval by the creditors and members whose vital interest in the company
are really at stake is of primary importance; and unless the scheme is properly
considered by different classes of creditors and members, it cannot be taken up
for consideration by the court. Therefore, the distinct and homogeneous class
of creditors and members should be properly drawn up while giving directions for
convening meetings, and it would be impossible to do so in the absence of
disclosure about the latest financial position of the company, at that stage.
It was further urged that material facts which ought to be disclosed as
required by the proviso would include all the relevant facts which would go to
show that the company is liable to be wound up and that the compromise and
arrangement is fair and reasonable and is not mala fide and that it would be a
proper alternative to the winding up of the company the material facts required
to be disclosed would also include the information which would help the court
in determining the class of creditors or members whose separate meetings should
be convened and their values to be properly determined.
Affidavit
in support of the judge's summons moved under section 391(1) has to be drawn up
in Form No. 34 —a perusal of which shows that in the affidavit the party
seeking the directions of the court which would of necessity be either the
company or its creditor or member, must set out the circumstances that have
necessitated the proposed compromise and arrangement, the object sought to be
achieved by it, the terms of the compromise and arrangement, the effect if any
of the compromise and arrangement on the material interests of the directors
managing director, managing agent, secretaries and treasurers or manager of the
company and when the compromise and arrangement affects the interest of the
debenture-holders its effect on the material interests of the trustees of the debenture
trust deed. It must further be disclosed in affidavit that classes of creditors
or members with whom the compromise or arrangement is to be made and if the
compromise and arrangement is between the company and its members it should
further be stated whether any creditor or class of creditors are likely to be
affected by it. The affidavit must show that different kinds of meetings of
different classes of persons are required to be convened. It is obligatory upon
the applicant under section 391(1) to set out the aforementioned facts in the
affidavit in support of the judge's summons. The aforementioned facts, if
properly disclosed, would enable the court to give proper directions as
envisaged by rule 69 and the absence of the latest financial position of the
company or the latest auditor's reports would not be handicap in the court
giving proper directions. In my opinion, the details required to be mentioned
in the affidavit have been so prescribed to enable the court to give proper
directions and no disclosures are required to be made as required by the
proviso at that stage. The form in which the affidavit is required to be made
further strengthens the conclusion that the proviso does not come into play
when the court deals with the petition under section 391(1) but it comes into
play only at the later stage.
It
was however urged that if the court is going to rely on the affidavit in
support of the judge's summons in Company Application No. 23 of 1968, for reaching
a conclusion that relevant information was disclosed in the affidavit, it would
be necessary to consider in detail the affidavit of Mr. B. I. Patel, the
constituted attorney of the company who filed his affidavit in support of the
judge's summons. It was urged that the affidavit of Mr. Patel did not disclose
the fact that the company had suffered consent decrees and charges were created
on the properties of the company indicating that the company was guilty of
giving fraudulent preferences in favour of the creditors in whom the then
directors were vitally interested. It was urged that this affidavit does not
disclose the fact that various petitions praying for winding up the company
were presented and were pending; nor the fact that the company had executed two
mortgages, one in favour of the Union Bank of India in January 1968 and the
other in favour of the Regional Provident Fund Commissioner in May 1968; and
that the company had incurred losses in the last year to the tune of Rs. 45
lakhs and odd. The affidavit of Mr. Patel is in the prescribed form and it sets
out various details necessary for giving proper directions. It may be mentioned
that Mr. Patel had annexed the latest balance-sheet of the company upto 31st
March, 1967, to the affidavit. He had also stated the dues of the managing
agents, Indequip group of companies and dues of the managing director as well
as the members of his family and the effect of the scheme on their claims.
Therefore, whatever was necessary at that stage was disclosed in the affidavit
and nothing further was required to be done at that stage.
Mr.
Vakil further urged that the proposed scheme is to be considered by the members
and creditors of the company and when they are considering the scheme, they
should ordinarily have all the relevant information about the financial
position of the company so that they can bring to bear upon the subject their
independent (intelligent) commercial judgment as to whether the scheme should
or should not be approved. If the matter is viewed from this angle, urged Mr.
Vakil, it would indicate that disclosure should be made at the stage when the
application is filed under section 391(1) because that information would be
available to the creditors and members in their meeting. It was contended that
if the creditors and members are called upon to vote upon the scheme without
supplying them necesssary information which would help them in judging the
scheme in its proper perspective, their approval of the scheme in sheer
ignorance of the relevant facts would be of no avail. The approval of the
scheme by the creditors and members must be after bringing to bear upon the
subject their intelligent judgment based upon full disclosure as to the
existing stage of affairs of the company and its future which is sought to be
assured by the proposed scheme of compromise and arrangement. Mr. Vakil
referred to In re Travancore National & Quilon Bank Ltd.
An objection was raised before the court considerig the scheme that as the
scheme was not based upon correct information as to the affarirs of the company
and has not had the intelligent support of the body of creditors who are
supposed to have given assent to the scheme and there is no guarantee that the
realizations therein promised would be realised. Referring to two English cases
it has been observed that any scheme which is approved must prima facie appear
to be based on correct information and data. However, having thus observed the
court further proceeded to observe that this does not mean that the application
for sanctioning the scheme should be rejected on the ground that sufficient
information was not supplied at the meeting of the creditors when they approved
the scheme. This would not bear out the submission that the disclosure must be
made at the initial stage. Reference was also made to In re Calcutta Industrial
Bank Ltd.
wherein an objection was taken that the books of accounts of the company were
not available at the meeting of the creditors and that the creditors were
prevented from putting questions. Even though these grounds were considered, it
may be stated that on the facts found in the Chariman's report no weight was
attached to the aforementioned objections. Reference was also made to In re
Bharati Central Bank Ltd.
The question raised before the court was whether the creditors and members who
had unanimously approved the scheme had full information of all the aspects and
were acting honestly and in good faith at the meeting. After considering the
evidence in the case it was observed that it was impossible to say that the
creditors had full and fair knowledge of all the relevant facts on which they
could come to an intelligent decision or that they had applied their
independent mind to the scheme. In my opinion, no proposition of law can be
deduced from the aforementioned case as suggested by Mr. Vakil that the
disclosure ought to be made at the initial stage. It is always a question of
fact whether the creditors and members did consider the scheme in the various meetings
after getting the relevant information which would help in judging the scheme
on its merits. But it cannot be said that as discloures were not made at the
initial stage when the directions were given by the court the requirements of
the proviso were not complied with.
Looking
to the language of the proviso especially its opening words:
"Provided
that no order sanctioning any compromise or arrangement shall be made..."
and the location of the proviso in the scheme of section 391 and especially the
fact that section 391(1) and section 391(2) envisage two distinct and
independent stages when the court is called upon to apply its mind to the
proposed scheme of compromise and arrangement and the contents of the affidavit
required to be drawn up in prescribed form in support of the judge's summons
under section 391(1) it is not possible to accept the submission of Mr. Vakil
that disclosures as required by the proviso shonld be made at the intial stage
when the application is made under section 391(1). In my judgment, these
disclosures are required to be made when a petition is filed under section
391(2) for sanctioning the scheme and must be available when the court proceeds
to examine the scheme to find out whether sanction should be accorded to it or
not.
As
a second limb of the argument, it was contended that even if it be held that
disclosures as required by the proviso are to be made at the stage when the
court is considering the petition for sanctioning the scheme, in fact, no
disclosures have been made in this case and therefore, the court should not
accord sanction to the scheme. It was argued that the proviso being couched in
the negative form is of a mandatory character and disclosures being a condition
precedent to the court's exercise of jurisdiction for sanctioning the scheme,
unless condition precedent is fully satisfied, the court will have no
jurisdiction to sanction the scheme. It is true that the proviso is cast in the
negative form. It is equally true that the court is precluded from according sanction
to the scheme unless the disclosure as required by the proviso are made. As the
proviso is prohibitory in character, it is not possible to treat it as merely
permissive (vide High Commissioner for India and the High Commissioner for
Pakistan v. I.M. Lall )
The proviso was introduced in the year 1965 and as it is prohibitory in
character and provides condition precedent to the court's exercise of jurisdiction
for sanctioning the scheme it definitely appears to be mandatory in character
and must be strictly complied with. The question is whether in fact it has been
complied with or not. When the present petition was filed, the company was in
charge of the provisional liquidator. The petitioner being a creditor could not
produce documents showing latest financial position of the company. In order to
make available latest financial position of the company and latest auditor's
report, the petitioners took out a judge's summons in Company Application No.
11 of 1969 for a direction that the provisional liquidator who is in charge of
the company should supply the latest financial position and all material facts
pertaining to the said company. The court gave certain directions as a result
of which Mahendra M. Patel & Company, Chartered Accountants, were appointed
as auditors to prepare the latest financial position of the company and to
submit the auditor's report. It transpired that the books of accounts for certain
period were not written and under the supervision of the provisional
liquidator, the ex-directors of the company were permitted to complete the
books of accounts. Thereafter the chartered accountants prepared the latest
balance-sheet upto 29th July, 1968. Company Application No. 23 of 1968, was
filed under section 391(1) on 27th June, 1968. The mills of the company are
closed from 2nd April, 1968. Therefore, when the books of accounts till 29th
July, 1968, are prepared and auditors have audited the books, it cannot be
gainsaid that the latest financial position and latest auditor's reports have
been disclosed by the petitioner. The requirement of the proviso has certainly
been complied with. But Mr. Vakil urged that the auditors did not get
clarification on a number of points set out in the report under the heading
"Notes forming part of the accounts for the period 1st April, 1968, to
29th July, 1968." It was urged that, unless these points have been
clarified, it cannot be said that the latest financial position of the company
is made available to the court. It was also contended that looking to what the
auditors have stated in the report, the latest financial position of the
company is not capable of being ascertained at the present stage. It was also
contended that the dues of certain creditors have not been properly verified
and there is difference in the trial balance prepared by the auditors to the
tune of Rs. 18,214 which the auditors have debited to the suspense account. It
is undoubtedly true that the auditors have set out various queries in the
report, but these queries did not in any manner come in the way of proper
appreciation of the latest financial position of the company as disclosed in
their reports. There may be some difference here or there but that is not
material because the court is not examining the accounts of the company or any
allegation of embezzlement or defalcation. The court at this stage is concerned
with the financial position of the company in its broad outlines. In fact, the
court would primarily be concerned with the assets and liabilities of the
company and a few minor details here or there would not be of any consequence
while considering the scheme of compromise and arrangement. These details may.
be of importance when the claim of each creditor qua the company is being
considered; but while considering the scheme of compromise and arrangement, the
court, more particularly, is concerned with the assets and liabilities of the
company and they are admittedly set out in the reports submitted by the
auditors. It may be mentioned that the petitioner has filed the affidavit of
Gopaldas P. Parikh at page 506 of the record to which is annexed the
clarifications submitted by the directors to the queries raised by the
auditors. However, it is not necessary to go into them at this stage. Suffice
it to say that proper disclosures in their broad outlines have been made so as
to comply with the proviso to section 391(2). In my judgment, therefore, the
first ground of attack is without merits and must be negatived.
Reg.
Ground No. 2.—Second ground of attack was that the proposed scheme is not a
proper alternative to an order for winding up the company in view of the fact
that the company is guilty of giving a number of fraudulent preferences in favour
of the Union Bank of India, the Regional Provident Fund Commissioner and five
other creditors, namely, (1) Indian Electro Chemicals Ltd., (2) Dyestuffs and
Chemicals Private Ltd., (3) Indequip Ltd., (4) Amarshi Damodar, and (5) Messrs.
Atul Cotton Traders, which can only be investigated and avoided in winding up
proceedings. The contention is that the proposed scheme was put forth by the
directors of the company in order to shield themselves and to prevent
investigation of their misdeeds, misfeasance and non-feasance during their
management of the affairs of the company. It was very vehemently contended that
if the petition for sanctioning the scheme is rejected, the only alternative
open to the court would be to wind up the company. If the company is wound up
the official liquidator would be able to investigate the management carried on
by the directors of the company. The official liquidator would also be able to
avoid fraudulent preference alleged to have been granted by the directors of
the company in favour of their chosen creditors as also in favour of the Union
Bank of India and the Regional Provident Fund Commissioner and that neither
this investigation could be made nor fraudulent preferences could be avoided if
the scheme is sanctioned. In other words, it was urged that sanctioning of the
scheme would provide a shield to the ex-directors of the company to cover up
their misdeeds which brought the company to a state of complete ruination. The
charge is rather very serious and if prima facie it could have been shown that
the ex-directors were guilty of giving fraudulent preferences to their chosen
creditors and further if these fraudulent preferences could not have been
avoided except on the pain of winding up the company, I would have experienced
considerable hesitation in further considering the scheme.
The
company was indebted to the tune of Rs. 2,63,129.92 to Indian Electro Chemicals
Ltd., Rs. 5,79,650 to Dyestuffs and Chemicals Private Ltd., Rs. 33,14,783 to
Indequip Ltd., Rs. 3,38,267.96 to Messrs. Amarshi Damodar and Rs. l,86,225.50
to Messrs. Atul Cotton Traders. Gopaldas P. Parikh is vitally interested in the
first mentioned three creditors and one Manubhai Amarshi, who carries on
business under the name and style of Messrs. Amarshi Damodar and Messrs. Atul
Cotton Traders is a close friend of Gopaldas P. Parikh. Manubhai Amarshi has
supplied cotton to the company, Indian Electro Chemicals Ltd., and Dyestuffs
and Chemicals Private Ltd. had supplied goods and stores to the company;
Indequip Ltd. had not only supplied goods and stores but also extended cash
loans from its sharafi accounts to the company. Gopaldas P. Parikh holds large
blocks of shares in the Indequip Ltd. and is virtually the owner of the Indian
Electro Chemicals Ltd. and Dyestuffs and Chemicals Private Ltd. Thus there is
no room for doubt that Gopaldas Parikh was vitally interested in the
aforementioned five creditors. The first petition for an order for winding up
the company was filed in the year 1967 being Company Petition No. 27 of 1967.
That was withdrawn on 24th April, 1968. By that time, another petition filed
for winding up the company was pending. During the pendency of this petition,
it appears that the aforementioned five creditors filed suits against the
company which was then being managed by Anil Parikh, son of Gopaldas P. Parikh,
Surotam Hathising and Linubhai Banker. Undoubtedly, Gopaldas P. Parikh was the
boss of the whole show. Indian Electro Chemicals Ltd. filed Summary Suit No.
789 of 1968. Dyestuffs and Chemicals Private Ltd. filed Summary Suit No. 790 of
1968. Indequip Ltd. filed Summary Suit No. 791 of 1968, Messrs. Amarshi Damodar
filed Summary Suit No. 768 of 1968 and Messrs. Atul Cotton Traders filed
Summary Suit No. 977. 1968 against the company for recovering their respective
claims as set out above. All these suits were filed on 15th April, 1968. On the
next day, the board of directors of the company resolved to suffer consent
decrees in all these suits. The company suffered consent decrees for the full amounts
claimed by each creditor. So far no serious objection could have been taken;
but the company over and above suffering consent decrees without investigating
the exact amount payable to each of the creditors, the directors went further
and created charges in favour of each of the creditors for its respective
claims over the movable and immovable properties of the company. The suits were
filed by Mr. B. A. Kayastha, who, it was urged, is an associate of Messrs I. M.
Nanavati & Company Associates and Mr. I. M. Nanavati has been throughout
appearing for the company. In the suits Mr. Nanavati had not appeared for the
company. Not only the suits were not contested, but even the plaints drawn up
show very sketchy averments as to how the amounts were due. Apart from that,
the company suffered decrees and created charges in favour of each of the
aforementioned creditors. These decrees were suffered as stated earlier on 17th
April, 1968, when winding up petition was pending against it and the mills of
the company had already closed down. The creation of a charge on immovable
property would be a transfer of property which, in certain circumstances,
either in winding up proceedings or insolvency proceedings, can be attacked as
fraudulent preference and if so proved, the transfer can be declared to be
void. The attempt of the then directors of the company, which included one Anil
Gopaldas Parikh, son of Gopaldas P. Parikh, who was vitally interested in the
creditors, was to give benefit or preference to the aforementioned creditors to
the detriment of the other unsecured creditors of the company. On the face of
it, the creation of the charge was fraudulent preference and having given when
the petition for winding up was pending or having been given within a period of
6 months prior to the presentation of these petitions for winding up the
company, it would certainly be fraudulent preference. The zeal evinced by the
directors in these circumstances in suffering decrees smacks of giving an
unfair advantage to the creditors in whom they were vitally interested and
detrimental to the financial interest of the company. This conduct is
unbecoming of a responsible director of a company. As between a company and
director, it is fair to presume that there is a fiduciary relationship and if
that presumption is proper, the directors in suffering decrees conducted
themselves in a manner unbecoming a custodian of the interest of the company.
Their action in giving charges would very adversely hit the other unsecured
creditors. The directors preferred between creditors and creditors and
especially preferred those in whom they were vitally interested and could
certainly be stigmatized as guilty of giving fraudulent preferences. Mr. Gandhi
who appeared for the petitioner made no attempt to defend this action of the
directors in suffering decrees. One may not take a very serious objection to
the suffering of the decrees but for the manner in which they were suffered;
but the most undesirable part is of giving charges in favour of select and
chosen creditors. If these charges could not have been avoided except in
winding up proceedings as fraudulent preferences, no alternative would have
been left but to reject the scheme and wind up the company. However, I would
presently point out that charges created in favour of the aforementioned
creditors no more subsist.
After
the charges were created in favour of the aforementioned live creditors, an
application was made to the Registrar of Companies in each case for registering
the charges as required by section 125 in Part V of the Companies Act. However,
Gopaldas P. Parikh filed an affidavit at page 590 of the record in which he has
stated that, even though the applications were made to the Registrar of
Companies in respect of the charges created in favour of the aforementioned
five creditors, the said charges are not registered. The Registrar of Companies
was summoned to the court to find out whether the charges were registered by
him or not. The Registrar informed the court in the presence of the parties at
the hearing of this petition that certain corrections had to be made in the
form in which the applications were made and he had informed the directors of
the company to make necessary corrections. But before these corrections could
be made by the directors, a provisional liquidator was appointed with the
result that the corrections were not made and charges were not registered; and
unless the provisional liquidator makes the necessary corrections, the charges
cannot be registered and the provisional liquidator informed the court that he
does not wish to make corrections. If the scheme is sanctioned and the company
gets going, the directors will be precluded from making corrections. If the
corrections as suggested by the Registrar are not made, the charges cannot be
registered and if the charges are not registered, they are void as provided in
section 125 of the Companies Act.
It
must further be noticed that the aforementioned five creditors have
specifically given up their charges. Gopaldas P. Parikh as director of Indequip
Ltd. has filed an affidavit at page 499 of the record. He has annexed the
resolution of the Indequip Ltd. This resolution would show that Indequip Ltd.
has accepted the scheme and has agreed to accept 50 per cent, of its dues in the
form of shares and other 50 per cent, as provided by the scheme, which I would
point out at a later stage. Indequip Ltd. has agreed not to claim and discharge
the company from the liability of paying the amount if the scheme is to be
sanctioned. The resolution further shows that the charge created in favour of
Indequip Ltd. is relinquished and will not be enforced. In the affidavit of
Gopaldas P. Parikh at page 590, he has stated that Indequip Ltd. would not
pursue the application for registering the said charge and the application
should be deemed to have been withdrawn. There is also the affidavit of
Prabhakar L. Khale, Director of Dyestuffs and Chemicals Private Ltd., at page
495 to which is annexed the resolution at page 497, which is to the same effect.
There is also an offer on behalf of Dyestuffs and Chemicals Private Ltd. not to
claim the remainder of its 50 per cent, dues if the scheme is sanctioned. The
charge in favour of Dyestuffs and Chemicals Private Ltd. is relinquished.
Further affidavit is filed by Mr. Khale in which he has stated that the
application for registration will not be pursued and he undertook to intimate
to the Registrar that the application for registration of the charge is
cancelled. Mr. S. N. Shelat, learned advocate who appeared for Messrs. Atul
Cotton Traders and Messrs. Amarshi Damodar, filed two statements of appearance
at pages 694 and 695 signed on behalf of the aforementioned two creditors
accepting the scheme and the charges in their favour stand cancelled. It may also
be mentioned that the aforementioned two creditors by their two letters dated
15th October, 1969, at pages 533 and 534 of the record have informed the court
that they accept the scheme, which in terms means that the charge in their
favour would be ineffective and of no consequence. Then remains the case of
Indian Electro Chemicals Ltd. Mr. C. C. Gandhi, learned advocate appearing for
the Indian Electro Chemicals Ltd., at the earlier stage of hearing stated that
he would oppose the scheme on behalf of his clients. Subsequently, during the
course of hearing a statement signed by Mr. C. C. Gandhi, advocate for the
Indian Electro Chemicals Ltd., has been filed at page 702 of the record to
which is annexed a letter from the clients of Mr. Gandhi whereby they informed
the court that they do not oppose the scheme. Now, the scheme provides that 50
per cent, of the dues of the unsecured creditors of the Indian Electro
Chemicals Ltd. will be converted into share capital by issue of shares and 50
percent, will be paid in a certain manner after some period. Indian Electro
Chemicals Ltd. does not oppose the scheme, meaning thereby that it is prepared
to accept its dues in the manner provided in the scheme for payment to the
unsecured creditors. The scheme does not provide for payment to Indian Electro
Chemicals Ltd. as secured creditors. The scheme in fact treats Indian Electro
Chemicals Limited as a secured creditor. If Indian Electro Chemicals Limited
does not oppose the scheme it would only mean that it would accept the position
that it is not a secured creditor and that payment would be made to it in
accordance with the provisions for the payment to other unsecured creditors. It
would thus appear that all the five charges created by the decrees, which could
have been avoided as fraudulent preferences in the event of the winding of the
company, have been withdrawn, relinquished or cancelled and, at any rate, are
void for want of registration and of no consequence in law. The result which
Mr. Vakil seeks to achieve in winding up proceedings is achieved while
sanctioning the scheme.
Turning
next to the mortgage in favour of the Union Bank and Regional Provident Fund
Commissioner, it may be mentioned that Mr. Vakil, after perusing the documents
produced by the bank with the affidavit of Mansukhlal Hiralal Trivedi at page
601, did not suggest that the mortgage in favour of the bank for Rs. 13,00,000
dated January 19, 1968, would be a fraudulent preference. Suffice it to say
that the bank had advanced cash loan of Rs. 13 lakhs on the security of the
State Government to the company and the mortgage security was given towards
this cash loan of Rs. 13 lakhs. By no stretch of imagination such a mortgage
could be styled as a fraudulent preference.
It
was next contended that the deed of mortgage executed by the company in favour
of the Central Board of Trustees for the Provident Fund on May 21, 1968, would
be a fraudulent preference given to the said trustees. It appears that Rs.
15,05,418.37 were due and payable by the company in respect of the provident
fund contribution and Rs. 47,693.80 for administration charges to the Regional
Provident Fund Commissioner. It appears that the company had committed default
in payment of this amount and the properties of the company were attached. Subsequently,
on May 21, 1968, the company executed a mortgage deed in favour of the Central
Board of Trustees. It was urged that a petition for winding up the company was
pending when this mortgage deed was executed by the company and that, in the
absence of the mortgage, the Central Board of Trustees for the Provident Fund
would be unsecured creditors and they are given fraudulent preference by
executing the mortgage deed in their favour and that would be a fraudulent
preference. It is undoubtedly true that the mortgage deed in favour of the
Central Board of Trustees was executed on May 21, 1968, when the petition for
winding up the company was pending in the court. It is, at any rate, executed
within six months prior to the institution of the petition which is now pending
and in which prayer for winding up the company is made. If that petition
succeeds, investigation will have to be made whether the mortgage in favour of
the Central Board of Trustees would amount to a fraudulent preference within
the meaning of section 531 of the Companies Act. Mr. R. M. Gandhi, learned
advocate who appeared for the Regional Provident Fund Commissioner, urged that
the properties of the company were already attached by the revenue authorities
at the instance of the Central Board of Trustees right from the year 1961-62
and the Central Board of Trustees gave further time to pay up the amount on the
company executing the mortgage deed in favour of the Central Board of Trustees.
Accordingly, the company executed the mortgage deed. Mr. Gandhi, however, urged
that, even apart from this, the circumstances in which the mortgage deed came
to be executed would themselves indicate that it could not be avoided as a
fraudulent preference. Mr. R. M. Gandhi referred to the arguments of Mr. D. C.
Gandhi in which he has stated that the directors of the company were threatened
with prosecution and under the threat of prosecution they executed the mortgage
deed. Mr. R. M. Gandhi, however, urged that, assuming that this submission is
factually correct, yet, execution of the mortgage in favour of the Central
Board of Trustees would not be. a fraudulent preference. Mr. Gandhi urged that,
in order to avoid a transfer of property by a debtor in favour of the creditor
on the ground of its being a fraudulent preference, it must be shown that the
debtor with intent to prefer the creditor has transferred the property, and it
must be a free and volitional act of the party. It refers to the state of mind
of the debtor and it must be shown that the debtor intended to prefer the
creditor or acted in a manner solely with a view to prefer the creditor to the
exclusion of others. If, therefore, it could be shown that the debtor acted
under an apprehension that he would be prosecuted or under a threat of prosecu
tion, the transfer of property by him could not be said to be a free volitional
act of the debtor disclosing an intention to prefer the creditor but it would
appear that he has acted under the compulsion of the circumstances, may be of
his own creation. Reference in this connection may be made to Sharp (Official
Receiver) v. Jackson.
In that case it was found that the trustee had committed breaches of trust and
was insolvent, and, on the eve of his bankruptcy, he conveyed an estate to make
good the breaches of trust, this transfer was sought to be avoided as
fraudulent preference in a bankruptcy proceeding against a trustee. It was held
that the transfer cannot be avoided as fraudulent preference because it was
found that the trustee made the conveyance not with the intention or view or
object whatever it may be called preferring any person in whose favour the
transfer was made but for the sole purpose of shielding himself. In order to
find out whether a transfer of property would amount to fraudulent preference,
the question should be addressed whether it was done to prefer one of the
creditors to the exclusion of others. If it was done not with a view to prefer
one of the creditors but to save one's own skin, say a threat of prosecution
looming large or to avoid prosecution, certainly the transfer could not in such
circumstances be fraudulent preference. This decision has been followed in In
re M. I. G. Trust Ltd.
Reference may also be made to In re F. L. E. Holdings Ltd. In that case a passage from Buckley on the
Companies Acts, 13th Edition (1957), is quoted which shows that as preference
implies selection and selection implies freedom of choice, a payment must in
order to constitute a preference be voluntarily made, and that a payment made
under pressure, e.g., in the shape of proceedings actual or threatened by the
creditor concerned, or fear of such proceedings, is not for this purpose a
voluntary payment. Viewed from this angle, the transfer by way of mortgage by
directors in favour of the Central Board of Trustees would not prima facie
appear to be fraudulent preference as it appears that it was done under the
threat of imminent prosecution.
Recalling
now the submission of Mr. Vakil that the company has been guilty of giving a number
of fraudulent preferences they could not be investigated except in a winding up
proceedings and, therefore, the scheme is not a proper alternative to winding
up, does not carry conviction. The charges created by the decrees in favour of
the five aforementioned creditors, which certainly call for investigation, have
been set aside without having taken recourse to the proceeding in winding up
and two mortgages one in favour of the Union Bank of India and the other in
favour of the Central Board of Trustees of Provident Fund have prima facie no
tinge of fraudulent preference. Therefore, it is not possible to accept the
submission of Mr. Vakil that the fraudulent preferences given by the company
would go unchallenged and uninvestigated, if the scheme is sanctioned.
Mr.
Vakil further urged that apart from this fraudulent preference given by the
directors there are several acts of mismanagement pointed out by the auditors
in their report which cannot be investigated and brought to light except in
winding up proceedings. The accounts of the company were not written from
December, 1967, and they were completed during the course of the proceedings in
the court. They have been audited by Messrs. Mahendra Patel & Company,
Chartered Accountants, and their detailed report is placed on record. It is
true that the auditors have stated that in view of the state of accounts they
are not in a position to express opinion whether the accounts give a fair view
in respect of the balance-sheet as on 31st March, 1968, and 29th July, 1968,
and profit and loss accounts. They have also stated that they were not able to
obtain all the information and the explanation which was necessary. They have
also stated that the books of accounts have not been kept as required by law.
They have also set out certain queries in their report. Those queries will have
to be complied with by the Board of Directors that may come into existence if
the scheme is sanctioned. But Mr. Vakil could not point out to me any specific
case of either embezzlement or of fraud. A very general statement was made that
there are several acts of mismanagement which must be investigated in winding
up proceedings. Such an allegation is rather vague and devoid of details. On
such a vague allegation, the scheme cannot be rejected. But it was urged that
even the debt which the company owes to the aforementioned five creditors
requires to be verified and checked up; and that also cannot be done, unless
the official liquidator in winding up proceedings proceeds to verify the claims
lodged with him by the creditor. In order to ascertain and verify the debts
owed by the company to the aforementioned five creditors, one need not resort
to the extreme provision of the winding up of the company. Those debts can be
verified by an order of this court by the official liquidator as court officer,
and such a direction can be given while sanctioning the scheme. As for the
vehemence with which a grievance was made that there are several acts of
mismanagement and misfeasance committed by the directors of the company that
for the commercial morality and purity of administration of such a public
company it is best to pass an order for winding up the company and investigate
its affairs, it must be said that the last board of directors against whom Mr.
Vakil with a very facile tongue and vituperative language made serious
allegation came into the management of the affairs on 1st January, 1966, and
prior thereto Mr. Chandulal Hiralal Banker, the constituted attorney of Mr.
Vakil's client, was in active management of the company and even during that
period the losses had mounted up to a considerable extent and a land deal in
favour of one Bansidhar Private Limited prima facie appeared to be shady. The
attitude adopted on behalf of Mr. Chandulal Banker totally fails to carry
conviction in the matter and investigation, if need be made, should be made for
a period much prior to 1st January, 1966, when Chandulal and Manubhai were in
active management of the company. But these are hardly considerations on which
it can be said that the scheme approved by a statutory majority is not a proper
alternative to winding up. It is not possible, therefore, to accept the
submission of Mr. Vakil that this scheme is a cloak put forth to cover the
misdeeds of the directors because the cloak, if any, extends to the period when
Chandulal and Manubhai were in active management of the company. It is true
that if the court comes to the conclusion that the scheme is a cloak to cover
the misdeeds of the company or is put forth with a view to shield the directors
against the investigation into their mismanagement of the affairs of the
company, the scheme cannot be accepted, only on the ground that it has been
approved by the creditors and members. Reference in this connection may be made
to In re Calcutta Industrial Bank Ltd.,
wherein it is observed that the creditors, left to themselves, do not
appreciate the importance of many things unless it is brought to their notice.
The object of having the affairs of the company investigated by an independent
auditor was to bring all material facts relating to the management as well as
the present financial position of the company to the notice of the creditors so
as to enable them to make up their minds whether they should at all enter into
any arrangement with such a company. Reference was also made to Pioneer Dyeing
House Ltd. v. Dr. Shankar Vishnu Marathe.One
of the grounds for opposing the scheme in that case was that the object of the
scheme was to cover the deeds of the delinquent directors. It was observed that
if the scheme is sanctioned, the winding up order will stand set aside, the
liquidators will be discharged, there will be none to prosecute the misfeasance
summons against the erring directors and the assets of the company will once
again fall into the hands of persons whose rectitude is under a cloud; and that
cannot be permitted under the cloak of a scheme of reconstruction. It would
undoubtedly be so if the scheme is put forth as a cloak to cover the misdeeds
of the directors. (But it will be a question of fact in each case as to whether
it is so). In the aforementioned case the first scheme proposed was rejected
and after a lapse of a period of ten years after the order for winding up was
made another scheme was proposed which when examined disclosed a number of
defects. In the facts and circumstances of this case, it does not appear that
the scheme is put forth with a view to shield the directors of the company.
When it comes to choosing between a scheme for reconstruction and an order for
winding up after keeping all the circumstances of the case as also the question
of commercial morality in view and if the scheme appears to be feasible and
workable, it should be preferred to compulsory liquidation. The second
contention of Mr. Vakil, therefore, cannot be accepted.
Re.
Ground No. 3.—The third ground of attack was that the scheme proposes scrapping
of Unit No. II and part of Unit No. I of the mill of the company and in the
absence of a permission for scrapping a textile mills, it would be illegal to
sanction the scheme. The scheme envisages scrapping of Unit No. II of the mills
of the company. The mills of the company are divided into two units described
as Unit No. I and Unit No. II. There are 501 looms and 13,488 spindles in Unit
No. I and there are 308 looms and 23,160 spindles in Unit No. II. The scheme
proposes that Unit No. I with 400 looms and 15,000 spindles should be restored
and Unit No. II comprising the rest of looms & spindles and machinery
should be scrapped. Scrapping of Unit No. II is an integral and inseverable
part of the scheme because by scrapping the company hopes to realise Rs. 14
lakhs which would go towards the discharge of debts of the bank and the central
board of trustees of the provident fund. Mr. Vakil urged that a textile mill
cannot be scrapped without the permission of the Central Government. No
provision or statute was pointed out to the court which would show that textile
mills cannot be scrapped without the permission of the Central Government. But
it was common ground that such a permission is essential before a textile mill
can be scrapped. Mr. D. C. Gandhi for the petitioner urged that the company has
obtained such a permission while Mr. Vakil strongly urged that there is no such
permission. The company applied for such a permission and the letter of the
Government of India, Ministry of Commerce, dated l/4th October, 1966, at page
175 of the record shows that such a permission was granted. It is stated in the
letter that the Government of India have no objection to M/s. Maneckchowk &
Ahmedabad Manufacturing Company Mills, Ahmedabad, being scrapped. If the matter
were to rest with this letter, it would indisputably appear that the permission
to scrap the whole mill which would enable the company to scrap a part of the
mill was granted. Mr. Vakil however urged that this permission was cancelled
and even the company has admitted that it was withdrawn and is no more
effective and no fresh permission is applied for or obtained. In this
connection Mr. Vakil first referred to the report of the court of inquiry
constituted by the Government of Gujarat under section 100(1) of the Bombay
Industrial Relations Act presided over by Mr. D. M. Vin which has inquired into
some aspects concerning the company. The report of the court of inquiry is
published in the Gujarat Government Gazette, Part I-L, dated 10th October,
1968. The company appeared in this inquiry and filed its statement, part of
which is reproduced in the report. In para. 5 of the report it is stated that
the Government of India, Ministry of Commerce, permitted scrapping of the mill
but that permission was subsequently withdrawn at the instance of the Textile
Labour Association. Relying on this statement of the company before the court
of inquiry, it was urged that even according to the company the permission was
withdrawn and no fresh permission is granted. Mr. D. C. Gandhi for the company
urged that what is sought to be culled out from the report as an admission of
the company is not accurate. Mr. Gandhi urged that the permission was at best
kept in abeyance till April, 1967, and as no further order is made by the
Government of India, the original permission became effective and is still
effective. The letter of the Government of India at page 175 of the record
shows that the permission to scrap the whole mill was granted. At that stage,
the Textile Labour Association, which is a representative Union of the workers
of this company, opposed the grant of such permission with the result that the
Government of India, Ministry of Commerce, by its letter dated 15th December, 1966,
informed the company that the question of scrapping of the mills of the company
would be further examined and the decision conveyed by the letter of the
Government of India dated l/4th October, 1966, by which permission was granted
was to be held in abeyance till April, 1967. This letter of the Government of
India is at page 389 of the record. If the decision of the Government of India
granting permission was held in abeyance for a certain period and if no further
order was made, cancelling or revoking the permission, obviously after the
period having expired, the permission would be good and valid. It was, however,
urged that a later query with the Government of India disclosed that no such
permission as alleged by the company is granted. During the pendency of this
petition Mr. Vakil for the contesting creditors addressed a letter to the
Textile Commissioner on 29th November, 1968, inquiring whether the company has
been granted permission to scrap the mill or any unit thereof or any
prohibitory order has been issued against the company against scrapping the
unit under the Cotton Textile Control Order, 1948. This letter of Mr. Vakil was
forwarded by the Assistant Director to the Textile Commissioner,I.L. Section.
Finally, by the letter from the office of the Textile Commissioner dated 23 rd
December, 1968, Mr. Vakil was informed that the Government of India had not
permitted the management of the Maneckchowk & Ahmedabad Manufacturing
Company Limited to scrap their unit. These last three letters are at pages 318
to 320 of the record. Relying on these letters it was strenuously urged that no
permission is granted or at any rate no valid permission is in force and if the
permission is not in force or effective, Unit No. II cannot be scrapped and the
very foundation of the scheme is knocked out. The contention appears to be
entirely without merits. It cannot even be disputed that the Government of
India by its letter dated 1/4th October, 1966, did grant permission to scrap
the whole mills. This permission was to be held in abeyance as per the letter
of the Government of India dated 15-12-1966 till April, 1967. The query of Mr.
Vakil may have been directed to the Textile Commissioner and the reply of that
office that no such permission is granted cannot be accepted in the face of the
letter dated l/4th October, 1966. The period during which the permission was
held in abeyance having expired and no order having been made either cancelling
or revoking the permission, the permission would be good and valid and the company
was justified in proceeding on the basis that it has got a valid permission to
scrap Unit No. II. It may incidentally be mentioned that the permission was
held in abeyance on an objection raised by the Textile Labour Association
representing the workers of the company. The Textile Labour Association has
entered into an agreement with the company and has accepted the scheme; when
the Textile Labour Association accepted the scheme it is implicit that it
agrees to scrapping of Unit No. II which would result in discharge of some of
the workmen, yet, the textile Labour Association does not raise any objection
to the scrapping of Unit No. II. Therefore, also, it appears crystal clear that
the permission for scrapping Unit No. II is good and valid and would be
effective. Further, it may be mentioned that Mr. B. R. Shah, learned Assistant
Govt. Pleader, appearing for the State of Gujarat, relying on the relevant
files of the industries department, made a statement to the court that there is
nothing on the record of the Government that permission granted by the
Government of India is cancelled or set aside or withdrawn.
It
is, therefore, not possible to accept the submission of Mr. Vakil that there is
no valid permission for scrapping Unit No. II and scrapping of Unit No. II
being an integral part of the scheme, the scheme cannot be sanctioned.
Re.
Ground No. 4.—The next ground of attack of Mr. Vakil is that the proposed
scheme envisages reorganization of the share capital of the company including
reduction and increase of share capital, which cannot be done without going
through the whole gamut of the procedure prescribed for the same and, as it is
an inseverable part of the scheme, it would be futile to sanction the remainder
of the scheme in its mutilated form. It is undoubtedly true that the scheme
envisages reorganization of the share capital of the company. The share capital
of the company is at present divided into 788 ordinary shares of each of Rs.
1,000 and 1,050 preference shares each of Rs. 100 fully paid. The scheme
envisages reduction of share capital by REDUCING the face value of the ordinary
shares of Rs. 1,000 to Rs. 250 and preference shares of Rs. 100 to Rs. 25. The
scheme also envisages fresh issue of share capital by converting 50 per cent,
of the claim of the creditors by issue of fresh shares. As a necessary
corollary the authorised, issued and subscribed share capital of the company
would be increased. Thus the scheme envisages reorganization of the share
capital of the company. There are certain specific provisions in the Companies
Act which prescribe the procedure for the reduction of the share capital and
for increase of the share capital. The issue of fresh share capital is governed
by the Capital Issues (Control) Act, 1947. The contention of Mr. Vakil is that,
as part of the scheme it is not open to the court to sanction reorganization of
the share capital which includes reduction, increase and issue of fresh
capital. It was urged that if the scheme of compromise and arrangement
envisages reorganization of share capital, it cannot be sanctioned as part of
the scheme and the provision of the Companies Act which prescribe the procedure
for reduction of share capital and increase of share capital and issue of fresh
capital must be specifically and strictly complied with. On the other hand, it
was urged by Mr. Gandhi that section 391 provides a complete code for the
reconstruction of the company which may include reorganization of its capital
as part of the scheme of compromise and arrangement. In other words, it was
urged that if the scheme of compromise and arrangement includes in its ambit
reorganization of the share capital then it can be carried out as part of the
scheme of compromise and arrangement and it is not at all necessary to go through
the whole gamut of the procedure prescribed for the reduction of share capital
and for issue of fresh capital. There seems to be considerable force in the
contention of Mr. Gandhi that section 391 is a complete code. It provides for a
scheme of reconstruction and amalgamation of companies. The scheme of
reconstruction of a company may also include a compromise and arrangement
between the company and its creditors or any class of them or between the
company and its members or any class of them. Section 390(b) provides that the
expression "arrangement" as used in sections 391 and 393 includes a
reorganization of the share capital of the company by the consolidation of
shares of different classes or by the division of shares into shares of different
classes or by both those methods. It is an inclusive definition. It was
attempted to be urged that the arrangement herein defined does not include
increase of share capital, so also it does not include reduction of share
capital even though a specific provision is made as to what procedure would be
gone through when the scheme of compromise and arrangement provides for
reduction of share capital. Rule 85 of the Companies (Court) Rules, 1959,
provides that where a proposed compromise or arrangement involves a reduction
of capital of the company, the procedure prescribed by the Act and the Rules
relating to the reduction of capital and the requirements of the Act and these
Rules in relation thereto shall be complied with, before the compromise or
arrangement, so far as it relates to reduction of capital, is sanctioned. If
section 391 were not to be treated as complete code and if it is intended that
various things that can be done by way of a scheme of compromise and
arrangement, if they were to fall under different provisions of the Companies
Act which prescribe certain procedure for doing the same and that procedure has
to be gone through, it was not necessary to provide specifically that if the
scheme of compromise and arrangement includes reduction of capital special
procedure in respect of reduction of capital must be gone through before it
could be sanctioned as part of the scheme of compromise and arrangement. There
seems to be good reason for making such a provision in rule 85. A scheme of
compromise and arrangement may be between company and creditors or between the
company and members. If the proposed scheme offers compromise or arrangement
between the company and its members only and it envisages reducti6n of share
capital which can be carried out as part of the scheme under section 391
without going through the procedure prescribed under section 100 onwards, it
may be that reduction of share capital in a given case may adversely affect the
creditors and the creditors would have no chance to object to the same. It is
manifestly clear that reduction of share capital in certain circumstances may
adversely affect the creditors but if reduction of share capital is brought
about as part of the scheme of compromise and arrangement between the company
and its members yet as this prescribed procedure for affecting reduction of
share capital has to be gone through even though it forms part of a scheme of
compromise and arrangement, the creditors will have a chance to object to the
same if it adversely affects them. Such would not be the case where the capital
is increased or the rights of various classes of shareholders are altered or
changed. The reorganization of capital as envisaged in section 390 would
certainly include increase and reduction of share capital, but reduction of
share capital can be brought about by arrangement between the company and
members yet it will have direct impact on the creditors and therefore a
specific provision is made in rule 85 that even if reduction of share capital
is to be effected as part of the scheme of compromise and arrangement, the
procedure prescribed for reduction of share capital in the Companies Act and
the Rules must be gone through before the scheme is sanctioned. This specific
provision would indicate that other things such as increase of share capital
simpliciter when sought to be carried must be done according to procedure
prescribed for the same. It can also be done as part of a scheme of compromise
and arrangement and the result can be achieved by following the procedure prescribed
in section 391. Section 391 provides a complete code of putting through a
scheme of compromise and arrangement which may even include reorganisation of
share capital subject to the well recognized exception that if reorganization
of share capital included reduction of share capital, the prescribed procedure
for effecting the same must be gone through in view of rule 85 before the
scheme could be sanctioned. If rule 85 were not enacted, obviously, reduction
of share capital could have been effected as part of the scheme of compromise
and arrangement without going through the procedure prescribed in section 100
onwards. The very fact that a specific rule had to be enacted for this purpose
indicates that section 391 is a complete code providing for all those things
which can be included in a scheme of compromise and arrangement and all those
things can be brought about by the procedure prescribed in section 391 onwards.
The nature of compromise that can be entered into under section 391 is not
defined. The definition of reorganization of capital is an inclusive definition
which would not exclude reduction of share capital or increase of share capital
which would also be a kind of reorganization of the share capital of a company.
If section 391 was subject to other provisions of the Act every time the scheme
of compromise and arrangement is put forth for the sanction of the court, if it
includes things for which specific provisions are made and that will have to be
gone through before the scheme is sanctioned, it would result in unnecessary
duplication of procedure and would be cumbersome. On the contrary, it appears
that if the creditors and members of the company arrive at a certain compromise
which the court considers fair, it can be sanctioned under section 391 despite
the fact that for some of those things included in the compromise another
procedure is prescribed in the Companies Act and which has not been carried
out. It, therefore, appears that section 391 is a complete code which provides
for sanctioning of the scheme of compromise and arrangement. If such a scheme
of compromise and arrangement includes increase of share capital, it can be
done as a part of the reorganization of the share capital, which would be part
of the arrangement that would be brought about between the company and its
members. In case of reduction of share capital, in view of rule 85, the
procedure prescribed under section 100 and onwards will have to be gone
through. Looking at the matter from a slightly different angle, it appears that
section 391 is a special provision for sanction of a scheme of reconstruction
of companies, of amalgamation of companies and for a scheme of compromise and
arrangement. The scheme of compromise and arrangement, or for that matter even
the scheme of amalgamation of two companies, may envisage reorganisation of
share capital of one or the other company. The Companies Act no doubt makes
provision for reduction of share capital simpliciter, increase of share capital
simpliciter, or fresh issue of capital simpliciter without its being part of
any scheme of compromise and arrangement. The scheme of compromise and
arrangement can be brought about only between the company which is liable to be
wound up under the Companies Act and its members or creditors. The special
provision contained in section 391. namely, sanction of the scheme of
compromise and arrangement would in my opinion exclude general provisions for
reduction of share capital or for issue of fresh capital. It is well settled
that a special provision should be given effect to the extent of its scope,
leaving the general provision to control cases where the special provision does
not apply: vide South India Corporation (P.) Ltd. v. Secretary Board of Revenue
and C. Rajagopalachari v. Corporation of Madras,
Therefore, it appears that the provisions contained in section 391 is a
complete code. As a necessary corollary, if the scheme of compromise and
arrangement includes reorganization of share capital except reduction of share
capital, it can be sanctioned as a part of the scheme of compromise and
arrangement. In the case of reduction of share capital as part of the scheme of
compromise and arrangement, rule 85 will have to be given full effect. The
scheme has been approved by a statutory majority as will be presently pointed
out and if the scheme is to be sanctioned as part of such a scheme,
reorganization of the share capital except the reduction of share capita] can
be sanctioned. It will, of course, be necessary to find out whether the
procedure prescribed for effecting reduction of share capital has been gone through
or not.
The
reorganization of the share capital sought to be effected by the scheme
involves reduction of share capital, issue of fresh share capital and increase
of share capital. It will be proper to dispose of first the question with
regard to increase and issue of fresh capital. The memorandum of association of
the company shows that the issued and subscribed capital of the company
consisted of 788 ordinary shares each of Rs. 1,000 and 1,050 redeemable
cumulative preference shares of Rs. 100 each. Thus the total issued and
subscribed capital was Rs. 8,93,000. The preference shares were redeemable
cumulative preference shares. Article 10 of the company's articles of
association provides that the company may by ordinary resolution in general
meeting alter the conditions of its memorandum by increase of its share
capital, by such amount as it thinks expedient by issuing new shares as may be
necessary. The company can also divide and consolidate its shares. Thus the
company has reserved powers to itself to increase the share capital by ordinary
resolution in a general meeting. Now, when share capital is increased and fresh
shares are issued, such issue would be governed by section 81. Section 81
provides that such fresh issues should be offered to persons who, at the date
of the offer, are holders of the equity shares of the company, in proportion,
as nearly as circumstances admit, to the capital paid up on those shares at
that date. The procedure for making the offer is also set out in section 81(1).
It was urged that even if it be assumed that the company has power to increase
the share capital, fresh share capital can be issued only to the existing
shareholders in proportion to the capital paid up on those shares on that date.
The scheme envisages increase of share capital by converting 50 per cent, of
the claim of the unsecured creditors into paid up share capital at the reduced
value of shares. It is no doubt a fresh issue of capital to persons other than
existing shareholders and it would also result in increase of capital; the
company having power to increase its capital can further issue capital but it
is urged that it can be done in the manner provided in section 81(1) and, if
the scheme is sanctioned, it would result in contravention of section 81(1).
Sub-section (i A) of section 81 provides as under:
"81.
(1A) Notwithstanding anything contained in sub-section (1), the further shares
aforesaid may be offered to any persons (whether or not those persons include
the persons referred to in clause (a) of sub-section (1)) in any manner,
whatsoever—
(a) if a special resolution to that effect is
passed by the company in general meeting, or
(b) where no such special resolution is passed,
if the votes cast (whether on a show of hands, or on a poll, as the case may
be) in favour of the proposal contained in the resolution moved in that general
meeting (including the casting vote, if any, of the chairman) by members who,
being entitled so to do, vote in person, or where proxies arc allowed, by
proxy, exceed the votes, if any, cast against the proposal by members so
entitled and voting and the Central Government is satisfied, on an application
made by the board of directors in this behalf, that the proposal is most
beneficial to the company."
There
is a similar provision in article 15 of the articles of association of the
company. It would appear that sub-section (1A) permits issue of further shares
to persons other than the existing ordinary shareholders of the company. It
cannot, therefore, be said that issue of further shares to the persons other
than the existing shareholders of the company is wholly barred. It would only
require special resolution to that effect passed by the company in the general
meeting. If, therefore, a special resolution for issue of further shares after
increasing the capital to persons other than the existing shareholders of the
company is passed in a general meeting of the company, section 81 would not be
contravened. In the present case, the scheme provides for issue of further shares
and these further shares are to be issued to the persons other than the
existing shareholders of the company. The further shares are to be issued to
the creditors of the company in satisfaction of the 50 per cent, of their
claims. Mr. Vakil urged that before sub-section (1A) of section 81 can come
into play, it must be shown that the special resolution has been passed in the
general meeting of the company. Mr. Vakil urged that the meeting of the company
to be a general meeting must be of all the members of the company entitled to
attend and vote and the resolution to be a special resolution must satisfy all
the requirements of section 189 of the Companies Act. It was urged that if the
members of the company did not meet together at one place to consider the
resolution but divided themselves and met in two separate meetings, it cannot
be said that the proposal for further issue of shares was considered in the
general meeting of the company. There are two classes of members of the
company. They are: (1) holders of ordinary shares; and (2) holders of
redeemable cumulative preference shares. Article 5(b) of the articles of
association of the company provides that the cumulative preference shares shall
not entitle the holders thereof to be present at or to vote either in person or
by proxy at any general meeting of the company unless a resolution is to be
passed affecting their rights or privileges. Further issue of ordinary shares
would not affect the rights or privileges of the holders of the preference
shares. Therefore, if article 5(b) were to apply, the holders of the cumulative
preference shares had no right to attend and vote at any general meeting. The
general meeting of the company would be a meeting of ordinary shareholders of
the company. Indisputably, such a meeting has been held and therein the scheme
has been voted upon which includes issue of further shares. But it was urged
that as the interest for more than two years payable on redeemable cumulative
preference shares is in arrears, section 87(2)(b)(i) and article 119(b)(i) of
the articles of association of the company would come into play and they would
have a right to attend and vote at every general meeting. That of course is
true. The question then is if the holders of the preference shares met in a
meeting separate from the meeting of the ordinary shareholders and in each
meeting the proposal for further issue of shares was considered and voted upon
by a majority of 75 per cent, of members present and voting, could it be said
that special resolution has been adopted? It was very vehemently urged that the
concept of a general meeting connotes consensus or meeting of minds and joint
deliberation and that would be lacking in group or class meetings. It was urged
that to interpret the concept of general meeting otherwise would permit the
company to consult each individual shareholder to consider the proposal denying
the benefit of joint deliberations and even if all shareholders agree to the
proposal it cannot be said that there was a meeting of the minds which is of
the essence of a general meeting. It was, therefore, urged that the meeting of
a class of members and general meeting of all members are two distinct things.
In my opinion, what is of the essence of the matter is that the persons
affected must have an opportunity to consider the proposal and deliberate
together. If the deliberations are carried on by two distinct classes having
distinct interests separately it cannot be said that the proposal has not been
considered in a general meeting. A too narrow and strict view may necessitate
first convening the meeting of two classes together and then for the purpose of
the scheme separate meetings of each class. It, in my opinion, would be an idle
formality. It would be more so on the facts of this case because preference
shareholders were not ordinarily entitled to attend and vote at the meeting but
for the eventuality that the interest payable on preference shares is in
arrears. Therefore, in my opinion, it cannot be said that the resolution
adopted was not adopted at a general meeting. Even if it be said that joint
deliberation of all those who are entitled to participate in the meeting is of
the essence of a general meeting, it cannot be said that two classes of persons
one of whom in ordinary circumstances was not entitled to attend the meeting
deliberated in a different meeting and both adopted the same resolution, there
was no joint deliberation. In fact when one class of members are likely to
overwhelm the other class, to safeguard the interest of the other class,
deliberations are held in separate meetings, but a common resolution is adopted
by both the meetings and in each meeting it was passed with statutory majority.
It can never be said that the resolution was not adopted at a general meeting. Reference
was made to Sharp v. Dawes.
In that case a meeting was called by the secretary and only one shareholder
attended, where a resolution was adopted making a call on the share and
pursuant to this resolution a call was made which was challenged. It was held
that one shareholder cannot constitute a meeting. I fail to see how this
observation is of any use in the present case.
The
question then is whether the requirements of a special resolution are
satisfied. Section 189 of the Companies Act provides as to which resolution
could be said to be a special resolution and in what manner it should be
passed. Sub-section (2) thereof provides that the special resolution could be
said to have been passed when the votes cast in favour of the resolution are
three times the number of votes, if any, cast against the resolution— meaning
thereby that it must be passed by 75 per cent, majority of the members present
and voting. The notice convening the meeting at which the resolution is passed
should be given 21 clear days before the date of the meeting as required by
section 171. In the notice convening the meeting, intention to move the
resolution as a special resolution should be specifically set out and
explanatory note should be annexed thereto. In order to be a special
resolution, the aforementioned conditions have to be complied with. The notice
convening the meeting was issued on 3rd September, 1968, and the meeting was to
be held on 5th and 6th October, 1968. The proposed scheme of compromise and
arrangement in respect of the company was annexed to the notice and it was
specifically set out in the scheme that the face value of the ordinary shares
will be reduced from Rs. 1,000 to Rs. 250 and of the preference shares from Rs.
100 to Rs. 25 and thereafter 50 per cent, of the claim of the unsecured
creditors will be coveted into share capital by issue of further shares to
unsecured creditors. In the notice convening the meeting it was stated that the
meeting is specifically convened to consider the proposed scheme and to approve
the same with or without modification. The production programme after the mill
is restarted along with the production estimate and cash flow statements were
also annexed to the notice convening the meeting. Thus the notice convening the
meeting gave information to the members that the meeting is being convened for
considering the proposed scheme which included both reduction and increase of
share capital. The votes cast in favour of the resolution approving the scheme
were more than three times the votes cast against it. Therefore, sub-clauses
(b) and (c) of sub-section (2) of section 189 are strictly complied with. It
was, however, urged that clause (a) is not properly complied with inasmuch as
in the notice convening the meeting, intention to move the resolution as a
special resolution was not set out. Taking a very strict view of sub-section
(2)(a) of section 189, it might appear that the requirement therein contained
is not properly complied with. The question then is whether clause (a) is
mandatory in terms or it is merely directory. If it is mandatory, different
considerations might arise. If it is held to be directory, the doctrine of
substantial compliance would come into play. It is not inconceivable that part
of the section may be directory and part of the section may be mandatory. It
cannot be gainsaid that clauses (b) and (c) of sub-section (2) are certainly
mandatory. The notice of certain duration must be given and resolution must be
adopted by a statutory majority. This requirement could, by no stretch of
imagination, be said to be directory; otherwise sub-section (2) may lose all
its significance. Even giving of notice may be said to be mandatory. But the
question is whether failure to set out in the notice convening the meeting to
move a particular resolution as a special resolution could be said to be
mandatory. There is no general rule for determining whether particular
provision in a statute is a mandatory or directory. The court must look at the
purpose for which the provision is made, its nature and intention of the
legislature in making the provision, to find out whether it is directory or
mandatory. The use of the word 'shall' is not decisive of the matter. In Raja
Buland Sugar Co. Ltd. v. Municipal Board, Rampur,
the Supreme Court has in this connection observed as under:
"The
question whether a particular provision of a statute which on the face of it
appears mandatory—inasmuch as it uses the word 'shall' as in the present
case—or is merely directory cannot be resolved by laying down any general rule
and depends upon the facts of each case and for that purpose the object of the
statute in making the provision is the determining factor. The purpose for
which the provision has been made and its nature, the intention of the
legislature in making the provision, the serious general inconvenience or
injustice to persons resulting from whether the provision is read one way or
the other, the relation of the particular provision to other provisions dealing
with the same subject and other considerations which may arise on the facts of
a particular case including the language of the provision, have all to be taken
into account in arriving at the conclusion whether a particular provision is
mandatory or directory."
In
that case section 131(3) of the U. P. Municipalities Act came up for consideration.
Section 131(3) is divided into two parts. The first part lays down that the
Board shall publish proposals and draft rules along with a notice inviting
objections to the proposals or the draft rules so published within a fortnight
from the publication of the notice. The second part provides for the manner of
publication and that manner is according to section 94(3). The condition of
prior publication is always held to be mandatory. Yet, while considering the
question of non-compliance with the manner of publication as provided in
section 94(3), the Supreme Court observed that the requirement of publication
is mandatory but the manner of publication appears to be directory and, so long
it is substantially complied with, that would be enough for the purpose of
providing the taxpayers a reasonable opportunity of making their objections. It
would thus appear that part of section 131(3) was held to be mandatory while
part of it was held to be directory. Approaching the subject from this angle,
it would appear that clause (a) of sub-section (2) appears to be directory and
not mandatory. The purpose behind making this provision appears to be to convey
definite information about matters to be considered at the ensuing meeting. The
explanatory note to be annexed will enable members to understand and appreciate
the object behind the proposed resolution. The intention being a state of mind
in this case the state of mind of a corporate body is required to be set out
for the benefit of the members of the corporate body. The question then is
whether the requirement of setting out this intention in the notice could be
said to be such mandatory requirement, the failure to comply with it would
invalidate the resolution. The purpose behind enacting this provision and its
nature and the intention of the legislature and the general inconvenience that
the failure to observe it is likely to cause to members all go to show that the
requirement to set out the intention to move a resolution as special resolution
could not be mandatory. The resolution ought to be adopted as special
resolution and that requirement is mandatory. But the setting out of the
requisite intention in the notice convening the meeting could not be mandatory
but only directory. The absence of requisite intention in the notice was not
likely to cause serious inconvenience to the members. Considering the provision
in juxtaposition with clauses (b) and (c), it appears that the provision
contained in clause (a) is directory and it is sufficient if it is substantially
complied with.
The
notice convening the meeting to which the proposed scheme was annexed and
various statements including the statement under section 393 (1)(a) annexed to
it would give sufficient information to the members that they have to consider
both increase and reduction in share capital. That, in my opinion, would be
substantial compliance with the provisions contained in sub-section (2)(a) and
provisions contained in sub-sections (2)(b) and (2)(c) are strictly complied
with. Therefore, the resolution adopted will have all the trimmings of a
special resolution and it can be said with reasonable certainty that a special
resolution at a general meeting as envisaged by clause (1A) of section 81 has
been adopted. If such a resolution is adopted further issue of shares to
persons other than the members of the company would be legal and valid even
though it's done in contravention of the provisions contained in section 81(1).
Incidentally
it was contended that even if the special resolution was adopted at a general
meeting as provided by section 81(1A), yet notice of that meeting was not given
to the auditors as required by section 172(2)(iii) and the explanatory note as
provided under section 173(2) was not annexed to the notice and, therefore, the
resolution could not be said to have been adopted as a special resolution.
Sub-section (3) of section 172 provides that the accidental omission to give
notice to, or the non-receipt of notice by, any member or other person to whom
it should be given shall not invalidate the proceedings at the meeting.
Non-issue of the notice to the auditors, in my opinion, would be covered by
sub-section (3) of section 172. As for the explanatory note as envisaged by
section 173(2) it must be stated that the whole scheme annexed to the notice
and production and cash flow statement and statement under section 393(1) would
provide sufficient material as to be an adequate substitute for explanatory
statement as envisaged by section 173(2) and, therefore, also, the proceedings
of the meeting would not be invalid or proceedings would not be vitiated.
The
above discussion would establish that the resolution for increasing the share
capital of the company has been adopted in a general meeting of the members of
the company and the resolution satisfies all the requisites of a special
resolution. It would appear that the requirements of section 81(1A) of the
Companies Act are fully satisfied and it would be lawful for the company to
issue further ordinary shares as part of the scheme to both holders of ordinary
shares and persons other than present holders of ordinary shares of the company
but all of whom should be unsecured creditors of the company and further shares
should be issued only in satisfaction of 50 per cent, of the claim of each
unsecured creditor.
It
was next contended that the issued and subscribed capital of the company would
be raised by roughly Rs. 39 lakhs by converting 50 per cent, of the claims of
the unsecured creditors into share capital and that would be in contravention
of section 3 of the Capital Issues (Control) Act, 1947. It is indeed true that
fresh capital cannot be issued without the permission of the Controller of
Capital Issues as provided by section 3 of the said Act. The scheme envisages
increase of capital by roughly Rs. 39 lakhs. Permission for issue of fresh
capital is not obtained from the Controller of Capital Issues. However, that
should not come in the way of the court considering the scheme because that
part of the scheme can come into operation after obtaining the permission of
the Controller of Capital Issues. That was the view taken by me in a similar
situation in In re New Commercial Mills Co. Ltd.
and I am informed that necessary permission by the Controller of Capital Issues
was obtained soon after the scheme was sanctioned by the court.
The
second ground of attack of Mr. Vakil under the head of reorganization of share
capital is that the company would be issuing fresh shares at a discount in
contravention of section 79 and the court should not, therefore, sanction the
scheme. The contention is entirely without merits. Section 79 provides that a
company shall not issue shares at a discount except as provided in sub-section
(2) thereof. Sub-section (2) provides that a company may issue shares at a
discount if the issue is authorised by a resolution passed by the company in
general meeting and sanctioned by the court and the resolution specifies the maximum
rate of discount (not exceeding 10%, or such higher percentage as the Central
Government may permit in any special case) at which the shares are to be issued
and not less than one year has at the date of the issue elapsed since the date
on which the company was entitled to commence business and the shares should be
issued within two months after the date on which the issue is sanctioned by the
court. Mr. Vakil urged that 50 per cent, of the claims of the unsecured
creditors are to be converted into shares; in other words, 50 per cent, of the
claims of the unsecured creditors will be paid in the form of shares. Mr. Vakil
had twofold objection to the issue of shares in this manner. The first limb of
the argument was that, even according to the company, if the company is wound
up, the unsecured creditors are likely to get nothing and their claims are
merely chose-in-action which are entirely worthless in respect of which shares
of Rs. 250 fully paid up will be issued in proportion to the claims and the shares
would thus be issued at a discount. The other limb of the argument was that the
shares are issued otherwise than for cash because they would be in payment of
claims which cannot be realized. Reliance was placed on a statement in the
affidavit of the petitioner that in the event of the winding up the unsecured
creditors are not likely to get anything looking to the assets and liabilities
of the company and the claim of the secured creditors and preferential
creditors. Undoubtedly there is a statement to that effect in the affidavit of
the petitioner. Does it necessarily imply that if the shares are issued against
the claim of the unsecured creditors, the issue is either at a discount or for
no consideration? It will be presently pointed out that in order to write off
the loss of capital the share capital is being reduced by reducing the face
value of ordinary shares of Rs. 1,000 fully paid up to Rs. 250 fully paid up
and cumulative redeemable preference shares of Rs. 100 fully paid up to Rs. 25
fully paid up. After the reduction of the face value, the shares will be
allotted and issued to the unsecured creditors in satisfaction of 50 per cent,
of their claims. For every ordinary share of Rs. 250 issued, the claim of the
unsecured creditors exactly to that extent will be wiped out. Unless an idle
formality of the company paying Rs. 250 cash towards discharge of the liability
of the unsecured creditor and then every unsecured creditor buying the shares
of the company is to be insisted upon, it can never be said that the issue is
either at a discount or for no consideration or for consideration otherwise
than cash. In fact for every ordinary share of Rs. 250 issued, the liability of
the company to the unsecured creditor would be proportionately decreased and wiped
out. In other words, the company will get Rs. 250 for a share of Rs. 250. But
it was urged that even a share of Rs. 250 of this company would not fetch
anything in the market and when it is issued for a consideration of Rs. 250 to
unsecured creditors the issue is based on misrepresentation. There again, I see
no substance. A majority of unsecured creditors of the company, except very few
represented by Mr. Vakil, have approved the scheme and thereby agreed to accept
the ordinary share of this company of Rs. 250 as against his claim of Rs. 250.
There is no misrepresentation involved in such a transaction. The statement of
the petitioner that in the event of the company being wound up the unsecured
creditor is not likely to realise anything cannot be the foundation for a
submission that as the claim is merely a chose-in-action and entirely worthless
it cannot provide consideration for issuance of the shares of the company nor
could it be the foundation for a submission that the shares are issued for a
consideration otherwise than cash or for no consideration. In this connection,
it was lastly urged that, even though new ordinary shares issued at Rs. 250
would be fully paid up share, yet, in the event of the company being wound up,
the liquidator would certainly inquire if anything was paid by the holder
towards the share of Rs. 250 and in that event if his finding that the claim
that was set off against the issue of shares was entirely worthless or of no
value it would be open to the liquidator to treat such shareholder as
contributory and to insist upon his contributing Rs. 250 into the assets of the
company. Reliance in this connection was placed on In re Anglo-Moravian
Hungarian Junction Railway Company
In that case one Dent, a subscriber to the memorandum of association of a
limited company, subscribed for 100 shares. The articles of association recited
that Even, who assigned the concession to the company, had agreed to cause
fully paid up shares to be allotted to all the persons subscribing the
memorandum. Subsequently £ 4,000 fully paid up shares were issued to Even for
work done by him for the company and Even requested the company to allot 100
shares out of the same to Dent. Subsequently the company was ordered to be
wound up and the official liquidator placed Dent on the list of contributories
for 100 shares and made calls upon him to pay the amount. The contention of
Dent was that the shares allotted to him were fully paid up shares and,
therefore, he was not liable to pay anything as contributory. His further
contention was that even though he had subscribed for 100 shares, as the shares
were allotted to him at the instance of Even and that the shares were fully
paid up shares, he was not liable to pay as a contributory. Negativing this
contention it was held as under:
"........
where a man, by subscribing to the memorandum of association
contracts
a liability to pay to the company the full amount of his shares, and by another
contract agrees to receive a certain number of paid-up shares, so that he is to
have two sets of shares, one on which he is to be liable, and one on which he
is not to be liable, he cannot extinguish his liability on the shares for which
he has subscribed by setting off against it that which, although it might be
valuable to him, would not increase the capital of the company and cannot
therefore be assumed to be an equivalent, in money's worth, to the payment of
his shares."
In
fact the present case is simpler in which the company proposes to issue shares
to unsecured creditors in satisfaction of its liability. Issue of one share of
Rs. 250 fully paid-up to an unsecured creditor would go to discharge an
equivalent amount of debt owed by the company to the unsecured creditors. Such
an arrangement brought about between the company and its creditors and members
cannot be contested on hypothetical submission that the share has no value in
the market nor the claim could ever be realised in the event of winding up. In
fact the arrangement as proposed here is quite legal and valid and that also
becomes evident from the further observations from the judgment quoted above.
The relevant observation is as under:
"The
previous agreements between Even and the company are all before the court, and
I find that in the particular agreement referred to, which is dated the 19th
September, 1865, certain persons who are subscribers to the memorandum of
association, being creditors of the contractor for work and labour done, or
money advanced for preliminary expenses in respect of which he had a claim upon
the company, are to be paid what is due from him to them in paid-up shares of
the company; and I do not say that the court would not give effect to such an
arrangement. I must not be understood as deciding, to the prejudice of any of
those persons, that if they were really creditors of the contractor for matters
for which he was entitled to be paid by the company, they might not receive
under those documents their payment in paid-up shares, and have those shares
attributed to their subscription to the memorandum of association; the effect
being, to discharge" the company from an equivalent amount of debt, due
from the company to the contractor."
This
is exactly the position in the case before me. For each share issued to the
unsecured creditor the liability of the company for the amount equivalent to
the face value of the share would stand discharged or the company would be
discharged from equivalent amount of debt due from the company to the unsecured
creditor. Such arrangement, in my opinion, is quite legitimate and can be the
subject-matter of compromise and arrangement between the company and its
members and creditors and, if it is otherwise reasonable and fair, must be
given effect to At any rate, it cannot be thrown out on the ground that on the
one hand the share would fetch no price if it is sold in the market and the
claim of the creditor being a chose-in-action has a debatable value or is of no
value. Reference in this connection may be made to the Ooregum Gold Mining Co.
of India Ltd. v. George Roper and Charles Henry Wallroth.
At page 136, their Lordships have observed that a company is free to contract
with an applicant for its shares; and when he pays in cash the nominal amount
of the shares allotted to him, the company may at once return the money in
satisfaction of its legal indebtedness for goods supplied or services rendered
by him. That circuitous process is not essential. It has been decided that
under the Act of 1862, share may be lawfully issued as fully paid up for
consideration which the company has agreed to accept as representing in money's
worth the nominal value of the shares. At another stage, it has been observed
that not only may a share be allotted as fully paid up in respect of property,
goods or services received by the company, but the courts will not inquire into
the adequacy of the consideration, and certainly have not required it to be
proved that the consideration given was equivalent in cash value to the nominal
amount of the shares. Reference may also be made to Hilder v. Dexter.
In that case, the company raised necessary working capital by issue of one-half
of the share capital for cash, the other half being used for the purpose of
payment in shares credited as fully paid up for the concessions to be purchased
by the company. Of course, after referring to the sections of the English
Companies Act, the court reached a conclusion that a transaction of this nature
is not prohibited; but the important observation was that in such a transaction
the shares so issued could not be said to have been issued either at a discount
or for consideration other than cash. Reference was also made to Madanlal
Fakirchand Dudhedia v. Shree Changdeo Sugar Mills Ltd.
The subject-matter of dispute in that appeal before the Supreme Court was with
regard to the agreement between the promoters and the company for paying them
certain commission out of the net profits of the company. I fail to see how any
portion of that judgment helps in deciding the controversy in the present case.
In
view of the aforesaid discussion, in my opinion, the further issue of shares to
unsecured creditors in satisfaction of their claims as provided in the scheme
cannot be said to be issue of shares either at a discount or on
misrepresentation or for no consideration or for consideration other than cash.
That
takes me to the last attack under the head "reorganization of share
capital", namely, that the scheme envisages reduction of share capital and
that cannot be done without following the procedure as prescribed in section
100 onwards of the Companies Act, even if it be done as part of the scheme. I
have already pointed out above that reorganization of the share capital can be
carried out as a part of a scheme of compromise and arrangement under section
391 without following the whole gamut of the procedure prescribed for the same
in other parts of the Companies Act. However, rule 85 makes a special departure
in case of reduction of share capital when it is to be carried out as part of
the scheme of compromise and arrangement. Rule 85 which I have already referred
to earlier, provides that when reduction of share capital is to be effected as
part of a scheme of compromise and arrangement, procedure prescribed for the
same in the Companies Act and Rules should be carried out as stated earlier.
This provision is made for very good reasons. It unmistakably indicates that
reorganization of share capital can be brought about as part of the scheme of
compromise and arrangement. But even if it is to be done as part of the scheme
of compromise and arrangement this special provision in rule 85 enjoins a duty
to carry out the procedure contained in section 100 onwards of the Companies
Act. Ordinarily, reduction of share capital affects members of the company and
it can be brought about by a compromise or arrangement between the company and
its members ignoring the creditors. Now, if reduction of share capital involves
repayment of a part of paid up capital or extinguish or reduce the liability on
any of the shares in respect of unpaid share capital it would adversely affect
the creditors. Yet the creditors would have no voice in the matter. If the
procedure as provided in section 100 onwards has got to be carried out the
court could not sanction reduction of share capital unless the creditors are
heard and provision is made for the creditors who object to the reduction.
However, if the reduction of share capital does not involve either diminution
of liability in respect of unpaid share capital or payment to any shareholder
of any paid up capital, the court can sanction the same without reference to
the creditors. The creditors in such a case would not even be entitled to object
to the proposed reduction as provided in section 102. In the instant case,
admittedly, the reduction of share capital is by way of cancellation of share
capital which is lost or is unrepresented by available assets. In such a case,
creditors, even in a reduction simpliciter, are not entitled to object and it
makes no difference if reduction is brought about by following the procedure
prescribed in section 100 onwards or by way of a scheme of compromise and
arrangement. Thus, if it can be done in a given set of circumstances as part of
a scheme of compromise and arrangement, it has been properly done in this case
and while sanctioning the scheme ipso facto the reduction of share capital
ought to be confirmed.
I
am however prepared to proceed on the assumption that even if the proposed
scheme of compromise and arrangement envisages reduction of share capital which
is lost or is unrepresented by available assets the same cannot be done except
by following the procedure specifically prescribed in section 100 onwards of
the Companies Act. It is, therefore, necessary to find out whether the
procedure therein prescribed has been carried out by the company or not. There
is nothing objectionable in the company proposing a scheme of compromise and
arrangement simultaneously proposing reduction of share capital and both can be
considered and approved simultaneously. This is borne out by the observations
in In re Tata Iron and Steel Co. Ltd.
In that case it was contended that the scheme which effects alteration in the
memorandum or articles of association without proceedings having been taken
under the Act in the manner laid down by the Act for the purpose of effecting such
an alteration cannot be sanctioned unless separate proceedings are taken for
alteration in the memorandum and articles of association. Negativing this
contention, it was held that where the Act lays down express procedure for
altering the memorandum it is doubtful whether it is not necessary to follow
that procedure before applying for sanction under section 120, but where that
is not so, the court can under section 120 sanction the scheme which alters the
memorandum. In In re Katni Cement and Industrial Co. Ltd.
a scheme of amalgamation was proposed between the said company and merger of
all the cement companies to be named as Associated Cement Companies Ltd. Before
this merger could be made it became necessary to reorganize the share capital
and alter the rights conferred by the memorandum of association upon different
classes of shareholders in the capital of the said company. This was proposed
as a part of the scheme of amalgamation under section 153 of the Companies Act,
1913, which is pari materia with section 191 of the Companies Act, 1956. It is
observed that the court under section 153 can sanction a scheme, even though it
involves acts which, apart from such provisions, would be ultra vires the
company; but this rule is subject to the limitation that if the Companies Act
contains express provision enabling the doing of any act in a particular way,
the provisions of the enabling section, and not those of section 153, must be
followed. Relying on this observation, it was urged that if there is provision
for effecting' reduction of share capital, it must be followed to the exclusion
of section 391. Reference was also made to Bengal Bank Ltd. v. Suresh Chakvavarthy,
wherein it has been observed that a scheme involving reduction of capital must
be carried out in accordance with the statutory provisions relating to reduction.
Reference was also made to In re Bharati Central Bank Ltd.
wherein it has been observed as under:
"....where
the Act expressly prescribes a special procedure for reduction of capital,
e.g., by section 55 and the several sections following it, a scheme involving a
reduction of capital, such as the one now before me does, cannot be sanctioned
unless the procedure for reduction of capital has also been followed. Form No.
774 in Palmer's Company Precedents, 15th edition, Part I, page 1264, shows that
the reduction of capital and scheme may be considered by the shareholders at
one and the same meeting and separate meetings are not necessary and that the
court may, by one and the same order, sanction a scheme in conjunction with
reduction of capital, that is to say, under section 55 confirm the special
resolution for reduction of capital, and, under section 153, sanction the
scheme. If, however, the requirements of section 55 and other sections have not
been complied with, the court may direct the application for sanction to stand
over in order to enable the company to advertise the petition and otherwise
comply with the requirements of the Act for reduction of capital, as was done
in In re Cooper ."
It
does appear well settled that where the scheme of compromise and arrangement
comprises within its ambit reduction of share capital, the procedure for
reduction must be gone through but if it is shown that the procedure prescribed
under section 100 onwards has been carried out simultaneously while submitting
the scheme for approval of the creditors and members, the court can, while
sanctioning the scheme, sanction reduction of share capital. The important
thing to find out would be whether the procedure for reduction of share capital
wherever it is mandatory has been strictly carried out and wherever it is
directory has been substantially complied with.
Before
one can find out as to what exact procedure should be followed for effecting
reduction in share capital in a given case, it must be found out how the
company proposes to reduce the share capital. The share capital of a company
can be reduced in three distinct ways as set out in section 100. The. company
for effecting reduction of share capital may extinguish or reduce the liability
of any of its shares in respect of share capital not paid up; either with or
without extinguishing or reducing liability on any of its shares cancel any
paid up share capital which is lost, or is unrepresented by available assets;
or with or without extinguishing or reducing liability on any of its shares,
pay off any paid-up share capital which is in excess of the wants of the
company. The reduction of the share capital can be effected by a special
resolution at a general meeting which must be sanctioned by the court. Section
101 provides that, if the proposed reduction of share capital involves either
diminution of liability in respect of unpaid share capital or payment to any
shareholder of any paid up share capital, the provisions therein prescribed
shall have effect, subject to the powers of the court having regard to the
special circumstances in the case to direct that the provisions of sub-section
(2) shall not apply as regards any class or classes of creditors.
In
the present case the share capital is not reduced by extinguishing or reducing
the liability of any of the shares of the company, in respect of the capital
not paid up or by paying off any paid up share capital which is in excess of
the wants of the company. The reduction is effected by cancelling the paid up
capital which is lost or is unrepresented by available assets. When the capital
is reduced by cancelling any paid up share capital which is lost or is
otherwise unrepresented by available assets, it is not mandatory to follow the
procedure prescribed in sub-section (2) of section 101 unless the court so
directs. The procedure prescribed under sub-section (2) of section 101 requires
service of the notice of the petition filed for confirming the reduction of
capital on every creditor of the company affected by reduction and who is
entitled to object to the reduction. The procedure goes so far as to make
provision by order of the court for payment to the dissenting creditors. That
procedure is mandatory, where the proposed reduction involves diminution of
liability in respect of unpaid share capital or payment to any shareholder of
any paid up share capital. That is not the case here. It is common ground that
reduction is by way of cancellation of the paid up share capital which is lost
or is unrepresented by available assets. Unless, therefore, the court otherwise
directs, the procedure prescribed under sub-section (2) of section 101 is not
mandatory in this case. Therefore, in order to effect reduction of share
capital by way of cancellation of paid up share capital which is lost or is
unrepresented by the available assets, the company will have to adopt a special
resolution to be styled as resolution for reducing the share capital in a
general meeting and then apply for confirmation of the reduction of share
capital. For the reasons hereinbefore mentioned, I will hold that the company
has given notice of 21 days' duration and the notice convening the meeting
served upon the members disclosed the resolution that, while approving the
scheme, the members should approve the reduction of share capital. Resolution
approving the scheme has been passed with statutory majority. The only question
would be whether the intention to move the resolution as special resolution in
a general meeting to be attended by the ordinary shareholders and preference
shareholders is set out in the notice convening the meeting or meetings. The
reasons set out above while considering the case of issue and allotment of
further share and the provision contained in section 81(1) and 81(1A) would
mutatis mutandis apply here. I would, therefore, hold that the members of the
company in a general meeting approved reduction of share capital by a special
resolution which has been passed by statutory majority and while approving the
scheme the members simultaneously approved reduction of share capital by a
special resolution. Therefore, the procedure prescribed in sections 100 and 101
has been carried out by the company and section' 102 would not be attracted and
therefore while sanctioning the scheme the court can sanction the reduction of
share capital. I would, therefore, hold that the mandatory procedure prescribed
for reduction of the share capital has been strictly complied with. Therefore,
the company has carried out the procedure prescribed for reduction of share
capital and the same can be simultaneously confirmed while sanctioning the
scheme which I hereby propose to do.
I
may notice the last submission of Mr. Vakil under the head of
"reorganization of share capital". A very feeble attempt was made to
urge that the company cannot reduce preference share capital. Mr. Vakil
approached the problem from a number of angles such as that by reduction of
preference share capital without wholly extinguishing the ordinary share
capital, the holders of preference shares who are entitled to preferential
payment from the assets of the company in winding up are relegated to the
extent of cancellation of part of preference share capital behind the ordinary
shareholders which can never be done. It was also urged that an ordinary
shareholder would be paid Rs. 250 from the assets of the company in winding up
without paying full amount of Rs. 100 to the preference shareholders which
holder of the preference shares would be entitled to receive in the
distribution of the assets of the company. In my opinion, there is no substance
in this contention. The provision in the Companies Act at the relevant time
showed that the company could have two kinds of share capital— ordinary share
capital and preference share capital. Section 100 provides that subject to the
confirmation by the court, a company limited by shares, may if so authorised,
by its articles by a special resolution reduce its share capital in any way.
Section 100, therefore, enables the company to reduce its share capital. The
word "share capital" is a genus of which "equity and preference
share capital" are species. If the company has power to reduce its share
capital as provided in its articles of association, it is implicit therein that
it can reduce both ordinary share capital as well as preference share capital
unless specific provision to the contrary is made. Article 10 permits the
company to increase its share capital and article 7 authorises the company to
reduce its share capital by special resolution subject to confirmation by court
and subject to the provisions of sections 100 to 104 of the Companies Act.
Therefore, this company has retained to itself powers to reduce its share
capital—meaning thereby that it can reduce both its ordinary and preference
share capital—and there is no express provision to the contrary which says that
the preference share capital cannot be reduced till the whole of the ordinary
share capital is extinguished. Therefore, there is no substance in the
contention that preference share capital can never be reduced.
Considering
the matter from all the aspects, there is no substance in the contention that
the reorganization of share capital as contained in the proposed scheme of
compromise and arrangement cannot be given effect to. In my opinion, the
company has complied with the provisions of law and reorganization of share
capital can be confirmed as part of the scheme.
Re.
Ground No. 5—The next ground of attack of Mr. Vakil was that in the absence of
proper directions for convening separate meetings of different classes of
creditors and members of the company, appropriate meetings of distinct classes
of members and creditors were not held and, therefore, it is not possible to
say that the proposed scheme has been approved by requisite majority of
different classes of creditors and members. When a scheme of compromise and
arrangement is proposed between the company and its creditors or any class of
them; or between the company and its members or any class of them, the party
sponsoring the. scheme must move the court for proper directions by the judge's
summons under section 391 for convening the meetings of different classes of
creditors and members. It is at this stage that proper classification of
members and creditors must be made. There is little difficulty in defining
different classes of members. A formidable difficulty arises in deciding and
defining different classes of creditors.
When
the judge's summons is taken out for seeking directions for convening meetings
a duty is cast on the company to put proper materials before the court so that
the court may give proper directions for separate meetings of different classes
of creditors and members. If the creditors and members are not properly
classified and if the meeting of the proper class of creditors and members is
not separately held, the scheme approved at such meeting cannot be sanctioned,
vide Court Practice Note in (1934) Weekly Notes 142. The responsibility for
determining what creditors are to be summoned to any meeting as constituting a
class is of the applicant company and if meetings are incorrectly convened or
constituted or an objection is taken to the presence of any particular creditor
as having interests competing with the others such objection if successfully
taken at the hearing of the petition for sanctioning the scheme the company must
take the risk of having it dismissed.
It
is always a moot question what constitutes a class. Buckley on the Companies
Ads, 13th edition, page 406, has observed that it is a formidable difficulty to
say what constitutes a "class" of creditors. The creditors composing
the different classes must have different interests. When one finds a different
state of fact existing among different creditors which may differently affect
their minds and their judgment, they must be divided into different classes. "Class"
must be confined to those persons whose rights are not so dissimilar as to make
it impossible for them to consult together with a view to their common interest
(vide Sovereign Life Assurance Co. v. Dodd).
Speaking very generally, in order to constitute a class, members belonging to
the class must form a homogeneous group with commonality of interest. If people
with heterogeneous interests are combined in a class, naturally the majority
having common interest may ride rough shod over the minority representing a
distinct interest. One test that can be applied with reasonable certainty is as
to the nature of compromise offered to different groups or classes. The company
will ordinarily be expected to offer an identical compromise to persons
belonging to one class, otherwise it may be discriminatory. At any rate, those
who are offered substantially different compromises each will form a different
class. Even if there are different groups within a class the interests of which
are different from the rest of the class or who are to be treated differently
in the scheme, such groups must be treated as separate classes for the purpose
of the scheme. Broadly speaking, a group of persons would constitute one class
when it is shown that they have conveyed all interest and their claims are
capable of being ascertained by any common system of valuation. The group
styled as a class should ordinarily be homogeneous and must have commonality of
interest and the compromise offered to them must be identical. This will
provide rational indicia for determining the peripheral boundaries of
classification. The test as stated earlier would be that a class must be
confined to those persons whose rights are not so similar as to make it
impossible for them to consult together with a view to their common interest.
In
this case, the court gave directions on the judge's summons taken out under
section 391(1). The directions were to the effect that separate meetings of
ordinary shareholders, preference shareholders, secured creditors and unsecured
creditors of the company should be called on the dates mentioned in the notice.
The court, thus at the instance of the company, directed four separate meetings
to be held. The ordinary shareholders themselves will form one class; so also
the preference shareholders will form one class. In the case of each of them
the compromise offered to each member belonging to the class is identical.
Similarly, the meeting of the secured creditors is also properly directed to be
held. The real difficulty arose with regard to the meeting of the unsecured
creditors. Of course, Mr. Vakil has attempted to urge that even in respect of
the meeting of preference shareholders, directions are not proper. But I do not
see much substance in it for the reasons to be presently mentioned. So also, I
do not see much substance with regard to the directions given for holding the
meeting of secured creditors. It was very vehemently urged that there was a
conglomeration of persons with heterogeneous interest who were grouped together
in the class of unsecured creditors. Generally speaking the creditors of the
company should be divided into three different classes, viz., secured
creditors, preferential creditors and unsecured creditors. The workers of the
company each to the extent of the first Rs. 1,000 of his claim in winding up,
would be a preferential creditor and indisputably they would form a separate
and distinct class. They were grouped together with other unsecured creditors.
I shall separately deal with the objection in respect of each meeting raised by
Mr. Vakil.
As
per the directions given by the court, a separate meeting of ordinary
shareholders of the company was convened. In my opinion, equity or ordinary
shareholders each holding fully paid shares of the company will form a separate
class by themselves. They will also form a separate class in view of the
identical compromise offered to them. It was however urged that there might be
some creditors who may also be shareholders and their interest will conflict
with the interest of shareholders who are not creditors and they should form a
separate class. It was also urged that the managing director, Linubhai Banker,
and ex-director, Gopaldas P. Parikh, should, form a separate class as also
Indequip group of companies should also form a separate class. At page 244 of
the affidavit in reply, the shareholding of Linubhai and his relation, Gopaldas
P. Parikh, and the company in which Gopaldas P. Parikh is interested has been
set out and it is stated that out of the total of 788 ordinary shares, 424 are
held by these persons and they form a separate group. It is difficult to
understand how the interest of these shareholders is different from the other
shareholders. But it was urged that Indequip group of companies are very big
creditors of the company and they will be supporting the proposal for
converting half of their claim in the share capital so as to clamp down their
octopus hold on the company and therefore they would be vitally interested in
supporting the scheme and should form a separate class. Again, I see no
substance in this contention. The compromise offered to the ordinary
shareholders, whether creditor or not, is the same as any other shareholder.
Therefore, in my opinion, the ordinary shareholder will form a separate class
and proper directions in this behalf are given.
For
the reasons which are mentioned above, in my opinion, there is no substance in the
contention that all the preference shareholders will not form a class by
themselves. In fact all the preference shareholders of the company would form a
separate and independent class and their meeting is properly convened.
The
Union Bank of India and the Regional Provident Fund Commissioner as
representing the Central Board of Trustees are secured creditors of the
company. They will certainly form a class. But it was urged that Indian Electro
Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Indequip Ltd., Messrs.
Amarshi Damodar and Messrs. Atul Cotton Traders became secured creditors by
virtue of charges created in their favour by the decrees obtained by them
against the company and, therefore, they would be secured creditors and should
have been grouped with the Union Bank of India and the Regional Provident Fund
Commissioner. When the meeting of the secured creditors was held on October 6,
1968, seven creditors were present including the Union Bank of India, the
Regional Provident Fund Commissioner and the aforementioned 5 creditors. The
chairman has reported that at the commencement of the meeting the bank took
objection to any other creditor attending the meeting on the ground that there
was no other secured creditor of the company holding pari passu charge on the
assets of the company with the bank and this objection was submitted in writing
to the chairman. As on that date the charges created by the decrees in favour
of the aforementioned 5 creditors were subsisting, obviously those five creditors
would be secured creditors. Before the chairman could decide the objection
raised, it appears that all the secured creditors who were present requested
the chairman to direct that in view of the objection raised, and in view of the
statement made by the representatives of the Indequip group of companies, which
would include Indequip Limited, Indian Electro Chemicals Ltd., Dyestuffs and
Chemicals Pvt. Ltd., that they would attend the meetings of secured and
unsecured creditors but their votes in number and in value should be taken into
consideration at the meeting of the unsecured creditors subject to the approval
of the court. A direction to that effect has been given by the court. As a
matter of fact, the votes of the aforementioned creditors, who at one stage
claimed to be secured creditors, have not been taken into consideration at the
meeting of secured creditors in view of the directions issued by the court. It
should be so in view of certain later developments. The aforementioned five
creditors have relinquished the charges created in their favour by the decree
as also the charges are not registered as required by section 126 of the
Companies Act, and are not now likely to be registered and they have become
void. Obviously, therefore, the aforementioned 5 creditors would be unsecured
creditors and would certainly not be entitled to attend the meeting of the
secured creditors. The report of the chairman also shows that they did not vote
at the meeting of the secured creditors and, in my opinion, they have been
rightly grouped with the unsecured creditors. The Union Bank of India and the
Central Board of Trustees represented by the Regional Provident Fund
Commissioner are undoubtedly secured creditors of the company and they would
form a single class and their meeting is properly convened.
That
takes me to the meeting of unsecured creditors convened under the directions of
the court. Mr. Vakil took serious exception to grouping together all the
workmen of the company and other unsecured creditors some of whom may be
suppliers of goods and some of whom may be depositors or persons who had
advanced cash loan to the company, in one class. There is considerable force in
this contention of Mr. Vakil. In the affidavit filed by Chandulal Hiralal
Banker, at page 208 he has stated that in the context of a scheme of compromise
or arrangement between the company and its creditors, the creditors of a
company can be divided into at least three broad classes—secured creditors,
unsecured creditors and preferential creditors. In Palmer's Company Law, 21st
edition, at page 700, it is observed that creditors can be divided into three
categories (which may themselves overlap) of preferential creditors, secured
creditors and unsecured creditors. It is further observed that unsecured
creditors will normally form a single class except where some of them are to be
treated in a manner different from the rest and have different interests which
might conflict. It is unfortunate that the company did not take proper
directions with regard to the convening of the meeting of unsecured creditors.
In the class of the unsecured creditors, the workers of the company who, as
stated earlier, would be preferential creditors, have been grouped together
with other unsecured creditors. The only defect appears to be in grouping
together the workers who are preferential creditors of the company with other
unsecured creditors. In respect of the workers different compromise is offered
while to the remaining unsecured creditors a distinct compromise is offered.
That will also make them two distinct and separate classes. If the meeting is
not properly convened, the scheme approved at such meeting cannot be
sanctioned. If two distinct classes of creditors are grouped together in one
class and if there is no material for finding out who belonged to one class and
what was the result of their voting and who belonged to the different and
distinct class and what was their voting, the only course open to the court
would be to direct separate meetings of those two classes. But if the report of
the chairman provides ample material for finding out the number of preferential
creditors who attended the meeting of unsecured creditors and what was the
number and value of their votes then it can be separated from the number and
value of the votes of the remaining unsecured creditors and the court may
proceed to examine the result of the voting as if two separate meetings are
called. A view was taken by me in the case of Anant Mills Ltd.
If any creditor present at the said meeting would have said that the presence
of the distinct class of creditors was either oppressive or not conducive to
their deliberations all such objections could have been examined on merits. No
such objection is raised. The defect as far as the meeting of unsecured
creditors is concerned, appears to be that the preferential and other unsecured
creditors have been grouped together. The workers are preferential creditors in
winding up but not otherwise who would form a separate class. Instead of
remitting the scheme to separate meetings of unsecured and preferential
creditors in my opinion, there is ample material in the report of the Chairman
from which the votes in number and value representing the preferential
creditors can be separated from the votes and value of the votes representing
the other unsecured creditors. As this is quite possible and which would be
worked out while considering the ground of attack that the scheme is not
approved by a statutory majority in each class, it is not necessary to direct a
separate meeting of preferential creditors and other unsecured creditors.
Mr.
Vakil, however, urged that in fact there should have been seven separate meetings
of persons who were grouped together in the meeting of unsecured creditors,
viz, (a) workers of the company who would be preferential creditors; (b)
Linubhai Banker & members of his family; (c) Indequip group of companies;
(d) Manubhai Banker & members of his family; (e) depositors and persons who
have advanced cash loan and supplied stores and cotton to the company; (f) Asia
Electric Company and (g) shareholders who are also creditors and those who are
not. It is undoubtedly true that the workers of the company as preferential
creditors would form a distinct and separate class. But the depositors who had
supplied goods and cotton to the company on credit would not form a separate
and distinct class. This is so because identical compromise is offered to them.
Similarly, Linubhai Banker who was the managing director and members of his
family and Manubhai and members of his family who was in active management
prior to January 1, 1966, who are creditors of the company, would not form a
separate and distinct class. The compromise offered to them is identical with
the other unsecured creditors. Asia Electric Company need not form a class
because no compromise is offered to it. The Union Bank of India has agreed to
pay Asia Electric Company out of the sale proceeds of the blading system
supplied by the said creditor. The shareholders who are creditors are in no way
in a distinct class from the shareholders who are not the creditors of the
company. In my opinion, therefore, the classification suggested by Mr. Vakil is
neither logical nor is based on any intelligible differentia, and has no
rational nexus to the objects sought to be achieved while approving the scheme
of compromise and arrangement. The broad division as stated by me earlier, and
keeping in view what constitutes a class, would provide better and distinct
classification. The court has ample material to find out from the report of the
chairman the number and value of votes in respect of the two distinct classes
of creditors grouped together and it would certainly be open to the court to do
so. Therefore, there is no substance in the contention of Mr. Vakil that
appropriate meetings of distinct classes of members and creditors were not
held; and, therefore, it is not possible to say that the proposed scheme has
been approved by requisite majority of different classes of creditors and
members. The contention must be negatived.
Re.
Ground No. 6.—The next ground of attack is that a proper statement as required
by section 393(1) and as directed by the court's order dated 26th June, 1968,
in Company Application No. 23 of 1968 was not sent along with the notice
convening the meetings of members and creditors of the company.
Section
393 reads as under:
"393.
Information as to compromises or arrangements with creditors and members.—
(1) Where a meeting of creditors or any class of
creditors, or of members or any class of members is called under section 391,—
(a) with every notice calling the meeting
which is sent to a creditor or member, there shall be sent also a statement
setting forth the terms of the compromise or arrangement and explaining its
effect; and in particular, stating any material interests of the directors,
managing director, managing agent, secretaries and treasurers or manager of the
company, whether in their capacity as such or as members or creditors of the
company or other wise, and the effect on those interests, of the compromise or
arrangement, if, and in so far as, it is different from the effect on the like
interests of other persons; and
(b) in every notice calling the meeting
which is given by advertisement, there shall be included either such a
statement as aforesaid or a notification of the place at which and the manner
in which creditors or members entitled to attend the meeting may obtain copies
of such a statement as aforesaid.
(2) Where the compromise or arrangement affects
the rights of debenture-holders of the company, the said statement shall give
the like information and explanation as respects the trustees of any deed for
securing the issue of the debentures as it is required to give as respects the
company's directors.
(3) Where a notice given by advertisement
includes a notification that copies of a statement setting forth the terms of
the compromise or arrangement proposed and explaining its effect can be
obtained by creditors or members entitled to attend the meeting, every creditor
or member so entitled shall on making an application in the manner indicated by
the notice, be furnished by the company, free of charge, with a copy of the
statement.
(4) Where default is made in complying with any
of the requirements of this section, the company, and every officer of the
company who is in default, shall be punishable with fine which may extend to
five thousand rupees; and for the purpose of this sub-section any liquidator of
the company and any trustee of a deed for securing the issue of debentures of
the company shall be deemed to be an officer of the company:
Provided that a
person shall not be punishable under this sub-section if he shows that the
default was due to the refusal of any other person, being a director, managing
director, managing agent, secretaries and treasurers, manager or trustee for
debenture-holders, to supply the necessary particulars as to his material
interests.
(5) Every director, managing director, managing
agent, secretaries and treasurers or manager of the company, and every trustee
for debenture-holders of the company, shall give notice to the company of such
matters relating to himself as may be necessary for the purposes of this
section; and if he fails to do so, he shall be punishable with fine which may
extend to five hundred rupees."
One
of the directions which the court gave while giving directions for convening
meetings in Company Application No. 23 of 1968, was that the advocate for the
company should file in the court within five days a form of advertisement,
notice and the statement required by section 393 to accompany the notice to be
addressed to members and creditors of the company. The first question is what
should be the contents of the statements required by section 393. The statement
under section 393 must contain the terms of the compromise and arrangement
simultaneously explaining its effect on certain interests. It must particularly
contain any material interests of the directors, managing director, managing
agent, secretaries and treasurers or manager of the company whether in their
capacity as such or as members or creditors of the company or otherwise, and
the effect on those interests of the compromise or arrangement if, and in so
far as, it is different from the effect on the like interests of other persons.
The whole of the scheme of compromise and arrangement was annexed to the notice
convening the meeting. The statement as required by section 393 annexed to the
notice, does explain its effect on the interest of the creditors and members.
At the relevant time, there were no managing agent, secretary, treasurer or
manager of the company. Therefore, the company was obliged to disclose material
interests of the directors and managing director in their capacity both as
director and managing director and also as member or creditor of the company
and the effect of the scheme on their interests only in so far as that effect
is different from the effect on the like interests of other persons. The scheme
directly did not have any effect on the interests of the directors either as
director or as a member or creditor in a manner different from the manner in
which the scheme would have effect on the interest of other creditors and
members. The interest of the managing director as creditor of the company is
set out in paragraph 7 of the statement and it may be stated that the effect of
the scheme on his interests is identical as the effect on the interest of other
creditors and members of the company, if the scheme is sanctioned. Therefore, a
mere perusal of the statement annexed to the notice would show that it conforms
with the requirement set out in section 393(1)(a). The essential requirement is
that the creditors and members who are to assemble in the meeting should have
advance information of the proposed scheme of compromise and arrangement and
its effect on their interest as members and creditors. As the whole of the
proposed scheme was annexed to the notice, anyone having a bare perusal of the
scheme would be able to find out what was intended to be done by the scheme of
compromise and arrangement and what would be its effect on his interest as
creditor or member of the company. Therefore, the first part of clause (a) of
section 393(1) is fully complied with. In respect of the latter part of clause
(a), it must be stated that the material interest of director and managing
director in their capacity as such or as a creditor or a member of the company
will have to be stated in the statement; but the effect of the scheme on their
interest will have to be disclosed to the extent that effect differs from the
effect on the like interest of other creditor and member that would be made by
the scheme. If there is no difference, it is not essential that the effect of
the scheme on the interest of director and managing director and others need be
set out in the statement. In order that the statement accompanying the notice
may conform to the requirement of section 393, what should be its content has
been considered by Miabhoy J. (as he then was) in In re Sidhpur Mills Co. Ltd.
It has been observed in this connection as under:
"In
my judgment, the true legal position is that it is the duty of every officer of
the company and the company to acquaint himself or itself with the material
interests of every other concerned person, such as the director, managing
partner or manager of the company, and to mention that interest and to explain
its effect in the statement. That is the primary duty which has been cast upon
the concerned persons....... In my judgment, therefore, the true construction
of clause (a) to section 393 of the Indian Companies Act is that it requires
the material interests which every person concerned possesses, not only in the
company, but also in the scheme, to be stated by all the other persons
concerned and if the latter part of clause (a) applies, then, the effect
thereof must also be mentioned."
After
referring to the aforementioned observations Mr. Vakil raised four-fold
objection to the statement which was annexed to the notice. Before I refer to
these objections, the recitals made in the statement may be briefly referred
to. In paragraph (1) it is mentioned that the copy of the scheme of compromise
and arrangement is annexed to the notice. In paragraph (2) it is stated that
the company is in serious financial difficulties and as against the total assets
of Rs. 1,26,54,147 its present liabilities are to the tune of Rs. 1,30,89,493.
In paragraph (3) it is stated that several winding up petitions are filed in
the High Court and as the company is unable to meet with its liabilities, the
court in all probability may direct the winding up of the company. In paragraph
4 it is stated that if the company is ordered to be wound up and is sold as a
running concern, it may not fetch more than 17 to 20 lakhs of rupees, as
disclosed by the experience of selling Anant Mills of Ahmedabad and Rajratna
Mills. It is further stated that prior to the present management, the company
was being managed by the managing agency firm of Hiralal Trikamlal & Sons
and when the board of directors took over the management of the company, there
were accumulated losses of Rs. 62.43 lakhs. It is also stated that the
machinery of the company is old and worn out and requires renovation and
looking to the heavy losses, it is not possible to carry out renovation. In
paragraph (5) it is stated that, in the circumstances, the board of directors
have proposed a scheme of compromise and arrangement. In paragraph 6 it is
stated that the share capital of the company is to be reduced and portion of
dues of the creditors is to be converted into share capital and balance is to
be frozen for a period of two years, whereafter it would be paid by instalments
and, by this process, the company would be able to pay up its dues by 1970. In
paragraph 7 it is stated that the managing director is a creditor of the company
to the extent of Rs. 3,00,000 and he has agreed to convert 50 per cent, of his
dues into share capital and has agreed to the payment of the balance by yearly
instalment of Rs. 38,000 after 1972. In the last paragraph it is stated that
the company proposes to scrap Unit No. II and the price realised on the sale of
the scrap would provide some working capital and also enable the company to pay
partly some of the dues of the creditors as detailed in the scheme. This
statement is signed by Mr. R.L. Dave, in his capacity as Chairman appointed for
the meeting, and Additional Registrar, High Court of Gujarat, Ahmedabad.
The
first objection of Mr. Vakil to this statement is that the statement is not
settled by the Registrar as required by the order of this court dated 28th
June, 1968. The order on the judge's summons seeking directions for convening
meetings under section 393(1) is to be drawn up in Form No. 35. The order in
fact is drawn up in Form No. 35 and one of the directions thereby given is that
the advocate for the company should file in the court within the prescribed
time, the draft form of advertisement, notice and statement to accompany the
notice and the same should be settled by the Registrar of the court. It was
urged that the statement may have been submitted by the company but it is not
settled by the Registrar. It was urged that specific contention has been raised
in the affidavit in reply that the statement is not settled by the Registrar
and there is no denial thereof and that the perusal of the statement would show
that, at any rate, it is not settled by the Registrar. There is no substance in
this contention. Rule 2(11) of the Companies (Court) Rules, 1959, defines
"Registrar" to mean, in the the High Court, the Registrar of the High
Court, and includes among others such other officer as may be authorised by the
Chief Justice to perform all or any of the duties assigned to the Registrar
under the Rules. The Honourable Chief Justice has authorised the Additional
Registrar of this High Court to perform all or any of the duties assigned to
the Registrar under the Rules. Therefore, the Additional Registrar will have
all powers conferred on the Registrar under the Rules. In this case Mr. R.L.
Dave who was appointed Chairman of the meeting is Additional Registrar of the
High Court and to whom the work under the Companies Act is assigned by the
Honourable Chief Justice and, therefore, the Additional Registrar would have to
perform the functions of the Registrar and, therefore, he would have to settle
the statement. When the statement is signed by the Additional Registrar in his
said capacity, it can be said that he has settled the same. Mr. Vakil, however,
urged that the statement appears to have been prepared by the company and the
Additional Registrar has not applied his mind to the contents of the statement
with the result that false and misleading statements have crept into the
statement and it is a case of non-application of mind. In fact direction given
by the court shows that the statement in the first instance has to be furnished
by the advocate of the company and there is nothing on the record to show that
it was not furnished by the advocate of the company. The Additional Registrar
having signed it would mean that he has settled the same. Therefore, the
direction has been properly complied with.
The
next objection of Mr. Vakil was that this statement under section 393 ought not
to have been signed by the Additional Registrar as Chairman of the meeting, because
the Additional Registrar is an officer of the court and the statement issued
under his signature was likely to convey a wrong impression to the members and
creditors that the factual averments made in the statement had the sanction of
the court. It is true that the Additional Registrar was not well advised in
signing this statement. When a statement containing factual averments is signed
by an officer of the court judgment of the recipient of the statement was
likely to be influenced by the fact that the factual averments made in the
statement have been sanctioned by the court. Therefore, such a statement ought
not to have been signed by the Additional Registrar. But the mischief which was
likely to be perpetrated by this statement having been signed by the Additional
Registrar has been nullified by the direction given by the court in Company
Application No. 55 of 1968 filed by Chandulal Hiralal Banker on behalf of his
principals praying for a direction that the Additional Registrar and Chairman
appointed to preside over the meetings should withdraw the statement issued
under his signature and to send a fresh statement as required by section 393. A
further prayer was made that till the said company application is disposed of
the Chairman may be restrained from holding meetings. While rejecting this
application Mehta J. on 30th September, 1968, gave an oral direction that the
Chairman at the inception of each meeting should inform the creditors and
members as the case may be present and attending the meeting that even though
the statement sent to them is signed by him he does not vouchsafe the truth of
the factual averments made therein and no inference should be drawn from the
fact that the statement is signed by the officer of the court. He was further directed
to explain that contents of the statement were not either true to his own
knowledge or were not the view of the court; but they were factual averments
made and view expressed by the sponsors of the scheme. Under the directions of
Mehta J. the Chairman made this clarification at the inception of each meeting.
He has so stated in his report submitted to the court. Therefore, no damage is
done by the error committed by the court officer in signing the statement
annexed to the notice convening the meeting.
It
was next contended that this statement contained various false and misleading
statements and further contained some averments and recitals for carrying on
propaganda in favour of the scheme. It was urged that while complying with the
statutory requirements, the company utilised the opportunity and the forum for
carrying on propaganda in favour of the scheme so as to prejudicially influence
the judgment and decision of the creditors and members who were to attend the
meetings. It was urged that material facts were suppressed with ulterior end in
view of obtaining approval of the scheme by the members and creditors. Mr.
Vakil took serious exception to the averments in the statement that Anant Mills
and Rajratna Mills of Petlad have been sold for an amount varying from 12.50
lakhs to Rs. 20 lakhs. I fail to see how exception can be taken to these
averments because it is not suggested that these facts are untrue. It was
further contended that the averments in the statement that the previous
management was responsible for the loss suffered by the company to the tune of
Rs. 62.43 lakhs (sic). Even Mr. Vakil could not urge that the statement as a
fact is not true. In fact there is good evidence to show that the company had
suffered loss to that extent till January 1, 1966, when the management changed.
But it was urged that further loss suffered by the new management when they
came to power from January 1, 1966, ought to have been set out. The omission to
make certain statement, not required by law to be made, could not vitiate the
statement nor the maker of the statement could be charged with making false or
misleading statement on that account. It was then urged that the interest of
family members of the managing director in the company as well as the effect on
such interest of the scheme have not been set out in the statement. Section 393
only requires that the statement should contain material interest of the
managing director and others set out in the section and not of the friends and
relations of the managing directors and the other concerned persons: vide In re
Sidhpur Mills Co. Ltd.
But Mr. Vakil took a very serious exception to
the averment contained in the last para. of the statement that the price
realised on the sale of the scrap of Unit II of the mills would provide some
working capital. It was very vehemently urged that the cash-flow statement
annexed to the scheme shows that the company expects to realise Rs. 14 lakhs by
sale of the scrap of Unit No. II of the company's mills and it further shows
that Rs. 14 lakhs are to be forthwith paid to the secured creditors of the
company, namely, Union Bank of India and Central Board of Trustees of the
Provident Fund. It is true that the amount realised by the company by sale of
scrapping of Unit No. II is to be appropriated towards the discharge of the
liability of the company to its secured creditors, namely, Union Bank and the
provident fund authorities. It is true therefore that no part of it would be
available for running the mills. But the cryptic statement made in the last
para. of the statement annexed to the notice would go to show that if the
liability of the company to its secured creditors is discharged the company
would be able to arrange for cash in view of the reduced liability of the
company from other sources for running the mills. The statement made in
paragraph 8 has to be read in this background. There is no suppression of the
fact that the amount realised by sale of the scrap is to be utilised towards
discharging the liability because it is so stated in the cash-flow statement
annexed to the scheme. In my opinion, therefore, there is no substance in the
contention that the statement contained false and misleading statements of
facts with a view to obtain the approval of the scheme of compromise and
arrangement or it prejudicially influenced the judgment of creditors and
members.
The last objection of Mr. Vakil
under this head of attack is that the effect of the scheme on the material
interests of directors and managing director has not been clearly set out in
the statement. It was strenuously urged that annexing of the statement as
required under section 293 of the notice convening meeting is obligatory and
absence of it would vitiate the proceedings of the meeting. It was further
urged that the statement must contain in clear and unambiguous terms the effect
of the provisions of the scheme on the interest of the directors and managing
director so that the members and creditors may have full information about the
change that would be brought about by approving the scheme, and which change
may influence their judgment in the matter. It is undoubtedly true that the
company is under an obligation to set out the interest of the directors and
managing director in the company and the effect on their interest by the
scheme—more particularly when the effect is likely to be different from the
effect on the interest of like nature on other creditors and shareholders. The
question then is whether the interest of the directors and managing director in
the company and the effect of the scheme on such interest has been set out in
the statement or not. It may at once be stated that the interest of the directors and
managing director in the company has been set out in the statement. The latter
part of clause (h) of section 393(1) is required to be complied with only if
the effect of the scheme on the interest of the directors and managing director
is likely to be different from the effect of the scheme on the like interest of
members and creditors in the company. If the effect is to be the same in
respect of both categories of persons, in my opinion, it is not obligatory on the
company to set out the effect in the statement. But it was urged that, in this
case, the effect of the scheme on the interest of the directors and managing
director; is going to be of such a revolutionary character that it should have
been set out in the statement. To illustrate this point, it was urged that
Gopaldas P. Parikh is virtually the owner of the companies, namely, Indequip
Ltd., Indian Electro Chemicals Private Ltd., Dyestuffs and Chemicals Private
Ltd. and these three companies are creditors of the mills company to the tune
of more than Rs. 42 lakhs. It was then pointed out that under the scheme 50 per
cent, of their claim would be converted into share capital. Therefore, the
effect of the scheme in the words of Mr. Vakil would be that Gopaldas P. Parikh
as virtual owner of the three aforesaid companies would have shareholding in
the mills company to the tune of Rs. 20 lakhs and, therefore, thereby Gopaldas
P. Parikh would establish his octopus hold on the mills company to the
detriment of other creditors and shareholders. It was urged that the interest
of Gopaldas P. Parikh should have been set out in the statement. But I am
afraid, the argument has its genesis in the obsession of the contesting
creditors with Gopaldas P. Parikh which never remained concealed throughout the
hearing of this petition. At the relevant time when the scheme was sponsored,
Gopaldas P. Parikh was not the director of the company. He had long ceased to
be director of the mills company. ' If he was neither the director nor managing
director, his interest was not required to be disclosed in the statement. But
it was urged that Anil Gopaldas Parikh, son of Gopaldas P. Parikh, was a
director of the company at the relevant time. That, of course, is true. But
Anil Gopaldas is merely a director and he had no other interest in the mills
company and, therefore, there was nothing to be disclosed in respect of his
interest and the effect of the scheme on his interest. The interest of the
managing director, Linubhai Banker, is disclosed and the effect of the scheme
on his interest is also disclosed and it can be said with reasonable certainty
that the effect on his interest is in no way different from the effect of the
scheme on the interest of other creditors and members. Therefore, there is no
substance in the allegation that necessary disclosure as required by section
393(1)(a), later part, has not been made.
As
a second limb of the argument, it was urged that the production programme,
annexed with the estimated production statement, and cash flow statement,
annexed to the scheme, contained misleading and incorrect information. I need
not dilate upon it because I would have to advert to this submission when I
consider the feasibility of the scheme.
The
statement under section 393 should be drawn up as to convey to the members and
creditors sufficient information so that they may be able to bring to bear upon
the scheme their intelligent judgment. They must have information which would
help in considering the scheme on its own merits. In my opinion, in this case,
the scheme as a whole as was annexed to the notice along with various
statements and statement under section 393 gave the necessary information to
the creditors and members so that they may be able to intelligently deliberate
upon the scheme keeping in view the commercial feasibility of the scheme and on
the material supplied they were in a position to decide intelligently whether
the scheme should or should not be approved. It is of course true that some
further information was sought at the meeting and Mr. Surottam Hatheesing, the
Chairman of the company, till the date of the appointment of the provisional
liquidator, was unable to furnish that information. But the information sought
was not of such a vital character that non-availability of it would have come
in the way of the creditors and members deliberating upon the scheme.
Therefore, considering the matter from all the aspects, in my opinion, the
statement as required by section 393 was annexed to the notice convening the meetings
and the provisions of section 393 have been duly complied with.
Re.
Ground No. 7. —The next ground of attack was that the meetings of creditors and
members were conducted in an irregular manner and, therefore, the votes
recorded at such meetings cannot be relied upon to show that the scheme has
been approved by the requisite majority of creditors and members. In Company
Application No. 23 of 1968, the court gave directions for convening separate
meetings of ordinary and preference shareholders and secured and unsecured
creditors. The court also gave a direction that the notice of the meeting
should be advertised and a notice convening meeting showing time, place of
meeting, together with the copy of the proposed scheme of compromise and
arrangement and statement required under section 303 and form of proxy, should
be served by a pre-paid letter under certificate of posting to each ordinary
and preference shareholder and individual notice to the creditors whose debts
exceeded Rs. 1,000. Individual notices to the creditors having a claim of less
than Rs. 1,000 was dispensed with. These directions have been complied with and
an affidavit to that effect has been filed by the chairman who presided over
the meetings. Requirements for convening proper meetings are contained in rules
69, 70, 73, 74, 75 and 76. The requirements of these rules appear to have been
properly complied with. Mr. Vakil had a four-fold objection to the procedure
adopted by the chairman at various meetings. The first objection is that the management
failed to furnish relevant information to the creditors and members at the
meeting with the result that the creditors and members had not enough
information to intelligently deliberate upon the proposed scheme. It was urged
that the chairman did not insist upon the management to furnish relevant
information sought for by the members and creditors and, in the absence of the
information, it cannot be said that the creditors and members were fully
apprised of the various ramifications of the scheme and brought to bear upon
the subject their intelligent judgment. At the meeting of the ordinary
shareholders of the company the question was put to Mr. Surottam Hatheesing as
to who were the directors of the company who had sponsored the scheme to which reply
was given that the scheme was sponsored by the board of directors consisting of
L.H. Banker, S.P. Hatheesing, P.H. Raval and Shri N.M. Soparkar, the last two
being Government-nominated directors. Thereafter, further questions were put by
the members relating to the working of the company and particularly as to the
assets and liabilities of the company. Mr. Hatheesing gave replies generally
dealing with the topic but he further stated that detailed figures could not be
given as the provisional liquidator is in charge of the company. Thereafter
some questions were put in writing and the chairman then requested Mr.
Hatheesing to give replies to these questions. Mr. Hatheesing disclosed his
inability to reply to the questions for want of detailed information.
Unfortunately questions given in writing are not annexed to the report of the
chairman. It is, therefore, difficult to find out what were the questions put
and what would be the effect of the failure of the chairman of the company to
give replies to the same. However, no objection appears to have been taken by
the ordinary shareholders that, in the absence of information sought for, they
would not be able to consider the scheme in its various aspects. Exactly
similar thing happened at the meeting of the unsecured creditors. The question
is whether the information sought for both by the ordinary shareholders and
unsecured creditors was of such a vital nature as to affect the deliberations
of the ordinary shareholders and creditors on the merits of the scheme. The
first information sought was as to the assets and liabilities of the company
and the exact figures have been set out in the statement annexed to the notice.
Therefore, the information in this respect is certainly given both to the
members and creditors. In respect of the other information sought, it is
unfortunate that the exact nature of the information sought is not available
and, therefore, it is not possible to come to the conclusion that in the
absence of such information the creditors and members were unable to deliberate
upon the scheme. The creditors and members attending did not consider the
information vital enough in the absence of which they could not consider the
scheme on merits. If that was the situation, they would have declined to approve
the scheme. The scheme is approved except by very few creditors whose
opposition is grounded on factors entirely irrelevant to the merits of the
scheme and to which I would refer at a later stage. It is undoubtedly true that
the creditors and members called upon to deliberate upon the scheme of
compromise and arrangement should have full and fair knowledge of all the
relevant facts on which they can come to an intelligent decision (vide In re
Bharati Central Bank Ltd.).
But, in my opinion, in the facts and circumstances of this case, it is not
possible to accept that the members and creditors could not bring to bear upon
the scheme an intelligent judgment for want of relevant information. The second
limb of the argument was that the amendments which had been proposed to the
original scheme by the secured creditors, namely, Union Bank of India and
Central Board of Trustees of the Provident Fund, have not been adopted
according to the correct legal procedure. The scheme as originally proposed
offered a compromise to the Union Bank of India— secured creditor of the
company—undertaking to pay arrears of provident fund dues to the Central Board
of Trustees—the other secured creditor—by monthly instalments of s. 40,000. At
the meeting of the secured creditors, the compromise offered to both of them
have undergone a change. The bank agreed to accept the scheme on its own terms
as suggested in the annexure to its letter dated 8th October, 1968. It must be
confessed that there is a radical change with regard to the mode of payment to
the bank. The amendments proposed by the bank are at page 154 of the record and
the amendments proposed by the Central Board of Trustees are at page 160 of the
record. The adjourned meeting of the secured creditors was held on 8th
December, 1968. At this meeting, the amendments proposed by the bank were
considered by the sponsors and they were accepted. The amendments proposed by
the Central Board of Trustees for Provident Fund have been accepted both by the
bank as well as the sponsors and they have been incorporated in the final
scheme submitted to the court for its sanction. The contention of Mr. Vakil is
that unsecured creditors and members approved the scheme as originally proposed
and the amendments made in the scheme in respect of the compromise offered to
the secured creditors have not been considered by the unsecured creditors as
well as by the members of the company. According to Mr. Vakil if a
comprehensive scheme of compromise and arrangement is offered to various
classes of members and creditors and if some class of members and creditors
approved the comprehensive scheme and if subsequently in respect of one other
class the scheme is modified at the suggestion of the other class, the modified
scheme should again be submitted to the remaining class of creditors and
shareholders. This approach to the problem ignores the very structure of
section 391 of the Companies Act. Section 391 permits the company or anyone
proposing the scheme to offer compromise between the company and its members or
any class of them, and between the company and its creditors or any class of
them. In other words, there can be a compromise between a company and one class
of its creditors or members and that compromise can be arrived at as between
the company and that class of members or creditors only and it need not be
approved or ratified by other class of members or creditors not affected by the
same. The compromise has to be considered by the class which is to be affected
by the compromise and to which the compromise is offered. Requirements of
section 391 do not imply that every compromise between a company and one of its
class of creditors or members should be approved and ratified by all other
class before it can be sanctioned by the court. It is implicit in section 391
that the company may offer compromise to one of its class of members or
creditors and approval by statutory majority of that class alone is necessary
before it can be submitted for sanction of the court. The court while according
its sanction to such a scheme may consider whether this compromise affects any
one other than the class to which it is offered. If it does not, it is not at
all necessary that such a compromise should be ratified and approved by a
statutory majority by other class of creditors and members. If this is the
correct interpretation of section 391, in my opinion, it furnishes a complete
reply to the contention of Mr. Vakil. The company in this case has two classes
of members and three classes of creditors. They are: ordinary and preference
shareholders and secured creditors, preferential creditors and unsecured
creditors. The company has offered compromise to each class and, in my opinion,
even though the compromise is incorporated in a comprehensive scheme, in fact,
each class will have particularly to consider and if thought fit to approve
that part of the compromise which is offered to it. In the process that class
may deliberate upon the entire comprehensive scheme of compromise and
arrangement, then it would be open to that particular class to reject the
compromise offered to it, if it felt that in comparison to other class of
creditors and members it has not been given a fair deal or in view of the
compromise offered to other class of creditors and members it may consider the
compromise offered to it as unfair and disapprove the same. But even if the
comprehensive scheme of compromise and arrangement is offered for consideration
to various classes of creditors and members each class will have to consider
and deliberate upon the compromise offered to it though in the process it may
consider the feasibility of the whole scheme. But the requirements of law will
be satisfied if each class deliberated upon and approved that part of the
compromise of offered to it. In the present case, ordinary shareholders were
offered a compromise by which the nominal value of the ordinary share was to be
reduced and the same was the case with regard to the preference shareholders.
Excluding the preferential creditors, namely, workers of the company, other
unsecured creditors were offered a compromise that 50 per cent of their claim
will be converted into share capital with the reduced nominal value of the
share and the balance of 50 per cent, would be paid by instalments after a
period of 2 years. Therefore, this would show that each class is offered a
distinct separate compromise. The secured creditors were offered a compromise
that they would be paid in full but the mode of payment would be by
instalments. This aspect was before the mind of the unsecured creditors and
members. If the mode of payment with regard to secured creditors as suggested
in the proposed scheme is altered at the instance of the secured creditors, in
my opinion, it is not necessary that before the scheme can be submitted to the
court for its sanction, the amended compromise offered to the secured creditors
should be ratified and approved by the unsecured creditors, preferential
creditors and members of the company. Even though an all-pervasive scheme of
compromise and arrangement comprising within its folds various different
compromises offered to different class of creditors and members is offered for
approval, in effect every class will have to consider the compromise offered to
it and its judgment disclosed by its voting will have to be considered in
respect of that part of the compromise affecting it. Viewed from this angle,
there is no force in the contention of Mr. Vakil that the amendments which had
been passed at the meeting of the secured creditors have not been passed
according to the correct legal procedure. In this connection, Mr. Vakil had
also contended that the amendment proposed at the meeting of the unsecured creditors
were also not properly adopted. Three amendments were proposed at the meeting
of unsecured creditors and members of the company relating to the payment to
the Employees' State Insurance Corporation; payment to Indequip group of
companies to be deferred till cotton merchants and suppliers of stores referred
to in clauses 2(e) and 2(f) are paid their dues and deletion of clause 2(g)
from the scheme. Clause 2(g) provides that the payment of arrears of wages and
retrenchment compensation to the workers be deferred for a period of two years.
These amendments were undoubtedly proposed at the meeting but it was urged that
they were not properly proposed and seconded. There is no substance in this
contention because the resolution passed at the meeting shows that the scheme
was approved after incorporating the aforementioned amendments. Therefore, the
contention of Mr. Vakil under this sub-head must be negatived.
The
third limb of the argument was that Indequip group of companies and two other
creditors participated in the meetings of both secured creditors and unsecured
creditors and this by no canon of construction of section 391 would be
permissible. This aspect has already been considered while disposing of ground
No. 5. Suffice it to say that Indequip group of companies and two other
creditors were not allowed to vote at the meeting of the secured creditors. In
fact, except the bank and provident fund authorities the other five secured
creditors having now given up their charge and charges created in their favour
having now been relinquished or were void from their very inception for want of
registration under section 125 they would be unsecured creditors and,
therefore, the value of their vote should not be taken into consideration while
considering whether the scheme has been approved by a statutory majority of the
secured creditors. It may be mentioned that after the aforementioned five
creditors are excluded from the category of secured creditors, only two secured
creditors remain, namely, the bank and the provident fund authorities and both
of them have approved the scheme and, therefore, no illegality attaches to the
proceedings of the meeting of the secured creditors where the aforementioned
five creditors initially attended the meeting. It must be distinctly made clear
that Indequip group of companies and two other creditors were not permitted to
vote at the meeting of the secured creditors and in final analysis the votes of
the remaining creditors, namely, M/s. Amarshi Damodar and Atul Cotton Traders, have
been excluded while computing the voting at the meeting of the secured
creditors.
The
last limb of the argument under this sub-head is that those creditors who are
companies within the meaning of the Companies Act should have lodged their
resolution and proxy as required by section 187 before they could attend and
vote at the meeting. Section 187 of the Companies Act reads as under:
"187.
Representation of corporations at meetings of companies and of creditors.—(1) A body corporate
(whether a company within the meaning of this Act or not) may—
(a) if it is a member of a company within the
meaning of this Act, by resolution of its board of directors or other governing
body, authorise such person as it thinks fit to act as its representative at
any meeting of the company, or at any meeting of any class of members of the
company;
(b) if it is a creditor (including a holder of
debentures) of a company within the meaning of this Act, by resolution of its
directors or other governing body, authorise such person as it thinks fit to
act as its representative at any meeting of any creditors of the company held
in pursuance of this Act or of any rules made thereunder, or in pursuance of
the provisions contained in any debenture or trust deed, as the case may be.
(2) A person
authorised by resolution as aforesaid shall be entitled to exercise the same
rights and powers (including the right to vote by proxy) on behalf of the body
corporate which he represents as that body could exercise if it were an
individual member, creditor or holder of debentures of the company."
It
would appear from the language of section 187 that if a company is a creditor
of another company within the meaning of the Companies Act, it may authorise by
resolution of its board of directors any person as it thinks fit to act as its
representative at any meeting of the creditors or at any meeting of members of
the company held in pursuance of the provisions of the Companies Act and such a
person authorised by the resolution would be entitled to attend in person and
by his presence, the company as creditor would be attending the meeting in
person. Such a person authorised by the resolution to represent the company
would also be entitled to vote by proxy. A proxy by such a person properly
lodged would be a proxy on behalf of the company. It would thus appear that
where a person authorised by the resolution of a board of directors of a
company attends in person it is not necessary that he should also hold a proxy
properly lodged for and on behalf of the company. On a true interpretation of
section 187 it appears that where a company is a creditor of another company,
the first company by resolution of the board of directors may authorise any
person to attend the meeting of the creditors of the other company of which it
is a creditor. In such circumstances, the authority conferred by the resolution
would enable the person so authorised to attend the meeting on behalf of the
creditor company. Such appearance of the person so authorised would indicate
the presence of the company as creditor in person looking to the language of
section 187. Such a person need not hold proxy on behalf of the company. In
fact he himself can nominate a representative to vote by proxy and his vote by
proxy would bind the company by whose resolution he is authorised to attend the
meetings. Mr. Vakil, however, urged that even if there is a resolution
authorising the person to attend a meeting of the creditors of the debtor
company on behalf of the creditor company, he should not only be authorised by
a resolution but he should also lodge proxy on behalf of the creditor company.
In my opinion, this is not borne out by the language of section 187. Mr. Vakil,
however, referred to Arun prasad v. Shantilal Shankarlal Shah.
The question that arose for consideration of the Supreme Court was as to the
manner in which the creditor company can validly cast its vote at the meeting
of the creditors held under the provisions of section 153 of the Companies Act
of 1913. It would appear that the case is decided under the provisions of the
Companies Act of 1913, Undoubtedly, in that case it is held that, though the
person who was authorised by the directors of the creditor company to represent
the said company at the meeting was present in person at the meeting, the
company could not be regarded as having been present at the meeting in person,
within the meaning of section 153, and, as that person was also not a proxy,
the vote cast by him at the meeting was void. But in this very case the effect
of the provisions contained in section 187(2) is left open. It is observed that
in the Companies Act of 1956 a provision has been introduced under which a
company which is a creditor of another company may by resolution of its
directors authorise such person as it thinks fit to act as its representative
at any meeting of the creditors of the company held in pursuance of the Act and
a person authorised in this manner shall be entitled to exercise the same
rights and powers (including the right to vote by proxy) on behalf of the
company. Such a provision was not to be found in the Companies Act of 1913 and,
therefore, this decision is not an authority for the proposition that a person
authorised by a resolution of the board, before he can represent the company
should also hold a proxy, especially after the introduction of section 187, and
particularly subsection (2) of section 187 of the Companies Act. In my opinion,
the provision contained in sub-section (2) is a complete answer to the
contention of Mr. Vakil and it must stand negatived. Thus, there is no force in
the contention that the meetings of the creditors and members were conducted in
an irregular manner.
Re.
Ground No. 8.—The next ground of attack is that even if it be held that the
meetings were properly conducted, in fact, the scheme is not approved by a
statutory majority. There was also an alternative submission that, assuming
that the other view is possible, the court on an analysis of votes recorded at
the meeting should not exercise its discretion in favour of the scheme so as to
impose it on the dissenting creditors and members. I will first examine the
first part of the submission that the scheme is not approved by the statutory
majority of the creditors and members. Before the court can accord sanction to
the scheme of compromise and arrangement, it must be approved by a majority in
number representing 3/4ths in value of the creditors or class of creditors or
members or a class of members, as the case may be, present and voting, either
in person or where proxies are allowed by proxy. The submission is that neither
the creditor nor the members have approved the scheme of compromise and
arrangement by majority in number representing 3/4ths in value. Ordinary and
plain meaning of section 391(2) is that the scheme of compromise and
arrangement must be approved by a majority in number of each class of creditors
and each class of members and the affirmative votes must represent 3/4ths in
value of the shares or debt represented by the person attending the meeting
either in person or by proxy.
The
issued and subscribed capital of the company consists of 788 ordinary shares
each of Rs. 1,000 fully paid and 1,050 redeemable cumulative preference shares
each of Rs. 100. In all 117 ordinary shareholders holding 597 ordinary shares
attended the meeting of the ordinary shareholders by person or proxy.
Eighty-one shareholders holding 522 equity shares voted in favour of the scheme
and 34 ordinary shareholders holding 72 ordinary shares voted against the
scheme. The validity of votes of the two ordinary shareholders holding three
shares was considered doubtful. Excluding the doubtful votes the analysis would
show that 80 ordinary shareholders holding 5/8 ordinary shares cast valid votes
in favour of the scheme and 32 ordinary shareholders holding ordinary shares
cast valid votes against the scheme. It would immediately appear that the valid
votes cast in favour of the scheme were majority in number representing 3/4ths
in value of the total shares represented at the meeting by the members
attending the meeting by person or proxy. Obviously, therefore, the scheme is
approved by a statutory majority in the meeting of ordinary shareholders.
The
meeting of the preference shareholders was attended by 71 preference
shareholders either in person or by proxy holding 544 preference shares. Out of
the aforementioned 71 preference shareholders present in person or by proxy 55
shareholders holding 456 preference shares voted in favour of the scheme while
16 shareholders holding 88 shares voted against the scheme. It would
immediately appear that the valid votes cast in favour of the scheme were
majority in number representing 3/4ths in value of the total shares represented
at the meeting by the members attending the meeting by person or proxy.
Doubtful votes were not taken into consideration. Obviously, therefore, the
scheme is approved by a statutory majority in the meeting of preference shareholders.
The
meeting of the secured creditors of the company was convened first on October
6, 1968, and was adjourned to various other days. The Union Bank of India and
the Central Board of Trustees of the Provident Fund were the only secured
creditors of the company and both of them have voted in favour of the scheme
subject to the modifications suggested by them in respect of the compromise
offered to each of them and the same has been accepted by the sponsors of the
scheme and, therefore, the final scheme submitted to the court is approved by
both the secured creditors which would indicate that the same has been approved
by a statutory majority. It may be mentioned here that Asia Electrical India
Pvt. Ltd. Company holds a charge for the price of the blading system supplied
by it to the company. The said creditor claims to be the creditor of the
company to the tune of Rs. 1,48,471.20 and has filed a suit to recover the said
amount in the High Court of Maharashtra against the company. A representative
of the said creditor attended the first meeting of the secured creditors but
did not attend the subsequent meetings when the secured creditors finally voted
upon the scheme. It may however, be mentioned that under the scheme Unit II of
the mills of the company is to be scrapped and sold and the realization
therefrom is to be shared by the Union Bank of India and the Central Board of
Trustees of the Provident Fund. The scrapping of Unit No. II includes scrapping
of the blading system which is part of the power plant of the company.
Therefore, blading system will also be sold. Out of the price realised by the
sale of the blading system the Union Bank has agreed to pay the amount payable
to Asia Electric India Pvt. Ltd. Company. At any rate, it cannot be said that
Asia Electric Company claiming to be secured creditor of the company has voted
against the scheme. Indian Electro Chemicals Ltd., Dyestuffs and Chemicals
Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton
Traders had at one stage claimed to be the secured creditors. They were not
recognised as such and they were not permitted to vote at the meeting of the
secured creditors. In fact the charge created by the bank in their favour
having not been registered by the Registrar of Companies on the date of the
meeting or subsequent thereto and they having specifically relinquished the
charges in their favour could by no stretch of imagination be said to be
secured creditors and, therefore, they were rightly not permitted to vote at
the meeting of the secured creditors. Even if they are considered to be secured
creditors, they having approved and consented to the scheme, there is no
negative vote at the meeting of secured creditors. It can, therefore, be said
with reasonable certainty that the scheme has been approved by the secured
creditors of the company by more than the statutory majority.
That
takes me to the meeting of unsecured creditors. As stated earlier, the meeting
of unsecured creditors was attended by the creditors who were suppliers of
stores and cotton, workmen of the company and the depositors. The depositors
are relations and members of the family and a few friends of the managing
director, Linubhai Hiralal Banker. The total value of the debt represented by
the creditors attending the meeting was to the tune of Rs. 1,11,05,004. The
creditors representing the claim in the value of Rs. 94,94,502 voted in favour
of the scheme. If the meeting of the unsecured creditors as a class is held to
be valid, it would appear that as against the creditors representing the debts
of the company to the tune of Rs. 94,94,502 who voted in favour of the scheme,
only creditors representing debts to the tune of Rs. 9,52,185 voted against the
scheme. Therefore, it would prima facie appear that majority of the unsecured
creditors representing 3/4ths in value approved the scheme.
It
was very vehemently contended that preferential creditors and unsecured
creditors were grouped together in one class and, therefore, the votes cast at
such an illegal meeting approving the scheme cannot be taken into consideration
by the court. As stated earlier, the workers of the company would be
preferential creditors; so also, the Employees' State Insurance Corporation
would be a preferential creditor of the company and they should not have been
grouped together with the other unsecured creditors. For the reasons stated
hereinabove, the creditors of the company would fall broadly into three
distinct classes, namely, secured creditors, preferential creditor of the
company and they should not have been grouped together with the other unsecured
creditors. For the reasons stated hereinabove, the creditors of the company
would fall broadly into three distinct classes, namely, secured creditors,
preferential creditors and other unsecured creditors. Separate meeting of
secured creditors has been convened and they have approved the scheme. The
error appears to have been committed in convening the joint meeting of
preferential and unsecured creditors. But the report of the Chairman would help
in finding out the debts represented by the preferential creditors and the
debts represented by other unsecured creditors in the meeting of unsecured
creditors. The report of the Chairman would show that out of 1955 creditors
including both preferential and unsecured creditors, who attended the meeting,
1055 creditors inclusive of both the classes representing Rs. 94,91,502 voted
in favour of the scheme. It would further appear from the report that the
workmen of the company forming a class of preferential creditors who attended
the meeting represented their claim to the tune of Rs. 36.33,400. The claim of
the Employees' State Insurance Corporation against the company on that date was
to the tune of Rs. 6,27,346. The workmen and Employees' State Insurance
Corporation, being the preferential creditors, would form one class. It may be
that as the compromise offered to the Employees' State Insurance Corporation is
slightly different from the compromise offered to the workmen of the company,
the workmen and the Employees' State Insurance Corporation may each form a
distinct class. The remaining unsecured creditors would comprise suppliers of
cotton and stores and depositors. An entirely identical compromise is offered
to the suppliers of cotton, stores and depositors and, therefore, they can be
conveniently grouped together in one class. Their rights are not so dissimilar
as to make it impossible for them to consult each other for their own interest.
Thus, the workers being preferential creditors would form one distinct class.
Employees' State Insurance Corporation would form another class. The remaining
unsecured creditors would form a class by themselves. The next thing is to find
out the votes and value of votes cast in each class to ascertain whether in each
class the scheme is approved by statutory majority. It is very easy from the
report of the Chairman to find out the total number of workers present and the
value of their votes. It is equally easy to find out the value of the vote of
Employees' State Insurance Corporation. The composite value of the affirmative
votes cast in favour of the scheme at the meeting according to the report was
Rs. 94,94,502. This is inclusive of the claim of workers as preferential
creditors which was to the tune of Rs. 36,33,400. If the votes of the workmen
representing in value the claim to the tune of Rs. 38,33,400 is deducted from
the votes representing the debt of other unsecured creditors to the tune of Rs.
94,94,502 the balance would be Rs. 58,61,202 out of which vote representing the
value of the claim of the Employees' State Insurance Corporation to the tune of
Rs. 6,27,346 should be deducted which would leave a balance of Rs. 52,33,756.
The unsecured creditors being suppliers of stores and cotton and depositors and
excluding preferential creditors who attended the meeting and voted in favour
of the scheme represented the debt in the value of Rs. 52,33,756. The value of
the claim of the creditors who voted against the scheme was Rs. 9,82,185. It
would immediately appear that the unsecured creditors excluding the
preferential creditors, namely, the workmen and Employees' State Insurance
Corporation have approved the scheme by more than the statutory majority.
The
workmen of the company who attended the meeting unanimously voted in favour of
the scheme, and the value of their claim was Rs. 36,33,400. Similarly,
Employees' State Insurance Corporation whose claim was in the amount of Rs.
6,27,346 has accepted the scheme. Thus the workmen of the company who would be
preferential creditors forming a distinct class of creditors of the company
have approved the scheme by more than a statutory majority. So also, the
Employees' State Insurance Corporation who would be a distinct class of
creditor of the company has accepted the scheme. It thus becomes crystal clear
that the preferential creditors of the company have approved the scheme by more
than the statutory majority.
At
this stage one submission of Mr. Vakil may be noticed. It was very vehemently urged
that if the preferential creditors and unsecured creditors each form a distinct
class, separate meetings of each class ought to have been convened and it is
not open to the court to analyze the votes at a meeting attended by such
heterogeneous creditors as unsecured creditors, preferential creditors and
Employees' State Insurance Corporation and arrive at a positive finding. It was
further urged that it would not be possible to find out how the judgment of
each class of creditors must have been affected or influenced by deliberation
in such a meeting of heterogeneous creditors and it was further contended that
the workers who are vitally interested in the restarting of the mills of the
company must have caused an over-powering influence on the deliberations at the
meeting and the judgment of other creditors would be adversely affected. The
submission was that if once an error is committed in convening the meetings,
nothing further can be done and either the court should ignore the decision
arrived at such a meeting or at best fresh meeting with proper clarification
should be convened and consideration of the scheme should be postponed till
such meeting is convened and result is notified to the court. It is undoubtedly
true that at the stage of giving directions under section 391 it is the bounden
duty of the sponsors of the scheme to place proper materials before the court
so that the court can give accurate directions for convening separate meetings
of distinct class of creditors and members. It must be confessed that such a
case was not taken by the company when direction for convening the meeting of
unsecured creditors was given and which included within its fold grouping
together of such heterogeneous creditors as preferential creditors, Employees'
State Insurance Corporation and other unsecured creditors. It would have been
well and good if such distinct and separate meetings were convened in respect
of each class of distinct creditors. But if error was committed yet the voting
at the meeting can be properly analysed to find out which was the distinct
class whose separate meeting could have been called and votes of each class can
be ascertained, in my opinion, such an error would not be fatal. There is
absolutely no allegation that one class of creditors imposed themselves on the
other class or that the majority coerced the minority into acceptance of the
scheme. In the absence of slightest allegation to that effect and in the
absence of any allegation that there were no free, frank and fair deliberations,
in my opinion, it is not necessary to order a fresh meeting of the distinct
class of creditors. If there was the slightest doubt in my mind that one class
of creditors, namely, preferential creditors, by their sheer majority imposed
themselves on the minority or the minority were coerced into approving the
scheme, I would have certainly ordered separate meetings of preferential
creditors and unsecured creditors. But the analysis of the votes would show
that except the principals of Chandulal Hiralal Banker who is practically the
only contesting creditor and whose stubborn opposition to the scheme is
attributable not to inherent demerits of the scheme but to the personal feuds
and vengeance and no other unsecured creditor representing any substantial interest
opposed the scheme in the meetings of unsecured creditors, framing or the
hearing of their petition, it is not necessary to order. In these
circumstances, in my opinion, the analysis of the vote at the unsecured
creditors' meeting after separating the preferential creditors from other
unsecured creditors should be taken into consideration to find out whether the
preferential creditors as a class have approved the scheme and whether other
unsecured creditors as a class have approved the scheme. As stated above, the
workers as being preferential creditors, the Employees' State Insurance
Corporation and other unsecured creditors each as a class has approved the
scheme by statutory majority and, therefore, there is no substance in the
contention that the scheme is not approved by statutory majority.
The
alternative submission of Mr. Vakil may now be considered. It was urged that
even if it be held that the scheme has been approved by different classes of
creditors and members in their respective meetings by statutory majority, the
court on an appropriate analysis of voting would not impose such a scheme on
the dissentient members and creditors. The submission was that the scheme is so
designed as to help Gopaldas Parikh and his protege, Linubhai Banker, to cover
their misdeeds and to give them unfair advantage by which they would have an
octopus hold on the company. It was urged that if the scheme is approved, three
companies in which Gopaldas Parikh has a controlling interest, namely, Indian
Electro Chemicals Limited, Dyestuffs & Chemicals Private Limited and
Indequip Limited, would be able to obtain ordinary shares of the company worth
Rs. 20 lakhs and thereby they would have such a controlling voice in the
affairs of the company that their misdeeds could not be brought to light and
they would be able to ride rough shod over the other shareholders. It was also
urged that Shardaben, Shantaben and Chandulal Banker who are contestants would
be left to the tender mercy of Gopaldas Parikh and Linubhai Banker. In fact,
even at the present stage, Indequip group of companies along with Linubhai
Banker, and the members of his family hold 422 shares out of the total number
of 738 ordinary shares of the company. If the scheme is sanctioned Indequip
group of companies would be able to get allotment of shares worth Rs. 20 lakhs
by conversion of their 50 per cent, claim against the company. It is not likely
to tilt the balance in a different way. It cannot be said, therefore, that the
scheme is designed for obtaining a controlling voice in the affairs of the
company. On the contrary, if the scheme is sanctioned, number of other
creditors would become holders of shares and would be able to influence the
management in the affairs of the company. Therefore, on this account, the scheme
cannot be rejected. Even at the cost of repetition, it must be mentioned that
the scheme is opposed by a very few creditors and an infinitesimally small
number of shareholders. The fact that the scheme has been approved by a
requisite majority of shareholders is undoubtedly a strong argument in its
favour, unless it is shown that their approval was not obtained fairly and the
terms of the scheme are not such as a reasonable man may accept. The approval
of a scheme by statutory majority of creditors and members is not decisive of
the matter. But it is equally true that due weight should be attached to the
choice indicated by the creditors and members who are vitally interested in the
company and the scheme affecting the company. Further, on the analysis of the
votes cast at the meeting, the salient feature that comes out to the surface is
that the scheme was opposed especially by those who, apart from the merits of
the scheme, are personally opposed to Gopaldas Parikh and Linubhai Banker. The
feud appears to be more between the blood relations rather than between the
creditors and members who have offered their best commercial judgment to the
scheme on its merits. It is an inescapable conclusion that Chandulal Banker as
a power of attorney holder of Shardaben, and Shantaben who is the principal
contender, opposed the scheme tooth and nail not because he had the interest
either of the company or creditors and members at heart but because he had to
leave the active management when Gopaldas Parikh and Linubhai Banker stepped in
and because of his personal vendetta against both of them. In this view of the
matter it is not possible to accept the submission of Mr. Vakil that the scheme
should not be imposed upon dissentient members.
Re.
Ground No. 9.—The last ground of attack was that the scheme is not commercially
and economically viable or feasible and is in fact unfair and unreasonable.
Before I proceed to consider this contention on merits, the approach to the
scheme of compromise and arrangement by the court should be made clear. How
should the court approach a scheme of compromise and arrangement submitted for
its sanction which is shown to have been approved by a statutory majority of
creditors and members who are directly affected by the scheme. The burden, of
course, of showing that the scheme is a fair and reasonable one initially lies
on the petitioner. The petitioner must prima facie show that the scheme is
pre-eminently fair and reasonable as a prudent and reasonable shareholder would
approve of and not object to. In order to show prima facie that the scheme is
fair and reasonable, it is open to the petitioner to submit that due weight
must be accorded to the fact that the majority has recorded a decision in
favour of the scheme and the court must not lightly ignore or set aside that
decision. In In re Sidhpur Mills Co. Ltd.
Miabhoy J. (as he then was), in this connection, observed as under:
"Therefore
the scheme has not got to be scrutinised by the court with that much care with
which an expert will scrutinise it, nor will it approach it in a carping spirit
with a view to pick holes in it. If the majority is acting in a bona fide and
honest manner and in the interests of the class that it purports to represent,
then, if the scheme is such as a fair-minded person, reasonably acquainted with
the facts of the case, as prevailing at the time when the scheme was sponsored
and approved, can regard it as beneficial for those whom the majority seeks to
represent, then, unless there are some strong and cogent grounds to show that
the scheme was conceived, designed or calculated to cause injury to others, the
court will ordinarily sanction it, rather than reject it."
This
must be the approach of the court while examining the scheme and the court
should, keeping in view all the aspects of the matter, prefer a living scheme
to compulsory liquidation bringing about an end to a company. Reference may be
made to Lawrence Dawson v. j. Hormasji
Cunliffe J. has observed as under:
"The
court is of course not a mere machine for registration. It will look into the
proposed scheme much as a court of appeal will canvass, if asked to do so, the
decision of a jury, to ascertain if there was reasonable evidence to support
their verdict; but it will, I think, always also prefer a living scheme to a
compulsory liquidation bringing about an end to a company, and usually without
any hope of payment in full."
The
court in exercising its discretion under section 321(2) must treat it as
cardinal that its function does not extend to usurping the view of the members
or creditors. It must look at the scheme to see that it is a reasonable one and
while so doing, the court will be strongly influenced by a big majority vote
and the reasons which actuated the contesting creditors in opposing the scheme.
None the less it is essential that the scheme must be a fair and equitable one
though it is none of the business of the court to judge upon the commercial
merits which in fact is the function of the creditors and members.
Approaching
the scheme from this angle, let me find out whether it is feasible and
workable. It is not necessary to bring to bear upon the subject the expertise
of textile magnates. The court must be prima facie satisfied that the scheme in
its broad outlines is a reasonable and fair one and that it is feasible and
workable. The first objection was that the estimate of receipts and outgoings
made in the cash flow statement annexed to the scheme is factually incorrect
and cannot be conceived even in the realm of possibility. The estimate of rent
of godowns to be constructed on the land that will be vacated by scrapping of
Unit II was considered exaggerated. Except making a statement in affidavit in
reply that the estimate is exaggerated, no material is placed on record to
reach the conclusion that the estimate is exaggerated. It was also urged that,
in the year 1963, Rs. 3 lakhs will be received by way of deposits from the
intending lessors and acceptance of deposit from the intending lessee would
result in contravention of section 18 of the Bombay Rents, Hotel & Lodging
House Rates Control Act, 1947 (hereinafter referred to as the "Rent
Act"), which prohibits a landlord from receiving any fine, premium or
other like sum or deposit or any consideration other than the standard rent or
the permitted increases, in respect of the grant, renewal or continuance of a
lease of any premises. It was also urged that acceptance of deposit from the
intending lessee by the landlord for granting lease would be a penal offence.
It is unnecessary to decide this point in this case because it does not
directly arise for consideration. Prima facie, however, it may be pointed out
that Explanation I to section 18 of the Rent Act would show that receipt of
rent in advance for premises let out for the purpose other than residence would
not come within the mischief envisaged in section 18. If the premises let out
are for the purpose other than residence, advance rent can be taken by the
landlord and if the lease is for a longer period, it would be open for the
landlord to contract that the advance rent taken would be given credit for for
the period which is just preceding the expiry of the lease. Such an agreement,
if entered into between the landlord and tenant in respect of the premises
leased for a purpose other than residence, would enable the landlord to take
advance rent and also continue to recover the rent for the initial period of
the lease. Therefore, even though what is styled as rent deposit-, it in effect
appears to be advance rent to be taken from the intending lessee and prima
facie it does not appear that such an action would be in contravention of
section 18. It was also contended that Rs. 25,000 are expected to be received
by sundry receipts, but there is no source disclosed. The amount is not very
large and a textile mill can hope to get it by way of sundry receipts. It was,
however, urged that there is no cash capital with the company and initially a
large cash amount would be required for restarting the mill and if the
realisation from the scrap of Unit No. II is to be paid straightaway to the
secured creditors, there would be no cash capital with the company to start
Unit No. I and unless the Unit No. I starts no income can be expected. In this
connection, I would like to point out that Gopaldas Parikh has filed his
affidavit at page 500 of the record in which he has stated that he is connected
with about 24 companies and he would be in a position to arrange finances to
the extent of Rs. 10 lakhs for restarting Unit No. I of the mills of the
company. There is a similar affidavit of Surotam Hatheesing at page 498 who is
connected with two mills and live other companies. He is also a managing
director of Arvind Mills Ltd. It is nowhere suggested that these persons would
not be able to provide finances as indicated by them in their respective
affidavits. It is also proper to refer at this stage to another affidavit of
Gopaldas Parikh in which he has stated that he would be able to arrange liquid
finance to the tune of Rs. 10 lakhs for the working of the mills for two years
from the date of sanctioning the scheme and that he is prepared to provide
finance from his own resources and personal guarantees to be furnished by him
subject to a condition that whatever additional funds are brought by him within
the said period of 2 years from his resources or on his personal guarantees
they should be secured against the block of the company and will have first
preference of payment after the dues of the present secured creditors are paid
off. At no stage, the ability of Gopaldas Parikh to provide additional finances
was in any way seriously disputed before me. Looking to his connection with
different companies and looking to the fact that various creditors have
extended credit to the company to the tune of Rs. 74 lakhs on the personal
guarantee of Gopaldas Parikh, it would be reasonable to believe that he would
be able to procure finances as promised by him in his affidavit.
It
was next contended that production programme annexure and estimate production
statement annexed to the same are based on exaggerated action of the efficiency
of the machinery of the mills and the management. It was urged that the textile
machinery of the company is very old and completely worn out and would not work
at the expected efficiency and the estimated production cannot be obtained.
Reference in this connection was made to the observations made by the court of
inquiry appointed to inquire into the closure of the mills in Inquiry Case
(IC.I/67) wherein it is observed that the mills is very old with equally old
machinery and that there is no other alternative but to scrap the mill. It is
true that the machinery is very old; and it is also true that when both the
units worked the company suffered loss and, therefore, apparently, it would
appear that when one of the two units is to be scrapped the other unit could
not be profitably worked. But it appears that uneconomic working of the two
units apart from being the result of depreciation in the textile industry was
to a considerable extent attributable to the division of the mills into two
units in two separate sheds which raised labour ratio to an uneconomic level.
Once Unit No. II is scrapped the other Unit can be profitably worked. An expert
like Chandraprasad Desai, general manager of Arvind Group of Mills, was one of
the opinion that Unit No. I can be profitably worked and estimated production
can be obtained. Gopaldas Parikh consulted Chandraprasad Desai and a reply
received from Chandraprasad Desai is at page 503. Annexed thereto are the
monthly working of the mills and estimated production statement. Mr. Vakil
compared these two statements with statements annexed to the scheme submitted
to the creditors and members and tried to point out discrepancies between the
two. There are some discrepancies but they are not of material nature. After
all two experts are bound to differ in their estimates and unless the
difference is of an unbridgeable character, it is not the function of the court
to examine the scheme like that of an expert in the textile industry. Suffice
it to say that Chandraprasad Desai, whose claim as an expert was not very
seriously disputed and cannot be disputed, has expressed an opinion that Unit
No. I can be profitably worked and that, in my opinion, along with the fact of
approval by creditors and members, would be sufficient to come to the
conclusion to say that the scheme is workable and feasible.
The
next question is whether the scheme is a reasonable and a fair one. The scheme
offers compromise of an equitable character to the members and unsecured
creditors. But it was urged that the Union Bank and the Central Board of
Trustees of the Provident Fund have been given an unfair advantage and they are
net expected to make any sacrifice which other interested persons are called
upon to make in the scheme. It was urged that the bank does not agree to reduce
its claim and insists upon continuance of its security and no relief is sought
to be given even in payment of interest. It was also urged that the amount to
be realised from the scrap of Unit No. II would be wholly appropriated towards
the payments of the dues of the Union Bank and the Central Board of Trustees of
the Provident Fund. That of course is true. It must, however, not be forgotten
that the Union Bank of India is a secured creditor and can remain outside
winding up and prima facie it appears that if it does realise its security,
nothing would be left for other creditors and members. The Central Board of
Trustees of the Provident Fund have given concession inasmuch as they have
agreed to give up damages payable by the company on its failure to pay the
provident fund contribution and that is an important concession. Further, both
the secured creditors agreed to accept payment by instalments spread out over a
long period. It, therefore, cannot be said that the bank and the Central Board of
Trustees of the Provident Fund are given unfair advantage in the scheme to the
detriment of the interests of the other unsecured creditors and members. Now,
if the scheme is sanctioned, the company is likely to be enormously benefited
and obtain substantial benefit to which I would presently refer. It must be
distinctly understood that the advantages sought to be extended and concession
sought to be granted are subject to an important reservation that the proposed
advantages and concessions would be extended or made if and only it the scheme
is sanctioned. Considering all these aspects, in my opinion, the scheme is a
reasonable and fair one and, on the present material, it can be said that it is
commercially sound and economically viable. Therefore, it is not possible to
accept the contention of Mr. Vakil that the scheme is neither fair nor
reasonable nor workable.
I
should like now to dwell upon the important aspect why the scheme should be
approved. There are two alternatives before the court: (1) to sanction the
scheme, or (2) to reject the scheme and as a necessary corollary to wind up the
company by passing appropriate orders on three winding up petitions which are
pending before the court. If the scheme is to be rejected the only alternative
is to wind up the company; and it was urged with utmost vehemence that for an
insolvant company, winding up is its inevitable fate and natural corollary. The
company can at this stage be undoubtedly said to be commercially insolvent and
in respect of such a commercially insolvent company, the creditor would be
entitled to an order for winding up the company ex debito instias. But when in
respect of such a company, a scheme of compromise and arrangement is offered,
the court should, in my opinion, evaluate the position—firstly of creditors and
secondly of members in winding up and in the scheme and should weigh the
advantages that may accrue in either course to be adopted by the court and find
out which way the balance tilts. If the matter is approached from this angle,
in my opinion, the conclusion in this case is inescapable. If the company is
ordered to be wound up, the liquidator would dispose of the assets of the
company and will have to apply first the receipts for discharging the dues of
the secured creditors and then preferential creditors and thereafter unsecured
creditors; and if there is any balance, there would be pro rata distribution to
the members. The present liabilities of the company are in the aggregate amount
of Rs. 1,64,54,117. The company is indebted to the bank to the tune of Rs. 40
lakhs and roughly Rs. 22 lakhs are payable to the Central Board of Trustees of
the Provident Fund. The company has to pay Rs. 8 lakhs to the Employees State
Insurance Corporation and the preferential claim of the workers would come to
Rs. 20 lakhs. Indequip Group of companies are creditors to the tune of Rs. 40
lakhs and there are other unsecured creditors to the tune of Rs. 15 lakhs. The
remainder is the claim of the workers representing their non-preferential
claim. If the assets of the company are sold, taking the best view of the
matter, Rs. 28 lakhs may be realised by the sale of the machinery and the land
may fetch, at the best available price, Rs. 35 lakhs. I have worked out the
figure of Rs. 28 lakhs of the machinery on the basis that the company hopes to
realise Rs. 14 lakhs by sale of the machinery after scrapping Unit No. II only.
The company is the owner of the land admeasuring about 59,000 sq. yds. These
are approximate estimates. It would immediately appear that the claim of the
secured creditors and preferential creditors would not be paid in full by the
sale of the assets of the company at the market price. After satisfying the
claim of secured creditors and preferential creditors there will be no residue and
the unsecured creditors are not likely to get a farthing, and even a part of
the claim of the preferential creditors, in my opinion, would remain
unsatisfied. Therefore, there is no vestige of a chance for the unsecured
creditors to get anything towards their claim in the event the company is
ordered to be wound up. Even Mr. Vakil could not by any logic work out the
figures to show that looking to the present liabilities of the company towards
the secured creditors and preferential creditors in the event of winding up,
unsecured creditors were not likely to get even a fraction of one per cent,
towards their dues. In the event of winding up the mills will be closed down
and would be disposed of and, if they are disposed of by scrapping the
machinery, there is no question of restarting the mill even by the purchaser.
As a necessay consequence the workers would be unemployed and starvation would
be their only lot. The company would be dissolved and would come to a dead end.
This consequence would generally follow in the event of an order of winding up
the company being made and taken to its logical end.
If,
on the other hand, the scheme is sanctioned, the secured creditors and
preferential creditors would be paid in full. The unsecured creditors would get
50 per cent. of their claim in the shape of ordinary shares of the company and
the balance of 50 per cent. would be paid by instalments commencing after a
period of two years after restarting of all the departments of Unit No. I. Unit
No. I would be restarted under the scheme and would provide employment to
roughly 1,000 workers. These aspects cannot be lost sight of even on a
humanitarian ground. The company would be resuscitated. The debt liability of
the company would be considerably reduced because the Indequip Ltd., which is
the biggest unsecured creditor roughly to the tune of Rs. 40 lakhs, has agreed
under a compelling necessity and not out of altruistic motive to forgo balance
of 50 per cent. of its dues after recovering 50 per cent in the shape of ordinary
shares of the company. This concession is made in the affidavit of Gopaldas
Parikh. There is a similar concession made by Mr. Khale on behalf of Dyestuffs
and Chemicals Private Ltd. which would reduce the liability of the company by
another 3 lakhs of rupees. Thus the debt liability of the company would be
roughly reduced by Rs. 23 lakhs. These concessions are made on behalf of
Indequip Ltd. and Dyestuffs & Chemicals Pvt. Ltd. on the condition that the
court sanctions the scheme. It the company is resuscitated, the members may
also hope to earn dividend after a lapse of a few years. Now it must be
confessed that the concession made by Gopaldas Parikh on behalf of the Indequip
Ltd. and by Mr. Khale on behalf of the Dyestuffs and Chemicals Private Ltd. is
not actuated by any altruistic motive because it is absolutely certain that in
the event of the scheme being rejected and an order for winding up the company
is being made, they as unsecured creditors are not likely to recover a farthing
out of their total claim of nearly Rs. 46 lakhs. Their aporoach appears to be
that when everything is likely to be lost part of it may be recovered by
forgoing the other part of it. This concession is not by way of gift or as an
inducement to the court to sanction the scheme. They are actuated by their
approach as a man of business of sound commercial instinct. They may get 50 per
cent. by agreeing to the scheme while they would lose everything if the scheme
is rejected. It is under a compelling necessity that they have made this offer.
Nonetheless it would be beneficial to the company. When thus the consequence
that would follow in the event of sanctioning the scheme or in the event of
winding up order being made directly affecting the creditors and members,
undoubtedly, the balance in favour of the scheme considerably tilts and that
should be a very important circumstance which would influence the court's
decision while considering the scheme on its own merits.
It
must also be pointed out that if the scheme is not sanctioned and an order for
winding up is made, the secured creditors, namely, the Union Bank of India and
the Central Board of Trustees of the Provident Fund, have declared their
unequivocal intention to remain outside the winding up and they would insist on
realising their security in full and, in that event, nothing would be left
because the experience of this court, while considering the offers for purchase
of a textile mill in this city for the last one year, shows that the price
realised is hardly attractive. If the scheme is sanctioned the secured
creditors have agreed to be bound by the scheme, while in the winding up, they
have expressed in no uncertain terms that they would remain outside the winding
up and realise their security in full. If they come under the scheme which they
have agreed to do they could be paid by instalments and keeping in view some of
the conditions which I propose to impose while sanctioning the scheme, the
liability of the company to pay running interest may be reduced to some extent.
The Central Board of Trustees of the Provident Fund have agreed to forgo
damages to the tune of Rs. 6 lakhs in the event of the scheme being sanctioned.
The only thing that was harped upon by Mr. Vakil was that, in the event of
winding up, various inquiries can be made into the misdeeds of the ex-directors
and fraudulent preferences can be avoided. I have already pointed out that the
mortgage in favour of the bank and Central Board of Trustees of the Provident
Fund cannot be avoided as fraudulent preferences. The charges created by
decrees in favour of the other five creditors, namely, Indian Electro Chemicals
Ltd., Dyestuffs & Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi
Damodar and Atul Cotton Traders, have been relinquished, by way of concession
in the above. The result which Mr. Vakil seeks to achieve is obtained without
the order of winding up being made. Thus, giving the matter my anxious thought
the advantages and benefits that are likely to accrue by sanctioning the scheme
far outweigh the imaginary or productive result which Mr. Vakil thinks can be
achieved in winding up. Therefore, also, the scheme deserves to be sanctioned.
Before
sanctioning the scheme it is necessary to give specific directions subject to
which I would accord sanction to the scheme. The court has power at the time of
making an order sanctioning the scheme under section 392(1)(b) to make such
modifications in the compromise or arrangement as it may consider necessary for
the proper working of the compromise or arrangement. This power can be
exercised not for substituting the scheme as approved by the creditors and
members but for making the scheme of compromise and arrangement effective and
workable. The only pre-condition in the exercise of the power under section
392(1)(b) is that the court can make modifications for the proper working of
the compromise and arrangement. In other words, the court can modify the scheme
of compromise and arrangement so as to make it effective and workable. It has
become necessary to exercise this power because the scheme was considered by
the creditors and members prior to December, 1968, and it was hoped that it
would go through in the early part of the year 1969. For various reasons, the
hope has not materialised with the result that certain consequential
modifications will have to be made in the scheme to make it effective and
workable. Some modifications have also become necessary in order to restrict
the powers of the bank and Central Board of Trustees of the Provident Fund to
throw overboard the scheme at their sweet will and pleasure. The scheme gives
discretion to the bank in the event of the bank in its absolute discretion
feeling that its rights as secured creditors are in jeopardy or its guarantee
is impaired, to take any action as a secured creditor. The scheme also gives an
option to the bank and Central Board of Trustees of the Provident Fund to
recover the whole amount at once if the default in payment of instalment is
committed. While sanctioning the scheme if these provisions are retained, it
would give veto to the bank and the Central Board of Trustees of the Provident
Fund to play ducks and drakes with the scheme at their sweet will. Such a power
to take unilateral action to the detriment of other interested persons bound by
the scheme with a view to destory the scheme given to the bank and Central
Board of Trustees of the Provident Fund, would always keep the scheme at the
tender mercy of those two creditors and it would not be conducive to the
healthy working of the scheme of compromise and arrangement. Therefore, I
consider it just and proper for the proper working of the scheme of compromise
and arrangement to direct the following modifications to be made in the scheme
and, subject to these modifications, the scheme would be sanctioned.
Under
the scheme, the dues of the bankers are to be paid by monthly instalments
commencing from the specified date. The date has become almost unmeaning when
the scheme is being sanctioned. Some instalments holiday is absolutely
necessary to give a breathing time to the company. In my opinion, the first
instalment payable by the company to the Union Bank of India should commence
six months after restarting of all the departments of Unit No. 1 under the
scheme, and thereafter every succeeding instalment shall be paid from month to
month. The company would be liable to pay interest at the agreed rate but not
with quarterly rests. The interest should be simple interest payable from year
to year at the agreed rate of interest. The default clause in the scheme by
which, in the event of the company committing default in payment of any
instalment, the whole of the amount payable to the bank would become due and
payable at once, would stand deleted. Whenever the bank wants to sell any
property of the company under the rights conferred on the bank in the scheme of
compromise and arrangement the same shall not be exercised without prior
permission of the court. It is not open to the Union Bank of India to go out of
the scheme and proceed to realise the security without obtaining the prior
permission of the court.
Similarly,
the monthly instalments payable to the Central Board of Trustees under the
scheme would commence six month safter the restarting of all the departments of
Unit No. I. The company should pay simple interest on the outstanding amount at
the rate agreed upon between the company and the Central Board of Trustees of
the Provident Fund. The clause in the scheme giving option to the Central Board
of Trustees of the Provident Fund to recover the whole of the amount due to it
in the event of the company committing default in payment of monthly
instalments would stand deleted. The Central Board of Trustees of the Provident
Fund would not be entitled to recover damages as conceded in letter No. BPF-1969/
44878-M Education and Labour Department, Government of Gujarat, dated 18th
June, 1969. Whenever the Central Board of Trustees of the Provident Fund want
to sell any property of the company under the rights conferred on the board in
the scheme of compromise and arrangement the same shall not be exercised
without prior permission of the court. It is not open to the board to go out of
the scheme and proceed to realise the security without obtaining the prior
permission of the court.
The
claim of Indequip Ltd., Indian Electro Chemicals Ltd., Dyestuffs Chemicals
Private Ltd., M/S. Amarshi Damodar and M/s. Atul Cotton Traders shall be
verified by the official liquidator as court officer. After ascertaining the
amount, half the verified claim will be converted into share capital of the
company. The balance of 50 per cent. of the verified claim payable to Indequip
Ltd. and Indian Electro Chemicals Ltd. shall not be payable by the company on
their own concession in the event the scheme is finally sanctioned and is worked.
The
directors to whom the management of the company would be restored by the
provisional liquidator on the scheme being sanctioned are restrained from
registering taking any steps hereafter pursuant to the applications already
made in respect of charges created in favour of Indequip Ltd., Indian Electro
Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Messrs. Amarshi Damodar
and Messrs. Atul Cotton Traders by the decrees of the City Civil Court,
Ahmedabad.
In
the event of the scheme being finally sanctioned the Union Bank of India should
pay to Asia Electric India Private Ltd. from the amount realised from the sale
of scrap of Unit No. II of the mills of the company whole or a portion of its
claim proportionate to the amount realised from sale of blading system, being
part of the power plant of the company, sold by the said creditors to the
company and having a charge on it for the unpaid price.
Sanction
is hereby accorded to the scheme of compromise and arrangement, copy of which
is annexed to this judgment subject to the aforementioned modifications and
directions. The court hereby accords sanction to the reduction of share capital
as envisaged in the scheme.
All
the parties who appeared at the hearing should bear their respective costs, except
the official liquidator whose costs should come out of the company. The costs
payable to the official liquidator is quantified at Rs. 1,000.
The
provisional liquidator is in charge of the company. The directions for return
of possession of the company will be given hereafter on judge's summons being
taken out by the petitioner or the company. The operation of the order
sanctioning the scheme is stayed till 10th January, 1970, as two directors,
namely, East India Company, and one other creditor, namely, Pratapsinh
Vasantlal, intend to prefer an appeal against this order. The company to pay
the expenses incurred by the provisional liquidator on the bills submitted by
him.
[1962] 32 COMP.
CAS. 804 (CD)
v.
C.H.
Musselwhite & Son Ltd.
RUSSELL,
J.
DECEMBER
20, 1961
RUSSELL,
J. read the following
judgment, in which he stated the facts, and continued : On December 30, 1958,
the annual general meeting of the company was held. I am not concerned was what
business was before the meeting or what passed. No notice of the meeting was
served on the plaintiffs. Prima facie the meeting was a nullity for that
reason. The defendants, however, rely on the relevant article 43 of Table A,
which is in this form : “The accidental omission to give notice of a meeting
.... to any member shall not invalidate the proceedings at any meeting.” [His
Lordship referred to the answers to interrogatories and the paragraph quoted
above in the letter from the defendants’ solicitors, who were also the
company’s solicitors, dated July 15, 1959, which was agreed to be correct, and
continued :] On those facts I fail to understand how the omission to give
notice to the plaintiffs was accidental. As Mr. Dehn for the plaintiffs
succinctly put it, it would have been accidental if a notice had been given to
the plaintiffs. It was argued that an omission founded on a misapprehension of
law, or indeed of fact, was accidental. Reference was made to the cases or
Barker v. Pur and In re Inchcape.. Those
cases concerned R.S.C., Ord. 28, r. 11, which in relation to judgments or
orders permits the correction of “errors arising therein from any accidental
slip or omission.” I do not see how these cases can support the argument that
an omission is accidental because it arises from an error.
For the
plaintiffs it was alternatively argued that the general meeting was a nullity
because of the failure to comply with the requirements of section 158(1) of the
Companies Act, 1948. At the risk of seeming discourteous, I would content
myself with saying that there is nothing in that point.
Prima facie,
therefore, the plaintiffs are entitled to their declaration that the annual
general meeting was a nullity. On that basis they ask for an order that the
annual general meeting for the year 1957-58, now long overdue, be held. By
itself, this would be unnecessary, even if the court had power to order it, but
in truth what the plaintiffs wanted was declaration that whenever such meeting
was held the voting rights should be on the basis of the state of the share register
at the expiration of the period during which the meeting was required by law to
have been held. The exact date is not determined, but it would have been prior
to a date in October, 1959, when 50 more shares of the original capital were
issued to and registered in the name of the female defendant, upsetting the
balance on the register between the families. Two reason for this were
advanced. First, when that meeting takes place after the end of the period laid
down by law for its holding, it must be conducted on the basis of the register
as it stood on the last permitted day. I know of no justification for this
proposition in authority or statute law, and it seems to me wrong in principle
and contrary to the requirements of the articles of the company. The second
reason advanced was that the applicable article 35 of Table A in the First
Schedule to the Companies Act, 1929, requires that these 50 shares be first
offered proportionately to all the members of the company, which was not done.
But that article does not apply to shares forming part of the original capital,
and article 4 of the company’s articles in terms leaves the allotment of the
shares of the company to the board. It would accordingly have been quite wrong
to disqualify those 50 shares at any new meeting on either of those grounds. If
the matter ever arose it is, of course, possible that such disqualification, or
its equivalent, might be based on some other vice in their issue, for example,
as being contrived not in the interests of the company, but no such matter was
or could have been debated on the pleadings in this action.
This brings
me to the substantial point in this matter. For the individual defendants it
was said that, though, as an academic matter, the plaintiffs were entitled to asserts
against the company that they had a right to receive the notice and that the
annual general meeting was a nullity, they could not do so effectively, or
could not be permitted to do so, in an action to which the individual
defendants were parties, and against their wish. The reasons, shortly stated,
were these : that the result of the contract of May 21, 1958, it being
specifically enforceable, was to confer upon the purchaser the beneficial
ownership in the shares, leaving the vendors (they remaining on the register)
the legal owners of the shares, with but a vendor’s lien for the unpaid
purchase money and otherwise trustees for the purchaser : that as such trustees
they must, in the exercise of any right associated with the shares, comply with
the wishes of the beneficial owner of those shares, and therefore of that
right, short of a wish which would fraudulently deprive them of or undermine
the security of their vendor’s lien : that one right associated with the shares
was the right to complain or not to complain of the omission to give notice of
the annual general meeting; and that the plaintiffs in bringing the action were
obviously acting directly contrary to the known wishes of the purchaser in this
regard without there being any allegation or suggestion that a direction not to
complain would affect in any way the value of their vendor’s lien, let alone
fraudulently.
The matter
was put also in this way : that the plaintiffs in exercising their voting
powers at any general meeting were by virtue of the beneficial ownership of the
purchaser bound, with one exception, to comply with the directions of the
purchaser : that (as I understand the argument) they were in this respect in
exactly the same position as vendors who had been fully paid but remained on
the register as bare trustees, except in respect of any voting direction which
would fraudulently deprive them of or undermine the value of their vendor’s
lien : that there was no suggestion that a repetition of the December, 1958,
meeting would have such a result or indeed would in any way affect the value of
the vendor’s lien : that the court not make a declaration requiring as a purely
academic exercise a repetition of that meeting.
For the
plaintiffs it was contended that unpaid or partly paid vendors were not in the
position of trustees for the purchaser who must obey his behests : they
remained entitled to exercise the voting and ancillary powers as they wished
without necessary reference to the purchaser, though liable to the purchaser if
they took, or liable to challenge by the purchaser if they threatened to take
action damaging the subject-matter of the purchase. The analogy was to a vendor
of land entitled to remain and remaining in possession after the execution of
the contract, of whose actions the purchaser had only a limited right to
complain.
Further, for
the plaintiffs it was contended that guidance could be found from the position
in law of a mortgagee of shares to whom the shares had been transferred and who
was the registered holder thereof. Such a mortgagee had, it was submitted, the
prima facie right to decide how the votes were to be case, subject to
interference at the instance of the mortgagor in a case only of unjustifiable
damage to the interests of the latter; and the position of a vendor on the
share register with a vendor’s lien was vis-a-vis the purchaser (who was the
the beneficial owner subject to that lien) relevantly comparable with that of a
mortgagee on the share register with a charge for the money advanced vis-a-vis the
mortgagor whose equity of redemption made him in effect the beneficial owner
subject to that charge.
For the
defendants it was asserted that it was not authoritatively established that a
mortgagee of shares on the register had the right to decide how to vote subject
only to a limited right in the mortgagor to intervene in special circumstances;
and moreover, in principle, the position was the converse. Further, it was
argued that even if the authorities favoured the mortgagee in that regard, that
did not point to a similar answer in the case of the unpaid vendor.
The question
really, for the purpose of this case, is whether, as between the plaintiffs and
the individual defendants, the plaintiffs have the pima facie right to decide
how to exercise the voting rights in respect of the shares, or whether the
defendants have the prima facie right to direct in all cases how those votes
are to be cast. If the former, then there is no justification for not holding a
proper meeting : if the latter, there is no point in holding a proper meeting
and no justification for this action, for there is no suggestion by the
plaintiffs that anything done at the purported annual general meeting went
beyond the scope of the legitimate exercise of the defendants’ prima facie right
to direct how the votes should be cast, and there is no suggestion by the
defendants that if a proper general meeting is held, the plaintiffs will do
anything which exceeds the legitimate exercise of their prima facie right to
decide how the votes should be cast.
It is, I
think, convenient to examine first the position of a mortgagee of shares who is
on the register. I refer first to Siemens Bros. & Co. Ltd. v. Burns. The
mortgagees there were trustees for debenture stockholders of company A, and as
such were on the register of company B in respect of shares belonging to
company A which had, by a hiving off of part of the assets and undertaking of
company A, become subject to the specific charge in the debenture trust deed,
and accordingly had been transferred to the trustees. The first part of the
headnote says : “Where a company makes
an issue of debenture stock which it secures by a debenture trust deed, and as
part of the specifically mortgaged property causes shares in another company to
be registered in the names of the trustees of the deed, the trustees are, in
the absence of any contract restricting their rights, entitled, as the legal
owners of the shares, to exercise the voting rights in respect of them in such
manner as in their judgment they may deem best, irrespective of any directions
of the mortgagor company as to how the voting rights should be exercised, and
this, notwithstanding that the security is not yet enforceable.” On this matter
I add that counsel for the trustees, that is to say the mortgagees, were not
called upon. It was argued that where,
as there, there was a clause in the debenture trust deed entitling the
mortgagor to carry on its business until default, the trustees could only vote
before default as the mortgagor directed, since that was carrying on the
business of the company. Further it was argued that this was not negatived by
the existence of a general clause authorising the trustees, pending default, to
empower the mortgagor to exercise any powers and rights incident to the
ownership of any specific mortgaged property and - I quote - “in particular any
voting right ...”
On this,
Swinfen Eady M.R. expressed himself in a judgment concurred in by Duke and
Scrutton L.JJ. as follows : “It cannot be doubted that this provision in
sub-clause 11 of clause 19 extends to any voting right in respect of the shares
in question. These shares are specifically mortgaged premises, and the
provision that the trustees may permit the company, or any nominee of the
company, to exercise any powers and right incident to the ownership of any of
the specifically mortgaged premises, and in particular any voting right, has
this operation, that it shows that there was an express agreement between the
parties as to the extent to which, if at all, the company was to exercise or
have the benefit of any voting rights in respect of the shares. In the ordinary
way, where shares are transferred to and registered in the name of a mortgagee
it follows, from his position as owner at law of the shares, that the ownership
carries with it the voting right, that this is vested in the owner of the
shares; and it would require a contract to exclude that right. Sometimes, where
shares form a security, there is a contemporaneous collateral agreement as to
the mode in a which, and the extent to which, voting rights in respect of the
shares shall be exercised. But in the absence of any such agreement the voting
rights would be with the legal owners of the shares, and it would require a
contract to control the exercise of those rights. The present case does not
even stop there, because the contract itself shows that the mortgagor company
was only to have voting rights so far as the trustees for the debenture-holders
permitted them to have them. The words of clause 19, sub-clause 11, are : ‘May
permit the company ... to exercise... in particular any voting right’; and,
except so far as the trustee mortgagees permit the company to exercise the
voting right, I am of opinion that such right remains vested in the debenture
trustees to be exercised by them primarily for the benefit of the stockholders.
Then it was urged that the effect of this would be to contravene the provisions
of clause 11 of the trust deed, because that clause provides that ‘The trustees
or trustee shall permit the company to hold and enjoy the mortgaged premises
and to carry on thereon and therewith the business or any of the businesses
mentioned in the memorandum until the security shall become enforceable.’ In my
opinion, the fact that the trustees exercised voting rights in respect of the
shares in the Dynamo company does not in any way interfere with the company
enjoying the mortgaged premised and carrying on thereon and therewith the
business or businesses mentioned in the memorandum which are the business or
businesses of the Siemens company, and not the business of the Dynamo company.”
I pause here to say that the Siemens company is company A and the Dynamo
company is company B.
The judgment
continues: “It is, in my judgment, no breach whatever of this clause for the
debenture trustees to insist that the voting in respect of the shares rests
with them, and that they are entitled to exercise the voting power. Under these
circumstances I am of opinion that the learned judge in the court below was
right in refusing to make any order, and that this court will be right in
refusing to make any order, the effect of which would be, according to the
notice of motion, to prevent the trustees from voting in respect of the shares
in the Dynamo company held by them as part of the security for the debenture
stock otherwise than in accordance with the directions of the Siemens company.
In my opinion the trustees are entitled to exercise their voting rights as in
their judgment they may deem best, irrespective of any directions of the
Siemens company as to the way in which their votes are to be recorded.” It was
submitted that so much of the judgment as stated the general position was
obiter dictum. I do not agree. It appears to me that the judgment enunciates
the general position and considers it as concluding the case and adds a further
ground for good measure based upon the inference to be drawn from the reference
to voting rights, an inference in entire accord with the general position. The
argument of Mr. Gore-Browne, for the mortgagor, did not even venture to propose
that the general position was in fact the opposite, which would obviously have
been the starting point of his argument and not the reservation to the
mortgagor of the power to carry on its business until default.
An indication
to the same effect is to be found in Puddephatt v. Leith. The question on which
the case is reported is whether a mandatory injunction would be granted to
enforce an express agreement by the mortgagee (he being on the register) to vote
as required from time to time as the mortgagor requested him. But a preliminary
point was decided by Sargant J. that the letter containing this agreement
constituted a collateral agreement binding on the mortgagee. If the general
position as between mortgagee and mortgagor had been the opposite of that
stated by the Court of Appeal in the Siemens’ case, it would have been
unnecessary for the mortgagor to place any reliance on the letter.
Reference may
also be made in this case to the fact that a special form is to be found in Key
& Elphinstone, designed to preserve by express agreement to the mortgagor
the right of voting in respect of mortgaged shares. Reference may also be made
to Coote on Mortgages (1927), 9th ed., vol. I, p. 311. I need not discuss the
implications of Wise v. Lansdell, where the mortgagor was in fact on the
register, a bankrupt, whose trustee had disclaimed any interest in the shares,
and who was entitled to exercise voting powers, though at the direction of the
mortgagee.
It was submitted
that older cases indicated that powers in connection with mortgaged property
could only be exercised at the volition of the mortgagee where the result of
such exercise would be to produce moneys towards payment of principal or
interest. Reference was made to mortgages of advowsons where the mortgagee
could not exercise the right or power of presentation, a right or power which
was necessarily unproductive on its exercise of any money. I cannot conclude
from this that the law as to voting power is other than as stated in Siemens
case.
I turn next
to the position of an unpaid vendor of shares (still on the register),
vis-a-vis the purchaser in connection with voting rights. Counsel was not able
to find any authority directly on this point. For the plaintiffs it was
submitted that such a vendor was in at least no worse position than a mortgage
on the register. For the defendants is was submitted the he was in the position
of trustee for the purchaser to whom, on the signing of the contract, the
beneficial ownership had passed (the contract being specifically enforceable)
and that the position of a mortgagee on the register was different.
Counsel
referred to the position of vendor and purchaser on a sale of land and drew my
attention to the following passages in Shaw v. Foster. One passage is from the
speech of Lord Cairns where he says (Ibid. 338.) : “Under these circumstances I
apprehend there cannot be the slightest doubt of the relation subsisting in the
eye of a court of equity between the vendor and the purchaser. The vendor was a
trustee of the property for the purchaser; the purchaser was the real
beneficial owner in the eye of a court of equity of the property, subject only
to this observation, that the vendor, whom I have called the trustee, was not a
mere dormant trustee, he was a trustee having a personal and substantial
interest in the property, a right to protect that interest, and an active right
to assert that interest if anything should be done in derogation of it. The
relation, therefore, of trustee and cestui que trust subsisted, but subsisted
subject to the paramount right of the vendor and trustee to protect his own
interest as vendor of the property.”
I was also
referred to a passage from the speech of Lord O’Hagan which reads as follows
(Ibid. 349.) : “Although a good deal of time was occupied in a learned
disquisition on the effect of a contract for sale, as creating an equitable
estate in the purchased, I do not apprehend that there is any doubt, or that
the noble and learned lord whose judgment we are considering could have meant
to suggest any doubt, upon that subject. The law is clear. It is, as Lord St.
Leonards has said, ‘one of the landmarks of the court’ : Baldwin v. Belcher;
and it ought not to be called into question. By the contract of sale the vendor
in the view of a court of equity disposes of his right over the estate, and on
the execution of the contract he becomes constructively a trustee for the
vendee, who is thereupon on the other side bound by a trust for the payment of
the purchase-money; or as Lord Westbury has put in Rose v. Watson : ‘When the
owner of an estate contracts with a purchaser for the immediate sale of it, the
ownership of the estate is in equity transferred by that contract.’ This I take
to be rudimental doctrine, although its generality is affected by
considerations which to some extent distinguish the position of an unpaid
vendor from that of a trustee. Thus, as it is stated by the Master of the Rolls
in Wall v. Bright : ‘The vendor is not a mere trustee; he is in progress
towards it, and finally becomes such when the money is paid, and when he is
bound to convey. In the meantime he is not bound to convey; there are many
uncertain events to happen before it will be known whether he will ever have to
convey, and he retains for certain purposes his old dominion over the estate.”
The matter
was put thus by Jessel M.R. in Lysaght v. Edwards : “What is the effect of the
contract ? It appears to me that the effect of a contract for sale has been settled
for more than two centuries; certainly it was completely settled before the
time of Lord Hardwicke, who speaks of the settled doctrine of the court as to
it. What is that doctrine ? It is that the moment you have a valid contract for
sale the vendor becomes in equity a trustee for the purchaser of the estate
sold, and the beneficial ownership passes to the purchaser, the vendor having a
right to the purchase-money, a charge or lien on the estate for the security of
that purchase-money, and a right to retain possession of the estate until the
purchase- money is paid, in the absence of express contract as to the time of
delivering possession. In other words, the position of the vendor is something
between what has been called a naked or bare trustee, or a mere trustee (that
is, a person without beneficial interest), and a mortgagee who is not, in
equity (any more than a vendor), the owner of the estate, but is, in certain
events, entitled to what the unpaid vendor is, viz., possession of the estate
and a charge upon the estate for his purchase-money. Their positions are
analogous in another way. The unpaid mortgagee has a right to foreclose, that
is to say, he has a right to say to the mortgagor, ‘Either pay me within a
limited time, or you lose your estate,’ and in default of payment he becomes
absolute owner of it. So, although there has been a valid contract of sale, the
vendor has a similar right in a court of equity; he has a right to say to the
purchaser, ‘Either pay me the purchase- money, or lose the estate’. “The
reference by Jessel M.R. to an analogy between a mortgagee and an unpaid vendor
is of some interest.
In relation
to a specifically enforceable contract for the sale of shares, similar
considerations apply. Parway Estates Limited v. The Commissioners of Inland
Revenue is an example of how shares, the subject-matter of such a contract,
become in equity the property of the purchaser on the execution of the
contract. Reference may also be made to Oughtred v. Commissioners of Inland
Revenue. Such cases, it was submitted for the defendants, show that the only
right or interest of a vendor after contract is his vendor’s lien, with the
exception in the case of land of a right in the vendor to possession and to the
rents and profits of the land up to the date fixed for completion. If that be
the situation then, it was submitted, the vendor of shares is trustee thereof
for the purchaser, the purchaser owns the whole beneficial interest and, in
principle, it is right to say that the vendor must do as he is bidden by the
true owner in relation to the shares, subject only to such control as may be
required to protect the only interest of the vendor. It was sought to
distinguish cases of mortgage as involving a deliberate transfer of shares into
the mortgagee’s name.
In my
judgment, so far as voting powers are concerned, an unpaid vendor remaining on
the register is not be regarded as in a weaker position, so far as the exercise
of voting powers is concerned, than a mortgagee. The purchaser acquires the beneficial
interest subject to the vendor’s lien : the mortgagor retains the beneficial
interest subject to the charge in favour of the mortgagee, in the form of an
equity of redemption. In the one case the mortgagee is deliberately put on the
register to safeguard his money lent : in the other case the vendor is
deliberately left on the register until all is paid to safeguard his
purchase-money due.
In my
judgment an unpaid vendor of shares remaining on the register after the
contract for sale retains vis-a-vis the purchaser the prima facie right to vote
in respect of those shares. That being so then, as I have already indicated, in
the present case he is entitled to complain in this action of the defect in the
purported annual general meeting.
Whether in the
end it would do the plaintiffs any good, I do not know.
I should
refer to a final argument for the defendants, that there is to be spelled out
of the contract in the present case an agreement that the purchaser shall have
the prima facie right to say how the shares should be voted. For myself, I
cannot see how that can be made out.
Accordingly,
the plaintiffs are entitled to a declaration in terms of paragraph I of the
writ and prayer in the statement of claim, and the counterclaim must be
dismissed.
[1973] 43 COMP. CAS. 275 (CAL.)
HIGH COURT of CALCUTTA
Bharat Commerce & Industries
Ltd.
v.
Registrar of Companies
S.K. MUKHERJEA AND S.C. GHOSH, JJ.
Appeal No. 310 of 1971, C.P. No. 222 and C.A. No. 178
of 1970
S.B.
Mukherjee for the appellant.
Ashim
Ghosh for the Registrar of Joint Stock Companies.
Prabir
Sen for the employees’ union.
Ghose, J.—This appeal is directed against
the judgment and order dated November 16, 1971, passed by the court of first instance
(see [1973] 43 Comp. Cas. 162), refusing to confirm a special resolution passed
by the petitioner-company at an extraordinary general meeting of the members of
the petitioner-company held on May 30, 1970, at No. 10, Ring Road, Lajpat Nagar
IV, New Delhi-24, resolving to remove the registered office of the company from
No. 10, Camac Street, Calcutta, to the said No. 10, Ring Road, New Delhi, under
section 17 of the Companies Act, 1956.
The
petitioner, Bharat Commerce & Industries Ltd., hereinafter referred to as
the company, was originally incorporated under the name of Bharat Airways Ltd.
on or about August 11, 1945. Upon the nationalisation of the scheduled
passenger traffic by air, the name of the company was changed to Bharat
Commerce & Industries Ltd. with effect from January 4, 1956. The present
registered office of the company is situated at No. 10, Camac Street, Calcutta,
within the original jurisdiction of this court.
The
authorised share capital of the company is Rs. 5,00,00,000 divided into
25,00,000 equity shares of Rs. 10 each and 2,50,000 preference shares of Rs.
100 each. The issued and subscribed share capital of the company is Rs.
1,50,00,000 divided into 10,00,000 equity shares of Rs. 10 each, 30,000 9%
redeemable cumulative preference shares of Rs. 100 each and 20,000 9.3% second
redeemable cumulative preference shares of Rs. 100 each. All the aforesaid
shares are fully paid up.
The
objects of the company will appear from its memorandum of association. The
company now carries on, inter alia, the business of manufacturing yarn and
textile goods. After the nationalisation of the scheduled passenger flight by
air, the company diversified its activities and established mills for
manufacturing yarn and textile goods at Nagda in the State of Madhya Pradesh,
Thana in the State of Maharashtra, Nanjangud in the State of Mysore and and
Rajpura in the State of Punjab.
The
distance between different mills or factories belonging to the company and the
registered office at Calcutta and the route inter se the said places are longer
and circuitous than the distance between the said mills and factories and the
route between the said places and Delhi.
Due
to various disturbances at the registered office of the company in recent years
it is stated in the petition that the management of the business and the
affairs of the company situated at different places became impossible to carry
on from Calcutta. In fact, the business of the company at its registered office
has come to a standstill. For months together the registered office of the
company has been lying closed and the company cannot do any work including
registration of transfer of shares or holding of the general meeting of the
shareholders there. Filing of annual returns, preparation of accounts and auditing
the same cannot be done at the said registered office. It is clear, therefore,
that works for complying with even the mandatory provisions of the statute
cannot be done at the registered office of the company at No. 10, Camac Street,
Calcutta.
In
the premises, the directors and shareholders of the company contemplated and in
fact decided to remove the registered office of the company from No. 10, Camac
Street, Calcutta, to No. 10, Ring Road, New Delhi, in order to carry on the
business of the company more efficiently and economically. The company issued
notice for holding of an extraordinary general meeting of its members to
consider and to resolve, if thought fit, to remove the registered office of the
company from No. 10, Camac Street, Calcutta, to No. 10, Ring Road, New Delhi.
The said meeting was held at No. 10, Ring Road, New Delhi, at 10-30 a.m. on May
30, 1970. 21 shareholders of the company were present in person and 68 of them
were present by proxy. At the said meeting it was unanimously resolved that,
subject to confirmation by this court, “the provisions of clause 2 in the
memorandum of association of the company be and are hereby altered by deleting
therefrom the word ‘ Bengal’ and by substituting the words ‘ The Union
Territory of Delhi” It was further resolved that, subject to the aforesaid
resolution becoming effective, “the registered office of the company be removed
from ‘ Industry House’, No. 10, Camac Street, Calcutta-17, to No. 10, Ring
Road, Lajpat Nagar IV, New Delhi-24, or such other place in the Union Territory
at Delhi as may be determined by the board of directors of the company”.
The
company has not issued any debenture and in fact has no creditor save and
except the usual trade creditors in the course of its business. No creditor or
shareholder of the company has opposed this application. The court of first
instance granted leave to Birla Brothers and its allied concerns’ employees’
union, of which the employees of this company are also members, to intervene in
the proceedings.
For
the appellant Mr. S.B. Mukherjee submits that the shareholders of the company
after due deliberation unanimously resolved to transfer the registered office
from Calcutta to New Delhi. No shareholder nor any creditor of the company
opposed the transfer. The State of West Bengal was served with a notice of this
application but did not choose to oppose the same. There are 18 employees of
the company at its registered office. Out of them, 15 employees support the
company’s decision to transfer the registered office from Calcutta to New
Delhi. One of the employees is untraceable and one has already resigned. Only
one peon is opposing the said transfer. The employees’ union, according to Mr.
Mukherjee, has no locus standi to oppose the application. In fact, Mr.
Mukherjee contends that the employees’ interest cannot be considered in this
application. Mr. Mukherjee relied on the case of Mayor, Aldermen and Burgesses
of the Borough of Bradford v. Pickles , A.
Salomon & Co. Ltd. v. Aron Salomon , Fred
F. Edwards v. People of the State of California , Rank
Film Distributors of India v. Registrar of Joint Stock Companies and State of
West Bengal,
In re Mackinnon Mackenzie & Co. (P.) Ltd. and In
re Rivers Steam Navigation Co. Ltd Mr.
Mukherjee contends that the workers of a company are not persons interested in
the alteration of the memorandum of a company by removing its registered office
from one State to another under section 17 of the Companies Act Mr. Mukherjee
relied on In re Seksaria Cotton Mills Ltd., In re
Edward Textiles, In
the matter of Standard General Assurance Co. Ltd. and In re Weslburn Sugar Refineries Ltd.
Mr.
Ashim Ghosh, appearing on behalf of the Registrar of Joint Stock Companies,
relied on articles 75 and 76 of the articles of association of the company and
submitted that no extraordinary general meeting can be called except upon the
requisition of the requisite number of members. That meeting has to be called
at the office, i.e., the registered office of the company. Mr. Ghosh relied on
article 92 of the articles of association of the company. Mr. Ghosh submitted
that by reason of the premises the meeting held at No. 10, Ring Road, New
Delhi, was bad and the resolution passed therein was also bad and no effect can
be given to the said resolution.
Mr.
Prabir Sen, appearing on behalf of the employees’ union, submitted that section
17 of the Companies Act confers power upon the court to control the decision of
the domestic forum of the company in regard to some of its internal management
and affairs as mentioned in the said section. According to Mr. Sen, employees
are persons within the meaning of sub-section (4) of the said section whose
interests are likely to be prejudiced by the proposed transfer if carried into
effect and thus the court of first instance was right in granting leave to the
union to intervene. Mr, Sen further contended that the question of bona fides
of the company in removing the registered office can be and in fact has to be
gone into in such an application. The facts of closure of the registered office
and nonpayment of the salaries of the employees have been suppressed in the
petition, which, according to Mr. Sen, shows the mala fides on the part of the
company. Further, there was no genuine ground, according to Mr. Sen, for
transferring the registered office of the company. The proposed transfer, if
effected, will certainly prejudicially affect the interest of workers. Mr. Sen
relied on cases, Rank Film Distributors of India Ltd. v. Registrar of Companies
,
In re Westburn Sugar Refineries Ltd., In
re Jewish Colonial Bank Ltd., In
re Indian Aluminium Co. Ltd., In
re Indian Iron & Steel Co. Ltd., Orient
Paper Mills Ltd. v. State and In re Orissa Chemicals & Distilleries
Private Ltd.
Mr. Sen relied on the
provisions of the Companies Act indicated in sections 94 and 323 thereof and
emphasised on the difference between the provisions of the said sections and
section 17 of the said Act. The former sections did not require the sanction of
the court whereas section 17 required the sanction of the court as condition
precedent. Mr. Sen further contended that proceedings are pending before the
conciliation officer in regard to the disputes between the company and its
employees and thus the transfer should not be sanctioned in the instant case.
Section 17 of the Act
empowers a company to alter the provisions contained in its memorandum by a
special resolution in order to remove its registered office from one State to
another; the said section also empowers a company in the like manner to change
any of its objects clauses contained in its memorandum for the reasons
mentioned in clauses (a) to (g) of sub-section (1) of section 17 of the Act.
The section enjoins upon the court to be satisfied before confirming the alteration
that notice has been given to the debenture holders of the company and to every
person or class of persons “whose interests would be affected by the alteration
and to see that the debt or claim of a creditor who objects to the alteration
is discharged or determined or secured to the satisfaction of the court”.
Sub-section (6) to the said section imposes upon the court in exercising its
discretion under the said section, the obligation to have regard to the rights
and interests o£ the members of the company and every class of them including
adjournment of the proceedings in order to enable the parties to arrive at
arrangements for the purchase of the interests of the dissentient members of
the company without reducing the share capital of the company. The court has to
give notice, under subsection (4) to the section, of the petition for
confirmation of the alteration to the Registrar of Companies in order to enable
him to appear before the court and state his suggestion in regard to
confirmation of the alteration. Sub-section (4) to the said section was
introduced by way of amendment in 1965 by Act LXV of 1965 to empower the
Registrar to appear before the court and point out any irregularity in an
alteration proposed by a company to its memorandum.
Under the English law
confirmation by court is not necessary in order to alter the memorandum by a
company. The members of the company can do so by means of a special resolution
and that comes into effect at once. If 15 per cent. or more of the members of
the company object to the alteration they may apply to the court for nullifying
the effect of the special resolution. But in our country the alteration
proposed by a company by a special resolution of its members to the memorandum
of the company cannot take effect until scrutinised and confirmed by the court.
Under the section the court has discretionary power to confirm the alteration
wholly or in part and/or on such terms and conditions as it may think fit.
As noted earlier, only
three of the employees of the company did not agree to the proposed transfer of
the registered office. Mr. Samaren Sen, leading Mr. S.B. Mukherjee for the
company, stated before us that the company would not retrench any of its
employees because of the transfer of the registered office of the company from
Calcutta to New Delhi. That statement with the consent of Mr. Sen we directed
to be recorded.
In view of the aforesaid
statement which has been recorded, we do not think that there is any substance
any more in the contention that the company’s proposed act is mala fide and
that the company is seeking to transfer the registered office in order to
stifle the proceedings between the employees of the company and the company
pending before the conciliation officer. We do not, however, express any view
as to whether the question of bona fides of a company in transferring its
registered office from one State to another can be germane in an application
for confirmation of the alteration of the memorandum by removing its registered
office from one State to another. In the instant application it is not
necessary and indeed irrelevant for us to express any opinion on the said
question. The learned judge in the instant case granted leave to the union
mentioned above to intervene in the proceedings and upheld the contention of
the union and refused to confirm the proposed alteration. In Rank Film
Distributors’ case it
was held by a Division Bench of this court that the State had no legal right to
the issue and service of notice under section 17(3A) and that the loss of
revenue to or employment to the citizens of a State are not relevant factors
for consideration in an application for sanction to alter the memorandum of a
company by removing its registered office from one State to another. The case
of the Westburn Sugar Refineries was considered by the Division Bench in that
case and the observations of Lord Macnaghten as explained by Lord Radcliffe in
regard to the meaning of the words “general public” by limiting the words “to
persons who may in the future have dealing with the company and may be minded
to invest in its securities” was approved of. It should be noted in this
connection that the case of Poole v. National Bank of China Ltd. and
the case of In re Westburn Sugar Refineries Ltd. were
cases concerning reduction of share capital of companies and not removal of
registered office. In fact, in England, as it is apparent, no registered office
of a company can be removed from one State to another. In the case of Mayor,
Aldermen and Burgesses of the Borough of Bradford v. Pickles it
was laid down that if a person can do an act lawfully his motive behind doing
of the act would be immaterial. In fact, even if the motive was mala fide or
malicious to injure another until and unless the action was illegal the motive
could not be called into question.
In the instant case it
appears to us that the resolution was not illegal nor ultra vires nor injurious
to any of the members or creditors of the company nor even to its employees who
chose to oppose the application for confirmation of the alteration, in view of
the statement made by Mr. Sen in this court in regard to them. In the instant
case, it is submitted by Mr. Prabir Sen that the fact of closure of the
registered office of the company in Calcutta was suppressed from the
shareholders in the notice convening the extraordinary general meeting
including the explanatory statement to the said notice. In our opinion, the
omission of the said fact to be stated in the notice or the explanatory
statement thereto did not in any way vitiate the said notice or the meeting or
the resolution. In fact, if the said grounds were stated in the notice or the
explanatory statement the same would have been stronger grounds for the members
to decide for the removal of the registered office from Calcutta to New Delhi.
It is well-settled that the court in construing a notice for a meeting of a
company only tries to protect the interest of the absentee members. In our
opinion, the omission to state the aforesaid facts in the said notice or the
explanatory statement thereto did not mislead any of the absentee members. In
fact, none of the members as noted earlier came to oppose the application for
sanction. Mr. Prabir Sen then contended that the company had no right to
transfer its employees from Calcutta to Delhi and, if sanction is given by the
court to the proposed alteration, that would empower the company to transfer its
employees from Calcutta to Delhi. In the instant application we are not called
upon to decide as to whether the company can transfer any of its employees from
Calcutta to any other place. Indeed we are unable to do so. Those questions
would be governed by the provisions of the Industrial Disputes Act which we cannot take
notice of in the instant application.
Mr.
Ashim Ghosh’s contention that an extraordinary general meeting can be called
and held only on the requisition of the requisite number of members mentioned
in article 76 cannot be accepted. Article 75 of the company empowers the board
of the company to call general meeting. But, then all general meetings except
the annual general meetings of a company are extraordinary general meetings.
Hence, the meeting in the instant case to consider the proposed resolution for
alteration of the memorandum was rightly called, in our opinion, by the board
under article 75 of the company. Thus the said meeting need not have been held
only at the registered office of the company and on the said ground the meeting
was not bad nor the resolution passed at the said meeting could or can be said
to be bad or void. All the aforesaid contentions of Mr. Ghosh must fail.
In
view of the aforesaid we do not think it necessary to deal with the other cases
cited at the Bar.
For
the reasons stated above we are of the opinion that this appeal must succeed.
The appeal is allowed. There shall be order in terms of prayer (a) of the
petition. In the facts and circumstances of this case we, however, direct that
each party shall pay and bear his or its costs of this appeal.
[1986] 60 COMP. CAS. 353 (DELHI)
v.
Apparels Exports Promotion
Council.
M. K. CHAWLA J.
SUIT NO. 759 OF 1984
Arun
Kumar and S. K. Kaul for the Plaintiff.
G.
L. Rawal and Sunil Aggarwal for the Defendant.
M.
K. Chawla J.—The
plaintiff, M/s. Maharaja Exports, through its sole proprietor, Ms. Sushma
Gulati, has claimed the following reliefs in her suit for declaration:
(a) A decree for declaration declaring
that the impugned notice dated April 4, 1984, issued by the defendant, M/s.
Apparels Export Pro motion Council, regarding the holding of the fourth annual
general meeting of the defendant on May 14, 1984, is illegal, invalid and
inoperative and that no annual general meeting can be held in pursuance thereof
;
(b) declaring that all the 27 members of
the existing executive committee are not entitled to hold the respective
offices in view of the judgment of Hon'ble Mr. Justice S. S. Chadha referred to
above;
(c) declaring that the 18 members of the
executive committee have retired by rotation and are not entitled to continue
in office as members of the executive committee;
(d) declaring that the 9 members of the
executive council whose names are mentioned in the impugned notice have
automatically ceased to be the members of the executive committee and are not
entitled to function as such after May 14/15, 1984 ;
(e) declaring that all the proxy forms lodged with the
council regarding the fourth annual general meeting to be invalid and illegal
particularly those on the forms other than the official forms ;
(f) declaring the fourth annual general meeting purportedly held
on May 14/16, 1984, in so far as it relates to election of 9 executive
committee members who have retired by rotation to be illegal and invalid.
In order to understand the
true scope of the plaintiff's suit, it will be relevant to keep in mind the
salient features as given in the plaint. The plaintiff is carrying on business
as manufacturers and exporters of ready-made garments of which Ms. Sushma
Gulati is the sole proprietor; that M/s. Apparel Exports Promotion Council
(hereinafter referred to as "the council") is a public limited
company registered under the provisions of the Companies Act, 1956 (hereinafter
to be referred to as "the Act"), as per the certificate of
incorporation issued by the Registrar of Companies, Delhi and Haryana; that the
defendant is also licensed under section 25 of the Act by the Central
Government; that the objects for which the defendant company has been
established are given in the memorandum of association which amongst other
things includes "to promote, advance, increase, develop export, of all
types of ready-made garments excluding woollen knitwear, garments of leather,
jute and hemp, to undertake all export promotion measures including appointment
of representatives, agents or correspondents in foreign markets to conduct
propaganda and publicity" ; that the plaintiff is a member of the
defendant council as provided under article 5(a) of the articles of association
; that the membership of the defendant is about 5,000; that as per the articles
of association of the defendant, the executive committee is to be elected to manage
the affairs of the council; that the executive committee can have maximum 30
members besides four Government nominated members; that the membership of the
executive committee is on regional basis since the council is an all India body
; that as per the provisions contained in the articles of association,
one-third of the elected members of the executive committee will retire by
rotation every year and the vacancy so caused shall be filled up after the
annual general meeting every year; that a member of the council is entitled to
be elected as a member of the executive committee ; that the articles of
association of the defendant authorise the defendant to frame rules and
procedure for election to the executive council; that the council framed
certain rules which were, however, challenged by certain members through a suit
filed in this court being Suit No. 873 of 1981 entitled Pramod Chopra v.
Apparels Exports Promotion Council, that the said suit was ultimately decreed
on May 19, 1983, and the impugned rules were declared to be invalid ; that the
appeal against the said single judge's judgment filed by the council also
failed ; that as far as the plaintiff understands, the council has not framed
any rules of procedure for election so far, though they were required to do so
under the amended article 48 of the articles of association.
That on April 30, 1984, the
plaintiff received a notice regarding the fourth annual general meeting of the
defendant to be held on Monday May 14, 1984, at 11 a.m. at FICCI auditorium,
New Delhi, to transact the business incorporated in the notice ; that though
the notice is purportedly dated April 4, 1984, the same is understood and
reasonably believed by the plaintiff to have been posted only on April 26,
1984. by the defendant to the various members; that this notice is totally
illegal, invalid and mala fide for the grounds mentioned in the plaint; that in
view of these grounds, it is apparent that the fourth annual general meeting
convened through the impugned notice is illegal, invalid and the defendant
cannot be permitted to hold the same. Hence, the present suit.
Along with this suit the
plaintiff also filed an application (I.A. No. 2448 of 1984) under Order 39,
rules 1 and 2, CPC, praying for the issuance of an ad interim restraint order
against the defendant from giving effect to the notice dated April 4, 1984,
which is illegal and void and from holding the annual general meeting in
pursuance thereof.
After the suit was
registered and after hearing the learned counsel for the plaintiff on the
injunction application, S.B. Wad J. passed the following order on May 11, 1984:
"I.
A. No. 2448 of 1984 :
It is stated by the counsel
for the plaintiff that no election rules laying the procedure for the election are
framed by the defendant company. The notice for the annual general meeting
purported to be issued on April 4, 1984, is actually issued on April 26, 1984.
Counsel for the plaintiff states that it was received by the plaintiff on April
30, 1984. The notice was also published in the Economic Times, Bombay, on April
29, 1984, and Delhi on April 25, 1984. Section 171 of the Companies Act
requires that at least 21 days' notice of the annual general meeting, should be
given. Prima facie there is a ground for granting ad interim order restraining
the defendant firm from holding the annual general meeting on May 14, 1984. I
order accordingly. Notice for May 16, 1984, has to be issued today."
The plaintiff preferred to
serve the defendant with the restraint order only 15 minutes before the start
of the annual general meeting. Immediately after the service of the restraint
order, the defendant rushed to the court, filed the reply to the plaintiff's
application and obtained the following order on May 15, 1985:
"Having heard the
counsel for the parties, I find that an order one way or the other will dispose
of the suit itself. The complexity of the matter is such that a full trial with
evidence of both the parties is necessary for the proper disposal of the suit.
However, considering the urgency of the matter, I order that the suit itself be
disposed of expeditiously in the month of July, 1984. Since all the
arrangements for the election are already made and a lot of expenses have
already been incurred, I direct that the election/annual general meeting shall
be held on May 16, 1984, at 2 p.m. However, the result of the election shall
not be declared till the disposal of the suit."
On the same day, the
defendants were further directed to deposit with the Deputy Registrar (0) the
ballot papers, the proxies and other relevant papers relating to the elections
within 2 days after the annual general meeting is held. The venue of the
meeting was also shifted from FICCI auditorium to Hotel Taj Palace, Sardar
Patel Marg, New Delhi. In compliance with the directions of this court, the
fourth annual general meeting has since been held. Subsequently, the defendant
approached the Division Bench in appeal (F.A.O.(OS) Nos. 59 and 60 of 1984) for
the vacation of the order restraining the defendants from declaring the result
of the election of the members of the executive committee. This appeal was
disposed of by the Division Bench on May 25, 1984, vide the following order:
"After hearing counsel
for the parties, we are of the opinion that the old arrangement should
continue, but the result of the election shall be declared. The members
declared to have been elected as directors shall not act till the decision is
given by the learned single judge. The learned single judge will hear and decide
the matter on the date fixed by him. We are not expressing any opinion at this
stage since he has not given any decision on the merits of the controversy.
The F. A. Os. are disposed
of."
Before the defendant could
file the reply, the plaintiff was allowed to amend the plaint.
In the written
statement, the defendant took up a number of preliminary objections, inter
alia, alleging that the present suit of the plaintiff is false, frivolous and
vexatious and otherwise the same is a misuse of the process of law; that the
alleged disputes fall within the purview of the company court jurisdiction and,
as such, the suit for declaration is not maintainable; that no suit without
consequential relief is maintainable; that no suit can be brought in the name
of trading name when the same is a sole proprietorship firm; that the suit is
bad for delay and laches. On merits, the defendant admitted the correctness of
the various provisions of the articles of association under which one-third of
the elected members of the executive committee were to retire at the conclusion
of each annual general meeting and the vacancies so caused were to be filled
in. The defendant also admitted the filing of the suit by one of the members of
the council and the issuance of directions to the defendant for framing of the
rules. In compliance with the directions of the Company Law Board and also the
observations made in the judgment of this court in Suit No. 873 of 1981,
necessary amendments were carried out which ultimately resulted in the dismissal
of their appeal. The defendant also admitted the issuance of a notice for
holding the fourth annual general meeting on May 14, 1984, at FICCI auditorium
but denied the fact that the plaintiff received the notice on April 30, 1984.
The notice which was posted on April 26, 1984, was strictly in accordance with
the provisions of section 53(2) of the Act and its service must be deemed to
have been effected immediately on the expiry of 48 hours from the time of
posting. In these circumstances, in law, service on the plaintiff has been
effected on April 28, 1984, which gave full 16 days' notice to the plaintiff
whereas she was entitled (only) to 14 days' notice. The defendant also denied
each and every ground mentioned in paragraph 14 of the plaint which were made
the basis for the issuance of notice and holding of the fourth annual general
meeting as illegal. The fourth annual general meeting has already been held.
The defendant also took up the objection that not only the suit is mala fide
but is also bad for delay and laches. The plaintiff has been taking an active
interest in the election of the members of the executive committee and has been
a party to signing a number of pamphlets in this behalf. Even though the notice
was allegedly served on the plaintiff on April 30, 1984, the plaintiff
intentionally filed the present suit on May 11, 1984, when May 12 and 13, 1984,
were holidays being second Saturday and Sunday. Even after ex parte injunction,
the plaintiff intentionally did not serve the notice on the defendant or on any
of its officers either on May 11, 12 or 13, 1984, even though the office of the
defendant was open for making the arrangements for the holding of the annual
general meeting on May 14, 1984. The plaintiff got the service of the notice effected
only at about 10.45 a.m. on May 14, 1984, when all the arrangements for the
holding of the meeting were complete. Under these circumstances, the plaintiff
has not come to the court with clean hands and is not entitled to the
discretionary relief on this account also. It was prayed that the suit which is
a mala fide one and has been filed with the only motive of stalling the
elections deserves dismissal with special costs.
In the replication, the
plaintiff controverted the pleas raised by the defendant in the written
statement and reiterated the facts as stated in the plaint.
On the pleadings of the
parties, the following issues were framed:
1. Whether the defendant was enjoined in law to frame fresh rules for
holding elections of the defendant council after they were struck down by a
judgment of this court?
2. Whether this court
has the jurisdiction to try this suit?
3. Whether fourteen days' notice of the proposed fourth annual general
meeting of the defendant council was not served on the plaintiff in accordance
with law?
4. Whether the defendant was bound to hold elections to all the 27
posts of executive committee members in view of the judgment of this court in
Suit No. 873 of 1981, when the articles of association and rules for election
of the defendant council were struck down? In any case, was the defendant
enjoined to hold election for at least 18 members of the execucutive committee
as the annual general meeting was being held after two years?
5. Whether the delay in the despatch of the notice shows mala fides and
oblique motives on the part of the defendant council to secure re-election of
the retiring members. If so, to what effect?
6. Whether the list of members as circulated by the defendant council
contained the names of some members from whom certain sums were still payable
to the defendant council and its effect?
7. Whether the suit of the plaintiff is bad for delay and laches and/or
otherwise the conduct of the plaintiff is such as to disentitle her to any
relief in the suit as alleged in paras 13 and 14 of the written statement?
8. Relief.
Learned counsel for the
parties agreed that the evidence in the case be allowed to be led by filing
affidavits and documents. The plaintiff filed her own affidavit while the
defendants relied upon the affidavit of Shri S. K. C. Mathur, Secretary of the
defendant council. Later on, the learned counsel for the plaintiff agreed to
produce the proprietor of the plaintiff for her cross-examination by the
learned counsel for the defendant. She was cross-examined on September 20,
1984.
I have heard the arguments
of the learned counsel for the parties and with their help gone through the
record carefully. My findings on the above issues are as follows :
Issue
No. 1 :
The onus of this issue has rightly
been placed on the plaintiff. During the course of the arguments, the learned
counsel for the plaintiff did not press this issue nor did he address any
arguments, nor refer to the various provisions of the memorandum and articles
of association of the defendant firm indicating that the defendants were
enjoined in law to frame fresh rules for holding the elections to the defendant
council after the previous rules were struck down by the judgment dated May 19,
1983, of this court in Suit No. 873 of 1981 titled as Pramod Chopra v. Apparels
Exports Promotion Council. This issue is, therefore, decided against the
plaintiff.
Issue
No. 2 :
The objection of the
defendants is that as the disputes raised in the suit fall within the purview
of the company court jurisdiction, the present suit for declaration is not
maintainable. This objection appears to have been raised only for the sake of
raising an objection. Section 10 of the Companies Act defines the jurisdiction
of the court to entertain suits in such like matters. The definition of
"court" in clause (11) of section 2 and section 10 of the Companies
Act, 1956, dealing with jurisdiction of courts read together enables the
shareholders to decide as to which court they should approach for remedy in
respect of a particular matter. This provision does not purport to invest the
company court with the jurisdiction over every matter arising under the Act. In
view of the eloborate provisions contained in the 1956 Act in regard to
management and conduct of a company's affairs, including even important
internal matters of administration, the scope for interference by the civil
court may have become more limited, but the power has not at all been taken
away. It has been rightly observed in a case reported as R. Prakasam v. Sree
Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker) that except in
cases where the Companies Act, 1956, confers jurisdiction on the company court
or some other authority like the Central Government or the Company Law Board,
either expressly or by implication, all other disputes pertaining to a company
are to be resolved through the forum of civil court when the disputes are kept
on being resolved by them. Where wrong is done to an individual member, he can
insist, by recourse to a civil suit, on "strict observance of the legal
rules, statutory provisions and provisions in the memorandum and articles of
association which cannot be waived by a bare majority of shareholders".
Similar view was taken in a judgment reported as Panipat Woollen and General
Mills Company Ltd. v. P. L. Kaushik [1969] 39 Comp Cas 249 (Punj). While
interpreting the provisions of section 9 of the Code of Civil Proceduce
vis-a-vis the Companies Act, during the course of the judgment, it was observed
as under (headnote).
"Under section 9 of
the Code of Civil Procedure, 1908, civil courts have jurisdiction to try all
suits of a civil nature excepting suits of which their cognizance is expressly
or impliedly barred. Unlike some statutes, the Companies Act does not contain any
express provision barring the jurisdiction of the ordinary civil courts in
matters covered by the provisions of the Act. In certain cases like winding-up
of companies, the jurisdiction of civil courts is impliedly barred.
Where a person objects to
the election of directors and claims a decree for a declaration that he was one
of the directors, there is no provision which bars the civil court either
expressly or by implication from trying such a suit."
In the present suit also,
besides other reliefs, the plaintiff has sought a declaration that all the 27
members of the existing executive committee are not entitled to hold the
respective offices in view of the judgment of this court and further that the
18 members of the executive committee who have retired by rotation are not
entitled to continue in office as members of the executive committee. The
judgment, referred to above, fairly and squarely applies to the facts of the
present case and there is no reason to oust the jurisdiction of this court to
entertain the present suit. Under these circumstances, this issue is decided in
favour of the plaintiff and against the defendants.
Issue
No. 3 :
This
is the most material issue, the decision of which will decide the fate of the
parties. Before the relevant facts are taken into consideration as to whether
the plaintiff was duly served with a clear 14 days' notice of the proposed
fourth annual general meeting of the defendant council, the relevant provisions
of the Companies Act have to be kept in view. Section 171(1) of the 1956 Act
reads as follows :
"A
general meeting of the company may be called by giving not less than 21 days'
notice in writing..."
Admittedly,
the defendant council falls within the categories specified in clause (6) of
section 25 of the Companies Act. In exercise of powers conferred by this
provision, the Central Government notified that under section, 171(1) the
general body meeting may be called by giving a notice in writing of not less
than 14 days instead of 21 days.
The
next relevant provision is section 53(2); It reads as under :
"Where
a document is sent by post,—
(a) service thereof shall be deemed to be
effected by properly addressing, pre-paying and posting a letter containing the
document......
(b) such
service shall be deemed to have been effected—...
(i) in the case of a notice of a meeting,
at the expiration of 48 hours after the letter containing the same is posted ;
and
(ii) in
any other case at the time at which the letter would be delivered in the
ordinary course of post ;
Section 172(3) lays down
that the accidental omission to give notice to, or the non-receipt of notice
by, any member or other person, to whom it should be given shall not invalidate
the proceedings at the meeting.
Section 173 requires the company
to annex along with the notice the explanatory statements sought to be
considered during the meeting.
It is not disputed that the
date of service of notice of the general meeting and the date of the meeting
have to be excluded while counting 14 days, the period of notice prescribed
under section 171 of the Companies Act. The expression "not less than 14
days" used in section 171 (as amended by virtue of the Central Government
Notification) normally implies notice of 14 whole or clear days ; part of the
day, after the hour at which the notice is deemed to have been served, cannot
be combined with the part of the day before the time of the meeting, on the
date of the meeting, to form one day. Each of the 14 days must be a full or a
calendar day so that the notice can be said to be "not less than 14 days'
notice".
With this background, let
us now revert to the facts as have been brought out in the pleadings and the
documents, to determine if the plaintiffs have been served with 14 days' clear
notice of the annual general meeting of the defendant company or not. According
to the learned counsel for the plaintiff, on April 4, 1984, the meeting of the
executive committee of the defendant company was called to fix the date of the
fourth annual general meeting. Before the convening of this meeting, all the
formalities of carrying out the amendments as directed by the Company Law Board
had been complied with. The executive committee decided to hold the annual
general meeting on May 14, 1984, at 11.00 a.m. in the FICCI, Golden Jubilee
Auditorium, New Delhi. The office of the defendant company was required to send
along with the notice, the business relating to (i) the consideration of
accounts, the balance-sheets (which in this case was for a period of two years)
and the reports of the board of directors and auditors ; (ii) the declaration
of dividend ; (iii) the appointment of directors in the place of those
retiring, and (iv) the appointment of and the fixation of the remuneration of
the auditors. This requirement has admittedly been complied with by the
defendant company.
According to the plaintiff,
the impugned notice even though dated April 4, 1984, was posted to the
plaintiff and many other members on April 27, 1984. It was received by the
plaintiff on April 30, 1984, as is clear from the postal stamp affixed on the
envelope, exhibit P-8, which was an officially declared holiday in the area
where the plaintiff carried on business. It is also alleged that April 29,
1984, was a Sunday while May 1, 1984, was again a public holiday and,
therefore, it came to the plaintiff's notice only on May 2, 1984. This notice
did not allow clear 14 days' time before the annual general meeting and, as such, is bad and invalid
and the annual general meeting cannot be held in pursuance thereof. It is also
alleged that even if 48 hours are computed from the date of the despatch of the
notice, then April 29, 1984, being a Sunday has to be excluded and the
plaintiff must be deemed to have been served with notice only on the next date.
The service of the notice, according to the learned counsel, is not a mere
formality and the notice appears to have been posted on April 27, 1984, with a
view to avoid the presence of a large number of persons and deprive them of
their right to vote and to contest the election for the membership of the
executive committee. It is also contended that when a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the court is entitled and rather bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to and full effect
must be given to the statutory fiction and it should be carried to its logical
conclusion. If the purpose of the statutory fiction, mentioned above, is kept
in view, then, according to the learned counsel, it follows, that the purpose
of that fiction would be completely defeated if the defendant company
intentionally and wilfully defaulted in sending the notices on the date which
will deprive most of its members from exercising their statutory duty.
After
giving careful consideration to each and every point urged by the learned
counsel for the plaintiff during the course of the arguments, I do not find any
substance in the same. At the outset, it may be mentioned that in the prayer
clause, the plaintiff has not raised any grievance that she was not given 14
days' clear notice of the holding of the meeting. In sub-para (a) of paragraph
20 of the prayer clause, a declaration has been sought that the impugned notice
dated April 4, 1984, issued by the defendants regarding the holding of the
fourth annual general meeting of the defendants on May 14, 1984, is illegal,
invalid and inoperative and that no annual general meeting can be called in
pursuance thereof. Exhibit P-2 is the notice of the holding of the fourth
annual general meeting on May 14, 1984, at 11 a.m. at FICCI Golden Jubilee
Auditorium, New Delhi, to transact the following ordinary business :
(1) To consider and adopt the audited
balance-sheets and the income and expenditure accounts of the council for the
years ended December 31, 1981 and December 31, 1982, along with reports of the
auditors and the executive committee of the council.
(2) To appoint auditors of the council
to hold the office from the conclusion of this meeting until the conclusion of
the next annual general meeting and to fix their remuneration.
(3) To
appoint members to the
(a) Executive committee in place of Shri........................who
retire by rotation and is eligible for reappointment....
Admittedly, this notice
complies with all the requirements of section 173 of the Companies Act. Prima
facie this notice cannot be said to be illegal.
On the second aspect, the
facts mentioned in the plaint are to be taken at its face value. In paragraph
14 of the unamended plaint, the plaintiff alleged that the impugned notice
dated April 4, 1984, was posted only on April 26, 1984, by the defendant to the
various members. However, in the amended plaint, the plaintiff advanced the
date of posting of the notice as on April 27, 1984, which was received by her
on April 30, 1984. Even assuming that the impugned notice was issued by the
defendant company on April 27, 1984, even then, in my opinion, the company has
complied with the provisions of section 171 of the Companies Act. In this case
48 hours will expire on April 29, 1984. Even if we exclude the date of the
posting of the notice and the date of the receipt of the notice as per the
provisions of clause (b) of sub-section (2) of section 53 of the Companies Act,
even then the notice must be presumed to have been served on the plaintiff 14
days prior to the holding of the meeting. In the corresponding provision in the
1913 Act, the word implied was "time" at which the would be deemed to
be delivered in the ordinary course of post.
"Ordinary course of
post" in a vast country like ours with many far-places at inaccessible
distance, where the time taken for delivery of letters varied from place to
place induced an element of uncertainty. In order to do away with this state of
affairs and to import certainty to such an important matter, as to the length
of notice of general meetings of companies, legal fiction was pressed into
service, by indicating in the 1950 Act, that the notice shall be deemed to have
been served 48 hours after posting. The words "48 hours" are meant to
make the service certain and to fix the date of service as the date on which
the said 48 hours expired. Under these circumstances, as already observed
earlier, the notice issued on April 27, 1984, will expire on April 29, 1984,
which is well within the phrase "14 days' clear notice".
This aspect can also be
looked into from another angle. Sub-section (3) of section 172 of the Companies
Act lays down that even the accidental omission to give notice to, or the
non-receipt of the notice by, any member or other person shall not invalidate
the proceedings at the meeting. The "accidental omission" means that
the omission must be not only not designed but also not deliberate. This
expression implies absence of intention or deliberate design. The word
"or" appearing in this sub-clause is of great significance. The
company has only to prove on record that they have sent the notice to its
members on the addresses furnished by them. The non-receipt of the notice,
under no circumstances, shall invalidate the holding of the meeting or the
proceedings thereof. In this case, it is the admitted case of the parties that
the defendant company did send the notice and it in fact was received by the
plaintiff. Even the non-receipt, as observed earlier, would not have made any
difference.
At this stage, it will be
relevant to mention that the learned counsel for the plaintiff is mixing up the
service of the notice of the holding of the meeting with the filing of the
nomination for the membership of the executive committee of the defendant
company. By virtue of section 257 of the Companies Act, a person who is not a
retiring director shall be eligible for appointment to the office of director
at any general meeting, if he or some other member intending to propose him
has, not less than 14 days before the meeting, left at the office of the
company a notice in writing under his hand signifying his candidature for the office
of director or the intention of such member to propose him as a candidate for
that office. Mere knowledge of the holding of the meeting is sufficient. The
plaintiff has nowhere alleged in the plaint or in her affidavit that she was
not aware of the holding of the fourth annual general meeting on May 14, 1984.
It is also not alleged that the notice of the meeting was served on her on the
night of April 30, 1984, or that she made efforts in securing the signature of
a proposer and that she was not able to contact them. On the other hand, the
defendants have placed on record the numerous advertisements which have been
appearing from time to time, in the various newspapers and in different parts
of the country, intimating the members, to intimate the change in address, if
any, latest by April 12, 1984, and to clear the annual subscription so that
they may be eligible to vote at the forthcoming annual general meeting of the
council. Such notices were issued from April 5, 1984, till April 15, 1984. The
notices for the holding of the annual general meeting on May 14, 1984, were
also advertised in the various newspapers from April 14, 1984. The defendant
council also took care to publish the list of the nominations which had been
received from the members signifying their candidature for the appointment to
the office of the defendants in the fourth annual general meeting. Furthermore,
the plaintiff has been taking an active part in the affairs of the defendant
council, inasmuch as it is a party to the issuance of posters/pamphlets
opposing the candidature of Shri Mohanjit Singh and his associates as they are
alleged to have committed some malpractices, etc. All these facts go to show
that the plaintiff was fully aware of the holding of the fourth annual general
meeting on May 14, 1984, and was well within time to have filed her nomination,
if she was desirous of contesting the election. It has nothing to do with the
notice of the holding of the meeting which too has been held to have been
properly served on the plaintiff.
In view of these
circumstances, is it open to the court to extend the period of 48 hours in
order to give more time to the members enabling them to file the nominations?
The simple answer to this query raised by the learned counsel for the plaintiff
is in the negative. The Legislature in its wisdom reduced the period of 21 days
to 14 days by virtue of sub-section (6) of section 25 of the Companies Act. The
Legislature was also aware of the 14 days' notice as contemplated in section
257 of the Companies Act. It is not desirable for the courts to say that the
period of service of the notice should be reasonable. By doing this the court
will be extending the period which has purposely been limited to minimise the
scope of the mischief which used to be created in the holding of the annual
general meetings. In view of the fact that the plaintiff was fully aware of the
date of the meeting prior to the receipt of the notice, the plaintiff cannot
come forward and throw the blame on the defendant company. Taking an overall
view of the circumstances brought out on record and discussed earlier, there is
no hesitation for this court to hold that the plaintiff was duly served with 14
days' clear notice of the holding of the fourth annual general meeting of the defendant
council. This issue, therefore, is decided against the plaintiff.
Issue
No. 4 :
In order to appreciate the
scope of this issue, one has only to refer to the various dates admitted by the
parties. On October 29, 1981, the third annual general meeting was held. On
June 12, 1982, notice was issued to the members for the correction of
addresses, etc., so that the fourth annual general meeting is held within the
stipulated period. One of the members filed an application and obtained the
stay of the holding of the annual general meeting and for taking steps in this
direction, from this court on June 28, 1982. This ad interim stay dated August
25, 1982, was confirmed till the disposal of the suit. The plaintiff ultimately
succeeded in the suit and a decree was passed by S. S. Chadha J. on May 19,
1983. The respondent company preferred to file an appeal before a Division
Bench. This appeal was admitted on August 8, 1983, but they refused to vacate
the injunction. Being not satisfied with the dismissal of their miscellaneous
application, the defendant company filed a special leave petition. The order
dated May 19, 1983, was stayed by the Hon'ble Supreme Court but the court made
it clear that it would not have any effect on the Central Government (Company
Law Board) if they proposed to take any steps for the amendment of the rules.
Finally, the Company Law Board directed the defendant company to amend their
rules in order to bring them in conformity with the judgment of S.S. Chadha J.
dated May 19, 1983. On January 5, 1984, the defendant company held an
extraordinary general meeting and approved the amended rules and immediately
thereafter sought the approval of the Central Government. Within thirty days of
the Central Government's approval, the rules were submitted before the
Registrar of Companies at Kanpur and got the same approved. After having
completed the formalities, the respondent company held the executive committee
meeting on April 4, 1984, and fixed the holding of the fourth annual general
meeting for May 14, 1984. During this process, a period of two years has
expired inasmuch as the annual general meetings have not taken place for the
years 1982 to 1984.
The contention of the
learned counsel for the plaintiff is that the election be now held for all the
27 posts the holders which were to retire after the holding of the third annual
general meeting in the year 1981, in case the convening of the fourth annual
general meeting is held to be in order. It is not disputed that the defendant
council has on its board 27 elected members and four Government officials.
One-third of such directors have to retire every year by virtue of the
provisions of section 256 of the Companies Act. The plaintiff is not one of the
retiring directors. It may be that by virtue of the judgment of S. S. Chadha
J., the rules of the defendant company were held invalid and they were directed
to amend the same. At this stage, I do not propose to interpret the judgment of
S. S. Chadha J. but the fact remains that it will have prospective effect. The
defendant company cannot be held negligent or blamed for not holding the annual
general meetings. In fact, they were helpless in view of the circumstances
created by the filing of the various suits. As per the order sheet dated May
15, 1984, during the pendency of the suit, the defendant council was directed
to hold the elections of the executive committee members on May 16, 1984, at 2
p.m. but the result of the election was not to be declared. This order was
modified by the Division Bench of this court, wherein the council was directed
to declare the result of the election but the members declared elected were
required not to act till the decision of the present suit. It comes to this
that the 9 members of the executive committee have already been declared
elected. It is not denied that the fifth annual general meeting has already
been held except for the election of the executive committee members because of
the order of the Division Bench. Learned counsel for the defendant states at
the Bar that immediately after the decision of this case, they propose to hold
the election of the 9 members for the fifth annual general meeting in the month
of February, 1985, and they will hold the next annual general meeting and in
this way all the 27 members will be declared elected. For the reasons explained
above, I am not inclined to issue any directions to the defendant council for
holding the election for at least 18 members as urged by the learned counsel
for the plaintiff because this direction will not only be a harsh one, but will
also create lot of complications. The law must take its own course. Under no
circumstances, the defendant council can be blamed for not holding the annual
general meetings or electing one-third members. At this stage, I am not inclined
to grant this discretionary relief in favour of the plaintiff. Ordered
accordingly.
Issue
No. 5 :
Learned counsel for the
plaintiff in support of this issue contended that the defendant council acted mala
fide and with oblique motive to despatch the notices for the holding of the
fourth annual general meeting on a day which will deprive the members for
contesting the election for the membership of the executive committee of the
council. According to him, if the executive committee of the council had held
the meeting on April 4, 1984, and decided to hold the fourth annual general
meeting on May 15, 1984, there was no occasion for them to have despatched the
notices at such a late stage. Their intention obviously is to keep the people
in dark about the holding of the annual general meeting and deprive the
eligible members to contest the election.
Prima facie none of these
arguments has any substance. To start with, the plaintiff unfortunately has not
named the officer of the defendant company or the office bearers who could be
said to be in league for not despatching the notices within reasonable time.
Mala fides have to be alleged against some person. The defendant in this case
is the council. The particulars about the fraud or mala fides or motive are
missing. The general allegations of mala fides/motive, however strong the words
in which they are stated may be, if unaccompanied by particulars, are
insufficient to amount to an averment of the fraud or mala fides or motive of
which any court can take notice. Even otherwise, as observed earlier, section
53(2) of the Companies Act gives the right to the defendant council to serve
the members with the notice of the meeting at the expiration of 48 hours after the
letter containing the same is posted. This legal obligation has been duly
complied with by the defendant council. Furthermore, as already discussed
earlier, the council started issuing notices by citations in the various
newspapers throughout India, intimating the date of the meeting, requiring the
members to furnish their correct addresses and to send their nominations within
the statutory period. These publications continued appearing from April 5,
1984, to April 15, 1984. The defendant also started despatching the letters to
individual members supplying information about the holding of the fourth annual
general meeting. In compliance of the service of the individual notices as well
as the publication in the various newspapers, the defendant council was able to
correct the list of the members by April 20, 1984. By this time they also
started receiving the nominations for the post of executive committee members
the lists of which were published from time to time. While in the witness box,
even the plaintiff has not led any evidence showing the mala fides/motive on
the part of the defendant council to secure the re-election of the retiring
members by not sending notices. Unfortunately, she also did not mention the
name of any person/office-bearer or the member of the executive committee
alleging mala fide intention. The plaintiff having failed to furnish the
necessary particulars either in the plaint or in the form of evidence, this
issue has to be decided against the plaintiff.
Issue
No. 6:
Learned counsel for the
plaintiff has not pressed this issue and the same is hereby decided against the
plaintiff.
Issue
No. 7 :
It is the case of the
defendant that the plaintiff even after having been duly served with the notice
giving her clear 14 days, preferred to file the present suit on May 11, 1984,
when May 12, 13, 1984, were holidays for the courts, being Second Saturday and
Sunday. After having obtained the ad interim injunction on May 11, 1984, the
same was not got served intentionally immediately thereafter. The defendants
made all arrangements for the holding of the annual general meeting on May 14,
1984. Many members have reached Delhi from distant parts of the country to
attend the meeting. The plaintiff intentionally served the notice of the ad
interim injunction at 11 a.m. on May 14, 1984, whereas the meeting was fixed
for 11.30 a.m. According to the learned counsel, the plaintiff was fully aware
of the fact that the office of the defendant council was functioning on May 12,
13, 1984, as they were expected to receive proxies, 48 hours before the time of
commencement of the annual general meeting, as well as were also required to
give the inspection of the proxies as per the provisions of the Companies Act,
before the closing hours on May 13, 1984. This fact was known to the plaintiff
and she was also aware of the name of the counsel for the defendant. The
conduct of the plaintiff, according to the learned counsel for the defendant,
disentitled her to any relief in the suit.
Learned counsel for the
plaintiff, on the other hand, submits that May 11, 1984, was a Friday and 12th
and 13th being holidays, the plaintiff had no other option but to serve the
defendant with the ad interim order on May 14, 1984, which she did in the early
hours of the next working day.
The defendant cannot impute
motive or hold the plaintiff responsible for the delay or laches in the filing
of the present suit.
On a consideration of the
material on record, in my opinion, the defendant has something to say on this
aspect. As already observed, the plaintiff not only was served with a notice of
the holding of the annual general meeting but she was also aware of the annual
general meeting from other sources, including that of publication in the
various newspapers. In her cross-examination, she had also admitted that by
writing the letter, exhibit D-1, that Shri Mohanjit Singh had betrayed their
association (GEA), she meant to say that Mohanjit Singh had betrayed the
association by his entering into an agreement with another association of garment
exporters, other than the defendant council. She has also been participating in
the affairs of defendant No. 1 council by issuing pamphlets and taking up the
cause of the members of the council. If she had any grievance, the cause of
action had arisen immediately after the service of the notice of the holding of
the annual general meeting. There was no reason for her to have delayed the
action and disturb the annual general meeting at the last moment thereby
causing inconvenience not only to the defendant council but also to the various
members who had reached Delhi from distant parts of the country. Even if she
had been successful in obtaining the ex parte ad interim injunction on May 11,
1984, it was her bounden duty to have served the officers of the defendant
council on that very day or at least on the next day, so that the council may
have taken steps either for the vacation of the ex parte ad interim order or
informing its members not to attend the meeting. She was also fully aware of
the fact that Shri G.L. Rawal, advocate, is the retainer of the defendant
council and even if she was under a wrong impression that the office of the
defendant council will remain closed on May 12, 13, 1984, an attempt should
have been made to serve on the advocate at his residence/office. No explanation
is forthcoming as to why she did not care to take steps in this direction. The
only inference that can be gathered is that she had the intention to disturb
the annual general meeting and, as such she can be held responsible for the
delay and laches for the filing of the present suit which disentitles her to
the relief claimed in the present suit. This issue is, therefore, decided
against the plaintiff.
Relief:
As a result of the above
discussion, I see no force in the suit and the same is hereby dismissed with
costs.
[1984] 56 COMP. CAS. 103 (CAL.)
HIGH COURT OF CALCUTTA
v.
Time Travels Pvt. Ltd.
MRS. PADMA KHASTGIR, J.
Suit No. 4480 of 1982
JUNE 22, 1982
Sujit Sinha for the petitioner.
Rathin Nag and Hirak Mitter
for the respondent.
Padma Khastgir J.—This application had been made by Joginder Singh Palta
for an order of injunction restraining the defendants, Time Travels P. Ltd. and
others, from in any manner giving effect or further effect to the resolution,
dated May 14, 1982, restraining the defendants from interfering in any manner
with the right of the petitioner to act as the managing director of defendant
No. 1 and for other consequential reliefs.
It was the petitioner's
case that at all material times he was and still is the managing director of
defendant No. 1. The company was incorporated on or about March 8, 1978, under
the Companies Act, 1956, as a private company limited by shares. Defendants
Nos. 2, 3 and 4 at all material times were and still are directors of defendant
No. 1 and the petitioner along with the said directors constituted the board of
directors of defendant No. 1. The petitioner and defendants Nos. 2 and 4 were
the first named directors of the company in its articles of association.
According to the petitioner, he was duly appointed as the managing director of
defendant No. 1 by the board of directors for the initial period of three years
with effect from June 1, 1978, and subsequently from June 1, 1981, he was duly
appointed as the managing director of the defendant on various terms and
conditions as set out in paragraph 9 of the petition. Since June 1, 1976, the
petitioner has been duly acting as the managing director of defendant No. 1 and
performing his duties as such. It was the petitioner's case as made out in the
petition, that on May 23, 1982, the petitioner for the first time came to know
from an advertisement caused to be published by the defendants in an issue of
Amrita Bazar Patrika, dated May 16, 1982, that a resolution had been passed at
an extraordinary general meeting of defendant No. 1, dated May 14, 1982, for
the removal of the petitioner as director of defendant No. 1. The petitioner
denied and disputed the factum, validity and the genuineness of the said
resolution passed at the extraordinary general meeting inasmuch as, according
to the petitioner, no board meeting was held for the purpose of considering the
said purported resolution or convening the extraordinary general meeting of
defendant No. 1. According to him no notice of the said resolution or of the
said extraordinary general meeting was given by defendant No. 1 to him or by
any other defendants. According to him, no special notice had been served on
the petitioner and, under the circumstances, he was not given any opportunity
to be heard on the proposed resolution or at the meeting. Under those
circumstances, the petitioner had no opportunity to make any representation
with regard to the said proposed resolution for his removal as the director of
defendant No. 1. It was the petitioner's further case that such resolution had
not been notified to the Registrar of Companies removing the petitioner from
the directorship of defendant No. 1.
Mr. Sujit Sinha,
Barrister-at-Law, appeared in support of this application and submitted that
the removal of his client as a director was illegal, void and of no effect.
First of all, on the ground that no notice of the said resolution or of
convening of the said extraordinary general meeting was given, no board meeting
was ever held for the purpose of considering the said resolution. No special
notice had been given to the petitioner nor any particulars were given to the
petitioner to make any representation in respect of the said resolution for his
removal as a director of defendant No. 1. The meeting held and the resolutions
passed on May 14, 1982, were contrary to and in violation of the provisions of
the Companies Act as also the articles of association of defendant No. 1.
According to the petitioner, no effect whatsoever had been given to the
resolution inasmuch as the petitioner had been attending the office of
defendant No. 1 and performing and/or discharging his duties as the managing
director of defendant No. 1 by receiving visitors and callers and making
arrangements on their behalf by way of booking air passage with the diverse airlines and also making hotel
accommodation for the passengers. He gave particulars of the visitors and/or
representatives of different airways whom he met during that period and also
relied on a few letters written by the third parties to him as the managing
director. Under the circumstances, the petitioner was apprehensive, since
defendant No. 1 and other directors have threatened to invade the right of the
petitioner to act as the managing director of defendant No. 1.
The
petitioner instituted this suit for a declaration that the petitioner is the
managing director of the defendants and is entitled to act as such, for a declaration
that the resolution is illegal, void and of no effect, and for a perpetual
injunction restraining defendant Nos. 1, 2, 3 and 4 and/or their agents or
servants from in any way or manner interfering with the right of the petitioner
to act as the managing director of defendant No. 1 or from giving effect to the
resolution, dated May 14, 1982. The petitioner alleged that the defendants have
given instruction to the office staff not to carry out any instructions of the
petitioner and they in fact appointed security staff from the Security Service
of India for preventing the petitioner from attending or having any access to
his office from May 31, 1982. Mr. Sinha relied on the cases in Bimal Singh
Kothari v. Muir Mills Co. Ltd. [1952] 22 Comp Cas 248 (Cal) and Richard B.T.H.
Chow v. James Chow Wakin [1970] 75 CWN 173.
The
learned lawyers, Mr. Rathin Nag with Mr. Hirak Mitter, appeared on behalf of
the company and opposed this application.
It
appears that the petitioner, on his own admission, is not a member of the
company inasmuch as he has no shareholding of defendant No. 1. Under the
circumstances, he, being a non-member of the company, is not entitled to
challenge the non-compliance of s. 173 of the Companies Act, 1956, which
provides as follows:
"173(1). For the
purposes of this section—
(a) in the case of an annual general meeting,
all business to be transacted at the meeting shall be deemed special, with the
exception of business relating to (i) the consideration of the accounts,
balance-sheet and the reports of the board of directors and auditors, (ii) the
declaration of a dividend, (iii) the appointment of directors in the place of
those retiring, and (iv) the appointment of, and the fixing of the remuneration
of, the auditors; and
(b) in
the case of any other meeting, all business shall be deemed special.
(2) Where any items of business to be transacted
at the meeting are deemed to be special as aforesaid, there shall be annexed to
the notice of the meeting a statement setting out all material facts concerning
each such item of business, including in
particular the nature of the concern or interest, if any, therein, of every
director, the managing agent, if any, the secretaries and treasurers, if any,
and the manager, if any".
In view of the provisions
of s. 173 of the Companies Act, the petitioner is not entitled to any notice
under s. 173. Apart from that, factually it had been the case of defendant No.
1 as made out in the affidavit-in-opposition affirmed by Rajendra Prosad
Khaitan on June 7, 1982, that the petitioner had been served with the notice
accompanied by the requisition letter given by one of the shareholders having
more than 10% shareholding as also the explanatory statement of the said notice
by registered covers with acknowledgment due. The said cover was tendered to
the petitioner on more than one occasion by the postal delivery peon and the
petitioner refused to accept such cover, as a result whereof the said cover was
returned to the company. The sealed envelope was opened by the court's officer
in the presence of the learned lawyers appearing for both the parties and the
contents of the said cover were brought out which corroborated the affidavit
testimony of Rajendra Prosad Khaitan. Under the circumstances, the petitioner's
submission that he had not been served with any notice whatsoever of the
proposed meeting to be held on May 14, 1982, as also the proposed resolution to
be passed at such meeting is untenable and equally unacceptable is his
submission that he did not get any chance of making any representation against
the proposed resolution which was going to be passed at such meeting removing
him from acting as a director. Under the General Clauses Act, 1897, under s. 27
such tender of the registered cover and his refusal to accept the same is valid
service in accordance with law.
Mr. Sujit Sinha submitted
that the explanatory statement given by the company was not sufficient inasmuch
as the special notice given by the requisitionists should also have been
accompanied by the explanatory statement. In support of his contention he
relied on an unreported judgment of Mr. Justice Salil K. Roychowdhury (as he
then was) and submitted that inasmuch as there was no explanatory statement
annexed to the special notice given by the shareholder, it was contrary to law
and as such any resolution passed on the basis of such special notice and/or
requisition was void.
The suit filed by the
defendant seems to be not maintainable in law inasmuch as he has asked for a
declaration to the effect that he is still the managing director of the company
and he is liable to remain there. Such relief is not tenable in law inasmuch as
the managing director is an employee of the petitioner. In the cases reported
in Catherine Lee v. Lee's Air Farming Ltd. [1961] AC 12 (PC), Boulling v. Association of
Cinematograph, Television & Allied
Technicians [1963] 2 QB 606 at 607, it had been held that a managing director
is merely an employee of a company. Under the circumstances, no injunction
could be passed restraining the company from removing him as the managing
director inasmuch as the court of law will not compel a company to keep one of
its employees inasmuch as the court does not enforce an agreement for
employment specifically in case of personal service. No court can compel an
unwilling employer to keep a particular employee in whom the employer has lost
confidence. Mr. Nag craves reference to a judgment of this court passed in the
matter in Gobind Pritamdas Malkani v. Amarendra Nath Sircar [1980] 50 Comp Cas
219 (Cal), and submitted that in view of the observation there, this court
should not pass an order of injunction restraining the company from dispensing
with the service of the petitioner as its managing director.
The petitioner's submission
that there had been some irregularities in the conduct as also in convening the
said meeting cannot be a ground for an order of injunction inasmuch as the
company is at liberty to remove those irregularities at the next meeting of the
company and cure such irregularities and set at naught the order. Under those
circumstances, relying on the principles as laid down in Bentley-Stevens v.
Jones [1974] 2 All ER 653; [1974] 1 WLR 638 (Ch D) no order of injunction could
be passed against the defendants from interfering with the right of the
petitioner to act as the managing director.
Palmer's Company Law, 22nd
edn., page 651, article 59/25, article 59/30, page 554, observes that what
applies to directors applies with greater force to managing directors. In the
event of any breach of contract of employment of a managing director, in the
opinion of Palmer, at article 60/11 at page 668, is the remedy for damages for
such breach of contract.
The decisions relied by Mr.
Sinha have no application to the facts and circumstances of this case.
Section 170 of the
Companies Act provides as follows:
"170(1). The provisions of sections 171 to
186—
(i) shall, notwithstanding anything to the contrary in the
articles of the company, apply with respect to general meetings of a public company,
and of a private company which is a subsidiary of a public company; and (ii)
shall, unless otherwise specified therein or unless the articles of the company
otherwise provide, apply with respect to general meetings of a private company
which is not a subsidiary of a public company.
(2)(a) Section 176, with such adaptations and
modifications, if any, as may be prescribed, shall apply with respect to
meetings of any class of members, or of debenture holders or any class of
debenture holders, of a company, in like manner as it applies with respect to
general meetings of the company.
(b) Unless the articles of the company or a contract binding
on the persons concerned otherwise provide, sections 171 to 175 and sections
177 to 186 with such adaptations and modifications, if any, as may be
prescribed, shall apply with respect to meetings of any class of members, or of
debenture holders or any class of debenture holders, of a company, in like
manner as they apply with respect to general meetings of the company."
Pursuant to such provision
this particular company in its articles of association under art. 40 provides
in the manner following:
"The provisions contained under ss. 171 to
186 of the Act shall not apply to the company."
Under those circumstances,
as per the articles of association of the company, there need not be any
explanatory statement as provided under s. 173 of the Companies Act, 1956, for
the purpose of convening a meeting by a shareholder by giving any special
notice annexing therewith any explanatory statement. Mr. Sinha's submission is
that the expression "unless otherwise specified" in cl. (ii) of
sub-s. (1) of s. 170 does not mean omission of the provisions of the Companies
Act inasmuch as under art. 40 it does not make any other provision but only
excludes the application of certain sections of the Companies Act. In that
respect he craved reference to Black's Law Dictionary. So far as the word
"otherwise" is concerned, he submitted that the company should have
made some provisions in a different manner and in some other way so far as ss.
171 to 186 were concerned. From the various provisions made in the articles of
association of the defendant company it would appear that from arts. 40, 41,
42, 43, 44, 45, 46, 47, 48 and 49, various provisions have been made so far as
general meetings were concerned. Mr. Sinha's submission is that by virtue of s.
9 any provision made in the articles of association which is contrary to the
provisions of the Companies Act shall be void. That submission of Mr. Sinha is
also unacceptable inasmuch as the opening words of s. 9 provides "save as
otherwise expressly provided in the Act". Under the circumstances, by
virtue of s. 170, the company was entitled to frame its articles of association
by making other provisions and/or specifying otherwise.
Considering the balance of
convenience, it seems that the members of the company had unanimously resolved
to remove the petitioner as the managing director. Under the circumstances, to
insist on the company to engage such a managing director would be disastrous
for the company. There are allegations of removal of minutes of board meetings,
register of shareholdings and other statutory documents including the common
seal of the company. The company had duly notified to the Registrar of
Companies and the Officer-in-Charge of the Park Street Police Station to that
effect.
As a result, in view of the
peculiar facts and circumstances of this case and the principles as laid down
in the case of Bentley Stevens v. Jones [1974] 2 All ER 653; [1974] 1 WLR 638
(Ch D), no order of injunction should be passed even if there are
irregularities, which can be rectified by the company at its next general
meeting. Under the circumstances, this application is dismissed with costs.
[1983] 54 COMP. CAS. 12 (DELHI)
v.
Raj Kumar Kapoor
H.L. Anand J.
COMPANY PETITIONS NOS. 58, 86, 91 OF 1978, C.P. NO. 14
OF 1979
AND CRIMINAL MISCELLANEOUS (COMPANY) NO. 3 OF 1980
Daljit
Singh for the Petitioner.
D.R.
Mahajan for the Respondent.
This
petition under ss. 397 and 398 of the Companies Act, 1956, and the connected
petitions under s. 155 of the Act, being C.P. No. 86/78, C.P. No. 91/78 and
C.P. No. 14/79, and Crl. Misc. (Company) No. 3/80 under s. 340 of the Cr. P.C. surface disputes that have
arisen between two groups in a private company composed of close relations.
Himalaya Electricals
Industries (India) Private Limited, for short, the company, was incorporated in
June, 1952. It was essentially promoted by Tarlok Chand Khanna, for short,
Khanna, petitioner No. 1 in C.P. No. 58/78. Respondent No. 1, Raj Kumar Kapoor,
for short, Kapoor, a close relation of Khanna, was admitted to its membership.
The entire issued capital has, by and large, been held by Khanna, his wife and
his three sons and Kapoor and his wife. In September, 1975, Khanna fell
seriously ill and was eventually incapacitated and almost lost his vision. It
is then that Kapoor took advantage of his absence, as alleged by Khanna, or took
over management under the adverse circumstance of the liability of Khanna, as
alleged by Kapoor. Until 1976, out of the entire issued and paid-up capital of
Rs. 1,25,500, Khanna, his wife and his three sons—Ramesh Khanna, Kanwal Khanna
and Ish Khanna—held among them 133 shares of the value of Rs. 66,500. Kapoor
and his wife, respondent No. 2 in C.P. No. 58/78, between them held 114 shares
of the face value of Rs. 57,000. One Gaur held 4 shares of the face value of
Rs. 2,000. In the years 1976 and 1977, 27 shares held by Ramesh Khanna, 10
shares held by Kanwal Khanna and 4 shares held by Gaur were shown as having
been transferred in the records of the company to Kapoor and his nominees. This
improved the position of the Kapoor group to 155 and reduced that of the Khanna
group to 96. Khanna was removed from the board. In February, 1978, 102 further
shares were allotted to the Kapoor group increasing its strength to 25 7. 30
shares, at one time held by Parshu Ram, an employee of the company, had been
earlier shown in the record of the company as transferred to the wife of
Khanna.
By C.P. No. 58/78, Khanna
complains of oppression and mismanagement and seeks directions with regard to
the conduct of the affairs of the company, as well as the cancellation of the transfer
and registration of shares belonging to Kanwal Khanna, M. L. Gaur and Ramesh
Khanna, cancellation of the additional shares issued and allotted to Kapoor and
his nominee, removal of the wife of Kapoor from the board, removal of Kapoor
from the board, reinstatement of Khanna on the board, and a direction for
payment of arrears of remuneration as a director. Kapoor and his wife are the
respondents in this petition. C.P. No. 86/78 is by Ramesh Khanna for
rectification of the register of members with regard to 27 shares held by him.
C.P. No. 91/78 is for some relief by Kanwal Khanna in respect of 10 shares held
by him. C.P. No. 14/79 is apparently in the nature of a counter-blast filed by
Parshu Ram, at the instance of Kapoor, to annul the transfer of 30 shares held
by him to the wife of Khanna: By Crl. Misc. (Company) No. 3/80, the Khannas
seek to carry the dispute beyond the limits of adjudication and want Kapoor to
be prosecuted for certain offences arising out of certain returns filed with
the Registrar of Companies and applications and affidavits filed in this court.
In support of their
respective claims, parties produced evidence by way of affidavits and
documents. The petitioners also examined two officials of the Registrar of
Companies, inter alia, with a view to establish that Kapoor had filed two
successive returns, exs. P-A and P-B, as also the circumstances in which and
the dates on which these two returns were filed. I have heard learned counsel
for the parties at length on the various questions in controversy between the
parties.
The first question for
consideration is as to the true holdings of the parties and the validity of the
transfers and registration of four sets of shares held by Gaur (4), Kanwal
Khanna (10), Ramesh Khanna (27) and Parshu Ram (30). This would also involve
the question as to the validity of the additional issue of shares, as well as
the dates on which and the circumstances in which the two returns were filed by
Kapoor and if, having regard to all the circumstances, he is liable to be
prosecuted for any offence.
As regards the transfer of
10 shares held by Kanwal Khanna, according to the capital share account
register of the company, these shares were transferred by Kanwal Khanna to
Kapoor on March 30, 1976. Kanwal Khanna claims that he never transferred these
shares and no transfer deed was executed. He further claims that the share
certificates were with Kapoor and he misused the trust reposed in him. He
further claims that by his letter of March 23, 1978, annex. P-2, he had sought
the return of the share certificates from Kapoor but there was no reply. Kapoor
claims that these shares were purchased by him from Kanwal Khanna because
Kanwal Khanna was losing interest in the company and Kanwal Khanna had been
paid for these shares. According to him, the transfer deed was duly executed
but the relevant records were removed from the offices of the company by the
Khannas. In support of the valid transfer and registration, Kapoor also relies
on the fact that Ramesh Khanna, the brother of Kanwal Khanna, had attended the
annual general meeting of the company held on June 22, 1976, as also later in
December, 1976, and still later in March, 1977, and even though Kanwal Khanna
had never been sent notice of these meetings, Ramesh Khanna raised no objection
which he would have if Kanwal Khanna had not transferred these shares. It is
further claimed that the transfer was duly reflected in the balance-sheets of
the company for the years 1976, as well as 1977, which were duly signed by none
other than Khanna, the father of Kanwal Khanna.
True, the transfer deed in
respect of these shares is not available. Parties have made accusations and
counter-accusations against each other with regard to the transfer deed. The
registration of the transfer is not supported by the resolution of the Board
because the present minute book of the Board starts from July, 1976. Here
again, there are accusations and counter-accusations with regard to the
previous minute book. There is also no proof with regard to payment of
consideration apart from the entry in the capital account register itself.
There is neither any cheque payment nor any receipt executed by Kanwal Khanna.
Kanwal Khanna did ask for the return of the certificates in March, 1978. The
transfer was, however, not challenged until 1978, and what appears to clinch
the matter is the admitted fact that notices for the annual general meetings
held in June, 1976, and, thereafter, were not sent to Kanwal Khanna because of
the transfer and even though the meetings of June, 1976, December, 1976, and
March, 1977, were attended by Ramesh Khanna, and some of these were attended by
Ish Khanna, as also Khanna himself, no objection was raised with regard to the
non-receipt of notice by Kanwal Khanna. If these shares had not been
transferred, one would have expected an objection by Kanwal Khanna as well as
by the other members of the group. This clearly shows that these shares had
been duly transferred by Kanwal Khanna in favour of Kapoor and it is,
therefore, not possible to hold that these shares had not been duly
transferred.
Regarding four shares held
by Gaur, it has been a common case of the parties that Gaur has been a
non-resident during the last many years. No transfer deed has been placed on
record. His shares could not have been transferred without the prior permission
of the Reserve Bank in view of his admitted status as a non-resident. There is,
however, no challenge by him to the purported transfer and one does not know
whether he claims to be a shareholder of the company or has lost interest in
it. In any event, in his absence and in the absence of any records relating to
this transfer and the legal impediment to any such transfer, it is not possible
to accept the contention that these shares were duly transferred in favour of
Kapoor or that the transfer had been duly registered in the records of the
company. The transfer and its registration must, therefore, be ignored until
their existence and validity are determined in appropriate proceedings to which
Gaur is a party.
As for the shareholding of
Ramesh Khanna, the transfer was based on a transfer deed admittedly executed by
Ramesh Khanna but the contention of the Khannas is that this was a blank
transfer deed, intended to be used for the transfer of shares to the wife of
Khanna. It is alleged that the blank transfer deed, duly signed by Ramesh
Khanna, had been delivered to Kapoor for registration and since the share
certificates were already lying with him he misused the trust by transfer of
shares in his favour or in favour of his nominee. This contention does not
stand to reason. If the transfer was intended to be made in favour of Ramesh
Khanna's mother, one is unable to understand why a blank transfer deed duly
signed by Ramesh Khanna was handed over to Kapoor. Even with regard to this
transfer, there is no proof of consideration but it is reflected in the capital
account register. There was no requisition from Ramesh Khanna requiring Kapoor
to return the transfer deed or the share certificates. One would have expected
such a requisition if the shares were intended to be transferred to the wife of
Khanna. The registration of this transfer is based on the approval of the Board
in its meeting held on August 29, 1977, even though Khanna did not attend that
meeting. The meeting also approved the acceptance by the company of the
resignation of Ramesh Khanna from service. The admitted fact that
contemporaneously with the transfer, Ramesh Khanna resigned from the company
and set up in co-operation with Kanwal Khanna and with the blessing of Khanna,
an independent business in the same industry, gives support to the version of
Kapoor with regard to this transfer. Ish Khanna had also resigned earlier and
Kanwal Khanna had transferred his holding. These circumstances also lend
support to the version with regard to the transfer of these shares. From all
these circumstances, it would be a reasonable inference to draw that these
shares had been duly transferred by Ramesh Khanna. I have arrived at this
conclusion independently of the circumstances relied upon on behalf of Kapoor
that the transfer was duly reflected in the annual return for the year 1977, a
subject I would presently deal with in another context.
As for the transfer of
shares registered earlier in the name of Parshu Ram, an employee of the
company, the case of Khannas is that these shares were transferred by Parshu
Ram to the wife of Khanna in September, 1974, for a consideration of Rs. 4,800,
when the company had suffered huge losses and that the transfer was duly registered
in the records of the company and Parshu Ram has filed the present petition in
February, 1979, at the behest of Kapoor after disputes started between the
Kapoors and the Khannas and Khanna filed the proceedings in court. It is
interesting to notice in this context that Parshu Ram never appeared in this
court to pursue the petition and even Kapoor could not deny that Parshu Ram
ceased to be a member because the very annual return on which Kapoor relies,
whether of the year 1977 or earlier, do not appear to list his name as a member
of the company. If the shareholding was transferred in 1974, and the challenge
to the registration and transfer was not made until 1979, the plea of Khanna
appears to find support from this circumstance. Kapoor was also unable to deny
the charge of Khanna that this transfer had been duly effected and registered
in the records of the company in 1974 itself. The petition of Parshu Ram,
therefore, appears to have been filed at the instance of Kapoor as a measure of
counter-blast and there is, therefore, no ground to interfere in that behalf.
The transfer of shares and
their registration in respect of the aforesaid four batches were sought to be
voided on the ground that under art. 8 of the articles of the company, a
transfer of shares could be sanctioned by the Board only by a unanimous
decision of the directors and that none of these were sanctioned by such a
decision. This is what art. 8 provides :
"8. All transfer of
shares shall be sanctioned only with the unanimous decision of the directors
and the directors may refuse to register any transfer of a share without
assigning any reason."
This article would regulate
the sanction of transfers because the power of the company under its articles
to deal with transfers is preserved by sub-s. (1) of s. 111 of the Act. Such a
provision is also not inconsistent with any provision of the Act and is,
therefore, outside the reach of s. 9 of the Act. A unanimous decision of the
directors was, therefore, necessary for a valid sanction of any transfer. Aid
of art. 8 is, however, unnecessary in the case of shares held by Gaur because I
have already held that there was no valid transfer. If there was no valid
transfer, there was no question, of registration whether or not art. 8 is
invoked. So far as the transfer of shares of Parshu Ram is concerned, art. 8
would not hit it, because Kapoor does not join in the challenge to this
transfer and this transfer apparently had the concurrence of both the permanent
directors. This can be clearly inferred from the fact that the various returns
filed by the company and signed by Kapoor after the transfer consistently
reflected this transfer, including the return for the year 1977, on which
Kapoor particularly relied, on the ground that it had been signed by Khanna as
well. I would deal with the two returns for the year 1977, filed by Kapoor
presently. There is, however, no material to show that the registration of the
transfers of 10 shares of Kanwal Khanna and 27 shares of Ramesh Khanna had the
sanction of the company with the unanimous decision of the directors, as
envisaged by art. 8 of the articles. The records with regard to the first of
these transfers were not available. The registration of the second transfer was
based on the decision of the Board in its meeting held on August 29, 1977,
which was attended by Kapoor and his wife in the absence of Khanna. This
registration could not, therefore, be said to be with the unanimous decision of
the directors. The expression "present and voting" is not to be found
in the phraseology of this article. The article must, therefore, be construed
to mean that the sanction should be with the unanimous decision of all the
directors of the company. That would be a reasonable construction of the
article in the absence of any words of limitation. Unanimity among all the
directors, therefore, was a condition for a valid registration. The
registration of these Transfers was. therefore, vitiated on account of
noncompliance with art. 8, and it would be open to the transferees of these
shares to seek the registration of these transfers in accordance with law.
Until then, the transfers which are otherwise valid would not be given effect
to by the company until they have been duly registered in accordance with the
decision of the Board in terms of art. 8 of the articles of the company.
That takes me to the
consideration of the contention of Kapoor that, in any event, the objection to
the validity of transfers of shares of Kanwal Khanna and Ramesh Khanna and
their registration was squarely met because both the transfers and their
registration were duly reflected in the annual return, filed by the company for
the year 1977 in the office of the Registrar of Companies, and the concurrence
of Khanna to the registration be inferred from the fact that the return was
signed by Kapoor as well as Khanna. This calls for an examination of the
circumstances in which two returns for the same period were filed.
In the affidavit in
opposition filed by Kapoor in C.P. No. 58/78, Kapoor alleged that the return
for the period ending December 31,1976, reflected the change in the
shareholding in that year and the return had also been signed by none other
than Khanna himself. It was further alleged that the change in the shareholding
in 1977 was also reflected in the annual return filed for that period but the
further plea that the latter return was also signed by Khanna was not made.
This plea was never made until an application, being C.A. No. 605/79, was filed
on November 13, 1979, seeking leave to file an additional affidavit of that
date which was enclosed along with the application. In this affidavit, two
additional pleas were raised, that the changes in the shareholdings in 1976 and
1977 were reflected in the annual return filed for the year 1977, and that this
return had been duly signed by Khanna along with Kapoor. There is an
interesting backdrop to this application which can be reconstructed from the
material that eventually came to light. Annual return for the period ending
December, 1977, was originally filed by Kapoor on March 21, 1978, and is Ex.
P-A. This return, which is signed by Kapoor and his wife, Nirmala Kapoor, as
directors of the company, inter alia, indicates that Gaur and Kanwal Khanna had
ceased to be members of the company before the year 1977, and further that 27
shares held by Ramesh Khanna during the year 1977 were transferred to Nirmala
Kapoor, wife of Kapoor, on August 29, 1977. This document was apparently found
defective by the Registrar of Companies and a notice was admittedly sent to
Kapoor in October, 1979, requiring him to rectify the defects. Kapoor, on his
own showing, went to the office of the Registrar on the 9th and 12th of
November, 1979, and according to para. 9 of the affidavit, when he went there
on the 9th November, 1979, "corrections were made in certain documents for
the years 1971, 1975 and 1977, etc.". He also stated that he went to the
office of the Registrar again on November 12, 1979. Para. 10 of the affidavit
is significant and runs thus : "10. That during the course of the visits
on 9th and 12th November, 1979, t saw the annual return filed by the company
for the year 1977. In that return is mentioned the transfer of 27 shares by
Shri Ramesh Khanna in favour of Smt. Nirmala Kapoor and also the factum of the
appointment of Smt. Nirmala Kapoor as director of the company on March 21,
1977. The said annual return is duly signed by me as managing director and also
by Shri T.C. Khanna, the other director of the company." By this
application (C.A. No. 605/79), the court was requested to summon the file of
the Registrar so that the annual return for the year ending December, 1977,
could be examined by the court. Notice of this was issued to the Registrar and
when the file was produced, it was discovered that there were two returns for
the period, Ex. P-A, which was originally filed, and Ex. P-B, which was sought
to be substituted on November 12, 1979. Evidence of the officials of the
Registrar has since been recorded and what appears to have happened is this.
When Kapoor went to the office of the Registrar on or about 12th of November,
1979, he carried with him a fresh return for the same period incorporating
certain changes which were required, but on a form which had apparently been
signed by Khanna blank, because none of the entries is in his hand. This
document, Ex. P-B, was filed on November 12, 1979, but the office of the
Registrar put on it a stamp which had reference to the document filed earlier
in that it gives the number and date under which the fee had been originally
deposited when the return was filed in March, 1978. Below the stamp, however,
are the signatures of the officers under the date line November 12, 1979. It
appears that possibly the intention was to substitute this document for the
original return, and, either to take away the original document or to ensure
that that was not produced in court when the record was summoned. This,
however, appears to have misfired because the Khannas were a little vigilant
and on inspection found what had happened. This is how the records when
summoned contained both the returns, and the evidence of the two officials of
the Registrar, P.W. 1 and P.W. 2, abundantly establishes that Ex. P-A, which is
signed only by Kapoor and his wife, was filed on March 21, 1978, and the other
return, Ex. P-B, which is on a form bearing the signatures of Khanna, was filed
only on November 12, 1979, a day before the application, C.A. No. 605/79, was
filed. Since Ex. P-B was filed in November, 1979, and Ex. P-A filed in March,
1978, was not signed by Khanna, the affidavit-in-opposition did not contain the
plea that the return for the year 1977 had been signed by Khanna. These
preparations were apparently made to prepare the ground to urge in the
affidavit, enclosed with that application, that the return filed by the company
in respect of the year 1977 was duly signed by Khanna. The fact, that the
earlier return had not been signed by him and a subsequent document was filed
only a day before the application, was not disclosed to the court and an
impression was perhaps sought to be created by the application, as also the
accompanying affidavit, as if the only return for the year 1977 had been signed
by Khanna and that, therefore, the changes in the shareholding had his
concurrence. It is possible that Kapoor discovered an old form of a return
bearing the signature of Khanna, because Khanna could not have signed it in
1979 or even in 1978, because C.P. No. 58 was filed by Khanna in May, 1978. It
also follows that when Ex. P-A was filed by Kapoor in March, 1978, he was not
aware that a blank form of the annual return, signed by Khanna, was lying with
him, as, otherwise, the same would have been used on the earlier occasion. It
is also possible that the importance of such a form was not realised in March,
1978, because the petition was filed in May, 1978. That all the entries in both
the returns are exclusively in the handwriting of Kapoor closes the other
option. It is, therefore, reasonable to infer that with a view to reinforce the
validity and existence of these transfers, an attempt was perhaps made to
substitute the annual return in the office of the Registrar of Companies and a
false plea was sought to be raised in the affidavit that the only return for
the year 1977, reflecting these changes, had been signed by no other person
than Khanna. But for the vigilance of the Khannas, and perhaps, for the
intervention of someone in the office of the Registrar of Companies, an
impression could have successfully been created that the return filed in the office
of the Registrar for the year 1977 reflecting these changes had been signed by
Khanna. It also appears that such an attempt could not have been made without
the active connivance of someone in the office of the Registrar of Companies.
There may perhaps be another way of looking at the course of events. There may
possibly be some loose ends needing to be tied up and some questions calling
for explanation. In view, however, of the fact that I do not rely on this
return, it is unnecessary to take this matter any further.
In the circumstances, it
cannot be said that the aforesaid transfers had the concurrence of Khanna or
that the annual return reflecting these changes duly signed by Khanna had been
filed so as to fix Khanna with the knowledge of these exchanges. I would,
therefore, ignore Ex. P-B for the purpose of determining the validity of these
transfers and their registration. I have already held above that these two
transfers were valid but their registration was not. It would, therefore, be
open to the transferees to seek the registration of these transfers in
accordance with law, but, until the transfers are duly registered, the Khannas
would not be entitled to exercise any rights in relation to these two sets of
shares.
That leaves for
consideration the question whether proceedings for the prosecution of Kapoor
should be initiated for any offences that he may have committed having regard
to the circumstances in which Ex. P-B was filed and the plea sought to be
raised on its basis. I have already discussed above in great detail the
circumstances in which and the purpose with which Kapoor might have filed the
two annual returns for the period ending December, 1977, and how and why,
pursuant to the filing of the second return, Ex. P-B, an application, being
C.A. No. 605/79, was filed by him on November' 13, 1979. I have already
observed that the application and the affidavit enclosed with it were perhaps
intended to create a wrong impression that the return for the period ending
December, 1977, filed by the company with the Registrar of Companies, had been
signed by Khanna along with Kapoor and to conceal the fact from this court that
the original return filed for the period did not bear the signature of Khanna.
It is, however, true that neither the affidavit nor the returns have had the
desired effect partly because the attempt was more or less frustrated but
primarily because the way I had looked at the validity of the transfer of two
batches of shares and of their registration, the reinforcement that these
transfers had been duly reflected in the return said to have been signed by
Khanna would not affect the ultimate decision in the case. It is true that
perjury is rampant in court proceedings at almost all levels and because of the
burden of normal judicial work, presiding officers are reluctant to get
involved in the trial of collateral matters, because it is time-consuming. I
was for that reason (not ?) inclined to consider the question of prosecution of
Kapoor. The Khannas and the Kapoors, are, however, very closely related and any
further proceedings between them or involving them is bound to cause further
bitterness, which would not be conducive to their personal relations or to the
conduct of the future business of the company. Kapoor has apparently acted
rather indiscreetly in an attempt to establish a valid transfer of shares in
his favour and was probably misguided into an attempt to use a blank form of
return signed by Khanna to reinforce his case. No useful purpose would,
therefore, be served by pursuing the matter any further in the peculiar
circumstances of this case.
The next question is as to
the validity of the allotment of further shares by the Board of Directors of
the company on February 24, 1978. In this meeting 102 equity shares of the value
of Rs. 51,000 were allotted to the Kapoor group. The validity of the allotment
is challenged on the ground that by virtue of the provision contained in art; 6
of the articles, the unallotted shares were put under the control and at the disposal of
the Directors, who may allot the same at their
absolute discretion, but "only with their unanimous consent". The
allotment of the additional shares must, however, be voided on the short ground
that no notice of the meeting was sent to Khanna in view of his purported
removal. For the reasons I would presently give, while dealing with the
question of the validity of the removal of Khanna, his removal was bad and that
being so, he was entitled to the notice of the meeting which authorised the
allotment. Notice of this meeting admittedly was not issued to him. Besides,
allotment of further shares could have been done only with the unanimous
decision of the Board. There was no unanimity either, if Khanna continued in
law to be a director, in view of the invalidity of his removal. The allotment
of further shares must, therefore, fall with the decision in respect of the
removal of Khanna and the Kapoor group must be confined to the shareholding as
subsisted prior to the date of the meeting. The payment, if any, made by the
Kapoor group to the company for the additional shares would be refunded to
Kapoor or his nominees, as the case may be.
The next question is with
regard to the validity of the removal of Khanna from the Board. Khanna is
apparently the promoter of the company and was one of the two permanent
directors of the company, under art. 10 of the articles, entitled to hold
office for life, unless he voluntarily resigned, and was designated as
director-in-charge by that article. Kapoor was the other permanent director and
was designated by that article as the managing director of the company. Article
14 further provides that in case of the death of any permanent director a
"person nominated by such a director in his lifetime shall be permanent
director of the company in place of the deceased director". Article 17
further provides that every director, other than the permanent director,, shall
retire at the annual general meeting. Article 23 further empowers the managing
director and the director-in-charge to carry on the business of the company and
certain powers of management are entrusted to the director-in-charge by that
article.
According to Kapoor, Khanna
fell seriously ill in April, 1975, and was admitted to a nursing home and even
though by August, 1975, he had recovered, by September, 1975, he "became
almost invalid" "as he had undergone a major brain operation"
and was, therefore, unable to look after the affairs of the company except to
attend the meetings of the Board and that in spite of this, out of regard, the
company had been paying his salary regularly for a period of almost three
years. According to Kapoor, Ramesh Khanna had been attending the meetings of
the Board and'the annual general meeting of the company as a representative of
the Khanna Group even though the sons of Khanna had been carrying on
independent business in competition with the business of the company. It is
claimed that on a requisition from two shareholders for the removal of Khanna,
a meeting of the Board of Directors was held on March 30, 1978, a notice of
which had been sent to Khanna on March 27, 1978, and the Board resolved to
convene an extraordinary general meeting to consider the question of removal.
The extraordinary general meeting was convened for April 26, 1978, and a notice
of it was sent to all the shareholders, including Khanna, on April 3, 1978, and
the requisition for removal was enclosed with the notice. It is claimed that in
the extraordinary general meeting held on April 26, 1978, Khanna was removed
from the Board. It is alleged that the Khannas knew of this meeting because it
was only after receipt of the notice of the meeting that they illegally
purported to convene a meeting of the Board for April 27, 1978, to create
confusion and that none of the Khannas attended the extraordinary general
meeting as part of their concerted action. The validity of the removal of
Khanna from the Board depends on the answer to the questions if the appointment
of the wife of Kapoor to the Board on March 27, 1977, and the meeting of the
board of directors of the company held on March 30, 1978, and the extraordinary
general meeting of the company held on April 26, 1978, were valid as also in
the way one resolves an apparent conflict between the provisions of some of the
articles and the provisions of the Companies Act.
The first question to be
considered is the validity of the appointment of the wife of Kapoor to the
Board. This is important because until she was appointed to the Board in the
meeting held on March 27, 1977, Kapoor and Khanna were the only directors of
the company. If the meeting of the Board said to have been held on March 30,
1978, was to have taken a valid decision to convene an extraordinary general
meeting to consider the motion for the removal of Khanna with any claim of
legitimacy, someone must be added to the Board, obviously because Khanna would
not agree even if he was present in such a meeting and if he absented himself,
a meeting could not be held for want of quorum. It was for this reason
apparently that the process of removal of Khanna had perforce to be initiated
by the induction of a friendly director in the Board by Kapoor. This appears to
be a clear genesis of the appointment of the wife of Kapoor as a member of the
Board. She was appointed a director of the company by virtue of a resolution
passed at the extraordinary general meeting of the company held on March 21,
1977. Exception is taken to this meeting by Khanna on the ground that this was
done without any notice to him but there is no substance in this objection
because this meeting, among others, was attended by Ramesh Khanna. The validity
of the appointment is, however, challenged on the ground that in terms of art.
16, permanent directors had the power by their unanimous decision
"only" to induct a new director. This is how art. 16 reads :
"16. The permanent
directors shall have power from time to time and at any time by their unanimous
decision only to appoint any qualified person as a director of the company so
that the total number shall not at any time exceed five."
It empowers the permanent
directors to appoint a director of the company only by their unanimous decision
but it is difficult to hold that there is anything in the language of the
article which excludes the exercise of that power by the company in the general
meeting. The expression "unanimous decision only" merely underscores
that the decision of the permanent directors shall be unanimous but it is
difficult to read in the article a provision that the permanent directors alone
are entitled, by unanimity or otherwise, to appoint additional directors. It
is, therefore, not possible to void the appointment of the wife of Kapoor as a
member of the Board of Directors of the company.
The next question that,
however, arises is whether Khanna had notice of the meeting of the Board of
Directors held on March 30, 1978, and of extraordinary general meeting held on
April 26, 1978, since it is claimed that these meetings had been duly held in
the absence of the Khanna group and the decisions taken at the meetings were
duly recorded in relevant minute books. According to Kapoor, a notice had been
received from G. C. Khanna, a member of the company to move a resolution for
the removal of Khanna on the ground that he was unable to discharge the duties
and responsibilities of a director by virtue of physical incapacity and a
meeting of the Board of Directors of the company was convened for March 30,
1978, by a notice of March 24, 1978, inter alia, to consider the convening of
an extraordinary general meeting in terms of the requisition received from the
shareholders; It is claimed that the notice of this meeting was duly sent to
Khanna and on March 27, 1978, under certificate of posting, an intimation with
regard to the requisition was also sent by a separate letter with which a copy
of the requisition is said to have been enclosed. A photo copy of the
certificate of posting has been produced to show that four covers were posted,
two of which were addressed to Khanna while the third and the fourth were
addressed to Kapoor and his wife on March 27, 1978. It is further claimed that
the Board met on March 30, 1978, in the absence of Khanna and decided to
convene an extraordinary general meeting on April 26, 1978, to consider the
motion for the removal of Khanna. It is interesting to notice in this context
that by a registered A. D. letter of March 23, 1978, annex. P-9, Ish Khanna and
Kanwal Khanna made a grievance to the managing director that they had not been receiving notice of the annual
general meetings or copies of the balance-sheet,
etc. A registered A. D. letter of March 27, 1978, annex. P-19, was also sent by
the wife of Khanna making a similar complaint. The meeting of the Board
convened for March 30, 1978, was obviously expected to be a controversial one since
a permanent director was sought to be removed. There was, however, no
explanation why, in spite of this, a registered notice was not sent for the
meeting even though the registered letters were being received from the Khanna
group almost at the same time when the notice was supposed to have been sent
under certificate of posting to Khanna. It has often been pointed out that
though the requirement of the Companies Act is satisfied by posting a
communication under certificate of posting, service by this mode is the easiest
stand for any one to take at any time and it is not a sheer coincidence that in
practically all controversial meetings, the party claiming to have held the
meetings and to have notified the others almost always relies on a certificate
of posting clearly pointing to the possibility that such meetings are
invariably managed rather than held. This is because of the unfortunate
circumstance that certificates of posting are readily available. If the meeting
of the Board had, therefore, been held, I see no reason why a registered A. D.
notice was not sent to Khanna even though that may not be the strict legal
requirement. The . so-called certificate of posting also does not appear to
meet the requirement of law because, in the first instance, there is no
averment that the postal covers had been duly posted and the certificate of
posting had been duly issued and received. All that has been filed is a photo
copy of a list of four names with postal stamp marking. I am not prepared to
accept these as sufficient proof of the despatch of the notices to Khanna and
in holding that they have been notified of the meeting of the Board scheduled
to be held on March 30, 1978. What I have said above with regard to the meeting
of the Board is equally true of the extraordinary general meeting said to have
been held on April 26, 1978. The extraordinary general meeting was supposed to
have been held on April 26,1978. Notice of this meeting is of March 31, 1978,
and is supposed to have been sent under certificate of posting on April 1,
1978. It is interesting to notice in this context that between March 24, 1978,
and April 24, 1978, there were at least half a dozen letters written to the
company on behalf of Khanna group which were registered A.D. covers and which remained
unreplied. These are P-7 to P-9, and three of these are registered A.D. covers.
Neither of these were replied to by the company; In that kind of a situation,
one would have expected the company to send registered A.D. notice to Khanna
whose removal was due to be considered even though it may be conceded that in
view of the reduced majority of the Khanna group by that time, partly on
account of the transfers and partly on account of the increased allotment, the
decision with regard to Khanna would have been a foregone conclusion. It
follows, therefore, that either these meetings were never held or if they were
held, Khanna was not properly notified of the same.
The question still remains,
if Khanna, a permanent director of the company, could have been removed by the
company in a general meeting in spite of the provision in the articles. If
neither of the two meetings were valid, because Khanna had no notice of these,
even though he was intended to be removed from the board, his removal is bad in
law irrespective of the way one looks at the power of the company in a general
meeting to remove a permanent director, who is appointed as such by name in the
articles. I would, however, consider the question since it was raised. No
doubt, Khanna was a permanent director named in art. 10 to hold office for
life. In terms of art. 14, he also had a right during his lifetime to nominate
his successor on the Board in the event of his death. He could, nevertheless,
be removed under s. 284 of the Act. Section 284 is based on s. 184 of the
English Act and applies to all types of companies, public and private, and the
only exceptions are those that are built into the section itself. A person
appointed as a life director or permanent director by the articles or by any
agreement is, nevertheless, removable by the company in general meeting and has
no security of tenure in office. While the shareholders have no power, apart
from that given in the statute or the articles, to intervene in the management
of the company's affairs, this section was designed to enable them to control
the directors by their removal. The only exceptions are the directors appointed
by the Central Govt. under s. 408, and life directors holding office on April
1, 1952. The only other exceptions are nominee directors of financial
institutions, with which we are not concerned. No doubt, art. 14 empowers a
permanent director to nominate a director to take his place after his death,
but even that does not save the tenure from the operation of s. 284. True, s. 184
of the English Act specifically excludes the operation of articles which s. 284
does not, but that was not necessary in view of the scheme of the Indian Act,
because s. 9 of the Act provides that the provisions of the Act would have
effect, notwithstanding anything to the contrary contained in the articles of
the company. No further provisions for exclusion of provisions in the articles
to the contrary was necessary. Khanna could have, therefore, been removed, if
the requirements of s. 284 and of a valid meeting had been satisfied. This was,
however, of no avail, because, as observed earlier, the proceedings oi the
meetings which led to the removal were invalid in the absence of notice to
Khanna either of the proposed motion, or of the proposed meeting of the Board
and the extraordinary general meeting of the company. The effect, therefore, is
that Khanna continues to be a permanent director notwithstanding his purported
removal from the Board.
The next question is as to
the regulation of the conduct of the affairs of the company in future and as to
the directions that may be necessary and proper in the circumstances to ensure
the smooth conduct of the business of the company. In view of all that has
happened, there seems to be very little possibility of the two groups being
able to get along. There are also other genuine difficulties. Kapoor has
certainly been running the show almost on his own during the last many years
since 1975-76, when Khanna got incapacitated. He must have also made not only
substantial investment, but devoted considerable time to business. Meanwhile,
Khanna has not only remained incapacitated, but on his own showing, has been
virtually blind and, therefore, obviously unable to look after the business or
even to indirectly participate in the conduct of the affairs of the company as
a member of the Board, much less as director-in-charge, to which position he
was appointed by the articles. His sons have admittedly been carrying on for
some time now an independent business in the same industry, though confined to
certain other items. He has also admitted to have given them assistance in
establishing the business by offering to mortgage his property to enable them
to raise bank credit. The Khannas were, therefore, not averse in this situation
to be bought out of the company provided they get not only a fair value for
their admitted holding, but are also paid their entitlement such as arrears of
salary of Khanna as director and towards the amount standing to their credit in
the books of account of the company, if any. Since Kapoor was responsible for
taking a series of precipitate steps to exclude Khaonas and to perpetuate his
hold over the company, Khanna would ordinarily be entitled to an option to buy
out Kapoor on reasonable terms. It would, however, not be possible to compel
Kapoor to transfer his holdings to Khanna because of the peculiar compulsions
referred to above. It is also necessary to make a provision for the smooth
functioning of the company until Khanna has been paid.
There was some controversy
between the parties with regard to the opening of a new bank account in the
name of the company by Kapoor in the Kamla Nagar Branch of the Canara Bank and
as to the accountability of the management of the company with regard to the
operation of the bank account. The opening of this account was an apparent
sequel to the instructions by Khanna to the existing banker of the company with
regard to the disputes that had surfaced between the two groups and which may
have possibly led to the disruption of the normal banking channel for the
conduct of the business of the company. In any event, whatever the compulsions
for the opening of this account, it was nevertheless the account of the company
and even though operated upon by Kapoor exclusively, he is answerable to the
company for the various transactions reflected in this account. In any event,
all the directors of a company who are conducting the business of the company
on its behalf or in its name are always accountable to the company for the funds
or property of the company that they deal with in the course of the discharge
of their duties. There was also some controversy as to how much funds each of
the groups had made available to the company in addition to their respective
contributions to the capital. Some of the credits to which the groups are
entitled are apparently duly reflected in the books of account of the company.
It is possible that some of the credit entries may be exaggerated or fictitious
as was alleged on behalf of Khanna with regard to the period during which his
group had remained ousted from the management of the company and the affairs of
the company were being managed by Kapoor. These matters can be adequately dealt
with on the completion of the accounts of the company and the preparation and
audit of the balance-sheet and profit and loss account of the company to date.
If any of the groups is not satisfied with the accounts or their audit, they
would be entitled to raise these matters in the next meeting of the Board, as also
indeed, in the general meeting of the company and solicit an appropriate
decision at any of the two levels to ensure that the rights and liabilities of
the directors and the creditors of the company qua the company are properly
reflected in the balance-sheet and they are dealt with accordingly.
Having regard to all the
circumstances, I would make the following directions:
(i) Of the total issued capital of Rs. 1,25,500, divided into 251 equity
shares of Rs. 500 each, the valid holding of the Khanna group in respect of
which they are entitled to exercise their rights is 96. The valid holding of
the Kapoor group in respect of which they are entitled to exercise their rights
would be 114. 4 shares continue to be held by Gaur. 10 shares of Kanwal Khanna
and 27 shares of Ramesh Khanna continue to be registered in their names but
having been transferred to the Kapoor group, Kanwal Khanna and Ramesh Khanna
would not be entitled to exercise any right with regard to these shares. Shares
held by Parshu Ram;were duly transferred and registered.
(ii)The additional
allotment of 102 further shares in favour of Kapoor on February 24, 1978,
having been voided, Kapoor or his nominee would not be entitled to exercise any
right in relation to these shares and would have the corresponding right to the
refund of the amount, if any, that may have been paid by him or his nominee to
the company on account of the consideration for these shares.
(iii)The removal of Khanna
from the Board is void and he throughout continued to be a permanent director
of the company as well as director-in-charge in terms of the articles. He would
be entitled to be paid the salary that was being drawn by him as
director-in-charge but only for a period of 18 months. The amount would be paid
within a period of six months by equal monthly instalments. The first
instalment would be paid over before February 10, 1981. He would continue to be
the permanent director until he resigns or is removed. He would, however, not
be entitled to draw any salary in future and would be liable to be removed in
accordance with law.
(iv)Khanna would have the
option to be purchased out of the company by Kapoor on payment of the face
value of the shares registered in the name of Khanna besides the arrears of
salary referred to above and any amount that may be found due to any member of
the Khanna group on the audit of the balance-sheet and profit and loss account
for the period ending December, 1980. The option may be exercised by Khanna
within 3 months and the payment would be made within 3 months of the acceptance
of the offer by the Kapoors. The Kapoors would be bound to accept the offer
within one week of the receipt of the same. If the Khannas do not exercise the
option, Kapoor would have the option to be bought out of the company on the
same terms.
(v)The Khanna group would
be paid such amount as may be standing to their credit in the books of account
of the company on the basis of the certificate of the auditor to be furnished
on the completion of the audit of the books of account to date. The certificate
would be furnished within 3 months and the payment would be made within 3
months thereafter in equal monthly instalments.
(vi) The Board of Directors of the company would, until the exercise of
the option or settlement between the parties otherwise, be presided over by
Justice Prithvi Raj, former judge of this court, who would be the chairman of
the company. All decisions of the Board would be unanimous, but failing that,
with the concurrence of the chairman. The business of the company would,
however, continue to be carried on during the period by Kapoor under the
overall supervision of the Board. The Chairman would be paid a remuneration of
Rs. 750 per month and would continue to hold office for a period of six months
unless it is extended by the Board or by the company in its annual general
meeting. The Company would also have the liberty to substitute any other person
acceptable to both the parties for the aforesaid incumbent as Chairman. The
chairman would generally supervise the conduct of the business of the company
and would, inter alia, explore the possibility of a smooth transition to the
exclusive control by the one or the other of the groups.
(vii) Liberty to the Chairman and to the parties to obtain
directions of the court from time to time with a view to carry out the above
directions.
(viii) C.P. No. 58/78, C.P. No. 86/78 and C.P.No.
91/78 are disposed of in the aforesaid terms.
(ix) C.P.
No. 14/79 and Cr. Misc. (Company) No. 3/80 are dismissed,.
(x) Khanna would have his costs. Counsel fee is
assessed at Rs. 750.