The
question still remains as to whether in the case of appointment as sole selling
agents of the private company for a further term, a special resolution was
necessary. The answer to this question depends upon the true construction to be
placed upon the Explanation to sub-section (1). This Explanation was introduced
by the Amendment Act of 1960. Under that Explanation, a special resolution
would be required for every appointment in the first instance to an office ot
place of profit. It is also required in the case of "every subsequent
appointment to such office or place of profit on a higher remuneration not
covered by the special resolution, except where an appointment on a time scale
has already been approved by the special resolution ". On behalf of the plaintiffs
it was submitted that the only "subsequent appointment" contemplated
by the latter part of the Explanation was where the special resolution
according consent to the appointment in the first instance provided for a
-subsequent appointment on the same terms as to remuneration or for a
subsequent appointment on a higher remuneration, and if there was no provision
in the original appointment for a subsequent appointment or for a subsequent
appointment on a higher remuneration, then the subsequent appointment would
require a special resolution. In reply it was submitted that what the original
special resolution was required to cover was not a subsequent appointment on
the same remuneration or lower remuneration but a subsequent appointment on a
higher remuneration only and that if a subsequent appointment was made on the
same remuneration or on a lower remuneration, then even though the original
agreement or the special resolution in the first instance did not contemplate a
further appointment, none-the-less such appointment would be made and the
consent of the company accorded to it by an ordinary resolution.
Now,
bearing in mind the object sought to be attained by the enactment of section 314,
the better construction appears to me to be the one advanced by the plaintiffs.
To accept the contention of the contesting defendants would be to hold that
where once an appointment to an office or place of profit is made with the
consent of the company by a special resolution for the initial maximum period
of five years, such appointment could be renewed indefinitely by repeated
subsequent appointments for the same maximum period by merely a bare majority
without such appointments being contemplated at the time of the original
appointment. Such a construction would
militate against the object underlying section 314. As mentioned before, the
object is to prevent directors from putting into their pocket, either directly
or indirectly, more remuneration, whether by way of salaries, fees, commission,
perquisites, etc., other than the remuneration to which they are entitled as
such directors. Where three-fourths of the members of the company have agreed
to a director so obtaining profit from the company, for a period of five years
only, it cannot be that they should be deemed to have given their consent to
the directors doing so for all times by repeated subsequent appointments
consented to by merely a bare majority of the members. The ordinary rule of
construction is that the one which harmonises best with the intention of the
legislature and the object sought to be attained by the enactment should be
adopted, and applying these principles of construction the view which I am
inclined to take today is that unless the appointment in the first instance, to
which the consent of the company has been accorded by a special resolution,
provides for a subsequent appointment, the subsequent appointment would also
require the consent of the company to be accorded by a special resolution
irrespective of the fact whether the remuneration to be received is the same or
lower (sic higher).
So far as the present case
is concerned, the appointment in the first instance under the agreement, dated
September 24, 1963, to which the previous consent of the company was obtained
by a special resolution passed at the general meeting held on September 23,
1963, did not contain any provision for a renewal, reappointment or continuance
of the term of the sole selling agency and therefore an the construction I am
inclined to adopt the consent of the company required to be accorded to the
further appointment was by a special resolution. The resolution passed at the
extraordinary general meeting on April 28, 1969, was an ordinary resolution. Even
the number of votes required for passing the resolution as a special resolution
were not cast in favour of the resolution. After this meeting, not taking into
account the extraordinary general meeting held on April 29, 1969, the annual
general meeting of the company was held on August 28, 1969. Under section
294(2), an appointment is to be approved by the company in the first general
meeting held after the date on which the appointment was made. If the meeting
of April 28, 1969, were held to be invalid as contended for by the plaintiffs
and not even taking into account the requisitioned meeting held on April 29,
1969, the meeting at which such special resolution was required to be passed
would be the annual general meeting held on August 28, 1969, which not having
been done, the appointment ceased to be valid.
It was next submitted on
behalf of the plaintiffs that, even assuming that in the case of a subsequent
appointment a special resolution was required only if such appointment were on
a higher remuneration, not covered by the special resolution according consent
to the appointment in the first instance, in the present case the further
appointment was in fact on a higher remuneration. In support of this submission
reliance was placed upon the said letter dated February 18, 1969, from the
private company to the company stating that the clarification contained in its
letter dated April 4, 1968, would continue to remain in force. Under the letter
of April 4, 1968, the private company agreed to accept as from 1st April, 1968,
commission at the rate of 2 per cent, on the net selling price of the company's
products as prevailing on November 5, 1967. According to the plaintiffs, even
though the intention at the date when the letter of April 4, 1968, was written
or even on February 18, 1969, may have been that the private company should
receive commission at a lower rate than what it would otherwise have been
entitled to, the possibility of the private company receiving higher
remuneration cannot be ruled out, for there is always the possibility of the
selling prices in the future being lower than those prevailing on November 5,
1967. It is said that in fact such a situation has already arisen. It is
alleged by the plaintiffs in their affidavit in rejoinder to the company's
affidavit in reply in the notice of motion in Suit No. 522 of 1969 that in June
1969 the Government of India fixed prices of synthetic rubber at rates lower
than those prevailing on November 5, 1967. In support of these allegations a
copy of a letter dated June 4, 1969, addressed by the Government of India to
the company is annexed to the said affidavit. In that letter it is stated that
with effect from June 8, 1969, the plaintiffs should market their products at
the prices not exceeding those specified in the said letter. The prices so
specified are lower than those prevailing on November 5, 1967. The reason for
the revision as stated in the said letter is that the selling prices fixed on
April 2, 1968, were on the assumption that 25 per cent, of the company's
requirements of alcohol would be met from domestic soui.:es, while the balance
of 75 per cent, would have to be met from imports, but it was found that the
actual proportion of indigenous alcohol to imported alcohol used by the
plaintiffs worked out to 40 per cent, for indigenous alcohol and 60 per cent,
for imported alcohol and that for the next 12 months the proportion would be 70
per cent, for indigenous alcohol and 30 per cent, for imported alcohol. The
answer to this is to be found in paragraph 12 of the affidavit dated July 15,
1969, of J.B. Shukla, the secretary of the private company. In that affidavit
he has not admitted that the Government of India is proposing a reduction in
the selling prices. He has further stated that:
"Assuming
while denying that there is a possibility of the prices of synthetic rubber
being reduced by Govt. below those prevailing on 5th November, 1967, I deny
that the 2nd defendants could not claim commission at the rate of 2% on the
basis of the prices prevailing as alleged".
After
making this denial he sets out to state that the intention of the private
company was that it would forgo commission on the excess if the price was
higher than that prevailing on November 5, 1967, and to claim commission at the
rate of 2 per cent, of the price actually prevailing on the date of sale or on
the price prevailing prior to November 5, 1967, whichever is lower. It is
somewhat difficult to understand these contradictory averments. By these
averments the private company is in any event denying that it cannot claim
commission at the rate of 2 per cent, on the basis of the prices prevailing on
November 5, 1967. If, therefore, the contention of the private company is that
it is in any event entitled to commission on the prices prevailing on November
5, 1967, its intention becomes irrelevant. If the intention was as alleged in
the said affidavit of Shukla, there was nothing simpler than "to have had
an express provision to that effect either in the agreement dated February 18, 1969,
or in the said letter dated February 18, 1969. It was, however, contended that
this intention was shown by the use in the said letter of the words
"clarification" and "ad-hoc arrangement". I do not find it
possible to construe these words as meaning that the private company would be
entitled to commission at the rate of 2 per cent, on the prices actually
prevailing at the date of the sale or those prevailing on November 5, 1967,
whichever is lower. It is obvious that the prices of the company's products vary
from time to time. These prices are fixed by the Government and they have
varied in the past and they may well vary in the future. There is no binding
obligation on the private company either under the said agreement dated
February 18, 1969, or under the said letter of the same date to accept
commission on the basis of the prices prevailing on the date of sale or on
November 5, 1967, whichever are lower. In fact, under clause 13 of the
agreement the terms of the agreements with respect to the rate of commission
provided in clause 12 cannot be modified by mutual agreement of the board of
directors of the company and the private company though other terms can be. Any
revision in the rate of commission will, therefore, require the mutual consent
of the company at a general meeting and the private company. To accept the
submission of the contesting defendants that the words "higher
remuneration" in the Explanation to section 314(1) cannot cover the case
of the possibility of a higher remuneration would be to defeat the object of
the section. If there is possibility in the variation of the amount of
remuneration receivable by the holder of the office or place of profit under
which such holder could receive a higher remuneration than what was provided at
the time of the appointment in the first instance, it cannot be said that the
subsequent appointment was on the same terms as to remuneration or on lower
remuneration. In this view of the matter also the consent of the company to the
appointment of the private company for a further term was required to be
accorded by a special resolution.
It
was then submitted on behalf of the plaintiffs that this was not a subsequent
appointment within the meaning of the Explanation to section 314(1), as this
was an appointment made with retrospective effect. The first appointment of the
private company expired on September 30,1968. In fact, the private company by
its letter dated August 31, 1968, pointed this out to the company and requested
it to renew the agreement on the same terms and conditions for a further period
of five years. Nothing was done thereafter until the question of the further
appointment was brought before the board of directors on November 14, 1968.
Realising that between October 1, 1968, and November 14, 1968, the private
company was acting as sole selling agents without having been appointed as
such, the resolution of the board passed at that meeting expressly provided
"that the acts and deeds of Messrs, Kilachand Devchand and Co. P. Ltd.
done on or after the 1st October, 1968, be and the same are hereby ratified and
confirmed and that for such services, they be paid commission as provided in
the said agreement dated 24th September, 1963, clarified as aforesaid".
Now, I have not been shown any power in the board of directors of the company
to make an appointment with retrospective effect. Sub-section (2) of section
294 which speaks of the appointment of a sole selling agent by a board of
directors of a company does not provide for any such appointment to be made with
retrospective effect. It was submitted that even if the directors had such
powers, the words "subsequent appointment" in the Explanation to
section 314(1) imply continuity. It was not disputed by the contesting
defendants that, if between the original appointment and the further
appointment the appointment of another person had intervened, it would not have
been a "subsequent appointment". The question is whether an
appointment made after the expiry of the period of the first appointment is a
subsequent appointment. The dictionary meaning of the word "subsequent
"as given in the Shorter Oxford English Dictionary, volume II, page
2062(1), is "following in order or succession; coming or placed after,
esp., immediately after; following or succeeding in time; existing or occurring
after, esp., immediately after something expressed or implied…….". It was
argued that such a construction would entail great hardship, for a board may
not be able to meet by reason of the circumstances beyond its control, such as
illness of directors. I am not able' to see any such hardship as; envisaged. I
fail to see why a subsequent appointment should be deferred till the last
moment. Even in the present case the private company asked for further
appointment to be made one month before the expiry of the original term. The
board could have met within that month and passed the necessary resolution.
Section 204(4) expressly makes it permissible for re-appointment, re-employment
or extension of the term of office or place of profit within two years
preceding the date on which it is to come into force" Even otherwise, the
only "hardship" is that a special resolution would be required, in my
opinion, bearing in mind the object for which the section was enacted. The word
"subsequent "implies a continuity without a break, and an appointment
for a further term not made before or on the expiry of the earlier appointment
but thereafter would not be a "subsequent appointment". I also fail
to see how the board of directors of the company acquired the power to make
this appointment and that too with retrospective effect. The Companies Act does
not confer any power upon the board of directors to appoint sole selling
agents. The effect of section 294(2) is to lay restrictions on the power of the
board to make appointments of sole selling agents provided they have such power
under the articles. Assuming the board of directors of the company had the
power to appoint sole selling agents, under article 183 of the articles of
association of the company no director or other persons mentioned in section
314 is, without the previous consent of the company accorded by a special
resolution, to hold an office or place of profit under the company or any of
its subsidiaries except as provided in the said section. Thus, except in cases
where section 314 does not require a special resolution, the board of directors
of the company would have no power to make the appointment but the appointment
would have to be made by the company itself and that too by a special resolution.
Though the requirement as to previous consent of the company under section
314(1) was deleted by the Companies (Amendment) Act, 1965, a corresponding
amendment has not been made in article 183 though several other articles in the
articles of association of the company were amended in view of the amendments
made by the Amending Act of 1965. Thus, in cases where a special resolution
would be required under article 183 the board would have no power to make the
appointment.
The
next question to be considered is, assuming the board of directors has the
power to make this appointment and that too with retrospective effect whether
this action of the board has been approved or ratified by the general meeting
held on April 28, 1969. The notice convening the meeting and the resolution set
out therein which was required to be passed does not set out that part of the
resolution of the board under which the acts and deeds of the private company
done on or after October 1, 1968, were ratified and confirmed and it was
further resolved to pay them commission in respect of services rendered for the
said period as provided in the said agreement of September 24, 1963, clarified
by the said letter of April 4, 1968. The shareholders were never informed that
for this intervening period the sole selling agents had acted without any
authority and that they were not entitled to any commission unless the same was
provided for expressly. The explanatory statement to the notice convening the
extraordinary general meeting for April 28, 1969, also does not point this fact
out to the shareholders. In these circumstances, I am doubtful whether it can
be said that any appointment with retrospective effect was ratified or approved
by the shareholders. It was conceded that an appointment for five years from
October 1, 1968, cannot be read as an appointment for five years from the date
of the resolution of the board or as an appointment for a period from November
14, 1968, to September 30, 1973. Under section 294(2) the approval of the company
must be of an appointment made by the board. The appointment made by the board
included ratification of the acts and deeds of the private company for the
period October 1, 1968, to November 14, 1968. If this was not approved, then I
very much doubt whether it can be said that there was an approval under section
294(2) to the further appointment of the private company.
The
next point relates to the validity of the two notices dated March 27, 1969,
convening the extraordinary general meetings on April 28, 1969, and April 29,
1969. The arguments here are based on the provisions of section 173(2) of the
Companies Act, 1956. The relevant provisions of that sub-section are:
"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"
According
to the plaintiffs the said notices ought to have set out the nature of the
concern or interest of the solicitor-director in the matter of the appointment
of the private company for a further term as the sole selling agents of the
company and the correspondence which took place between the company and the
Company Law Board during 1965 and 1966, particularly the said letter dated July
28, 1965, and June 15, 1966, from the Company Law Board to the company. It was
submitted that these were material facts concerning the item of business to be
transacted at the said meetings and the non-disclosure, therefore, in the
explanatory statement to the said notices invalidates the said notices. That
the item of business to be transacted at the said meetings was special business
is not disputed. The questions to be considered are whether the above facts
were material facts and if either of them was a material fact, the consequence
of the non-disclosure thereof in the explanatory statement. If the
solicitor-director was an interested or a concerned director, the nature of his
concern or interest in the further appointment of the sole selling agents was a
material fact which was required to be disclosed in the explanatory statement,
and this position is not disputed. The contention of the contesting defendants,
however, is that the solicitor-director was not a concerned or an interested
director. This point has already been considered by me in connection with the
resolution of the board of directors at its meeting on November 14, 1968, and I
have already expressed the prima facie conclusion reached by me that he had a
concern or an interest in this matter. The only question, therefore, which
remains to be considered in this connection is the consequence of such
non-disclosure. First, however, I will deal with the question whether the
correspondence with the Company Law Board can be said to be a material fact
concerning the business to be transacted at the said meetings. Now, the first
meeting was for approving the private company's appointment as sole selling
agents for a further term. The second meeting, namely, the meeting
requisitioned by the plaintiffs, was for not approving the said appointment.
Any fact which would have a relevance or bearing upon the approval or a
non-approval of the said appointment would, in my opinion, be a material fact
concerning the said items of business. The facts relating to this
correspondence may be briefly recapitulated from this angle. The said letter
dated July 28, 1965, was a show cause notice issued by the Company Law Board
under section 294(5) on the ground that it appeared to the Company Law Board
that the terms of appointment of the private company were prejudicial to the
interests of the company. By this letter the company was required to show cause
why under section 295(5)(c) the terms and conditions of the appointment of the
private company should not be varied. This matter was at that time considered
so important that a sub-committee of the directors was formed to consider it.
Ultimately, by its said letter dated June 15, 1966, the Company Law Board
decided not to take any further action in the matter at that stage. The said
communication, however, expressly stated that:
"The
Board would suggest, however, that at the time of the renewal of the agreement
with the sole selling agents in 1968, your company should bear in mind the
views of the Board which were communicated to you in their letter of even number
dated the 28th July, 1965, read with their letter of even number dated the 18th
September, 1965".
It
was submitted by the contesting defendants that this was merely a suggestion
and not a directive or an order and that the proceedings commenced by the
show-cause notice under section 294(5) having terminated, there was no
obligation to disclose this correspondence in the explanatory statement. This
argument cannot be accepted. Under section 294(5) the Central Government has
the power to require such information regarding the terms and conditions of the
appointment of the sole selling agent as it considers necessary for the purpose
of determining whether or not such terms and conditions are prejudicial to the
interests of the company. There after, if it is of the opinion that they are
prejudicial to the interests of the company, it has the power to make such
variations in those terms and conditions as would in its opinion make them no
longer prejudicial to the interests of the company. If a company refuses to
furnish such information, the Central Government has the power to appoint a
suitable person to investigate and report on the terms and conditions of the
appointment of the sole selling agents. Thus, the Central Government is
conferred wide and extensive statutory powers of control over the sole selling
agencies of companies and is constituted the statutory authority to determine
whether the terms and conditions of a sole selling agency are prejudicial to
the interests of the company or not. Under section 10E these powers of the
Central Government have been delegated to the Company Law Board. Where,
therefore, a statutory authority empowered to decide whether the terms and
conditions of the appointment of a sole selling agent are prejudicial to the interests
of the company or not, had already opined that certain provisions of the said
agreement dated September 24, 1963, were prejudicial to the interests of the
company and had expressly required the company to bear its views in mind at the
time of the renewal of the agency, it cannot be said that the disclosure of the
views of the Company Law Board to the shareholders at the time of further
appointment on terms which contained the very features objected to by the
Company Law Board was not material. The object underlying section 1 73(2) is
that the shareholders may have before them all facts which are material to
enable them to form a judgment on the business before them.
Any
fact which would, influence them in making up their minds, one way or the
other, would be a material fact under section 173(2) and had to be set out in
the explanatory statement to the notice of the meeting. The views expressed by
the Company Law Board would have certainly played a part, and perhaps an
important part, in enabling the company's shareholders to make up their minds
whether to vote for approval of the further appointment or not.
The
contention that the matter was closed by the said letter dated June 15, 1966,
is too naive and is belied by subsequent events. By its letter dated April 9,
1969, headed "Sole selling agents ; terms and conditions of appointment
under section 294(5) of the Companies Act, 1956", the Company Law Board
called upon the company to clarify how the renewed agreement was proposed for
approval of the shareholders without reference to the views of the Board
communicated to the company earlier. The concluding paragraph of that letter
stated:
"From
the perusal of the renewed agreement, it appears, prima facie, that the terms
are prejudicial to the interests of your company and this Board will have to
examine to what extent the terms and conditions require modification or
abrogation. You are, therefore, hereby informed that if any such variation is
ultimately made by the Company Law Board, the terms of the said agreement would
be effective from 1st October, 1968".
There
was further correspondence pursuant to this letter to which I will refer later.
In
Shelh Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. it was held
that section 173 enacted a provision which was mandatory and not directory.
Bhagwati J., as he then was, observed in that case:
"The
object of enacting section 173 is to secure that all facts which have a bearing
on the question on which the shareholders have to form their judgment are
brought to the notice of the shareholders so that the shareholders can exercise
an intelligent judgment. The provision is enacted in the interests of the
shareholders so that the material facts concerning the item of business to be
transacted at the meeting are before the shareholders and they also know what
is the nature of the concern or interest of the management in such item of
business, the idea being that the shareholders may not be duped by the
management and may not be persuaded to act in the manner desired by the
management unless they have formed their own judgment on the question after
being placed in full possession of all material facts and apprised of the
interest of the management in any particular action being taken. Having regard
to the whole purpose and scope of the provision enacted in section 173, I am of
the opinion that it is mandatory and not directory and that any disobedience to
its requirements must lead to nullification of the action taken. If, therefore,
there was any contravention of the provisions of section 173, the meeting of
the company held on 5th September, 1961, would be invalid and so also would the
resolution passed at that meeting be invalid".
The
same view was taken by a Division Bench of the Calcutta High Court in Shalagram
Jhajharia v. National Co. Ltd That was a
case of a resolution to approve under section 294 the appointment of sole
selling agents. In that case Mitter J. observed :
"It
is well known that if a company can sell its products without the employment of
agents its profits would be substantially higher than in case where the selling
was done through agents. On the other hand it cannot be ignored that selling is
best done through an organization of experts and specially when sales have to
be made to overseas customers the employment of an overseas agent is almost a
necessity. As the legislature has thought it fit to provide that shareholders
must approve of the appointment of selling agents the opportunity given to the
shareholders must be full and complete and there must be a full and frank
disclosure of the salient features of the agency agreement before the
shareholders can be asked to give their sanction. The provision for inspection
of the agreement at the registered office of the company is not enough. Few
shareholders have either the time or the inclination to go to the registered
office to find out what the company is about to do. Moreover, such an
opportunity is illusory in the case of shareholders who do not live in Calcutta
when the registered office is situated here".
Section
71 of the Companies Clauses Consolidation Act, 1845, required every notice of
an extraordinary meeting or of an ordinary meeting to specify the purpose for
which the meeting was called. In Kaye v. Croydon Tramways Company the
defendant company entered into an agreement to sell its undertaking to another
company under which the purchasing company agreed to pay, in addition to the
sum payable to the selling company, a substantial sum to the directors of the
selling company as compensation for loss of office, and the agreement was made
conditional upon its adoption by the shareholders of the selling company. The
resolution approving the agreement was passed by a large majority
notwithstanding the plaintiff's opposition. Thereupon the plaintiff commenced
an action and served a notice of motion for an injunction to restrain the
selling company from carrying the agreement into effect. The notice calling the
meeting stated that the meeting was convened for the purpose of considering the
agreement for the sale of the undertaking of the selling company to the
purchasing company. It further stated that the directors and the secretary had
agreed to retire on being paid a lump sum as compensation for their loss of
office. The Court of Appeal held that the notice had been "most artfully
framed to mislead the shareholders "since a very considerable portion of
that, which was part of the consideration for the purchase, was not to be paid
to the vendors but was to be paid to the directors and officers of the selling
company. Lindley M.R. said at pages 369-370 :
"It
is a tricky notice, and it is to my mind playing with words to tell
shareholders that they are convened for the purpose of considering a contract
for the sale of their undertaking, and to conceal from them that a large
portion of that purchase-money is not to be paid to the vendors who sell that
undertaking………….. I do not think that this notice discloses the purpose for
which the meeting is convened. It is not a notice disclosing that purpose
fairly, and in a sense not to mislead those to whom it is addressed".
The
Court of Appeal, accordingly, granted the injunction prayed for subject to this
that it left the selling company free upon a proper notice to sanction the
agreement. It is pertinent to note that section 71 of the Companies Clauses
Consolidation Act was similar to section 172(1) of the Companies Act, 1956,
which requires every notice of a company to contain, inter alia, a statement of
the business to be transacted thereat and that there was no provision in the
Companies Clauses Consolidation Act similar to the mandatory provision of
section 173(2).
It
is alleged in the affidavits in reply filed on behalf of the company and
Tulsidas that the explanatory statements to the notices of the meeting held on
April 28, 1968, and April 29, 1968, respectively, were placed and generally
approved at the board meeting held on March 27, 1969, at which Reighley was
also present, the suggestion being that Reighley and through him the plaintiffs
had approved both the said explanatory statements. It was submitted that even
in their requisition dated March 17, 1969, for calling an extraordinary
meeting, in the explanatory statement which the plaintiffs required to be
included in the notice convening such meeting, they had not required the fact
either of the interest or concern of the solicitor-director or the said
correspondence with the Company Law Board to be set out. Now, when one turns to
the minutes of the board meeting held on March 27, 1969, it is apparent that
the only discussion about the explanatory statements was with respect to the
requisitionists' meeting, when the solicitor-director pointed out that the
statement of facts set out in the requisition should be sent to the
shareholders with the notice of the requisitioned meeting and, as the said
statement was silent regarding the directors' interests in the resolution, the
same should be added. There is no mention in the minutes of the explanatory
statement in respect of both the said meetings being placed before or generally
approved by the board as alleged. Further, by their said requisition dated
March 17, 1969, the plaintiffs did not set out the whole of the explanatory
statement to be incorporated in the notice. What they did was to make a request
that in the explanatory statement which would be annexed to the notice the
statement set out by them should be included. They were thus anxious that
certain facts should be included and not that they did not want other material
or relevant facts to be excluded. It is the duty of the company acting through
its board to incorporate in the explanatory statement all material facts
concerning the item of special business to be transacted at a meeting. At the
said board meeting held on March 27, 1969, one of the resolutions passed was
that the secretary of the company should send out notices of the said two
meetings together with the explanatory statements in consultation with the
solicitors of the company. This shows that neither the explanatory statements
nor their drafts thereof were placed before the board meeting, much less
approved.
It
was next sought to be contended that the plaintiffs had knowledge of the
correspondence and of the interest and concern of the solicitor-director and,
therefore, they could not. complain about the same and that it is only a
shareholder who was ignorant of these facts who could make such a complaint. In
support of this contention reliance was placed first upon Parashuram Detaram
Shamdasani v. Tata Industrial Bank Ltd. In that
case the Tata Industrial Bank decided to amalgamate with the Central Bank of
India Ltd. and an agreement of amalgamation was entered into. A meeting of the
shareholders was called for approving the scheme. The plaintiff who had in the
past adopted a hostile attitude towards the bank, which attitude was known to
the shareholders, opposed the scheme. On a poll being demanded, there were
5,25,249 votes in favour of the resolution, while only 369 votes were cast
against, and out of these 369 votes 100 votes being of the plaintiff and 10 of
his brother. The plaintiff and his brother filed a suit challenging the
resolution. The plaintiff's suit and appeal were dismissed and he filed an
appeal to the Privy Council which too failed. The Privy Council observed that
the fact that the action was personal to the appellant was unfortunate for him
as he knew before the first meeting everything about the scheme that was to be
known and that he had written open letters to the shareholders and no possible
complaint of the notice or circular on the ground of insufficiency was,
therefore, open to him. On a perusal of the notice their Lordships came to the
conclusion that it was in no way questionable. Another of the plaintiff's complaint
was that he was denied a hearing at the general meeting. The court held that on
the evidence it appeared that "there was no organised opposition ; there
was a very clearly expressed indication by the shareholders that they did not
desire further to hear the appellant, and what really happened was that the
appellant desisted from any further effort to make himself heard because even
he realised that no further speech from him would be of any avail ".
Reliance was also placed upon Maharani Lalita Rajya Lakshmi v. Indian Motor Co.
(Hazaribagh) Ltd. in which
the Privy Council decision in Shamdasani's case was
followed, and upon Kalinga Tubes Ltd. v. Shanti Prasad Jain, which was
affirmed by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. Relying
upon these authorities it was sought to be contended that the plaintiffs,
having full knowledge of the facts which according to them were not disclosed
in the explanatory statements, had no right to challenge the validity of the
notices on this ground and were estopped from doing so. There is, however, no
such plea in any of the affidavits in reply, and this question really does not
arise for my consideration, but as this question was argued at some length and as
the contesting defendants insisted that they could spell out such a plea from
their affidavit in reply—which they have not been able to do—I will shortly
deal with the same. In my opinion, none of these authorities support the
contesting defendants. Each turns upon its own facts. The Privy Council
decision in Shutndasani's case was under
the Indian Companies Act, 1913, which did not contain any section corresponding
to section 173(2) of the 1956 Act. Regulation 49 of Table A of Schedule 1 of
the 1913 Act, intel alia, required that, in case of special business, the
general nature of that business should be set out in the notice. This
regulation corresponds to section 172(1) of the 1956 Act which requires every
notice of a meeting to contain a statement of the business to be transacted
thereat. The Privy Council did not have to decide the question of a mandatory
statutory provision, non-compliance with which would invalidate the notice. The
Privy Council held that there was nothing questionable about the notice. The
plaintiff who had a long history of dispute with the bank was in a hopeless
minority. The shareholders did not appear to have put any faith in any
statement made by him. They did not even desire to hear him further. The
action, therefore, was, on the face of it, personal only to him and his
brother, who held between them 110 out of 5,25,618 votes, but of which 5,25,249
votes were cast in favour of the resolution. The Calcutta case was of an
application under section 397 of the 1956 Act, and what was contended was that
failure to comply with section 173(2) made it a case of oppression in
conducting the affairs of the company. The court held that it could not be oppression
because breach of section 173(2) could make the meeting called invalid and no
more, and if such a meeting was invalid, the Companies Act provided procedure
for calling valid or regular meetings or for regularising irregular
proceedings, a right which was open to every shareholder. The case of Kalinga
Tubes Ltd. v. Shanti Prasad Jain was also a
case under sections 397 and 398 of the Companies Act. There was no plea as to
the invalidity of the notice taken in the petition or in the affidavits, but at
a late stage of the case oral submissions were made challenging the validity of
the notice on the ground of non-compliance with section 173(2). As the High
Court expressly pointed out, no question arose about the disclosure of any
interest of, any director and the only contention on this aspect of the case
was that the notice was invalid for want of necessary particulars in the
explanatory statement. On examining the explanatory statement the High Court
came to the conclusion that it was comprehensive enough and was in compliance
with the statutory requirements. The court further pointed out that had any
objection been taken in the petition at the earliest instance, the appellant company
could have shown that no such material fact was relevant or could have been
given. The court observed at page 215 :
"In
particular cases, the omission to state the material facts may invalidate the notice
and consequently may hit the relative resolution passed in a meeting of the
shareholders who might be completely misled by the terms of the notice".
In
this case also the plaintiff was in a hopeless minority, and the court held
that in that view of the matter, any amount of elucidation in the explanatory
statement would not have been of any avail. The court also observed that,
assuming only material facts had been omitted from the notice, the mere
omission of such facts would not per se invalidate the notice and the
resolution passed in the meeting. It further held that what are material facts
and what is the nature and extent of interest under section 173(2) are
questions of fact depending on the facts of each case and the party who knew
the real nature of the transaction could not complain of the insufficiency of
the notice. The court held that, in the facts of that particular case, they
were not concerned to look to the interest of absentee shareholders. Before the
Supreme Court, however, the appellant, Shanti Prasad Jain, was not allowed to
urge this point inasmuch as the objection was not taken in the petition, and as
the point was a mixed question of fact and law, the court further added:
"We
may add that, though the objection was not taken in the petition, it seems to
have been urged before the appeal court. Das J. has dealt with it at length and
we would have agreed with him if we had permitted the question to be raised. This
attack on the validity of what happened on March 29, 1958, must thus fail"
Now,
what Das J. in the High Court really held was that the explanatory statement
was comprehensive and that there was no non-compliance with section 173(2) and
that what are material facts including the nature or concern of a director were
questions of fact depending on the facts and circumstances of each case. The
rest of what Das J. observed was really in the nature of an obiter. Even, on
the facts, the present case stands on a wholly different footing. There is no
question of the plaintiffs being in a hopeless minority. They have secured,
even as declared by Tulsidas himself, about 48 per cent, of the votes cast.
Admittedly, the Life Insurance Corporation of India which, along with its
subsidiaries held about 13,000 shares, had voted against the resolution.
Looking to the slight difference between the respective shareholdings of the
plaintiffs and the Kilachand group, in this case what really counted were the
votes of the independent shareholders. It is with reference to the effect on
them and the consequent result of the plaintiffs not being able to secure their
votes that the case must be considered. It was urged that in the statements
issued by the plaintiffs, both by way of circulars to the shareholders and by
advertisements in the newspapers asking for support, they had not only pointed
out that the solicitor-director was interested and concerned but had also
referred to the letter of the Company Law Board of July 28, 1965, read with the
letter of September 18, 1965, and the letter of June 15, 1966, and, therefore,
the shareholders had a correct picture before them and could not be said to be
misled by any omission in the explanatory statements. This is not correct and
the argument does not present a true picture. The various circulars and
advertisements have been put in by consent as exhibits. Exhibit A is a
statement issued by Ruia, Kirloskar and the solicitor-director, while exhibit B
is an advertisement containing the statement of the private company. All the
three directors in their statements have asserted that they were the only
independent directors. If the correct position with respect to the
solicitor-director is as I have opined above, this was itself a misleading statement.
The circulars and advertisements of the plaintiffs were in reply to the
statements of the directors, and the advertisement given by the private company
followed upon this. In the private company's statement it is stated that:
"The
Company Law Board had gone into this appointment in 1965, and, after a careful
examination, overruled the objections raised by Firestone in a full-fledged
memorandum and cleared the terms. The Company Law Board had, however, remarked
that ' at the time of the renewal of the agreement with the sole selling agents
in 1968……..', thus visualising the renewal of the agreement in 1968".
This
again is a misleading statement, for the relevant and important words in the
Company Law Board's communication, namely, that "your company should bear
in mind the views of the Board which were communicated to you in their letter
of even number dated 28th July, 1965, read with their letter of even number
dated 28th September, 1965", were omitted and substituted by dots, thus
suggesting that the Company Law Board had no objection to the renewal of the
agreement in the same form in 1968. In my opinion, this omission is deliberate
and made with the intention to mislead, particularly in view of the letter
dated April 9, 1969, from the Company Law Board to which I have already
referred above, which letter was certainly known to Tulsidas but most certainly
not known to the other shareholders of the company. This statement of the
private company appeared in the newspaper "Indian Express" of April
15, 1969, and in the newspaper "Financial Express" of April 16, 1969,
that is, after the receipt of the said letter of April 9, 1969. Secondly, in
the light of what was stated in the said communication from the Company Law
Board of June 15, 1966, the statement that the Company Law Board had cleared
the terms of the sole selling agency was hardly a fair or a true statement. All
that the Company Law Board did was to say that it had decided not to take any
further action under section 294(5) at that stage but had clearly indicated
that unless the objections raised by the Company Law Board were taken into
account at the time of the renewal of the agreement, further action would be
taken. The shareholders had thus before them a conflicting picture and at least
with respect to the relevant facts a misleading picture as presented by the
Kilachand group and those supporting it. The plaintiffs' objection to the
validity of the notice, therefore, cannot be dismissed so lightly on the ground
of their own knowledge of its infirmity as contended by the contesting
defendants. On the contrary, in my opinion, the plaintiffs' objections are
well-founded and, consequently, the said notices and meetings, particularly the
notice for the meeting of the 28th April and the meeting held on that day, and
the resolution passed at that meeting are invalid. Closely connected with this
point is the objection of the plaintiffs with reference to the non-disclosure
of the Company Law Board's said letter of April 9, 1969, to the shareholders at
the meeting of the 28th April. Tulsidas as the chairman of the board of
directors took the chair at the said meeting of the 28th April. It was
submitted on behalf of the plaintiffs that, since Tulsidas was vitally
interested in the said resolution, he deliberately suppressed from the
shareholders the receipt of the said letter so as to keep back from them the
knowledge that the Company Law Board was objecting to the said further
appointment. Tulsidas's answer is to be found in paragraph 15 of his
affidavit-in-reply affirmed on August 14, 1969. The relevant portion is:
"I
say that by the said letter, the Company Law Board only sought clarification
from the 1st defendant company which was given by the 1st defendant company by
its letter dated 22nd April, 1969. I say that there was no necessity for the
said letter dated the 9th April, 1969, being circulated to the board of
directors of the 1st defendant company as the same had been adequately dealt
with and, as no further communication had been received from the Company Law
Board, the said letter dated the 9th April, 1969, was dealt with in the
ordinary course after consulting the solicitors of the 1st defendant company. I
deny that the said letters dated the 9th April, 1969, and 22nd April, 1969,
were wrongfully or with mala fide intention suppressed as alleged. I say that
the said letter and the reply was placed at the first board meeting of the 1st
defendant company held thereafter".
Very
much the same statements are made in the affidavit-in-reply filed by Dabke, the
secretary of the company, on behalf of the company. The board meeting referred
to in Tulsidas's affidavit was held on June 25, 1969. At least one thing is
obvious on Tulsidas's own statement, that it was necessary to place the said
letter before the board. Bearing this in mind let us examine the bona fides of
Tulsidas. By his letters of April 9, 1969, and April 22, 1969, Reighley called
upon Tulsidas as the chairman of the company to call a meeting of the board of
directors immediately. Copies of these letters were sent to all the directors.
It appears that these letters were written as Reighley desired
that the procedure to be followed at the said extraordinary general meetings
should be discussed and agreed upon at a board meeting. No meeting was, however,
called until June 25, 1969. Now, if any such board meeting were called,
obviously Tulsidas would have had to place this letter from the Company Law
Board before the board of directors and Reighley would have come to know about
it. Reighley learnt about this letter only when in the newspaper of April 30,
1969, it was reported that Mr. Fakhruddin Ali Ahmed, the Minister for
Industrial Development and Company Affairs, had stated in the Lok Sabha on
April 29, 1969, that the Company Law Board had recently asked the company for
an explanation as to why the recommendations of the Company Law Board were not
included in the agreement of February 18, 1969. Thereupon, Reighly by his
letter dated April 30, 1969, called upon the secretary of the company to
immediately let him have a copy of the said communication and any
correspondence relating thereto and further stated that no reply should be sent
thereafter unless he had an opportunity of seeing the draft thereof.
Thereafter, Reighley was given inspection of the said letter dated April 9,
1969, and the company's reply dated April 22, 1969. The reply of April 22,
1969, is signed by Dabke. The astonishing thing about this reply is that
according to the affidavits-in-reply of Tulsidas and Dabke, Tulsidas by himself
dealt with the letter "in the ordinary course "after consulting the
solicitors of the company, namely, the firm of Messrs. Daphtary, Ferreira and
Diwan. Now, was Tulsidas a proper party to deal with this letter and keep the
knowledge of both the letter and the reply to himself until the fact that there
was such a communication came out by reason of the statement made by the
Minister in the Lok Sabha ? Tulsidas was the person vitally interested in the
further appointment of the private company as sole selling agents. As will be
shown later, while dealing with another aspect of the case, but for the sole
selling agency commission received by the private company its actual working
for the year ended September 30, 1968, would have shown a loss. On the previous
occasion when communication was received from the Company Law Board, that is,
in 1965, the matter was considered so important that a sub-committee of
directors was appointed to deal with it. Why were the objections of the Company
La Board to the further appointment dealt with in this fashion by Tulsidas
alone ? Tulsidas's explanation that it was not necessary to circulate the
letter as no further communication had been received from the Company Law Board
after the company's reply of April 22, 1969, is untenable on the face of it.
What was required to be circulated to the directors was the letter of the
Company Law Board before any reply was sent thereto. According to Tulsidas, the
matter was important enough to require consultation with the solicitors of the
company but not important enough to place before the board of directors. The
plaintiffs' contention that a board meeting was not called in April, 1969,
though repeatedly requested by Reighley because, otherwise, this correspondence
would have come to the knowledge of Reighley and through him to the knowledge
of the shareholders appears, therefore, to be well founded. No one can be naive
enough to believe, as Tulsidas expects it to be believed, that because no
further communication had been received to the company's reply dated April 22,
1969, between April 22, 1969, and April 28, 1969, the Company Law Board had
dropped the matter and it was, therefore; not necessary to apprise the
shareholders about this correspondence. The contention in the affidavits-in-reply
of Dabke and Tulsidas that it was for this reason that the said correspondence
was not disclosed at the said extraordinary general meeting does not reflect
credit upon them, and in this connection what transpired subsequently is
instructive. By the letter dated August 29, 1969, a copy of which is put in by
consent and marked as exhibit No. 1, the Company Law Board called upon the
company under section 294(5)(a) of the Companies Act to furnish certain
information regarding the terms and conditions of appointment of the private
company as selling agents of the company for a further term. There are in all
16 items in respect of which such information is required to be furnished. The
margin of difference between the votes for and against the impugned resolution
was very narrow, and, in my opinion, this correspondence may have well
influenced the necessary number of shareholders to vote against the resolution
even assuming the result of the poll as declared by Tulsidas was correct.
It
was also submitted on behalf of the contesting defendants that the Company Law
Board's letter of April 9, 1969, showed non-application of mind, that it was
addressed by some under-secretary and the facts on which it was based were not
existing facts, and for the said reason also it was not required to be
communicated to the shareholders. It is not necessary to go into the rival
contentions as to the validity or otherwise of the objections raised by the
Company Law Board and whether some of the facts which existed at the time of
the Company Law Board's objections in 1965 continued to exist in 1969, for one
thing is clear that Tulsidas, the person most vitally interested and concerned,
cannot be the sole judge of this. It was his duty to place these letters before
the meeting of the shareholders. Whatever had to be pointed out to the
shareholders could have been mentioned by Tulsidas at the meeting and it would
have been then for the shareholders to consider the Company Law Board's
objections and Tulsidas's explanation thereto. The submission that the letter
was signed by Some under-secretary is hardly worthy of mention. It is true that
the letter is signed by the under-secretary to the Company Law Board in the
same way as the earlier communications from the Board, but it is clear from the
letter itself that it is a communication from the Company Law Board. In fact,
the said letters dated July 28, 1965, and September 18, 1965, were also signed
by the under-secretary to the Company Law Board. These were, however, not
treated as letters from some under-secretary and not from the Company Law
Board. This letter of April 9, 1969, and the company's reply remained in the
exclusive knowledge of Tulsidas, Dabke and the company's solicitors and were,
in my opinion, deliberately kept back from the knowledge of all other
shareholders and directors with a view to see that the said resolution of
further appointment of the private company as sole selling agents should be got
passed. In Tiessen v. Henderson Kekewich J.
pointed out that:
"………..the
vote of the majority at a general meeting, as it binds both dissentient and
absent shareholders, must be a vote given with the utmost fairness—that not
only must the matter be fairly put before the meeting, but the meeting itself
must be conducted in the fairest possible manner".
To
repeat the words of Mitter J. in Shalagram Jhajharia v. National Co. Ltd.:
"As
the legislature has though it fit to provide that shareholders must approve of
the appointment of selling agents the opportunity given to the shareholders
must be full and complete and there must be a full and frank disclosure of the
salient features of the agency agreement before the shareholders can be asked
to give their sanction".
In
the present case it cannot be held that the shareholders were given a full and
complete opportunity or that there was a full, and frank disclosure, and I am
inclined to accept the plaintiffs' case that the resolution, said to be passed
at the meeting of April 28, 1969, falls in the well-known category of
resolutions obtained by trick.
I
will now deal with the other objections of the plaintiffs to the meeting of
April 28, 1969. The main amongst these are that Tulsidas was not entitled to
take the chair at the said extraordinary general meeting, that he had ho right
to give any decision as to the validity of any proxy or letter of revocation
after the votes were cast and that the decisions he has given with respect to
such objections are bad in law and are prompted by a mala fide motive of
invalidating as many votes in favour of the plaintiffs as possible in order to
secure a majority for the resolution approving the appointment of the private
company for a further term. It was submitted on behalf of the contesting
defendants that under article 92 of the articles of association of the company
the chairman of the directors, if present and willing to take the chair at -any
general meeting, whether annual or Extraordinary, was entitled to do so. It was
further submitted that, in order to show his fairness, Tulsidas had expressed
his willingness to vacate the chair in favour of any person who was unanimously
agreed upon to take the chair in his place and had even suggested the name of
another director of the company, Pratap Bhogilal,
but Reighley had objected thereto and so Tulsidas continued to act as chairman.
This gesture was to my mind a meaningless one, because from the nature of
things no one could have expected at the said meeting any agreement, upon any
subject at the said meeting. It was further stated that since article 92
authorises the chairman of the directors to take the chair at a general meeting
and as the articles of association of a company form a contract between the
company and the members and between the members inter se, the members had
agreed to an interested person being the chairman of every general meeting
inasmuch as the majority of the business which comes up before a general
meeting relates to the acts of directors. This argument does not appear to me
to have any relevance. What was before the meeting was not the act of Tulsidas
as a director in which he was concerned or interested as a director to see that
the same should be upheld by the meeting. What was before the meeting was the
approval of an agreement entered into between the company and the private
company controlled by Tulsidas under which the private company and, therefore,
indirectly, Tulsidas, were to receive considerable amounts by way of
remuneration and profit. In this matter Tulsidas, in his capacity as a
director, had not taken any part in the resolution of the board passed at its
meeting held on November 14, 1968. His interest in the item of business before
the meeting was, therefore, not in his capacity as director of the company but
in his capacity as director and member of the private company and as the person
controlling the private company, and it was his personal interest which would
be vitally affected if the resolution was not passed. I was referred to certain
authorities in this connection, but I do not propose to discuss them or to go
further into this question inasmuch as for the purposes of these notices of
motion, I am prepared to assume that Tulsidas was entitled to take the chair.
Nonetheless, I am of the opinion that any presumption of bona fides which may
attach to the acts of an independent chairman cannot be applicable to
Tulsidas's acts, in the present case. Similarly, I do not propose to consider
the elaborate arguments advanced and the number of authorities and passages
from text books cited before me as to when a poll is said to be completed. I
will also assume for the purposes of the present notices of motion that
Tulsidas was entitled to give his decision on the validity of the proxies and
of the letters of revocation at the time when he did. So far as the question of
directions or decisions given by Tulsidas on the validity of the proxies and
letters of revocation is concerned, it was submitted on behalf of the
contesting defendants that the defendants would fail if such directions or
decisions were bad in law. It was further submitted that short of fraud in the
conduct of the meeting or in the declaration of results or manifest error of
law in the directions and decisions given upon questions of validity of proxies and revocations, the
decisions and directions of the chairman cannot be challenged. For the
purposes of these notices of motion I will accept this proposition
without going into the authorities and the rival submissions in that behalf.
Even then, in my opinion, the result as regards these notices of motion must be
the same. Even assuming that any presumption of bona fides would attach
to the action of Tulsidas as the chairman of the meeting, such presumption is
rebutted by the conduct of Tulsidas in deliberately suppressing from the
meeting the said letter of April 9, 1969, from the Company Law Board to the
company and the company's reply dated April 22, 1969, thereto as also the other
circumstances to which I will presently refer. Further, as will be pointed out,
several decisions or directions given by Tulsidas cannot be supported in law
nor was any attempt made to justify them as being correct in law. If so, the
result declared by Tulsidas cannot be
said to be the true result of the meeting. I may also point out that while
article 97(2) of the articles of association of the company makes the
declaration of the chairman, whether on a show of hands a resolution has or has
not been carried, or has or has not been carried either unanimously or by a particular majority, conclusive evidence of that
fact, without proof of the number or proportion of the votes cast in favour of
or against such resolution, there is no such provision with respect to the
declaration of the result of a poll. Under article 98(6) it is only the
decision of the chairman on any difference between the scrutineers appointed by
the chairman to scrutinise the votes given on the poll and report to him which
is made conclusive and not his declaration of the result of the poll.
Before
I deal with the decisions or directions given by Tulsidas, a few further facts
which are important on this aspect of the case require to be set out. In the
plaint in Suit No. 681 of 1969 the plaintiffs have made a grievance that the
company through its secretary got some data fed into the computers maintained
by the Tata Consultancy Services, Bombay, and that the proxies lodged at the
registered office of the company were wrongfully caused to be removed to the
Tata Consultancy Services on April 26, 1969, and thereafter and that when such
data was fed, neither the scrutineers nor the plaintiffs were on the scene and
the fact that on that date the scrutineers were not even appointed and
the data was fed into the computers was known only to Tulsidas and Dabke and
that till today no one else knows the nature of such data or the accuracy or
sufficiency thereof or the sufficiency or accuracy with which answers or
results were obtained from the computers. The plaintiffs have submitted that
for this reason the result, purported to be declared from the alleged result
obtained from the said computers, is not valid and binding. Now, the position
with respect to the appointment of Tata Consultancy Services is as astonishing
as that relating to the Company Law Board's said letter of April 9, 1969. Just
as in the latter case Tulsidas on his own purported to deal with the said
letter and to reply thereto, so here Dabke, the secretary of the company, on
his own, without consulting the board of directors and without any authority
from the board of directors, engaged the services of the Tata Consultancy
Services. The services to be performed by the Tata Consultancy Services are set
out in their letter of April 15, 1969. They agreed to transcribe the names of
shareholders and joint shareholders along with their holdings into cards and
transfer them on to a magnetic tape provided this data was supplied to them by
April 19, 1969. This master tape was then to be sorted in dictionary order in
order to produce alphabetical index which would be used by the company's share
department to identify the shareholders giving the proxies. Further,
information regarding proxies and the revocations was to be punched into cards
and a proxy register was to be printed showing separately for the Kilachand
group and for the plaintiffs the following particulars, namely, (a) name of the
shareholder, (b) the total number of shares held, (c) proxy number, (d) the
date of proxy, (e) number of shares against the proxy, (f) date of revocation,
if any, (g) revocation number, and (h) number of shares against the revocation.
After the polling had taken place, information from the polling papers were to
be picked up and a fresh register showing the latest position of the polled
proxies was to be prepared. The register would flag those cases where the
proxies could be disputed, helping to avoid, as stated in the said letter,
"unnecessary screening of valid proxies". It appears that the Tata
Consultancy Services were paid a sum of Rs. 20,000 for this work. There is no
resolution of the board meeting authorising the engagement of the Tata
Consultancy Services or the payment of such amount to them, except that the
fact that such payment had been made was intimated to the board of directors at
its meeting held on June 25, 1969. In justification of his action Dabke sought
to rely in his affidavit-in-reply upon a previous instance when similar
assistance was taken from the International Business Machines Corporation.
According to him, in 1960, when the company's shares were oversubscribed to
about 60 times the face value of the shares offered to the public, assistance
of the International Business Machines Corporation was similarly taken for
processing allotment letters and refund orders, etc., and at that time also no
resolution of the board of directors was passed sanctioning such procedure, and
it was the secretary and the office staff who attended thereto. Now, I fail to
see what analogy there is between the two cases. Processing of allotment
letters and refund orders was not a contested matter, while here there was a
hotly disputed question on which the directors and shareholders were sharply
divided. It is also alleged that Dabke had informed the directors of the
company, including Reighley, about this arrangement. That Reighley gave his consent to it does not seem to be borne out by the
record. Why this was not put before and resolved upon at a meeting of the board
of directors, even though the plaintiffs were insisting that such a meeting
should be called, is a question which has not been answered in the
affidavits-in-reply. According to the affidavit-in-reply made by Dabke, he got
prepared a list of shareholders on the register of the company together with
the folio number, number of shares held by them, the names of the joint
holders, if any, and their adresses and sent it to the Tata Consultancy
Services for preparing the master tape. This appears to have been done prior to
April 26, 1969. On the basis of this data the master tape was prepared by the
Tata Consultancy Services and ari alphabetical index in the dictionary order
was made and submitted by them to the company. After receipt of the proxies, a
rubber stamp was put on each proxy indicating by means of the letters 'F', ' K'
and ' G ' whether such proxy was in favour of the plaintiffs or the Kilachand
group or was' in favour of an independent party, the letters 'F', 'K' and 'G'
standing respectively for "Firestone", "Kilachand" and
"General". To these proxies was given a register folio number,
serially numbered. Different serial numbers were given to the proxies lodged in
favour of Reighley and Tulsidas. The proxies which were serially numbered were
grouped according to the letters of the English alphabet and folio numbers were
put thereon with the help of the staff of the company. It is alleged that at
the said time many of the proxies in favour of Reighley and two others did not
state the name of the shareholder but merely stated "I, the undersigned
"and bore at the bottom the signature "purporting to be that of the
shareholder "and that in many of such cases it was not possible to
decipher the name of the shareholder from the signature or to relate the name
of the purported shareholder "as appearing on the proxy register of
members" in spite of diligent efforts by the staff of the company. Folio
numbers were, therefore, not given to such proxies and such proxies are
referred to as "untraceable "in the affidavit-in-reply. After the remaining
proxies were arranged as aforesaid and numbered and stamped with the relevant
letter, they were sent under armed escort to the Tata Consultancy Services in
the company of two representatives of the plaintiffs, two of the private
company and two of the company for preparation of proxy analysis which
accordingly was done by them. It is alleged that the said arrangement of taking
and bringing back proxies to and from the Tata Consultancy Services was arrived
at on April 26, 1969, in consultation with Ramdas, Reighley, Warner and their
solicitor and the solicitor-director. The said proxies were removed on 26th and
27th April, 1969, from the' company's office to the office of the Tata
Consultancy Services. It is alleged that the plaintiffs had deputed their own
representatives to accompany the said proxies as well as deputed their
representatives to supervise the return of the said proxies. It is said that
there could be no question of consulting the scrutineers when data was fed into
the computers prior to April 28, 1969, since on that date no scrutineers were
appointed. Prior to the date of the said meeting held on April 28, 1969, after
the master tape had been so prepared from the data supplied as aforesaid, the
data with respect to the proxies was fed into the computers for processing on
the 26th and 27th April, 1969. After the date of the said meeting the data
relating to the revocation letters received was further fed into the computers
"in order that the 1st defendant company and/or the scrutineers may have a
complete picture and/or a register of the proxies and revocation letters lodged
with the 1st defendant company". It is further alleged that the
scrutineers were present at the time the data relating to revocation letters
was fed into the computers. Paragraph 42 of the said affidavit further alleges
:
"As a result of the
feeding of this data the scrutineers and the 1st defendant company had before
them a register showing the names of shareholders, number of shares held by
them, the proxies and the revocations, if any, given by them. The validity of
the proxies and the revocations was thereafter subsequently determined by the
chairman and/or under his directions in accordance with his decisions and
directions given in his letter dated 26th June, 1969, to me. As the scrutineers
were not concerned and/or were not entitled to determine the validity or
invalidity of the proxies they were not informed of the further data regarding
the validity of the proxies which was fed to the computers subsequent to the
said letter……..I say that even the 2nd defendant was not aware of the actual
data fed into the computers at the time the same was fed into the computers. I
further say that the scrutineers had themselves checked the register of proxies
obtained from the Tata Consultancy Services on 14th May, 1969, as also the work
done by the office of the 1st defendant company."
In his affidavit-in-reply
Tulsidas has supported what Dabke has alleged, stating that Dabke informed him
about the said facts. Certain averments made by Tulsidas in paragraph 20 of the
said affidavit-in-reply are important and require to be quoted :
"I say that I was not
aware of the actual data which was fed into the computers at the time the same
was fed into the computers. I say that necessary data was fed into the computer
by the secretary of the 1st defendant company in consultation with the Tata
Consultancy Services. I say that the further data that was fed into the said
computer after 26th June, 1969, was based upon my decisions on the validity or
otherwise of various proxies and letters of revocations…….I say that, as
explained above, the scrutineers know the nature of the data fed except the
data which was fed after I had given my decisions aforesaid." The
plaintiffs have denied any prior knowledge, consent or approval of Reighley, Warner or the
plaintiffs to what was done. Even according to the contesting defendants, there
was no prior knowledge or approval or consent of either Reighley, Warner or the
plaintiffs. It also seems consistent with the other facts to believe that
Reighley protested against the proxies being removed as he alleges, and that
the plaintiffs' representatives accompanied the said proxies along with others
"to supervise the return of the said proxies as stated and alleged by
Dabke himself in his affidavit-in-reply". In any event, it is not the case
of the contesting defendants that anybody except Dabke knew what the complete
data was which was fed into the computers.
At
the hearing three registers were produced. Two of them were proxy registers,
one prepared before and the other prepared after June 26, 1969. These were
referred to at the hearing as the old proxy register and the new proxy
register. The old proxy register was produced by the company, while the new
proxy register was forwarded by the company to the scrutineers and produced by
them. The third was a printed register consisting of sheets headed
"Register of defective proxies and/or revocations". Admittedly,
however, it is a register relating to proxies only prepared or got prepared by
Dabke in the company's office. Each sheet has several columns headed "(1)
Reference folio number, (2) Number of shares held, (3) Serial number, this
being the serial number given to the proxy, (4) Duplicate, (5) Without date or
signature, (6) Date or signature filled by rubber stamp or typed, (7) Differs
from specimen signature, (8) Sig. or P/A or B/Reso. not Regd., that is,
signature of power-of-attorney or board resolution not registered with the
company, (9) Without the common seal of the company, (10) Stamps not cancelled,
(11) Stamps adjudicated, (12) Party out of Maharashtra and stamp of
Maharashtra, (13) Without date of meeting, (14) With dates of two meetings and
(15) Unsigned ". This register was forwarded by the company to the
scrutineers and was produced by the scrutineers.
One
of the charges levelled by the plaintiffs is that Tulsidas
deliberately deferred giving his decisions or directions on the
objections raised to the proxies and revocations until a complete
picture of proxies was before him, so that he may know how any decision
given by him would affect the voting, and give his decisions from
that point of view, not fairly and honestly but with the mala fide object of
invalidating the proxies in favour of Reighley, so that the resolution could be
got passed. The first objection relates to the late lodging of proxies. Under
article 110 of the articles of association of the company, no instrument of
proxy is to be treated as valid and no person is to be allowed to vote or act
as proxy under an instrument of proxy unless such instrument of proxy has been
deposited at the registered office of the company at least 48 hours before the
time appointed for holding the meeting. This is in conformity with the
provisions of section 176(3) of the Companies Act, 1956. Thus, the last minute
for lodging proxies at the registered office of the company was by 4 p.m. of
April 26, 1969. According to the plaintiffs, 1017 proxies in favour of Tulsidas
and three others were deposited by Shukla, the secretary of the private
company, after 4 p.m. on April 26, 1969, and after the bell announcing the
expiration of time allowed for depositing proxies had been rung. At that time
Reighley, Karode, one P.K. Nambia, also a shareholder of the company, and the
third defendant were present. Karode and Reighley objected to such proxies
being deposited. Such objection was recorded by Karode on the same day and
confirmed by Reighley and the letter of objection was signed by Karode and
Reighley in the presence of the third defendant who has attested their
signature. These 1017 proxies were in 12 unopened packets. These packets were
opened and numbered and a note has been put on the said letter of Objection to
the effect that "after numbering as above, receipt has been given to
Kilachand Devchand and Company Private Ltd. by Synthetics and Chemicals Ltd. at
5-55 p.m. on 26-4-69". According to the affidavits-in-reply, at about
12-30 p.m. on the 26th April, the company received from the private company
several packets containing all the proxies in favour of Tulsidas and three
others, each packet containing several files of proxies. For the purposes of
facilitating the passing of receipts after the counting of proxies by the
company's staff the private company had attached to each file a typed list in
duplicate showing the names of shareholders purporting to have issued proxies
in favour of Tulsidas and others with the folio number and the number of shares
held by each shareholder. All the said packets were brought by Shukla, the
secretary of the private company, along with two or three other representatives
of the private company and deposited with the company. The physical counting of
the said proxies took a considerable time and receipts were granted in respect
of the proxies contained in each file after the proxies in each file were
counted as of the time when the packets were received. Arrangements had been
made to receive the proxies in the open landing space opposite the lift. After
counting the proxies, they were removed inside the office of the company.
Exactly at 4 p.m. Dabke asked the staff of the company to stop counting the
proxies lodged by the private company on the landing and to remove the
uncounted proxies contained in the packets inside the office of the company for
the purpose of counting and issuing receipts. It is further stated that the
proxies lodged by the plaintiffs which were pinned together in lots of 100 each
generally (that is, not classified in the manner in which proxies lodged by the
private company) were lodged between 2-30 p.m. and 3-30 p.m. and the counting
of such proxies finished by 4 p.m. It is further alleged that it was pointed
out to Karode and others that the said packets brought by the private company
had been deposited at 12-30 p m. Now, whether these 1017 proxies were lodged at
12-30 p.m. as alleged by the contesting defendants or after 4 p.m. as alleged
by the plaintiffs is a question of fact which will fall to be decided at the
hearing, but one or two circumstances are significant. The total number of
proxies in favour of Reighley and others was about 11,732. These were on
Dabke's own showing in lots of 100 each generally and not classified as proxies
lodged by the private company were. These could, however, be counted within a period
of about one hour on Dabke's own admission. The total number of proxies lodged
on behalf of the Kilachand group was about 7,789 including the 1,017 disputed
proxies. It is thus difficult to understand why, when these 7,789 proxies were
lodged at 12-30 p.m., they could not have been counted till 2-30 p.m. or till
5-55 p.m. It is also difficult to understand why a receipt was not given in
respect of the said packets to the effect that so many packets said to contain
so many proxies were received. In fact, on April 28, 1969, Reighley had
deposited approximately 11,730 revocations contained in two trunks and in
respect of these trunks receipts were issued showing that trunk of a particular
colour said to contain revocation letters was received at the registered office
of the company on April 28, 1969, at 2-50 p.m. It is also significant that,
prior to the affidavits in-reply, the story now set up about all these proxies
being brought at 12-30 p.m. has not been set up in the correspondence.
At
the said meeting of April 28,1969, written objections were raised by a
shareholder, Kishore K. Koticha, to several proxies in favour of Reighley and
others. It appears that a similar letter of objection was written by Koticha
with respect to the proxies lodged for the meeting of April 29, 1969. By his
letter of April 30, 1969, Koticha stated that the objections which he had.
raised about the proxies in his letters of 28th and 29th April would also apply
to the letters of revocation lodged by the plaintiffs. Copies of the letters of
April 28, 1989, and April 30, 1969, have been exhibited by consent and the copy
of the letter of April 30, 1969, bears an endorsement that three letters were
received by the company on May 2, 1969. By their attorney's letter of June 10,
1969, the plaintiffs raised several objections to the proxies in favour of
Tulsidas and three others. A reminder was written on June 23, 1969. The reply
to this letter was only given by Tulsidas on July 2, 1969, after he declared
the result of the meeting held on April 28, 1969. It is contended by the
contesting defendants that the plaintiffs' attorney's letter cannot be treated
as objections raised by a shareholder to the said proxies. It is not necessary
to decide this question also as, on Tulsidas's own showing, whatever objections
were raised were equally applied to proxies both in favour of Reighley and in
favour of himself. Apart from that, when we come to consider these objections
it will be obvious that some of them are of such a nature that whether actually
taken or not, the proxies to which they applied could never have been treated
as valid. It is, however, alleged in paragraph 66 of Dabke's affidavit-in-reply
that, as the only objections were to the proxies in favour of Reighley,
tabulations were made, that is, the register of defective proxies was prepared
only with respect to such proxies and not with respect to the proxies in favour
of Tulsidas. This again is not true. The register of defective proxies produced
in court includes two sheets, on which in the left hand corner at the top is
written in ink "Kilachand P.", that is, the proxies in favour of
Tulsidas. These two sheets are in respect of shareholders in ledger folio
"N". From this an inference must arise that similar sheets must have
been prepared with respect to other shareholders who gave or purported to give
proxies in favour of Tulsidas but the same have not been produced. In the
register of defective proxies, in the case of Reighley and others as also in
those two sheets the entries in the columns are in ink but the totals of the
columns are in pencil arid on several sheets there is an analysis of the
different types of proxies worked out at the back. This is more than sufficient
to convey to any one what the effect on the voting "would be if a
particular class of proxies were held to be valid or invalid. It is difficult
to believe that a similar analysis was not done in respect of proxies in favour
of Tulsidas, if a register in respect thereof was prepared. At the hearing
various statements were sought to be handed over to me and facts and figures
were given to me of the various heads under which the proxies in favour of both
parties would fall. I was also handed over by learned counsel for the company a
specimen page, said to be a copy of one of the sheets in one of the proxy
registers. I have returned this document and not kept it on the file. Based on
the contents of the said specimen copy, detailed arguments were advanced to me
by the contesting defendants. When this specimen copy was compared with the
original sheet, of which it purported to be a copy, it was found that not only
the headings of the columns differed but what was filled in under the columns
had no relation to the original sheet. I may mention in fairness to the
attorneys of the company that this specimen copy was prepared not in their
office but in the office of the company. There were also other statements made
under instructions from those representing the company present in court which
also did not turn out to be correct. For this reason I have refused to accept
or attach any weight to any statement made from the bar which does not find a
place on the record.
On
the sixth day of the hearing, in order to answer the plaintiffs' charge that
the giving of directions by Tulsidas was deliberately delayed until he could
see for himself a complete picture of the proxies and revocations so as to
bring about a result favourable to himself, Mr. C.K. Daphtary, learned counsel
for Tulsidas, applied in Suit No. 681 of 1969 for leave to put in a further
affidavit explaining why the directions were not given by Tulsidas in writing
till June 26, 1969, and to show that they were given orally on June 19, 1969.
The plaintiffs objected to any such further affidavit being filed at this late
stage and I rejected the said application for several reasons. There is no
warrant whatsoever for saying that any directions as to the objections were
given by Tulsidas prior to June 26, 1969. The passages from the
affidavits-in-reply of Dabke and Tulsidas which I have set out above make this
amply clear. These passages further make it amply clear that Tulsidas gave his
directions only after a complete picture was presented to him. It is also
abundantly clear from the said affidavits that the validity of the proxies and
revocations was determined by Tulsidas and/or in accordance with his directions
given in his letter of June 26, 1969. For this reason as also for the reason
that this application was made at too late a stage, I rejected the said
application. Immediately thereafter Mr. Sen, learned counsel for the company,
called upon Mr. Daphtary to produce the opinion of counsel obtained by Tulsidas
on the objections to proxies for the meeting of April 28, 1969, and to the
letters of revocation This was also objected to by Mr, Nariman on behalf of the
plaintiffs. I upheld the objection because nowhere is there any suggestion in
any of the affidavits-in-reply that any opinion of counsel was taken. In fact,
Tulsidas expressly avers that these various registers were got prepared, so
that he may have a complete picture before him, and it was thereafter that he
gave his decisions and directions which are contained in his said letter of
June 26, 1969. Secondly, whatever counsel may have opined as to the validity in
law of any objection is immaterial. The matter is to be decided by the court
itself and not in accordance with the opinion given by counsel. For these
reasons I did not permit Mr. Daphtary to produce any such opinion.
I
will now examine the validity of the objections to the proxies. Though the
plaintiffs are challenging the validity of most of these decisions, at the
hearing of these notices of motion Mr. Nariman, learned counsel for the
plaintiffs, has confined himself to only some of them. The decisions or directions
of Tulsidas are contained in his said letter of June 26, 1969. That letter is
addressed to Dabke and begins this way:
"Now
that the papers relating to the extraordinary general meeting held on 28th
April, 1969, have been tabulated I am giving the following directions."
The
opening words of this letter also make it abundantly clear that these
directions have been given after the papers relating to proxies, etc., had been
tabulated and on the basis of such tabulations, that is, after Tulsidas had
before him a clear picture as to the proxies to which a particular infirmity
applied. The first decision objected to at the hearing of these notices of
motion is that contained in direction 1(c) under which a proxy by a company not
bearing the company's seal was to be rejected. Under section 176(5)(b) of the
Companies Act, 1956, an instrument of a proxy where the appointer is a body
corporate, is to be under its seal or is to be signed by an officer or an
attorney duly authorised by it. Article 109 of the articles of association of
the company contains a similar provision. This direction is, therefore,
contrary to law. It was submitted on behalf of the contesting defendants that
the result of a wrong direction is a mixed question of fact and law and such
direction cannot be held to be wholly bad. I am unable to follow this
submission. Rejection, therefore, of proxies given by a company not under its
seal but signed by one of its officers or an attorney duly authorised by it
would be a wrongful rejection contrary to law and such proxies must be held to
be valid.
The
third group of directions relates to stamps on proxies. Direction 3(a) provides
that a proxy which bears no revenue stamp should be rejected. There is no direction
as to what is to be done if a proxy bears a revenue stamp which has not been
cancelled. Admittedly, there were proxies in favour of Reighley as also
Tulsidas on which the stamps remained uncancelled. In paragraph 40 of the
affidavit-in-reply of Dabke and paragraph 18 of the affidavit-in-reply of
Tulsidas it is stated that the proxies, the stamps on which were not cancelled
were not rejected, whether the same were in favour of one group or the other.
This direction cannot be supported in law. Under section 10 of the Indian Stamp
Act, 1899, read with rule 13(f) of the Indian Stamp Rules, 1935, a proxy is to
bear an adhesive stamp. Section 12 of the Indian Stamp Act provides as follows;
"12. Cancellation
of adhesive stamps.—(1)(a) Whoever affixes any adhesive stamp to any instrument
chargeable with duty which has been executed by any person shall, when affixing
such stamp, cancel the same so that it cannot be used again ;
(b) whoever executes any instrument on any paper bearing an
adhesive stamp shall, at the time of execution, unless such stamp has been
already cancelled in manner aforesaid, cancel the same so that it cannot be
used again.
(2) Any instrument
bearing an adhesive stamp which has not been cancelled so that it cannot be
used again, shall, so far as such stamp is concerned, be deemed to be
unstamped.
(3)The person required by sub-section (1) to cancel an
adhesive stamp may cancel it by writing on or across the stamp his name or
initials or the name or initials of his firm with the true date of his so
writing, or in any other effectual manner. "
Thus,
under section 12(2) any proxy on which the stamp is not cancelled must be
treated as an unstamped proxy and ought to have been rejected. In In re Tata
Iron and Steel Co. Ltd Crump J.
has also held that the proxies which are unstamped or upon which the stamps
have not been cancelled must be excluded and any votes recorded on the
authority of such proxies should equally be excluded. No attempt has been made
to support the legal validity of this direction but it was suggested that this
was a favour to the plaintiffs inasmuch as several proxies in their favour bore
stamps which were not cancelled. This overlooks the fact that on the admission
of both Dabke and Tulsidas, there were proxies also in favour of Tulsidas on
which the stamps were not cancelled.
Direction
3(b) requires proxies against which objections have been raised and which are
signed by shareholders described as residing outside Maharashtra State and
which do not bear the stamp of the State where the shareholder is said to
reside to be rejected. This direction again cannot be supported in law. Under
section 2(11) of the Indian Stamp Act, an instrument is said to be duly stamped
when it bears an adhesive or impressed stamp of not less than the proper amount
and when such stamp has been affixed or used in accordance with the law for the
time being in force in India. Under section 10(1), all duties with which any
instruments are chargeable are to be paid and such payment is indicated on such
instruments by means of stamps, (a) according to the provisions contained in
the said section, or (b) when no such provision is applicable thereto as the
State Government may by rule direct. There is no provision in the Indian Stamp
Act with respect to an instrument executed in one State which is required to be
used in another State. Rule 3(1) (i) of the Bombay Stamp. Rules, 1939, made in
exercise of the powers conferred, inter alia, by section 10, provides that all
duties with which any instrument is chargeable shall be paid, and such payment
shall be indicated on such instruments, by means of stamps issued by the
Provincial Government for the purposes of the Act. Under rule 18, except as
otherwise provided by the said rules, adhesive stamps used to denote duty are
to be the requisite number of stamps bearing, inter alia, the words "India
Revenue" or "Bombay Revenue" The words "Provincial
Government" and "Bombay Government" are now to be read as the
"State Government" and the "Maharashtra Government".
Proxies, therefore, executed by shareholders in another State and bearing the
stamps of the Maharashtra State could not have been validly rejected and ought
to have been treated as valid. I may mention that no attempt was made to
support the validity of this direction.
Direction
3(c) requires that proxies by shareholders described as residing outside
Maharashtra State which bear a certificate of the stamp office to be shown to
Tulsidas. This again is surprising. Section 32 of the Indian Stamp Act provides
for a certificate to be granted by the Collector by endorsement on the
instrument in question to the effect that the full duty with which it is
chargeable has been paid. Under sub-section (3) of section 32, any instrument
upon which an endorsement has been made under section 32 is to be deemed to be
duly stamped and, if chargeable with duty, is to be receivable in evidence or
otherwise, and may be acted upon and registered as if it had been originally
duly stamped. There was, therefore, no question of Tulsidas or anybody sitting
in judgment upon the certificate of the stamp officer. All such proxies,
therefore, ought to have been held to be valid. Here again no attempt was made
to justify the validity of this direction.
Direction
5 requires that where there is a difference between the specimen signature of
the shareholder giving the proxy and the signature on the proxy, the proxy
should not be rejected by Dabke but the proxy and the specimen signature should
be shown to Tulsidas for his decision. It nowhere appears that any such
signatures were ever shown to Tulsidas. None of the affidavits-in-reply mention
that any such signature was ever shown to Tulsidas. On the contrary, the
affidavits-in-reply show that this work was done by the staff of the company.
This is also clear from the correspondence with the scrutineers. In their
letter of June 27, 1969, the scrutineers have stated that they had deleted from
the proxy registers those proxies on which specimen signatures differed from
that on the records of the company and all the duplicate proxies on the basis
of tabulations prepared by the company and test checked by them. Further, in
paragraph 50 of the affidavit-in-reply of Dabke and paragraph 31 of the
affidavit-in-reply of Tulsidas there is an express admission that the
signatures were verified by the staff of the company and test checked by the
scrutineers. There is, therefore, no question of any such signature being shown
to Tulsidas. It is the case of the contesting defendants that on a proper
construction of the relevant articles in the articles of association of the
company and a proper demarcation of the respective functions of the chairman of
the meeting and the scrutineers, Tulsidas as the chairman of the meeting had to
decide upon all questions of validity of proxies. If this submission is
correct, then it was for Tulsidas alone to have compared the signatures in
question. Whether the signature on a proxy differs from the specimen signature
or not was not a ministerial matter but a matter involving judgment, which
matter could not have been delegated either to the secretary or the staff of
the company.
Direction
6 provides that where the name of the shareholder cannot be ascertained either
from the information given on the proxy or the signature the proxy must be
rejected. As appears from paragraph 42 of the affidavit-in-reply
of Dabke, a large number of proxies in favour of Reighley, namely, those
referred to as "untraceable", were rejected and no folio number given
thereto on the ground that it was not possible from the signature to decipher
the name of the shareholder or to relate the name of the purported shareholder
with any name appearing on the register of member's and that this was done
immediately .after April 26, 1969, or thereabouts. No identification letters
were given to these proxies arid they did not feature in any of the proxy
registers and were, therefore, not taken into account. It certainly was not for
the company's staff to reject such proxies. Tulsidas admittedly never had a
look at any one of these proxies. By their letter of May 21, 1969, the
scrutineers stated that there were approximately 5,000 revocations and 1,000
proxies in favour of Reighley, which were reported "untraceable", and
that similarly about 700 revocations in favour of Tulsidas and others were also
reported "untraceable". It appears that such proxies and revocations
lodged by the plaintiffs, bore on the reverse certain reference numbers. By the
said letter the scrutineers requested that the company's office should be
instructed to trace the said proxies and revocations with the help of reference
on the back of the documents and suggested that the assistance of the
respective parties may be taken for that purpose. In the progress report which
the scrutineers made on May 22, 1969, they have referred to their letter of May
21, 1969, and requested that the same should be attended to. By their
attorneys' said letter of June 10,1969, addressed to Tulsidas, the plaintiffs
pointed out that the staff of the company had not mentioned folio numbers on
approximately 1,450 proxies and 5,000 odd revocations in favour of Reighley,
while they had given folio numbers to all proxies and revocations in favour of
Tulsidas. They have further recorded that on May 5, 1969, Reighley and Karode
were in the office of the company and had offered to assist in putting the
folio numbers by a reference to the plaintiffs' internal records, but this
offer was not availed of. By the said letter they requested that the assistance
of Reighley and Tulsidas in placing the correct folio numbers on the said
proxies and revocations should be taken. The plaintiffs by their attorneys'
letter of June 23, 1969, sent a reminder to Tulsidas. By their attorneys'
another letter of the same date the plaintiffs pointed out these facts to the
scrutineers and requested them to do the needful. A copy of this letter was
forwarded by the scrutineers to Tulsidas. The plaintiffs sent a reminder to the
scrutineers by their attorneys' letter of June 27, 1969. It appears that
Reighley also handed over to the scrutineers in the presence of Dabke four
files containing the information which would be useful for processing the
proxies and letters of revocation in question. Along with their another letter
dated June 27, 1969, addressed to Tulsidas the scrutineers enclosed a copy of
the said letter
dated June 27, 1969, addressed by the plaintiffs' attorneys to the scrutineers
and also recorded the fact that the said four files had been handed over to
them by Reighley in the presence of Dabke. They also pointed out that they had
so far not received any reply from Tulsidas to their letter of June 23, 1969.
By his letter of June 28, 1969, Tulsidas stated that it was no part of their duty
as scrutineers to have accepted papers from Reighley and that he had given to
the secretary the directions relating to the work of the secretary and as soon
as" the secretary finished his work, the scrutineers would take in hand
the scrutiny of the voting papers and counting of the votes and report to him.
It is thus clear that a large number of proxies and revocation letters in
favour of Reighley were not taken into account merely on the ground that the
company's office could not make out from the signature or the other information
contained in the proxies the name of the shareholder giving the proxies. This
work was left to Tulsidas who claiming to be the sole judge of the validity of
proxies and revocation letters to be done by the secretary and the staff of the
company and even when assistance was offered on the basis of information
appearing on the proxies and revocation letters themselves, namely, the
reference numbers on the back thereof, to help the company's staff "trace
these proxies and revocations", such offer was rejected. This attitude on
the part of Tulsidas militates against his claim of bona fides, fairness and
impartiality.
Direction
7 requires that wherever there is a difference between the specimen signature
and the signature on the revocation letter, the revocation letter should be
shown to Tulsidas for decision. As is clear from what is stated with respect to
direction 6, no such revocation letter was ever shown to Tulsidas, but such
revocation letters were dealt with only by Dabke and the office staff.
Direction
8(a) requires undated revocation letters to be ignored. The plaintiffs had
lodged about 11,000 revocation letters obtained by them. The position appears
to be that a large number of revocation letters in favour of Rgjghley and
others were undated, while those in favour of Tulsidas were dated. In In re
Tata Iron and Steel Co Ltd., Crump J.
said that such an objection with respect to proxies hardly required discussion.
He observed:
"The
proxy was lodged within the time allowed and before the date of the meeting. I
can understand that an omission to state the date of the meeting may be a
serious defect, but as for the date of execution 1 can only say de minimis. No
authority has been cited for questioning a proxy on such grounds."
I
fail to see why the same principle should not apply to revocation letters.
Under article 113 of the articles of association of the company, a vote given
in pursuance of a proxy is to be valid notwithstanding, inter alia, the
revocation of the proxy provided no intimation in writing of such revocation
has been received at the registered office of the company before the vote is
given. All that is, therefore, required to revoke a proxy validly lodged is the
receipt of a revocation letter before the vote is given; No form of revocation
letter is prescribed and this insistence on date appears to be incapable of
explanation except that a larger number of undated revocation letters were those
of proxies in favour of Tulsidas and others. Actually in the proxy register
prepared by the Tata Consultancy Services most revocation letters have been
bearing the date April 28, 1969. It was said at the hearing that this date is a
mistake and as appears on the record, a large number of the revocation letters
in favour of Reighley were undated. There is no mention in the
affidavit-in-reply that such a mistake was made or as to who made this mistake
or how such a mistake came to be made. It was said at the hearing that this
direction applied only where there were cross revocation letters in favour of
both parties, one of which' was dated and the other undated. There is no
warrant for this statement either in the said letter of June 26, 1969, or in
any of the affidavits in reply and this statement, therefore, cannot be
accepted. The direction unequivocally applies to all undated revocation letters
and, in fact, as the record shows, all undated revocation letters, whether they
were cross revocation letters or otherwise, have not been taken into account.
This direction, therefore, does not appear to have been given bona fide.
Direction
8(b) states that the letters of revocation filed by Firestone and Kilachand in
the form annexed to the said letter of June 26, 1969, were not revocation
letters and should be ignored. The form of revocations filed by the plaintiffs
and objected to, show that such revocation letters are addressed to the
company, signed by the shareholders and headed "Extraordinary General Meeting on 28th April, 1969, and 29th April 1969 "and are in these
terms:
"I
have signed forms of proxy and forms of revocation in favour of Mr. Tulsidas
Kilachand and others. I have subsequently revoked the said forms of proxy and
revocation and executed fresh forms of proxy and revocation in favour of Mr.
F.J. Reighley and others. Kindly note the aforesaid position in your register
and acknowledge receipt of this letter."
Now,
I fail to see what can be objected to in this form. All that was said was that
this form referred to revocation as having been done earlier and did not by
itself revoke the proxies. The form of letter of revocation in favour of
Tulsidas is more elaborate and it states that the executant had executed the
final proxies in favour of Tulsidas and others and had on that day revoked all
proxies executed in favour of Reighley and others. Now, I fail to see why
either of these two forms of revocation should be rejected. A proxy holder is
merely an agent of a shareholder to vote at a particular meeting. Under section
203 of the Indian Contract Act, 1872, except where an agent has an interest in
the subject-matter of the agency, the principal may revoke the authority given
to his agent at any time before the authority has been exercised so as to bind
the principal, and under section 207, revocation may either be expressed or
implied, and under section 208, so far as regards third persons, termination of
the authority takes effect when it becomes known to them. No particular form of
revocation is provided for by the articles. Article 113 only requires an
intimation in writing of revocation to be received at the registered office of
the company before the vote is given. In the forms of revocation rejected by
Tulsidas it is made expressly clear that the proxies given by the shareholder
in favour of a particular individual have been revoked by him and they ought,
therefore, to have been held to be valid.
Direction
8(c) says that where the name of the shareholder cannot be ascertained either
from the information given on the revocation letter or the signature, the
revocation letter should be rejected. A large number of revocation letters
obtained by Reighley and others have been rejected on this ground. Here the
position is the same as in the case of "untraceable "proxies and what
I have said with regard thereto while considering direction 6 must also apply
to direction 8(c).
Direction
8(d) provides that if there are two or more revocation letters given by the same
shareholder in favour of different parties and they all bear the same date,
they will cancel out. This direction is wholly untenable in law. I fail to see
why the revocation letters would cancel each other out. They would on the
contrary cancel the proxies in respect of which they have been lodged. The
effect of this direction would be that if proxies were given by a shareholder
in favour of both the parties and one bears a later date than the other, the
cancelling out of the cross letters of revocation in respect thereof would make
valid or revive the proxy of the later date. I am unable to see on what
principle of law this can be. The effect of such revocation letters must be
taken as cancelling the proxies in respect of which these letters have been lodged.
Direction
9(a) states that a proxy given by a shareholder will revoke an earlier proxy
given by him, whether in favour of the same persons or other persons unless the
later proxy is validly revoked, in which case the earlier proxy will stand. The
later proxy would of course revoke an earlier proxy, but I fail to see how,
when a later proxy which has revoked an earlier proxy is itself revoked, the
earlier proxy can be resuscitated. The result of a later proxy being revoked
would be that the later proxy would also fall and not that the earlier proxy
would revive. This direction too must, therefore, be said to be bad in law.
Direction
9(c), inter alia, provides that where a shareholder has given proxies in favour
of both Reighley and others as also Tulsidas and others, than if both the
proxies are undated or both bears the same date, they will be treated as
cancelling each other unless one of the proxies is validly revoked. Here also
to my mind the result would be that two cross proxies bearing the same date or
both undated would cancel each other out irrespective of whether one of them is
thereafter revoked or not because revocation of one of such proxies cannot lead
to the revival of the other proxy. This direction also, therefore, does not
seem to me to be justified in law.
So
far as the bona fides of Tulsidas are concerned, it may also be mentioned that
after the result was declared, Reighley, in his capacity as director,
repeatedly requested Tulsidas as well as Dabke as the secretary of the company
to give him inspection of various papers. Copies of that correspondence are
annexed to the plaint in Suit No. 681 of 1969. It is not necessary to refer to
that correspondence in any great detail, but it cannot be disputed that several
of the documents, of which Reighley required inspection in his capacity as
director, were those of which he was entitled to inspection under section
209(4)(a) of the Companies Act, 1956. Nonetheless inspection was denied to him.
It was said at the hearing that it was obvious that the plaintiffs were
contemplating filing suits and this inspection was asked for by Reighley for
the purposes of such suits. If a director is entitled to take inspection, his
motive in doing so is irrelevant. In fact, among the documents, of which inspection
was not given to Reighley, was the said letter of June 26, 1969, which came to
the knowledge of the plaintiffs and Reighley for the first time when a copy of
it was annexed to the affidavit-in-reply of Dabke as also of Tulsidas. This
fact also militates against the claim of bona fides put forward by Tulsidas.
Thus
several directions given by Tulsidas are bad in law and some others are not
given. Apart from this, admittedly the results prepared by the Tata Consultancy
Services contain several mistakes. The result was communicated by the Tata
Consultancy Services to the company by their letter of June 30, 1969, signed by
one Y.P. Sahni. Along with that letter a new proxy register was forwarded to
the company together with a list of what is referred to as "additional
changes which were not incorporated in the main register as they had been
missed by the company". It further appears from the said letter that due
to two punching errors, the total shares shown against the plaintiff group from
page No. 347 onwards of the register had to be amended, which was to be done by
ignoring the lakh position, and as a result thereof, the total shares shown on
the last page No. 465 was required to be read at 70,698 and not 8,70,698. A
mistake of eight lakhs in the total and in the punching of figures can hardly
be said to be a negligible error. The letter farther states that due to changes
which were pointed out to the Tata Consultancy
Services by the company, the final figures had to be further amended as set out
in the said letter. These corrections are as follows:
|
|
Firestone |
Kilachand |
|||||
|
|
Proxies |
|
Shares |
|
Proxies |
|
Shares |
|
Total number of proxies received and the number of shares against these
proxies (as shown in the register and rectified as mentioned in) |
|
...... |
|
...... |
|
...... |
|
|
(1) .. |
6,798 |
|
70,698 |
|
6,396 |
|
2,54,642 |
|
Minus : deletions as per list 'A' attached. |
182 |
|
2,972 |
|
53 |
|
8,171 |
|
|
6,616 |
|
67,726 |
|
6,283 |
|
2,46,471 |
|
Plus: as per additions mentioned in list 'B'…. attached… |
1 |
|
6 |
|
3 |
|
161 |
|
|
6,617 |
|
67,732 |
|
6,286 |
|
2,46,632 |
Along with the said letter the
Tata Consultancy Services also returned the old proxy register in which the
said changes were marked. This letter was sent to the company in duplicate and
was delivered by hand. One signed original was retained by the company and the
other sent to the scrutineers. In both the original letters, after the portion
reproduced above, further corrections have been made in ink under the heading
"Firestone" in the first three columns. These corrections are :
'"Delete (see
Statement 'A') .. ...
Thus, the total proxies in
favour of Reighley and the number of shares which such proxies represent are
reduced by 1 proxy and 6 shares respectively. I am informed by Mr. Sen, learned
counsel for the company, that the initials "D.V" are the initials of
the man from the Tata Consultancy Services who delivered these letters to the
company and that these corrections were made by him when these further mistakes
were pointed out to him by the company when the said letters of June 30, 1969,
were delivered to it. Both the signed originals of the said letters have been
exhibited by consent.
From this, it is obvious
that no reliance can be placed even upon the accuracy of the result obtained
through the services of the punching cards and the computer. Thus, the result
obtained was based on decisions erroneous in law, not given bona fide and
containing, for aught one knows, further arithmetical errors as yet undetected.
The decision so arrived at cannot be said to be valid and cannot stand. It was
submitted on behalf of the contesting defendants that on this position what the
court should do would be to give correct directions and direct a fresh count on
the basis thereof, and that in fact the plaintiffs have made an alternative prayer to
this effect in Suit No. 681 of 1969. I do not propose to decide at this stage
what the effect of these wrong decisions and arithmetical mistake is, whether
it renders invalid the said meeting and the resolution passed thereat or
whether the court has the power in such a case to give proper directions and
direct a re-count. This will have to be decided at the hearing of the suit, but
one thing cannot be disputed. Today there is no resolution of the company
approving the appointment of the private company for a further term, and in
view of the large number of proxies and revocation letters in favour of
Tulsidas and others which appear to have been rejected and proxies and
revocation letters in favour of Tulsidas and others which appear to have been
treated as valid by reason of these erroneous decisions, and bearing in mind
that the majority in favour of the resolutions as shown in the result of the
poll declared by Tulsidas is only of 20,171 votes, and having regard to the
fact that the one proxy in favour of Reighley and others averages about 10
votes or more, while that in favour of Tulsidas and others averages about 13 to
14 votes, it may well be that if a recount as submitted were ordered, the
resolution would be lost.
There
are a number of objections taken by the plaintiffs in connection with this
aspect of the case. In view of the conclusion which I have already reached, I
do not consider it necessary to deal with these objections and they may well be
decided at the hearing of the suit.
The
question that remains is what order to make in this case. It was submitted by
Mr. Nariman, learned counsel for the plaintiffs, that since the conclusions I
have arrived at are that the resolution passed at the meeting of the board held
on November 14, 1968, and the notice convening the said meeting of April 28,
1969, and what was transacted at the said meeting are all invalid, the court
must restrain the continuance of an ultra vires and an illegal act and grant an
injunction as prayed for. On the other hand, the contesting defendants
submitted that the conclusions to which I have arrived at on these notices of
motion can only be prima facie and on such prima facie conclusions the court
ought not to grant an injunction. I have at this stage held in favour of the
plaintiffs on almost all points. Even though the conclusions I may have reached
are prima facie and not final conclusions, I would have been inclined to grant
an injunction as prayed for, but for the fact that all parties are agreed that
the hearing of both these suits should be expedited and they should be heard
and disposed of as early as possible, a view which in the interests of the
parties, I am also inclined to take. I accordingly do not think it necessary at
this stage to disturb the status quo ante. But what is the status quo ante?
Admittedly, right from October 1, 1968, the private company has voluntarily not
taken any amount for its commission. It may have done this either because the
private company may have apprehended that the opposition of the plaintiffs to
this appointment for a further term may prove successful or because it may have
feared action by the Company Law Board. In fact, in its letter of April 9,
1969, the Company Law Board had made it expressly clear that any action taken
by it would be effective as from October 1, 1968. If, therefore, the private
company is to allow to continue to function as it has been doing, it can only
be upon terms. It was submitted that the financial condition of the private
company is so sound that no condition need be imposed and no security taken as
the private company is solvent enough to refund any moneys which it may
receive. In support of this submission a copy of the balance-sheet of the
private company for the year ending September 30, 1968, has been put in by
consent and marked exhibit No. 8. This balance-sheet, however, does not quite
bear out this claim, for certain items shown on the assets side cannot be taken
at the value shown therein. In the summary of investments, out of a total
investment of Rs. 1,23,39,296, investments of the value of Rs. 59,65,133 are in
shares of subsidiary companies which are, however, not quoted on the market,
and investment of the value of Rs. 13,19,532 in shares of subsidiary companies
quoted on the market. Further, on the assets side are shown two sums of Rs.
2,31,130 and of Rs. 27,25,818 aggregating to Rs. 29,56,948 due from the
Digvijay Spinning and Weaving Company Ltd., which are stated as
"considered good ". The Digvijay Spinning and Weaving Company Ltd. is
a company under the same management as the private company and it is
interesting to know its fate. By a notification No. BRU 21690-LAB. I, dated
July 9, 1969, of the Government of Maharashtra, Industries and Labour
Department, published in Part I-L of the Maharashtra Government Gazette,
Extraordinary, of July 9, 1969, the Government of Maharashtra in exercise of
the powers conferred by section 3 and clause (a)(iv) of sub-section (1) of
section 4 of the Bombay Relief Undertakings (Special Provisions) Act, 1958,
declared that the said Digvijay Spinning and Weaving Company Ltd. should be
conducted for a period of one year commencing on July 9, 1969, and ending on
July 9, 1970, to serve as a measure of unemployment relief, and has further
directed that during the said period any right, privilege, obligation or
liability accrued or incurred before July 9, 1969, and any remedy for the
enforcement thereof should be suspended. A copy of the relevant gazette has
been put in by consent and marked exhibit C. Thus, this debt is today not
recoverable, assuming that a company which had to be declared as a relief
undertaking is capable of meeting its debts. Further, the auditors' notes
appended to the said balance-sheet show that the sales tax assessments of the
company have been finalised up to March 31, 1967, only and that there are
pending assessments in respect of which the private company does not expect any
liability to be imposed. How far this expectation is true can only be known
when the assessments are finalised, but we should
bear in mind that the expectation of the private company in respect of the
debts due from the Digvijay Spinning and Weaving Company Ltd. was certainly not
justified. The auditors' notes also show that the bonus is paid and accounted
for on cash basis and, therefore, no provision has been made in respect thereof
during the year and that no depreciation is provided on land and godown and on
building other than the portion used for business which aggregated to Rs.
87,827, under section 205 of the Companies Act, 1956. Further, on the assets
side is shown a sum of Rs. 39,76,604 for advances and other income-tax payments
and the note to it runs, "completed assessments up to Asstt. Year 1963-64,
but under appeals; not adjusted therefrom". Note (B) of the company
auditors' report to the shareholders states that the auditors could not, in the
absence of availability of tax assessment records, ascertain the adequacy or
otherwise of the liability for taxation and provision thereof. This provision
is in the sum of Rs. 22,82,770. The secured loans aggregate to Rs. 82,01,245,
while the unsecured loans aggregate to Rs. 16,09,817. As the profit and loss
account shows, the actual working of the company has resulted in a profit of
Rs. 3,76,429, though the final figure of profit shown in the profit and loss
account which is taken to the balance-sheet is Rs. 7,32,273 arrived at by
taking into account certain other items, such as balance as per last
balance-sheet and income-tax refunds of previous years. In the
affidavit-in-reply of J.B. Shukla, the secretary of the private company,
commission in the sum of Rs. 21,03,300 is stated to have been earned from the
sole selling agency for the year ending September 30, 1968. According to the
said affidavit, the private company incurred expenses in respect of the sole
selling agency in the sum of Rs. 17,11,300. Thus, according to the said
affidavit, the profits earned from the sole selling agency are Rs. 3,92,000.
If, therefore, the profits from the sole selling agency were not there, then
for the year ending September 30, 1968, the actual working of the private
company would have shown a loss. The financial position of the private company
cannot, therefore, be said to be so sound as to justify dispensing with
security.
It was then submitted by
the contesting defendants that in respect of the working of the sole selling
agency, the private company has to incur expenses which, under the terms of the
agreement, are to be borne by it and, therefore, at least the amount of such
expenses should be allowed to be received unconditionally by it. In the said
affidavit-in-reply of Shukla it is said that the expenses incurred for the year
ending September 30, 1968, were in the sum of Rs. 17,11,300 and a summary of
such expenses is annexed as exhibit A to the said affidavit. After this affidavit
was filed, the plaintiffs by their attorneys' letter of September 8, 1969,
called upon the private company to give them inspection of documents from which
the correctness of such expenses could be ascertained as also inspection of the
balance-sheet for the year ending September 30, 1968, and the documents
required by law to be annexed or attached thereto, including the profit and
loss account and the auditors' and the directors' report, which balance-sheet
was referred to in the said affidavit. By its attorneys' letter of September 9,
1969, the private company refused to give inspection. The plaintiffs have
denied that the expenses could be in the sum alleged by the private company. No
supporting material is placed before me to show how the figures in the summary
of expenses annexed to the said affidavit have been arrived at. In view of
several incorrect statements made in the affidavits-in-reply, not much reliance
can be placed on these figures unsupported by any other material. It is also
alleged in the said affidavit that the cost of the company of setting up a
separate sales organisation would be over Rs. 25,00,000 and a statement thereof
is annexed as exhibit B to the said affidavit of Shukla. This exhibit B refers
to an estimate as contemplated by an expert committee sent by the plaintiffs in
1965. After this affidavit was filed, by their letter dated September 10, 1969,
the plaintiffs asked for inspection of the report of such estimate. No such
inspection was given to the plaintiffs nor has any such report been produced
before me and it is not possible at this stage to place reliance upon this
estimate without a detailed picture thereof being presented. The plaintiffs in
their affidavit-in-reply have pointed out that 85 per cent, of the synthetic rubber
produced by the company is bought by the 7 tyre companies and about 50
consumers borne on the list of the Director-General of Technical Development
and that no particular sales organization or special sales effort is necessary
for selling the company's products in view of this fact and the fact that the
company is the only company in India which makes synthetic rubber. There
appears to be considerable force in this. In any event, no sufficient cause has
been made out why in this case the normal rule as to taking of security should
be departed from. It was also submitted that, as in order to set up its sales
organisation the company would have to incur expenses, in the interest of the
company, therefore, instead of making the company incur such expenses the court
should permit the private company to continue as sole selling agents pending
the suits and direct a certain amount to be paid to it towards expenses, and
not by way of commission to be retained by it irrespective of the result of the
suits. In view of the provisions of the Companies Act, this is an astonishing
submission to make. Under the sole selling agency agreement the private company
has to set up and maintain at its own expense an adequate organisation for sale
of the company's products within the agency territories and is to bear and pay
all expenses relating to such organisation. Such expenses are, therefore, to be
met by the private company out of the amount of commission received by it.
Under section 294(2A), if the appointment of a sole selling agent is
disapproved by the company in general meeting, it ceases to be valid with effect from the date
of the general meeting, and section 294A(l)(a) provides that
"A
company shall not pay or be liable to pay to its sole selling agent any
compensation for the loss of his office in the following cases :—
(a) where the appointment of the sole selling
agent ceases to be valid by virtue of sub-section (2A) of section 294."
Under
sub-section (2) of section 314, if any office or place of profit is held in contravention
of the provisions of sub-section (1), not only is such office or place vacated
on and from the date next following the date of the general meeting of the
company at which a special resolution according the consent was required to be
passed, but the holder of such office or place also becomes liable to refund to
the company any remuneration received by him for the period immediately
preceding such date in respect of such office or place of profit. Thus, in law,
if the plaintiffs were to succeed, the private company would not only be not
entitled to receive any commission but would also be bound to refund moneys, if
any, received by it by way of commission. The submission of the contesting
defendants, therefore, amounts to asking the court to ignore and circumvent the
mandatory provisions of the Companies Act enacted in public interest and to
seek to perpetuate an illegal payment by means of a court order. This the court
consistently with the law ought not to do. Since the private company has rested
content with not taking any commission for a period over eight months prior to
the filing of the first suit, there is no reason why it should be permitted to
take any amount for the period preceding the hearing of these notices of
motion. At the highest it can only be permitted to take a reasonable amount
towards expenses from October 1, 1968, upon giving security and upon condition
of repayment or refund and the necessary direction in that behalf will be given
in the order which I will pass.
So
far as the other prayers in the notice of motion in Suit No. 681 of 1969, are
concerned, as mentioned before, the contesting defendants do not oppose the
granting of an injunction to restrain Tulsidas and the scrutineers from acting
as such in respect of the said extraordinary general meeting held on April 29,
1969. The parties had also agreed upon proper custody of all the papers and
documents in connection with polls taken at the meeting held on the 28th and
the 29th April, 1969. They are also agreed that inspection may be taken under
proper safeguard of all such papers forthwith without waiting for formal
discovery.
As
mentioned before, the parties wanted to take a consent order with respect to
this prayer, but no consent order can be passed inasmuch as the form of the
order was not agreed to. This was because the plaintiffs have prayed for a
receiver of all the papers and documents in connection with both the meetings
including those set out in exhibit 29 to the plaint.
According
to the company, some of the documents mentioned in exhibit 29 do not exist. I
am not today determining which document exists and which does not. An ad
interim injunction was given by me, as mentioned before, restraining each of
the defendants from disposing of or in any manner dealing with any of the said
papers and documents including those mentioned in exhibit 29. In spite of this,
in none of the affidavits-in-reply is the existence of any of these documents
denied. Since for whatever reason a consent order cannot be passed, it is not
possible to appoint any private individual to be the custodian of these papers
and the normal rule must prevail.
All
parties are agreed that the hearing of both these suits should be expedited,
but according to the contesting defendants, Suit No. 522 of 1969 ought to be
heard first and Suit No. 681 of 1969 to be heard one month thereafter. It was
submitted that Suit No. 522 of 1969 was filed as a short cause, the pleadings
in that suit are complete and when the suit came on board for directions as a
short cause, it has been ordered to be tried as a contested short cause on
December 1, 1969, while Suit No. 681 of 1969 is filed as a long cause and
written statements have not yet been filed therein. The last date for filing
written statements in Suit No. 681 of 1969 was August 23, 1969. If the
defendants have chosen not to file their written statements, the blame for this
lies only on them. The date for hearing which is given in respect of Suit No.
522 of 1969, is however, not a peremptory date and experience shows that the
suit is not likely to come on board on December 1, 1969, or for a considerable
time thereafter. These notices of motion have been argued as if the hearing
thereof were the hearing of the suits, and apart from formal discovery in both
suits and the written statements in Suit No. 681 of 1969, substantially what
remains to be done is only inspection of the papers and documents in connection
with the polls. Thereis also neither convenience nor merit in hearing Suit No.
681 of 1969 one month after Suit No. 522 of 1969. On the contrary, it is in
public interest for saving public time as also in the interest of the parties
that these suits should be heard one after the other and by the same judge.
Accordingly,
I grant, pending the hearing and final disposal of both Suit No. 522 of 1969
and Suit No. 681 of 1969, an injunction restraining the Synthetics and
Chemicals Ltd., the first defendants in both the suits, and its officers,
servants and agents from paying to Kilachand Devchand and Company Private Ltd.,
the second defendants in Suit No. 522 of 1969 and the fifth defendants in Suit
No. 681 of 1969, any payment by way of commission or otherwise in pursuance of
the said resolution dated November 14, 1968, of the board of directors of
Synthetics and Chemicals Ltd. or under the said agreement dated February 18,
1969, and/or the said letter dated February 18, 1969, as also restraining
Kilachand Devchand and Company Private Ltd., its officers, servants and agents
from receiving from Synthetics and Chemicals
Ltd. any amount by way of such commission or otherwise in pursuance of the said
resolution or the said agreement and/or the said letter. I further order and
direct that, pending the hearing and final disposal of both the said suits,
Synthetics and Chemicals Ltd. shall deposit in court for the period commencing
from October 1, 1969, the amount which would have been payable by it as
commission to Kilachand Devchand and Company Private Ltd. under the said
agreement dated February 18, 1969, read with the said letter dated February 18,
1969, were the said sole selling agency agreement held to be valid. The amount
for the month of October, 1969, shall be deposited on or before November 30,
1969, and the amounts for the subsequent months on or before the thirtieth day
of each succeeding month.
Kilachand Devachand and
Company Private Ltd. will be at liberty to withdraw one-half of the amount of
each such deposit upon furnishing a bank guarantee or security to the
satisfaction of the prothonotary and senior master of this court and on
condition that in the event of the plaintiffs succeeding in either of the said
two suits, Kilachand Devchand and Company Private Ltd. will forthwith deposit
into the court the amounts so withdrawn by it for the purpose of being refunded
.to Synthetics and Chemical Ltd.
I also grant, pending the
hearing and final disposal of this suit, an iujunction restraining Tulsidas
Kilachand, the second defendant in Suit No. 681 of 1969, from in any manner
exercising any power or function as chairman of the extraordinary general
meeting of Synthetics and Chemicals Ltd. held on April 29, 1969, as also
restraining defendants Nos. 3 and 4 in Suit No. 681 of 1969 and each of them
from exercising any power or function as scrutineers appointed at the said
extraordinary general meeting.
I also appoint, pending the
hearing and final disposal of this suit, the court receiver to be the receiver
of all the papers and documents in connection with the polls taken at the
extraordinary general meetings of Synthetics and Chemicals Ltd. held on April
28, 1969, and April 29, 1969, respectively, including the papers and documents
specified in exhibit 29 to the plaint in Suit No. 681 of 1969, except such of
them as may have been marked as exhibits at the hearing of these notices of
motion, but including the registers produced in court at the said hearing. The
registers produced in court will be tied up in packets; sealed by the office of
the prothonotary and senior master of this court and forwarded to the court
receiver. The court receiver will take charge of all the other papers and
documents in the presence of the attorneys of the plaintiffs and of the
defendants in Suit No. 681 of 1969. Defendants Nos. 1 to 5 or defendants Nos.
1, 2, and 5 in Suit No. 681 of 1969 will be at liberty to nominate the
attorneys or anyone of them to attend on their behalf for this purpose. All the
papers and documents taken charge of by the court receiver will be tied up in
packets and sealed with
the seal of the court receiver and of the attorneys of the plaintiffs and of
;the attorneys of the defendants in Suit No. 681 of 1969. The defendants Nos. 1
to 5 or defendants Nos. 1, 2 and 5 in Suit No. 681 of 1969 will be at liberty
to nominate the attorneys of any one of them to affix the seal on their behalf.
The parties will be entitled forthwith to take inspection of all the papers and
documents of which receiver has been appointed, in the court receiver's office
during office hours every working day. Such inspection will be taken in the
presence of a responsible representative of the attorneys of the plaintiffs and
of the attorneys of the defendants in Suit No. 681 of 1969. The defendants Nos.
1 to 5 or defendants Nos. 1, 2 and 5 in Suit No. 681 of 1969 will be at
liberty to nominate the representative of the attorneys or any one of
them to attend on their behalf for this purpose. The seal of the packets will
be opened only in the presence of such representatives of attorneys and after
inspection is over on each day, the papers and documents will be again tied up
in packets and sealed as aforesaid by the court receiver and such
representatives of attorneys. The attorneys of the parties will be at liberty
to initial all such papers and documents.
I
direct the defendants in Suit No. 681 of 1969 to file their written statement
on or before November 30, 1969.
The
affidavits of documents in each of the said suits shall be made on or before
December 15, 1969, and inspection of the documents disclosed therein shall be
given forthwith after such discovery is made.
I
direct that Suit No. 522 of 1969 shall be placed peremptorily on board for
hearing and final disposal, subject to a part-heard matter, on February 2,
1970, and that Suit No. 681 of 1969 be placed on board for hearing and final
disposal on the same date immediately after Suit No. 522 of 1969.
So
far as the costs of these notices of motion arc concerned, the hearing has
lasted nearly 63 hours. Looking to the length of the hearing, the heavy record,
the elaborate preparation and arguments and the complexity and importance of
the question involved and the fact that each side is represented by three, and
in some cases more than three, counsel, except defendants Nos. 3 and 4, who are
represented by two counsel only, I direct that the costs of these notices of
motion be taxed on the long cause scale with two counsel being allowed and
shall be costs in the cause.
[1949]
19 COMP. CAS. 175 (MAD.)
HIGH COURT OF MADRAS
v.
SATYANARAYANA RAO AND
PANCHAPAKESA SASTRI, JJ.
O.S.A NO. 22 OF 1948
OCTOBER 5, 1948
V.C.
Gopalaratnam and N. Rajagopala Aiyangar, for the Appellant.
O.T.G.
Nambiar instructed by King and Partridge and L.V. Krishnaswami Aiyar, for the
Respondent.
This appeal
arises out of an action by the members of the Madras Race Club. The action was
tried on the original side by Bell, J., and by his judgment he dismissed the
suit of the plaintiffs. Hence this appeal by the plaintiffs.
The Madras
Race Club is a body corporate registered under the Indian Companies Act of 1913
before it was amended in 1936. The object of the Club, as its name indicates,
is to carry on the business of a race club and to provide certain amenities to
its members. The Memorandum of Association and the Articles of Association are
contained in Ex. P-29. The Memorandum of Association prohibits the division of
profits by way of dividend amongst the members, and they have to be utilised
only for the purpose of the club. There are two classes of members, namely,
club members and stand members. There are about 260 club members, and they
alone are entitled to vote, while the stand members have certain other
privileges, but not the right to vote. The management of the business of the
Club is vested in six Stewards who must be club members. They occupy the
position of the directors of a company and discharge similar functions in
respect of the Club. The Articles provide as usual for the qualification for
Stewards, for their retirement by rotation, filling up of vacancies, and also
their powers and duties. After every annual general meeting of the club the
senior Steward is elected at the first meeting of the Stewards, who is to
preside at every meeting of the Stewards. The quorum for a meeting of the
Stewards is fixed at three. They are charged with the duty of calling for a
general meeting annually and also, on the requisition of a prescribed number of
members, calling for an extraordinary general meeting for special business.
Article 50 prescribes the period or notice and the manner of issuing the notice
for a general meeting. The senior Steward also presides as chairman at a
general meeting. Article 73 lays down the manner of serving notices on members.
After the Companies (Amending) Act of 1936 was passed the Articles of this Club
were also amended in 1941, and Ex. P-29 contains the articles which were in
force in 1947.
Some time in
April, 1947, 45 members of the Club sent a requisition to the Club for
convening an extraordinary general meeting, inter alia, to appoint a committee
to consider the revision of the Articles of Association and to suggest changes
wherever necessary (Ex. P-1). In pursuance of this, an extraordinary general
meeting was duly held on the 21st of June, 1947, and in that meeting a special
committee of seven members besides the Stewards, who were ex officio members
thereof, was constituted for the specific purpose of the revision of the
Articles of Association and the suggestion of changes. They were required to
submit a report on that behalf by the end of September, 1947, and it was also
decided that a meeting of the general body should be called for not later than
31st of October,. 1947, for the consideration of the report. The special
committee had several sittings, and in the meeting of the 13th of September,
1947, they proposed several alterations to the Articles, the most important of
which were that the management of the business of the Club should vest in a
managing committee of 12 members instead of the Stewards, and that from among
the members of the managing committee a senior Steward and five other Stewards
should be elected, who should be solely responsible for the racing. They also
recommended the abolition of the proxy system of voting. Under a licence
granted by the Central Government under Section 26 (2) of the Indian Companies
Act, 1913, the Club was permitted to be registered as a company with a limited
liability without the addition of the word "limited" to its name. The
Provincial Government on whom the duty of issuing licences subsequently
devolved framed regulations under the said section governing the issue of
licences (vide Development Department Notification, Fort St. George, March 6th,
1937, G.O. No. 549). Under clause 8 of this Notification, "If the Memorandum
and Articles of Association are altered without the previous approval of the
Government having been obtained in that behalf, the licence granted by the
Government shall be deemed to have become void."
In view of
this requirement the special committee directed the solicitors of the Club to
draft the necessary resolutions in proper form altering the Articles of
Association in the manner suggested, and at a subsequent meeting of the 26th of
September, 1947, in which some more alterations were suggested, the Club's
solicitors were also requested to further revise the draft and send it to the
Government for approval. The solicitors sent the revised draft to the
Government on the 29th of September, 1947 (Ex. P-5). On the 11th of October,
1947, the Government approved the revised Articles of Association proposed by
the Club but with one modification relating to Article 69. The Government also
pointed out that the revised Articles of Association should be adopted by
passing a special resolution under Section 81(2) of the Indian Companies Act.
Section 20 of the Indian Companies Act also requires a special resolution to
alter or add to the existing Articles. On the 15th of October, 1947, the
special committee at its meeting considered the order of the Government and resolved
that an extraordinary general meeting of the members be convened on the 7th of
November, 1947, at 6-30 p.m. to consider the report and pass a special
resolution and requested the solicitor, Mr. Small, to draft the resolutions.
The committee was adjourned to meet again at 5 p.m. on 7th November, 1947
(P-1). At this meeting of the special committee were present nine members of
whom one was the senior Steward, Mr. Annamalai Chettiar, and two Stewards. On
the 16th of October, notice was issued to the Club members of the extraordinary
general meeting on the 7th of November, 1947, at 6-30 p.m. The contents of this
notice (P-8) are material for the decision of this case, and therefore it is
necessary to set them out in extenso:—
"Notice
hereby is given, that an Extraordinary General Meeting of Club members of the
Madras Race Club will be held at the Members' Stand of the Club at Guindy on
Friday the 7th day of November, 1947, at 6-30 o'clock in the evening for the
following purpose:—
(1) To receive the report of the Chairman of the
Special Committee constituted to revise the Articles of Association of the Club
and to suggest developments to the Club's present amenities;
(2) To consider and, if thought fit, to pass as a
Special Resolution That the Article in the printed document submitted to the
meeting, and for the purpose of identification subscribed by the Chairman there
of be approved, with or without modification, and adopted as the Articles of
Association of the Club in substitution for and to the exclusion of all the
existing Articles of Association thereof".
(3) If the said Special Resolution be duly
passed ,then to elect twelve Club members as the first Managing Committee of
the Club to hold office until the Annual General Meeting of Club Members to be
held in November, 1948; and
(4) To consider the Special Committee's
following proposals for development of the Club's amenities and to give
directions to the Managing Committee thereon:—
(a) That the present lunch room be furnished
suitably to serve as a lounge for Club members:
(b) That the northern corner of the verandah
adjoining the lunch room be equipped to serve as a card room for Club members;
(c) That the present billiards room be reserved
for use only by Club and jockeys; and
(d) That
arrangement be made to serve Refreshments also.
N.B.—(1) A
print of the proposed amended Articles of Association will follow shortly.
(2) Each nomination of a Club
member as a candidate for election to the Managing Committee should be signed
by two Club members and sent to the Secretary fourteen clear days before the
date of meeting."
This notice,
it is common ground, was posted at Guindy on the 16th October. About the same
time notice of the annual general meeting of the Club fixed to 18th November,
1947, was also issued to the members. The extraordinary general meeting was
also advertised in the Hindu of 18th October, 1947, (Ex. P-10) and the Madras
Mail of even date (Ex. P-11.) In pursuance of this notice, Ex. P-8, the Club
received 24 nominations for the membership of the Managing Committee which was
communicated to the members by notice, dated 27th October, 1947 (Ex. P-12). By
29th October, 1947, the Club received notice of amendments to the Articles of
Association from Messrs. T.T. Krishnamachari, G. Narasimham, A.R. Srinivasan
and the Raja of Vizianagaram, and these were notified to the members by a
notice of 29th October, 1947 (Ex. P-13). On the 21st of October, 1947 (it is
admitted before us by both sides, though there is no evidence regarding it) the
Club sent the printed draft of the proposed amendments to the Articles of
Association (Ex. P-30) to all the members. On the 5th of November, 1947, the
Government of Madras suggested that the Articles of Association might be
suitably amended to eliminate voting by proxy and to delete Articles 55, 56 and
57 altogether with a view to make the members of the Race Club take full
responsibility for the proper conduct of racing. In the light of this suggestion
the Government wanted a fresh draft on those lines, or alternatively that the
existing Articles suitably altered and approved by the general body be
submitted to them through the Registrar of Joint Stock Companies, Madras, for
approval before "it is finalised". At 5 p.m. on the 7th November,
1947, the Special Co a-mittee met and considered the proposal of the
Government. They passed at that meeting two resolutions:
"(1) Resolved that the letter be placed before
the General Body Meeting to be held at 6-30 p.m. with the recommendation that
the suggestion of the Government be accepted; and
(2) Resolved also that this Committee
recommends that the spirit of the letter of the Government of Madras be
observed by refraining from using proxies at today's meeting and subsequent
meetings as well as the Annual General Body Meeting."
These
resolutions were passed, one member Mr. Annamalai Chettiar dissenting. The
extraordinary general body meeting was held on the 7th November, 1947, at 6-30 p.m.
which was presided over by Mr. P. Natesan as the senior Steward, Mr. Annamalai
Chettiar expressing his unwillingness to take the chair. What exactly happened
at that meeting is a matter of serious controversy between the parties, and the
fate of this case mostly depends upon our decision on this point. What
purported to be the proceedings of the meeting of the 7th November were
communicated by the Club to the members, and the plaintiffs filed the
communication received by them, which is marked as Ex. P-18. The solicitors of
the Club by their letter of 10th November, 1947, communicated to the Registrar
of Joint Stock Companies the proposed revised Articles which, it was alleged,
were adopted at the meeting of the 7th November. The Registrar of Joint Stock
Companies through a telephonic message of 14th of November, 1947, asked the
solicitors whether the revised set of Articles was adopted by a special
resolution at the meeting of the 7th, and that, if so, a copy of the resolution
and a copy of the notice convening the meeting should be sent to him for
reference. It was also pointed out by the Registrar that if the Articles were
adopted by a special resolution, prior sanction of the Government ought to have
been obtained and the Government might have to be addressed to condone the
omission. To this the solicitors replied by their letter of 15th November,
1947, pointing out that there was no such necessity. The general meeting was
held on the 18th at which some formal business was transacted, and the members
were informed that there was no necessity to elect the Stewards as at the first
meeting of the Managing Committee held on 10th of November, 1947, Mr. P.
Natesan was elected Chairman and five persons were elected as Stewards. Mr.
Annamalai Chettiar wrote to the Registrar of Joint Stock Companies on the 18th
(Ex. P-20) that the proposed special resolution had not been put to the meeting
at all by the Chairman, Mr. Natesan, on the 7th of November, 1947, and that it
had not been passed by the requisite statutory majority. The present
plaint-iris issued through their lawyers a notice to the Club questioning the
legality of the meeting of the 7th November and of the election of the members
of the Managing Committee on that date on the grounds elaborately specified in
that notice including the fundamental objection that the special resolution was
not moved or put before the meeting and was not voted upon. The notice demanded
the Managing Committee to accept the invalidity of the proceedings of the
meeting of 7th November failing which it was intimated a suit would be
instituted for appropriate reliefs. The reply of the Club is Ex. P-23, dated
25th of November, 1947, and was sent through their solicitors. In this the
allegations in the notice Ex. P-21 were denied.
This was
followed by the present suit which was filed on the 8th of December, 1947, by
two members of the Club for themselves and on behalf of the other members of
the Club other than those who were originally impleaded as defendants in the
suit after obtaining the necessary permission under Order 1, Rule 8, Civil
Procedure Code. The first defendant is the Race Club. Defendants 2 to 13 are
members of the Club who were elected as members of the Managing Committee. The
suit was originally filed impleading only defendants 1 to 13. Defendants 14 to
90 who are some of the other members of the Club were impleaded as parties at
their own request, as they wanted publicly to dissociate themselves from the
plaintiffs.
The main
reliefs claimed in the plaint were: (1) a declaration that the meeting of the
general body of the members of the Club held on the 7th November, 1947, was
invalid and void and that all business transacted thereat was invalid, null and
void; (2) a declaration that the Managing Committee comprising defendants 2 to
13 purported to have been elected at the said meeting was not lawfully or
validly elected and were not entitled to assume office; (3) a declaration that
the proposed amended Articles have not been duly passed and are ineffective;
(4) a declaration that the Stewards who were in office prior to 7th November,
1947, still continue to be in office and are the persons legally and lawfully
entitled to be in management and control of the Club; and (5) a declaration
that the proceedings of the general meeting of the 18th of November, 1947, are
illegal, invalid and void. There is also a relief for an injunction against
defenants 2 to 13.
The grounds
on which the reliefs claimed in the plaint were sought to be sustained before
us may be catalogued as follows: (1) The meeting of the 7th of November, 1947,
was not convened by the proper authority under the Articles, viz., the
Stewards. (2) The notice of the meeting (Ex. P-8) which was posted on the 16th
October, 1947, contravened the provision of Section 81 (2) of the Indian
Companies Act as 21 days were not allowed between the date of the meeting and
the receipt of the notice. (3) The notice of the meeting did not contain the
necessary particulars as it did not comply with the requirement that the
general nature of the business should be indicated in it, the proposed amended
Articles of Association not having been sent along with the notice so as to
give notice thereof of 21 clear days. (4) Item No, 2 in the agenda, the special
resolution relating to the proposed amendment of the Articles, was not moved or
put before the meeting for being voted upon. (5) In any event even if the
voting of 66 members at that meeting was in support of the special resolution,
that did not constitute the statutory three-fourths majority of the members
present, who numbered according to the plaintiffs 105. (6) The amendments moved
were not within the scope and ambit of the original resolution and could not
have been validly made. (7) The election of the 12 members of the Managing Committee
was illegal as the notice regarding it was insufficient as regards the time and
was also defective as the members were not informed of the qualifications and
the functions of the Managing Committee before they were called upon to submit
nominations. (8) The election of the entire Managing Committee was illegal, or
in any event that of Mr. Natesan, was clearly illegal as he was disqualified to
preside at the meeting, being himself a candidate for election to the Managing
Committee. (9) If the meeting of 7th November, 1947, was void, the annual
general meeting of 18th November, 1947, was equally void, as proxies were
illegally excluded.
These charges
are of course denied by defendants 2 to 8, 10, 12 and 13. In paragraph 5 ot the
written statement filed on behalf of the first defendant, the first defendant
stated with reference to the allegations in paragraph 6 of the plaint that
although 105 members signed the attendance sheet during the period of the
meeting and 49 proxies were registered, only 66 members were actually present
at the time when the resolution to adopt the new articles was put to vote. The
other defendants 2 to 8, 10, 12 and 13 filed a separate written statement
practically adopting the written statement filed on behalf of the first defendant.
Defendant 9 seems to have signed the written statement of defendants 2 to 8,
10, 12 and 13 but without looking into the written statement filed on behalf of
the first defendant. Mr. Vijayaraghavan, the 9th defendant, wanted to see the
written statement of the first defendant before their written statement was
actually filed into Court. For this purpose he wrote to his solicitors on the
10th of January, 1948, communicating his intention to see the written statement
of the first defendant before the written statement bearing his signature was
actually put into Court. To this the reply of the solicitors dated 12th
January, 1947, was that their written statement was filed in Court on that day
as Mr. Small was otherwise engaged that morning and that it was too late to
withhold the filing of their written statement. Mr. Vijayaraghavan was informed
that the written statement signed by him merely adopted the written statement
filed on behalf of the Club. On the 15th January, 1948, Mr. Vijayaraghavan by
his letter protested against this action of the solicitors and pointed out that
paragraph 5 of the first defendant's written statement was highly misleading
and even incorrect. According to him, when the resolution was put to vote at
the meeting, 66 persons voted for, one member said he was neutral and about 30
to 35 other members did not vote either way. He pointed out that the statement
in paragraph 5 of the written statement of the Club that only 67 members were
present at that time was not true and that therefore he could not subscribe to
it. After this protest when the written statement of the defendants 2 to 8, 10,
12 and 13 was returned the solicitors scored out his name. Mr. Vijayaraghavan
filed a separate written statement engaging another counsel. Mr. Vijayaraghavan
in his written statement denied the allegations in paragraph 5 of the written
statement, reaffirmed the facts as stated in his letters and left other
questions to be decided by the Court. Annamalai Chettiar also filed a separate
written statement setting out his contention.
The learned
Judge who tried the suit held that though there were some irregularities at the
meeting and though he was not prepared to accept it in their entirety the
contentions put forward by the Club relating to "waiver", "estoppel"
and the like, the plaintiffs had failed to substantiate their contention on the
material issues. He was of opinion that there was no illegality in the
proceedings of the meeting of 7th November, and that the special resolution was
validly passed at that meeting. He characterised the action as a case of
"a storm in a tea cup" and dismissed the plaintiffs' suit.
At the outset
it is necessary to consider the question whether the suit as framed is
maintainable. The action was brought by two plaintiffs who are the members of
the Club for themselves and also on behalf of the other members after obtaining
the requisite leave under Order 1, Rule 8, Civil Procedure Code. The learned
Judge was of opinion that the suit was incompetent as what is known as the rule
in Foss v. Harbottle applied to
the case. The rule in Foss v. Harbottle is that a Court will not interfere with
the ordinary management of a company acting within its powers and has no
jurisdiction to do so at the instance of the shareholders. A shareholder is
entitled to institute a suit to enforce his individual rights against the
company such as his right to vote, or his right to stand as a director of a
company at an election. If the shareholder however intends to obtain redress in
respect of a wrong done to the company or to recover monies as damages alleged
to be due to the company, the action should ordinarily be brought by the
company itself. In order therefore to enable a shareholder to institute a suit
in the name of the company, in such a case, there must be the sanction of the
majority for corporate action. In ordinary cases, therefore, this principle
implies the supremacy of the will of the majority. It is open to a majority
always to set right a thing which was done by the majority either illegally or
irregularly, if the thing complained of was one which the majority of the
company were entitled to do legally and was within the powers of the company by
calling a fresh meeting. That is the reason why in such cases the Court refuses
to interfere at the instance of a shareholder even in a representative action
brought by him. If the majority however act in an oppressive manner, it is not
as if the minority are without a remedy. This possibility was foreseen by Sir
James Wigram, Vice-Chancellor who delivered the judgment in Foss v. Harbottle. At page 492
the Vice-Chancellor says:—
"If a case should arise of injury to a
corporation by some of its members, for which no adequate remedy remained,
except that of a suit by individual corporators in their private characters and
asking in such character the protection of those rights to which in their
corporate character they were entitled, I cannot but think that the principle
so forcibly laid down by Lord Cottenham in Wallwonh v. Holt , and other
cases would apply and the claims of justice would be found superior to any
difficulties arising out of technical rules respecting the mode in which
corporations are required to sue."
In such a case where action by a shareholder is
permitted, the plaintiffs would not have a larger right to relief than if the
company itself were the plaintiff and are not entitled to complain of acts
which are valid, if done with the consent of the majority of the shareholders
pr are capable of ratification by the majority.
The later decisions however have recognised
exceptions to what is conveniently known as the rule in Foss v. Harbottle. James, L.J.
in MacDougall v. Gardiner considered
the rule and stated the exceptions in the following passages at page 21 which
has since become classic:—
"I think it is of the utmost importance in all
these companies that the rule which is well known in this Court as the rule in
Mozley v. Alston
and Lord v. Copper Miners Co. and Foss v
Harbottle
,should be always adhered to ; that is to say, that nothing connected with
internal disputes between the shareholders is to be made the subject of a bill
by some one shareholder on behalf of himself and others, unless there be
something illegal, oppressive, or fraudulent—unless there is something ultra
vires on the part of the company qua company, or on the part of the majority of
the company, so that they are not fit persons to determine it ; but that every
litigation must be in the name of the company, if the company really desire
it."
From this it follows that a shareholder or
shareholders are entitled to bring an action (1) in respect of matters which
are ultra vires the company and which the majority of shareholders were
incapable of sanctioning (see Burland v. Earle); (2) where
the act complained of constitutes a fraud on the minority; and (3) where the
action of the majority is illegal. The decisions in Baillie v. Oriental
Telephone and Electric Co. Lte., and Cotter
v. National Union of Seamen, recognised
a fourth exception where a special resolution was required by the articles of
the company and the company obtained the assent of the majority to such special
resolution by a trick, or even where a company authorised to do a particular
thing only by a special resolution does it without a special resolution duly
passed as in such a case to deny a right of suit to the shareholders without
using the name of the company would in effect result in the company doing the
thing by an ordinary resolution. In other words, this means that where a
special resolution was improperly passed, if the rule that the company alone is
the proper plaintiff to institute a suit questioning such resolution were to be
enforced, the shareholders by a bare majority could defeat and prevent the
minority from using the name of the company. The result of such a course would
be indirectly to uphold the validity of a special resolution which was
otherwise invalid. To avoid this result this exception was recognised in the
two decisions. The rule and the exceptions thereto are also stated in Palmer's
Company Law, 17th Ed., at pages 236 and 237 and Halsbury's Laws of England (2nd
Ed.), Vol. 5, page 445, paragraph 728. The appellants' learned advocate placed
before us the authorities bearing on the rule and the exceptions, and the respondents learned advocate did not
challenge the position contended for by the appellant. It is needless to
consider the authorities in detail as the substance of the decisions is as
stated above.
The attempt
of the learned advocate for the appellants is to bring the present case under
the two exceptions, namely, that the acts complained of are illegal acts, and
secondly that if the special resolution was not passed or was passed illegally
the effect of applying the rule in Foss v. Harbottle to this
case would be indirectly to sanction by an ordinary resolution that which the law
requires to be passed only by a special resolution. For reasons given below, in
our judgment the present suit falls within these two exceptions and that it is
maintainable.
It will be
convenient to deal first with the objection that the' special resolution, item
2 in the agenda, was not put to the meeting and was not passed, for this
question goes to the root of the matter. If we find that no special resolution
was passed at the meeting of the 7th November, 1947, the whole proceedings of
that meeting fall to the ground. Section 20 of the Indian Companies Act
requires a special resolution to alter the articles. If there was no special
resolution sanctioning the alteration, the action of the Club in altering the
Articles without authority would be void and the alterations would have no
legal effect. It is unfortunate that in this case notwithstanding the presence
of the solicitor of the Club, Mr. Small, at the proceedings of the meeting and
notwithstanding the fact that the Chairman of the meeting and shareholders were
men of status in life there is no authentic record of the proceedings of the
meeting. This has made our task more difficult. ' According to the plaintiffs
one and only one resolution was put before the meeting on that day, that is,
resolution No. 1 of the special committee in Exhibit P-16, and that it was this
resolution that was passed by 66 voting for, and one remaining neutral out of
the members present. The plaintiffs categorically asserted in the plaint that
the special resolution (items in the agenda) was not put to the meeting and was
not passed. This of course was denied by the defendants. According to the
version of the defendants the special resolution alone was put to the meeting,
and it was in respect of that that the counting of the votes took place and it
was carried by 66 votes, one remaining neutral. According to both versions it
would be clear from the evidence that there was only one counting of the votes
at which it was found that 66 were in favour of the resolution, whether it was
the resolution of the special committee that was put to the meeting or the
special resolution itself. As regard the number of persons; present at that
sole count, there is also conflicting evidence,
[After
discussing the evidence bearing on this question their Lordships concluded.]
We,
therefore, hold agreeing with the contention of the plaintiffs that the special
resolution was not put to the meeting and was not passed.
If the
special resolution was, in: fact, pat to the meeting a passed by 66 voting for,
we have no doubt on the evidence adduced even by the plaintiffs that there were
no more than about 10 or 20, members who did not take part in the voting and
therefore the 66 would constitute the required majority for declaring the
resolution carried. In, view, of the finding that the special resolution was
not passed, the amendment of the Articles and the consequent election of the
members of the Managing Committee are wholly void.
This really
disposes of the suit in favour .of the plaintiffs. In this view it may not be
necessary to consider the other objections to the meeting. However we will deal
with the other objections also, as in our opinion, some of them are well
founded.
We now
proceed to consider them in the order in which they wore enumerated earlier.
The first of the objections is that the meeting was not convened by the proper
authority. The Stewards constitute the, authority under the articles (Article
49) to call for an extraordinary-general meeting as well as the annual general
meetings. The quorum for the meeting of Stewards is fixed at three. The notice,
Exhibit P-8 was signed by the Secretary. It is common ground that there was no
separate meeting of the Stewards in which "they decided that an
extra" ordinary general meeting should be convened on the 7th November. No
minutes of any such meeting have been placed on record. Of the six Stewards Mr.
Lawrence died some time ago, Mr. Chidambaram Chettiar was out of India and
according to Mr. Small, Mr. Hume was at the time of the notice in Ceylon,
though he had no personal knowledge of it. Mr. Hume was present on the 7th both
at the special committee and also at the extraordinary., general meeting. It
may that Mr. Hume also was not available at the time Exhibit P-8 was issuee.
The notice Exhibit P-8 did not indicate the authority under which the meeting
was called. The extraordinary general, meeting decided on the 21st June, 1947
(Exhibit P-2), that after the report of the special committee then constituted
for revising the Articles was submitted, a meeting of the general body should
be called for not later than 31st October, 1947, for the consideration of the
report. This authority would not avail, because the time fixed had expired and
the meeting was subsequently convened only 6n the 7th November, 1947. The.
defendants relied on Exhibit P-7 which contains a resolution of the special
committee passed on 15th October., 1947, that an extraordinary general body
meeting should be convened on the 7th November, 1947. This meeting of the
special committee was attended by 9 members of whom 3 were Stewards who were ex
ojficio members of the special Committee. As three of the Stewards who
Constituted the quorum for a meeting of the Stewards and who were the only
persons available in India at that time took part in the special committee
meeting, it is urged on behalf of the defendants that the resolution of that
meeting may be deemed to be a resolution of the Stewards and therefore
justified the calling of the meeting. Alternatively, it is also contended that
in any event this is at the most an irregularity and not an illegality which
justifies the setting aside of the resolution. If a general meeting is convened
by the Secretary without proper authority it is not valid. See Hay craft Gold
Reduction and Mining Company, In re and State
pf Wyoming Syndicate, In re. Where the
directors however met aad decided to convene a general meeting but the meeting
of the directors itself was not properly convened, it was held in Browne v. La
Trinidad,
that by reason of the irregularity of the Board meeting the general Meeting was
not incapacitated from acting. In the case in Harhenv. Phillips a Board
meeting of the directors was held which decided to convene an extraordinary
general meeting. At the Board meeting the plaintiffs who were the directors
were refused admittance to the meeting by the Secretary under the direction of
persons in possession of the Board room. The plaintiffs protested and withdrew.
The persons in possession of the Board room purporting to act as a Board
adjourned their meeting to the next day to a different place, the office of
their solicitor, and on the requisition presented to the meeting on the next
day which was attended by three of the defendants, appointed a special
committee to convene an extraordinary general meeting. At the meeting of the
Board there was unquestionably a person who took part in the meeting and who
was not a director. It was held that the meeting of the Board of Directors on
the two days were unlawful and that everything that was done at those meetings
was invalid. The. consequence was that the appointment of the special committee
and the notice convening the meeting were also invalid. It was pointed put in
answer to an argument that there was a quorum of the directors and therefore
the meeting was lawful and that it was not enough that there was a quorum as
the lawfully constituted directors were prevented from attending the meeting.
The convening of the meeting, according to this decision, was not a mere
ministerial act. The directors have to exercise their discretion and have to
fix the time within which and the place at which the meeting should be held,
and whether a meeting should at ail be held. In the light of these decisions it
is difficult to say that there was a valid meeting of the Stewards. There is no
doubt some force in the argument of the respondents that the proceedings of the
special committee in which three of the Stewards who were available in India
were present may be deemed to be a valid meeting of the Stewards. The objection
of the plaintiffs is technical. The mere presence of the other members of the
special committee at that meeting may not vitiate the resolution to which the
Stewards were a party. We do not however think it necessary to express any
final opinion on this question.
The next
question for consideration is whether the notice, Ex. P. 8, posted on the 16th
October, 1947, complied with the requirement of Section 81, sub-clause (2), of
the Indian Companies Act that there should be a notice of "Not less than
21 days." There were 260 Club members of whom 23 were living outside
British India, 51 members were absent members and 59 members lived at places
which could be served through post after more than a day had elapsed from the
date of posting. 127 members were within one day's reach from the date of
posting. The notice of the meeting therefore posted on the 16th at Guindy could
have been received by less than half the members only on the 17th. More than a
day was required at least in respect of 59 members. Excluding therefore the
date of service of notice and the date of the meeting there was only an
interval of 20 days in respect of 127 members, and a still less interval in the
case of others. Section 81(2) of the Indian Companies Act provides:—
"A
resolution shall be a special resolution when it has been passed by such a
majority as is required for the passing 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.
Provided
that, if all the members entitled to attend and vote at any such meeting so
agree, a resolution may be proposed, and passed as a special resolution at a meeting
of which less than twenty-one days' notice has been given."
It is
obligatory to serve notice of the meeting of a company with a statement of the
business to be transacted at the meeting on every member in the manner laid
down for service of notice under the Articles. Article 49 of Table A of the
Indian Companies Act which is the same as Article 50 of the Articles of the
Club lays down;—
"Subject
to the provisions of sub-section (2) of Section 81 of the Indian Companies Act,
1913, relating to special resolutions fourteen days' notice at the least
(exclusive of the day on which the notice is served or deemed to be served, but
inclusive of the day for which notice is given) specifying the place, the day
and the hour of meeting and, in case of special business the general nature of
that business, shall be given in manner hereinafter mentioned, or in such other
manner if any, as may be prescribed by the company in a general meeting to such
persons as are under the Indian Companies Act, 1913, or the regulations of the
company, entitled to receive such notices from the company; but the accidental
omission to give notice to or the non-receipt of notice by any member shall not
invalidate the proceedings at any general meeting."
The manner of
serving notices is provided by Article 112 of Table A which is the same as
Article 73 of Ex. P-29. It states:—
"112. (1)A notice may be given by the company to any member,
either personally or by sending it by post to him to his registered address or
(if he has no registered address in British India) to the address if any within
British India supplied by him to the company for the giving of notice to him.
(2) Where a notice is sent by post, service of the notice shall be
deemed to be effected by properly addressing, prepaying and posting a letter
containing the notice and, unless the contrary is proved to have been effected
at the time at which the letter would be delivered in the ordinary course of
post."
It is
admitted on behalf of the respondents that if regard be had to the expression
"not less than twenty-one days" occurring in Section 81 (2) there
should be an interval of 21 clear days and indeed this position could not be
disputed as it was established by decisions where similar expressions occurring
in the Companies Act and also other statutes were considered. See Railway
Sleepers Supply Company, In re, and Rex v.
Turner
The argument however that was pressed on behalf of the respondents was that the
section should be construed in the light of Article 49 of Table A which
includes the date of the meeting in cases where only 14 days' notice is
required. It was also argued that it was permissible to refer to the Articles
for the purposes of ascertaining the intention of the legislature in the body
of the Act. In support of this contention the decisions in Barned's Banking
Co., In re, Ex parte The Contract Corporation, Lock v.
Queensland Investment and Land Mortgage Company, and
Halsbury's Laws of England. Vol. 5, Second Edition, Page 292, para. 504 were
referred to. There cattle no dispute that the principle of construction
contended for On behalf of the respondents is correct. As Article 49 is
expressly made subject to the provisions of sub-section (2) of Section 81 it cannot
be inferred that in construing that sub-section the Legislature intended to
include the date of the meeting within the period of 21 days. It cannot be
assumed that because that date was included, in other cases the Legislature
intended to include it also in case of special resolutions covered by
sub-section (2) of Section 81. The very fact that a specific reference is made
in Article 49 to include the date of the meeting within 14 days in cases in
which a notice of 14 days is required is a clear indication that it was not
intended to apply to cases of meetings which require 21 days' notice. Under the
corresponding provisions of the English Companies Act of 1929 the Court of
Chancery had to consider a similar question. Sub-section (2) of Section 117 of
the English Act corresponds to sub-section (2) of Section 81 of the Indian Act,
and Article 42, of the English Act corresponds to our Article 49. In the case
reported in Hector Whaling Limited, In re a notice
convening an extraordinary general meeting of the company on 30th May, 1935,
was dated 8th May, 1935, and was posted on that day. By virtue of the Articles
of Association of the company the notice is deemed to have been served on the
following day, that is, 9th May, 1935. Excluding the date of the meeting it
would be noticed that in that case the interval was only 20 days. Article 138
of the company in question stated:—
"Any
notice or other document if served by post shall be deemed to have been served
on the day following that on which the letter containing the same is put into
the post, and in proving such service it shall be sufficient to prove that the
letter containing the notice or document was properly addressed and put into
the post office as a prepaid letter or prepaid registered letter as the case
may be."
On the
authority of the decisions in Rex v. Turner and
Chambers v Sniiih, Bennett,
J., held that the expression "not less than twenty-one days’ notice"
contained in sub-section (2) of Section 117 meant 21 clear days exclusive of
the day of service and exclusive also of the day on which the meeting was to,
be held. It was also pointed out that It was not open by the Articles of
Association to curtail the length of time which the statute had fixed. No doubt
in that decision, specific reference was not made to the language of Article
42, and the contention now advanced was not raised and considered. It cannot
however be assumed that the counsel who argued the case and the learned Judge
who decided it were not aware of the language of Article 42. In view of the
clear language of the./article the point does; not admit of any doubt, and
perhaps that was the reason why the contention was not raised as of no
substance.
It was next
argued that in any event we should count 21 days from the date of posting, and
that if that was done, there was an interval of clear 21, days even if the date
of the meeting was excluded. The argument, in our opinion, is opposed to the
clear language of Article 112, The Article states that, unless the contrary is
proved the notice must be deemed to have been effected at, the time at which
the letter would -be delivered in the ordinary course of post, and this would
be the 17th in the case of at least half the number of the members. This
extraordinary contention is not supported by any decisions. Form No VIII in which
a special resolution has to be communicated to the; Registrar of Joint Stock
Companies was relied on. In the form one of the columns is "Date of
dispatch of notice specifying the intention to propose the resolution as a
special resolution or extraordinary resolution." We do not think that it
is permissible to rely on the language of the form to interpret the section and
the article. The date of the meeting and the date of service of notice are
therefore to be excluded, and in-between the dates there should be an interval
of 21 days, The notice issued to all the members therefore was inadequate and
did not comply with the statutory requirement and is therefore illegal. The
meeting therefore was not legally convened.
The next branch of argument on behalf of the
respondents in., this part of the case was that as none of the members
including the plaintiffs, who though absent appointed proxies on their behalf,
objected at the time of the, meeting, it must, therefore be deemed that the
members Present either in person or by
proxy had waived the objection was not specifically raised in the, written
statement nor in, the issues. All that was said in paragraph 3 of the written
statement was that the plaintiffs had revived the notice pf the meeting iii due
time arid raised no objection (to the validity of the notice, at, any time or
about, the meeting though they were present by proxy at the meeting. Issue 3
raises, in a general form the question whether the, plaintiffs were entitled to
question the validity of the notice of the meeting, or the proceedings of the
meeting at the general body of the 7th .November, 1947, as stated in paragraph
3 of the written statement. As the. facts have been pleaded in the. written
statement, though the point was not specifically raised in the form of waiver,
we thought that 'the respondents should be allowed to argue the question. The
respondents wanted also to raise a point based on the proviso to sub-section
(2) of Section 81 but as it was nowhere raised we refused to grant them permission
to raise and argue it for the first time in appeal. In 31 Halsbury, 2nd Edition
at page 559 it is stated that, "a statutory right which is granted as a
privilege may be waived either altogether or in a particular case."
If the
plaintiffs had waived their right to question the legality of the notice, it is
urged that they are precluded from maintaining the suit not only on their
behalf but also on behalf of other members. Strong reliance was placed on the
decision in Burt v. British Nation Life Assurance Association, where it
was held that a plaintiff who has a right to complain of an act done to a
numerous society of which he is a member, is entitled to sue on behalf of himself
and all others similarly interested, though no other may wish to sue, so
although there are a hundred who wish and are entitled to sue, still, if they
sue by a plaintiff who is personally precluded from suing, the suit cannot
proceed, although other persons on whose behalf the suit was instituted might
maintain the action as plaintiffs. The question therefore resolves itself into
this, namely, whether in view of the imperative provision regarding the notice
in Section 81 (2) it is open to the plaintiffs to waive their right to object
to an illegality, the right being certainly not their personal right but a
right belonging to them in their corporate character. The proviso to Section
117(2) of the English Act was added for the first time in 1929 in view of the
decision in Oxford Motor Co., in re, which
decided that it was competent for the shareholders of the company acting
together to waive the formalities required by Section 69 of the Companies
(Consolidation) Act, 1908, as to notice of intention to propose a resolution as
an extraordinary resolution. In that case all the shareholders met and passed a
resolution without objection and it was held that the want of notice could be
waived. The Indian Companies (Amending) Act of 1936 introduced a similar
proviso in Section 81 (2). Under this proviso, it would be seen that the
requirement as to 21 days' notice may be dispensed with by an agreement of all
the members entitled to attend and vote and not merely of all the members
entitled to vote and present in person or proxy at the meeting. It requires
therefore an agreement of all the members of the Club in order to dispense with
the requirement of 21 days' notice. The proviso in other words indicates the
intention on the part of the Legislature that the provision in sub-section (2)
is mandatory and that it can be dispensed with only by the agreement of all the
members, It is not enough that the members present at the meeting indicated either
expressly or impliedly that they consented to or acquiesced in shortening the
period of notice. An establishment of all the members to wave the notice has
not been established in this case. Even if the members present agreed to waive
the defect in the notice the meeting would not be valid meeting. The plaintiffs
therefore are not precluded form raising the contention that the notice
contravened the provisions of sub-section (2) of Section 81.
The next objection is that the notice was insufficient,
in that it did not give full particulars of the nature of the business. Under
the articles the notice should indicate the general nature of the business
intended to be transacted at the meeting. The draft proposed amendments to the
Articles of Association did not accompany the notice and were if fact posted
only on the ,21st October, and therefore must have been received on the 22nd.,
On this question there is no evidence on record, but it was agreed before us by
the learned advocates appearing for the appellants and the respondents that the
printed draft was posted on the 21st October. It is therefore urged that the
notice did not indicate the general nature of the business. We are not prepared
however to agree with this contention. It was on the initiative of the general
body that a special committee was appointed to consider the amendments, if any,
to the Articles of Association. The notice clearly stated that a print of the
proposed amended Articles of Association will follow shortly. From the 22nd to
7th of November the members had ample time to consider the proposed amended
Articles. We do not think that the notice was insufficient and therefore bad on
this ground. No useful purpose would be served by referring to the decisions to
which our attention was drawn, as the decision of the question would invariably
rest on the fact's of each case.
In Palmer's Company Precedents, Part I, at page 1002, it is pointed out
that:
"Where a large number of alterations have to be
made, it is generally more convenient to adopt a new set of articles
altogether. Where this is course is adopted, a copy of the new regulations
should life for inspection at the office, and the notice convening the meetings
should state the fact; and in some cases it may be deemed expedient to Send
printed copies of the proposed new articles with the notices. According to the
decision of Kekewich, J., in Normandy v. Ind Coope & Co., the
notice should Call attention to any material alterations; and in Baillie v
Oriental Telephone and Electric Co., the Court
of Appeal held that a notice of a proposed resolution to alter articles
involving a large increase in the remuneration of the directors was invalid on
the ground that the proposed increase was not fully and frankly disclosed….
The notice
should state that a copy of the new articles is enclosed, or that a copy of the
proposed new articles may be seen at the company's office."
In this case
in the notice it was stated that the proposed articles would be sent shortly,
and they had been posted within six days from the date of posting of the
notice. In the light of the principles stated above we think that there is
substantial compliance with this requirement of law and that the notice was not
bad on this ground.
Nor is there
any force in the objection that the amendments moved relating to the proxies
were not within the scope and ambit of the original resolution. Notice of the
amendments was given in Exhibit P-13 by Mr. T. T. Krishnamachari and others,
and the Government later pointed out that it would be advisable in the
interests of racing that prbxies should be abolished to make the members take
active interest in racing. The amendments proposed by Mr. Eswara Aiyar cannot
be said to be outside the scope of the original resolution.
The next
objection relates to the election of 12 members of the Managing Committee. If
our view that the special resolution was not at all moved and the amendments
were not passed by a special resolution is correct, the meeting had no
authority to elect 12 members to the Managing Committee, as the old articles
continued to be in force. Apart from this, we think that the election was
illegal, as the notice was not sufficient in the circumstances of the case.
Exhibit P-8 was posted on the 16th October, and it required nominations for
election to the Managing Committee to be submitted to the Secretary 14 clear
days before the date of the meeting. That means, the nominations should be
posted by a member either on the 21st October or on the 22nd to reach the
Secretary. The members were not made aware of the functions and the duties of
the Managing Committee, and in fact they did not receive the proposed
alterations earlier than the 22nd, taking the view most favourable to the
defendants. It is impossible for the members to make up their mind with no data
before them and to submit nominations. Practically they had no valid notice of
the election and the election was rushed through at the meeting of the 7th. The
election is also invalid on the further ground that Mr. Natesan presided at the
meeting. He was himself a candidate for the Managing Committee. There were 24
nominations and 19 actually contested the election. Objection was raised at the
meeting that the new rule came into existence only on that day and that
nominations were proposed 14 days before the passing of the rule. The chairman
had to give a ruling on the question, and he decided in favour of the validity
of the nominations including his
own. The chairman's ruling may be correct or may be incorrect.
Perhaps in view of the decision in Pacific Coast Coal Mines Ltd. v. Arbuthnot, a notice
for election of the members of the Managing Committee may retrospectively be
validated bypassing a special resolution, but that is not the question. Here is
an instance where the chairman was in the position of a quasi-judicial officer,
and he had to be a judge in his own cause. There was clearly a conflict between
his duty and his interest. In the normal course he should have vacated the
chair and requested another member who was not a candidate to take it, and this
was not done. That a person cannot be a judge in his own cause is an elementary
rule, and if an authority is wanted it is to be found in Rag v. Owens. In Fanagah
v. Kernan,
it is stated:—
"There is no more sacred maxim of our law than
that no man shall be a judge in his own cause, and such force has that maxim
that interest constitutes a legal incapacity to a person being a judge in every
case ... It is impossible for a Court of law to allow him to exercise the
function of presiding at that election of which he could influence the result.
No man can preside at his own election and return himself.
See The Queen v. White. These
principles are well established, and it is unnecessary to deal with them
elaborately. In fact, the respondents' advocate does not dispute the propositions,
but contends that those principles apply to meetings other than the meetings of
a company. Under the articles provision is made for the appointment of a
chairman, and he continues to preside at the meeting whether the meeting is one
for transacting ordinary, business or passing a special resolution or for the
election of members to the Board, and the mere fact that the chairman is also a
candidate for a committee or a Board of Management will not vitiate the
proceedings. So ran the argument. No authority in support of this distinction
was placed before us, and we do not see any reason for making a distinction
between meeting of company and other meetings. The principles above referred to
are elementary and are of universal application. We therefore hold that the
election of the 12 members of the Managing Committee was illegal, even apart
from the question whether the special resolution was put to the meeting and
passed or not.
We therefore hold that the special resolution
"item 2 in the agenda" was not passed, that the meeting of the 7th
November was not legal and that the members of the Managing Committee were not
duly elected. From this it follows that the proceedings of the general meeting
of 18th November, 1947, are void, and, in any event, the exclusion of proxies
at the meeting was not warranted by the articles then in force. Differing
therefore form the learned trial Judge we hold that the plaintiffs are entitled
to the reliefs asked for.
The appeal is
therefore allowed and the decree dismissing the suit is set aside. There will
be decree in favour of the plaintiffs as prayed for. The plaintiffs are
entitled to the costs of this appeal and the costs of suit, payable by the
first defendant. Having regard to the trouble involved and time taken we fix
under rule 12 of Order 6 of the High Court Fees Rules, a fee of Rs. 2500 for
the plaintiffs advocates in the appeal and Rs. 2,500 for them in the
suit.
[1952] 22 COMP CAS 248 (CAL.)
HIGH
COURT OF CALCUTTA
v.
Muir Mills Co. Ltd.
HARRIES, C.J.
AND BANEBJEE, J.
Appeal
from Original Order No. 19 of 1951
MARCH 5, 1952
S.M. Bose and A.K. Sen, for the appellants.
S.K. Mitter, for the respondents.
Banerjee, J.—This is an appeal from an order made by S.R. Das Gupta, J., on January 5, 1951, revoking leave granted to the plaintiffs to institute the suit under clause 12 of the Letters Patent. That clause provides that if the cause of action shall have arisen in part within the local limits of the Ordinary Original Jurisdiction of this court, the plaintiffs may file the suit with leave of the court first obtained. The leave under this clause is a condition precedent to jurisdiction. Unless the condition is fulfilled by obtaining the necessary leave to sue, the court will have no jurisdiction to entertain the suit. If the suit is instituted with the leave, and thereafter the leave is revoked, the court will have no jurisdiction to try the suit. The revocation of leave deprives the plaintiff of his right to have his suit tried by the court of his choice. The matter, therefore, is very serious to the plaintiff.
The granting and revocation of the leave is a matter in the discretion of the court, to be exercised on well-established judicial principles.
In our court the practice is that such leave is asked for at the time of the presentation of the plaint to the Master. The Master goes through the plaint, and if he finds that the allegations in the plaint require that such leave should be obtained, he makes an endorsement on the plaint to the effect that such leave has been asked for. Then the plaint is presented before a Judge of this court sitting on the Original Side for the grant of the leave. The Judge after perusal of the plaint grants such leave if he thinks fit. But the whole thing in the first instance is done ex parte, and naturally so, because until the leave is granted, there is no suit filed, and therefore no question arises as to hearing the defendant on an application for granting the leave. If the defendant is so advised, he may make an application to the court for revocation of the leave, and the matter is then heard on notice to the plaintiff, and suitable orders are made. If a case is made out, the leave granted is revoked.
The plaintiffs in this case allege in their plaint that as all the defendants do not reside or carry on business within the local limits of the Ordinary Original Jurisdiction of this court, and inasmuch as it may be contended that a part of the cause of action has arisen outside the jurisdiction, they ask for leave under clause 12 of the Letters Patent to file the suit. The leave was asked for and, as usual, it was granted ex parte.
The defendants took out a Master's summons dated August 5, 1950, for, inter alia, revocation of the leave. The summons was supported by the petition of the defendant company duly affirmed, and an affidavit was filed in opposition to the petition. The matter came up before S.R. Das Gupta, J., who, after hearing the parties, made the order revoking the leave. From this order the appeal which we have heard has been taken.
The plaintiffs are small shareholders of the defendant company, Muir Mills Co. Ltd.,—referred to in this judgment as the defendant company,—described in the cause title as carrying on business through its managing agent, the Indian Textile Syndicate Ltd., and its sole selling agent, the Cotton Textile Corporation Ltd., at 9-A, Esplanade East, Calcutta, within the local limits of the Ordinary Original Jurisdiction of this court. The first plaintiff is described in the cause title as a merchant residing at No. 26, Indian Mirror Street, Calcutta. It is also alleged that the second plaintiff carries on business at 7, Lyons Range, Calcutta. They have filed the suit in their individual capacity as shareholders of the defendant company, and also on behalf of all other shareholders of the defendant company, except those shareholders who are defendants to the suit. Besides the defendant company, there are nine defendants. The second defendant is the said Indian Textile Syndicate Ltd., a company registered under the Indian Companies Act, having its registered office at 9-A, Esplanade East, aforesaid. Defendant No. 5, Hanuman Prasad Dhanuka, is described in the cause title as of 180, Chittaranjan Avenue in Calcutta, within the said jurisdiction. The sixth defendant is described as of 7, Wellesley Place, Calcutta, within the said jurisdiction. Thus, the plaintiffs, defendants 1, 2, 5 and 6 either reside or carry on business within the local limits of the Ordinary Original Civil Jurisdiction of this court. The other defendants, six in number, are described in the cause title as either being residents of, or carrying on business at, places outside the said jurisdiction. Hence, according to the plaintiffs, was the necessity for obtaining the leave.
The plaintiffs' case as pleaded in the plaint shortly put is as follows:
Prior to September 25, 1947, two directors of the company, called the managing directors, were in charge of the management of the affairs of the company. They have since retired. Some time prior to February, 1947, the defendant Hanuman Prasad Dhanuka and two Nepalese gentlemen entered into a partnership for the purpose of buying the majority of the shares of the defendant company with a view to get a controlling power in the affairs of the company. Pursuant to the agreement, the partners acquired 19,540 preference shares and 5,085 ordinary shares of the company. As the preference shares carry with them the right to vote, it is alleged that the three partners have got a controlling interest in the affairs of the company.
On or about February 15, 1947, defendant Dhanuka was appointed a director of the defendant company. On or about June 20, 1947, a company under the name of the Cotton Textile Corporation Ltd. was registered under the Indian Companies Act. On July 5, 1947, another company, namely, the said Indian Textile Syndicate Ltd. was likewise incorporated. The shares of both these companies were held by the partners in equal shares, each having an one-third share in his name or in the name of his nominee.
On or about July 1, 1947, the Directors of the defendant company appointed the Cotton Textile Corporation Ltd. as the selling agent of the defendant company. The said appointment has been accepted by the Cotton Textile Corporation Ltd. It is alleged in the plaint that having acquired a controlling power in the defendant company, the defendants Nos. 3, 5, 6 and 7 decided to appoint the Indian Textile Syndicate Ltd. as its managing agent and also to change the articles of the defendant company in such a manner as would give them the entire control of the defendant company and stifle the minority shareholders. It is further alleged that with that end in view they issued a notice and a circular on September 25, 1947, for a meeting to be held on October 20, 1947. The said notice and circular were sent to and received by the plaintiffs at their residence in Calcutta. It is alleged in the plaint that there was no managing agent before this time, and the directors were proposing to get their nominee appointed as the managing agent. The plaint further alleges that the notice was misleading and was intended to be so. In the notice it was alleged that the proposed changes in the articles were necessary for the management of the company's affairs by a managing agent instead of the managing directors. It is also alleged that the real object of the meeting and of the proposed changes and the managing agency agreement was not disclosed to the plaintiffs or the other shareholders. It is submitted that such non-disclosure amounted to fraud and was made with the deliberate object of misleading the shareholders into the belief that no important or unusual or extraordinary change was going to be made in the meeting. The plaintiffs allege that they did not attend the meeting being misled by the notice into the belief that no radical change would be made in the articles of association nor any extra provision would be made in respect of the remuneration, and terms of appointment, of the managing agent.
The changes in the articles made at the meeting held on October 29, 1947, are large in number; two of them at least are very important, namely, relating to (1) the appointment of the managing agent and (2) the voting right. Under the old articles, each share carried with it the right to vote. Under the new article that was not so. The old article 97 read as follows:
"97. On a show of hands, every member present in person shall have one vote, and upon a poll, every member present in person or by proxy shall have one vote for every share held by him, provided that no company shall vote by proxy so long as a resolution of its directors under the provisions of Section 80 of the Act is in force."
The new article which replaces the old article reads:
"99. Subject to any special rights or restrictions as to voting upon which any shares may be held on a show of hands, every member present in person or by general proxy (as defined by article 103 hereof but who is not a member of the company or who is a member not qualified to vote) shall have one vote and upon a poll, every member present in person or by proxy shall have one vote provided that no company shall vote by proxy so long as a resolution of its directors under the provisions of Section 80 of the Act is in force."
The difference in the two articles is obvious. The right to vote is a very important right of a shareholder, and the new articles have restricted that right. There is no dispute before us that the changes are many and are material.
The notice which was served on the shareholders on September 25, 1947, did not disclose the changes that were intended to be effected in the articles of the defendant company at the meeting, which was held on October 20, 1927. The notice ran as follows:
The Muir Mills Company Ltd.
Notice is hereby given that an extraordinary general meeting of the above-named company will be held at the registered office of the company, Kanpur, on Monday, the 20th day of October, 1947, at 3 p.m. to consider and, if thought fit, to pass, with or without modification, the following resolutions:—
1. (As a special resolution)—that the regulations contained in the document submitted to this meeting, and for the purpose of identification subscribed by the Chairman thereof, be and the same are hereby approved and that such regulations be and they are hereby adopted as the articles of association of the company in substitution for and to the exclusion of all existing articles thereof.
2. (As a special resolution)—that Indian Textile Syndicate Ltd., be appointed managing agents of the company for the period, at the remuneration, and on the terms contained in the draft of an agreement, providing for the same, submitted to this meeting and signed in the margin by the Chairman of the meeting by way of identification, which said agreement be and the same is hereby approved and that the directors shall be and they are hereby authorised to carry the said agreement into effect as on and from the 1st day of October, 1947, with full liberty, subject nevertheless to the provisions of the Indian Companies Act, 1913, to agree to any modification of such agreement before the same is executed.................."
Along with the notice there was a circular in which it was, inter alia, stated that copies of the proposed new articles of association and of the managing agency agreement were available for inspection at the office,—meaning the registered office of the defendent company, which is at Kanpur.
The plaintiffs claim various reliefs, inter alia, a declaration that the special resolutions Nos. 1 and 2 passed on 20th October, 1947, are void, inoperative and should be set aside. There is no dispute in this case between counsel who appear for the parties that that is the main prayer. The other reliefs claimed in the plaint follow as a matter of course. Indeed it has been admitted by the counsel for the plaintiffs who are the appellants before us, that this declaration is the real relief claimed.
The defendant company was under no misapprehension as to the contents of the plaint and the nature of the relief claimed. In the defendant company's petition for revocation, it summarises the plaint as follows:—
"The plaint alleges—
(1) that the appointment
of the selling agents and the managing agents was not in the interest of the
company;
(2) that the articles were altered to stifle
the minority;
(3) that due
notice of the changes proposed to be brought about in the articles was not
given to the shareholders;
(4) that the
full terms on which the managing agents were going to be appointed were not
disclosed to the shareholders;
(5) that the
non-disclosure mentioned above was fraudulently made with the deliberate object
of misleading the shareholders;.............."
It is quite clear from the summary given by the defendant company that it understood that the plaintiffs had based their suit on the ground that by not making a frank and free disclosure in the notice of the changes that were going to be made at the meeting, the defendant company had misled the shareholders including the plaintiffs, thereby preventing them from attending the meeting at which the changes were made on October 20, 1947.
Mr. G.K. Mitter, counsel for the respondent, has not denied that the notice did not convey a true picture of what was done at the meeting, but he said that inasmuch as information had been given to the shareholders that a copy of the proposed changes could be inspected at the registered office of the defendant company, it was incumbent on the plaintiffs to go to the registered office and inspect, if they so desired, the new articles of association and the proposed changes. Therefore, according to counsel, there was no non-disclosure at all. If the plaintiffs did not come to know what changes were going to be made, it was their fault.
In support of this contention, Mr. Mitter relied on a passage in Palmers's Company Precedents, 15th Edition, Part I, page 1002, where it is said:
"Where a large number of alterations have to be made, it is generally more convenient to adopt a new set of articles altogether. Where this course is adopted, a copy of the new regulations should lie for inspection at the office, and the notice convening the meeting should state the fact".
Relying on this passage, Mr. Mitter argued that that was the course which the defendant company followed. The alterations were large in number. So a new set of rules was adopted and a copy of the new regulations was kept for inspection at the registered office of the company. It was available for the inspection of the plaintiffs, and if they did not take inspection, they cannot complain of the alleged nondisclosure.
But Mr. Mitter has overlooked a further statement which occurs in the same paragraph in Mr. Palmer's book:
"And in some cases it may be deemed expedient to send printed
copies of the proposed new articles with the notices. According to the decision
of Kekewich, J., in Normandy v. Ind. Coope & Co., the notice should call
attention to any material alterations and in Baillie v. Oriental Telephone and
Electric Co., the Court of Appeal (in England) held that the notice of a
proposed resolution to alter articles involving a large increase in the
remuneration of the directors was invalid on the ground that the proposed
increase was not fully and frankly disclosed".
In Baillie's case, a shareholder brought an action on behalf of himself and all the other shareholders of a company for a declaration that certain resolutions were not binding on the ground of insufficient notice of the meeting at which they were passed, and for an injunction to restrain the company and the directors from acting upon them. The plaintiff moved for an interim order. The Court of Appeal held that the notice did not give a sufficiently full and frank disclosure to the shareholders of the facts upon which they were asked to vote; and that the resolutions were invalid and not binding upon the company. Baker, J., considered this case in Narayan Lal v. Maneckji Petit Manufacturing Co. Ltd., and also reviewed other English cases. In that case the directors convened an extraordinary general meeting of the shareholders to pass the necessary resolution for substitution of a new set of up-to-date articles for the old ones and fixing the duration of the agency and defining the agent's power. The notice convening the meeting set out the necessary resolutions and was accompanied by a 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 a declaration that the resolutions were inoperative on the ground of insufficiency of 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. The learned Judge observed that if the directors issued a circular in which they referred to certain alterations and said that the only alterations were with regard to clause "X" of the articles of association, whereas there were equally important alterations in clause "Y", it could not be said that the shareholders had sufficient notice of the alterations in clause "Y".
In the case before us, the documents referred to in the clauses of the notice which we have set out above, were not sent to the shareholders. Mr. Mitter's contention was that that might be so, but the shareholders had notice that the new regulations were lying at the registered office of the company; so it was not necessary to send the documents to them. According to counsel it was quite sufficient to tell them that they could have inspection of the new regulations at the registered office of the company, and for this contention he relied on Mr. Palmer's observation which I have already set out.
But it should be observed that Mr. Palmer did not say that it was not necessary to send copies of the proposed articles with the notice. All that he said was that where a large number of alterations had to be made, it was generally more convenient to adopt a new set of articles altogether and that where this course was adopted, a copy of the new regulations should lie for inspection at the registered office of the company, and the notice convening the meeting should state that fact. But nowhere did he say that it was not necessary to send copies of the new proposed regulations with the notices. On the other hand, from the latter passage which I have quoted, it is clear that the learned author said that in some cases it was expedient to send printed copies of the proposed new articles with the notices and he has cited two English cases for that proposition. Assuming, however, that Mr. Plamer's observation supports Mr. Mitter's contention, it may not be possible for us to adopt that view in India, having regard to the local conditions and a variety of other considerations that prevail in India. It will not in all cases be sufficient in India to leave a copy at the registered office and state that fact in the notice, inviting the shareholders to inspect the proposed changes at the registered office. The travelling facilities here are not the same as in England, neither the country is so small as England. There are various difficulties that prevent the shareholders from going to the registered office and having inspection. Besides whether such a course should be adopted or not depends on the facts of each case. For example, it may be that the shareholders of a company live very near the registered office. In such a case possibly it would be sufficient to give them notice that the proposed changes could be inspected at the registered office. But in a case like the one under our consideration, where there is a large body of shareholders who reside at great distances from the registered office of the company, we do not think it would be fair on the part of the company to leave the proposed regulations at the registered office and give the shareholders notice of that fact. In a case like this we entirely agree with Mr. Palmer that printed copies of the proposed new articles should be sent with the notice. In this case that was not done, and therefore, we take the view that the notice did not disclose fully and frankly the facts upon which the shareholders were asked to vote.
It is quite possible to argue in this case that the notice in question was a 'tricky' notice, as was said in Kaye v. Croydon Tramways Co., and in Baillie's case (p. 515). In this case there is no dispute that there was a partnership between defendant No. 5 and the two Nepalese gentlemen. There is no dispute further that they acquired a very large number of shares in the defendant company. There is no dispute that the partners have acquired and now control the majority of the shares in the two companies, namely, the Indian Textile Syndicate Ltd., and the Cotton Textile Corporation Ltd., one of which companies has been appointed the selling agent of the defendant company. It is quite clear therefore that the three partners through the said two companies have acquired a preponderance of voting power in the defendant company and are in a position to divide practically the entire profit of the company amongst themselves. On these facts we are of opinion that it was necessary for the defendant company to disclose to the shareholders the controlling interest of the partners in the two companies. But that was not done. An argument is quite plausible that the notice deliberately withheld material facts from the knowledge of the shareholders including the plaintiffs and committed fraud on the plaintiffs. In this case it may be fairly argued that not only there has been a suppression of true facts, but also a false suggestion. Such an argument, we cannot say, would be unreasonable.
In the Indian Contract Act, "fraud" means and includes the suggestion as a fact of that which is not true by one who does not believe it to be true; the active concealment of a fact by one having knowledge or belief of the fact. A fraud may consist of the suppression of what is true as well as the representation of what is false. Therefore, it can be fairly argued that this notice comes within the mischief of Baillie's case and may be called a 'tricky' notice.
The main question then is: Has any part of the cause of action arisen within the jurisdiction of this court? For, if no part of the cause of action has arisen within that jurisdiction, leave or no leave, this court cannot entertain or try the suit. On this part of the case, Mr. Mitter's contention is that no part of the cause of action arose within the jurisdiction of this court and consequently the learned Judge was right in revoking the leave which the plaintiffs obtained by representation that a part of the cause of action had arisen within the jurisdiction.
Let us analyse the position. (1) The plaintiffs are shareholders of the defendant company, however small their shares may be. (2) They reside within the jurisdiction of this court. (3) They are entitled to get at their place of residence a notice which frankly and fully discloses all material facts.
The plaintiffs have stated in their plaint that they received a notice in Calcutta. There is no denial of this fact in the written statement, which the defendant company has filed. Therefore this is an undisputed fact, namely, that the notice was received by the plaintiffs within the jurisdiction of this court.
Mr. Mitter's argument is that it is perfectly immaterial that this notice was received by the plaintiffs in Calcutta. According to him, all that mattered was the posting of the notice. He contends that the service of the notice took place at Kanpur where the letter was posted and for this contention he relied on article 182 (now replaced by article 186). Article 182 of the old articles read as follows:—
"182. (1)A notice may be given by the company to any member either personally or by sending it by post to him to his registered address or (if he has no registered address, in British India) to the address, if any, within British India, supplied by him to the company for the giving of notices to him.
(2) Where a notice is sent by post, service of the notice shall be deemed to be effected by properly addressing, prepaying and posting a letter containing the notice and in proving such service, it shall be sufficient to prove that the letter or wrapper containing the notice was properly addressed, pre-paid and put in the post office.”
In the new article the word "British" has been omitted and the words, "In proving such service...............in the post office" have been replaced by the words- "Unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post"—This change has been made in view of regulation 112 of the Companies Act. But Mr. Mitter relying on the articles contended that immediately the notice was posted, the plaintiffs were served.
In this case there is no dispute that the notice was posted at Kanpur and, therefore, according to Mr. Mitter, the service was effected at Kanpur. We cannot accept this contention. The old article is contrary to the regulation which reads as follows:
"Where a notice is sent by post, service of the notice shall be deemed to be effected by properly addressing, pre-paying and posting a letter containing the notice and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post."
What does this mean? It means that if a notice is sent by post, the service of it shall be deemed to have been effected at the time when in the ordinary course of post the letter would be delivered. If the company proves the posting of the notice, it has not to prove the service. The court is to presume that the addressee has received the letter when it should have been delivered to him in the ordinary course of post. The word "deem" is significant. What does it mean? It means—"to think of as existing": "to believe a thing to be true till the contrary is proved." The articles only raise the presumption as to the time of service and not the place. The presumption only goes this far and no further: namely, until the contrary is proved, it should be presumed that the addressee received the notice at the time when the letter would be delivered to him in the ordinary course of post. That is all. But the question arises, where did the service take place? At Kanpur or in Calcutta? Neither the regulations nor the articles on which Mr. Mitter relies give him any assistance on this point. The service must be at the place where the notice is received. Further it was held in London and Staffordshire Fire Insurance Co., that the provisions of articles 95 and 97 of Table A to the Companies Act, 1862, for the service of notices by a company on its members, apply only to notices relating to the ordinary business of the company, and service in the way there pointed out is not sufficient for the purpose of fixing a shareholder with knowledge of a misrepresentation which would entitle him to repudiate his shares, unless he had been guilty of laches after notice of the misrepresentation. The article or Regulation 112 does not apply so as to affect the member with notice of misrepresentation (which notice was in fact given by the document), if the document does not reach his hands; in other words, the misrepresentation by non-disclosure or otherwise must be taken to have been made at the place where the letter was received; and this is only common sense. A sends a letter to B containing a misrepresentation. Can it possibly be said that the misrepresentation was made at the place where the letter was posted? It must be at the place where the letter reaches him. For there only the letter is read or may be supposed to have been read by the addressee. This argument applies to cases of misrepresentation where there is suppression of what is true as well as a representation of what is false.
The defendant company was bound to give a notice containing all the material facts. The defendant company did post the notice at Kanpur and under the articles the defendant company need not prove the actual receipt of the notice by the plaintiffs. It will be presumed to have been received by them. But then the misrepresentation is made when the letter reaches the hands of the plaintiffs and at the place where it is read. Consequently a part of the cause of action of this suit has arisen within the jurisdiction of this court.
For, what is a cause of action? It means every fact which, if traversed, it will be necessary for the plaintiff to prove in order to get a judgment of the court. It means every fact which the plaintiff must prove to get a decree and which, if not proved, would entitle the defendant to get a judgment in his favour. It is a bundle of essential facts which, it is necessary for the plaintiff to prove before he can succeed. It has no relation whatsoever to the defence which may be set up by the defendants. The test for determination of what a cause of action is, has been thus stated by Rankin, C.J., in Engineering Supplies Ltd. v. Dhandhania & Co.
"The only definition that will work, if it has to be applied to cases of all kinds, is the entire set of facts that gives rise to an enforceable claim, or in the words of Fry, L.J., 'everything which if not proved gives the defendant an immediate right to judgment'; every fact which is material to be proved to entitle the plaintiff to succeed, every fact, which the defendant could have a right to traverse."
Now, apply this test to the present case. The plaintiffs must prove in order to succeed: (a) that they received the notice; (b) that the notice did not disclose all the material facts. Where was the notice received? The answer must be, in Calcutta. Where was the misrepresentation made? It must be in Calcutta. These two facts are material to be proved and they must be proved by the plaintiffs; otherwise the defendant company would be entitled to get judgment in its favour forthwith. There cannot be any doubt, therefore, that a part of the cause of action has arisen within the local limits of the Ordinary Original Civil Jurisdiction of this court, and if so, the plaintiffs with leave of the court obtained under clause 12 of the Letters Patent can file the suit on the Original Side of the High Court. The plaintiffs have the right to file the suit in the High Court subject to the court granting them leave for the purpose. They have obtained the leave and filed the suit.
It must be remembered that it is entirely for the plaintiff to choose his forum. The plaintiff as arbiter litis or dominus litis has the right to choose his own forum or rather any forum the law allows him. Of course this right is subject to control under the provisions of the Code of Civil Procedure or the Letters Patent as the case may be.
The next question is whether the leave granted should be revoked.
On this point in recent years there have been several decisions of this court, and it is sometimes said they are not consistent. I am unable to see that there is any difference, though the decisions have been couched in different words. It is unnecessary for me to discuss these cases. It is quite sufficient if I rely on the last pronouncement on the subject of our court of appeal. In Manindra Bhusan Biswas v. The Benares Hindu University, my Lord, the Chief Justice, observed:—
".............The learned Judge in my view expressed quite accurately the principles governing cases of this kind. He pointed out that before leave can be revoked on the ground of balance of convenience in favour of a trial elsewhere, something more is required than a finding that, on balancing the evidence for and against, there is a balance in favour of one side or the other. In other words, in dealing with this matter, the convenience of the respective parties must not be weighed too carefully............This was a matter in which the learned Judge had a discretion. As I have said, he has stated the principle upon which the discretion has to be exercised with absolute accuracy."
The judgment which was thus affirmed by the court of appeal contains the following statement of the law:
"In considering the question whether leave granted should be revoked or not, the question of convenience is a material factor, though the convenience of the parties is not to be weighed in a delicate balance. The nature of the suit and the question of comparative expenses are material considerations. But mere balance of convenience is not enough. It must be proved to the satisfaction of the court that either the expenses or the difficulties of trial in this court are so great that injustice will be done to the defendant. But at the same time the court ought not to exercise the jurisdiction, if by so doing an injustice is caused to the plaintiff."
Unless the inconvenience is so great as to cause injustice to the defendant, the leave granted by the court should not be revoked.
In another case, Bhualka Bros. Ltd. v. Gobindram Bros. Ltd., the learned Chief Justice observed:
"The plaintiff is the dominus litis and has the right to choose his own forum. This right of choice is, however, not absolute, and the court has the power in a proper case to interfere with the plaintiff's choice and revoke leave if the court considers that the forum has been chosen by the plaintiff mala fide or that the forum chosen is such that if the court permits the suit to go on, the other party would be so handicapped in his defence that it would lead to injustice or that the balance of convenience is decidedly or overwhelmingly against the suit going on in the forum chosen by the plaintiff."
The law on this point therefore is well-settled, so far as our court is concerned.
It ramains for us only to apply that law to the facts of this case. In this case the learned Judge has held that the convenience is to allow the suit to go on at Kanpur. And he says that convenience is great. With great respect to the learned Judge we are unable to agree with him on this point. For, what have the plaintiffs to prove in this case? They have to prove that the notice was defective. The notice is proved by its production. The service has been admitted. The changes in the articles are proved by a comparison of the old articles with the new and it becomes at once clear what the changes are and whether the changes are material. On a perusal of these two documents the learned Judge who will try the suit will be able to decide as to whether or not the notice frankly and freely discloses the material facts. I do not think any other evidence is necessary on this part of the plaintiffs' case. The learned Judge has observed that witnesses have to be called from Kanpur; the books of account would have to be brought down from Kanpur. But why? The books of account will not throw any light on the question as to whether there has been nondisclosure or not. The witnesses will not be able to say whether there was non- disclosure or not. These points are proved by the notice and the old and the new articles. It is not the defendant company's case that the plaintiffs had inspected the new articles at the defendant company's registered office and with that knowledge went to the meeting and cast their vote. If that was the defendant company's case, it would have been necessary to bring down witnesses from Kanpur to prove that the plaintiffs had inspected the new articles, attended the meeting and voted. But that is not the defendant's case. Therefore, with great respect to the learned Judge, I cannot see why it should be necessary to bring witnesses from Kanpur or bring down the books of account from that place to disprove this part of the plaintiffs' cause of action.
As to the three partners having a preponderating voting power, it would be proved by the production of the partnership deed, the fact of purchase of the shares, the certificates of incorporation of the two companies (the Textile and the Cotton Companies), the selling agency agreement, the managing agency agreement. The rest is a matter of inference. On this part of the cause of action also, prima facie, no witness nor any books of account need be brought down from Kanpur.
That being the
case, we are unable to agree with the learned Judge that the convenience of the
trial being held at Kanpur is so great that the leave should be revoked.
Mr. G.K. Mitter may be right in his criticism of the plaint that it contains many paragraphs not strictly relevant. But it is not for us at this stage to enter into a critical review of the plaint or the allegations it contains.
I have not overlooked the fact that the revocation of leave was entirely a matter of discretion with the learned Judge and a court of appeal would be very slow to set aside the discretion, unless it is proved that he has misdirected himself as to the facts or on the law. It may be that the court of appeal does not see eye to eye with the trial Judge in such a matter. But that is no ground for setting aside the discretion exercised by the learned trial Judge. But in this case, with great respect to the learned Judge, we think there has been a misdirection as to the facts and therefore we are bound to set aside the order.
Mr. G.K. Mitter then contended that this was a mala fide suit. He drew our attention to a petition filed on behalf of the plaintiffs (paragraphs 14 and 15) on 26th June, 1950, in this suit. Arguing on those paragraphs, he said that the suit was mala fide. But we are unable to discover anything in those two paragraphs which support Mr. Mitter's contention. We are unable to agree with him that the suit is a mala fide one.
Mr. Mitter also said that as result of a quarrel between two sets of rich people, the Singhanias and the Baglas of Kanpur, the plantiffs have filed the suit at the instigation of the Singhanias and that the Singhanias are helping the plaintiffs in the conduct of the suit, and the suit really is a suit of the Singhanias. Assuming that the Singhanias are helping the plaintiffs financially or otherwise, I cannot see how the suit can be called a mala fide suit, if the plaintiffs have a cause of action. If they have chosen a forum which the law allows them to choose, what does it matter if the plaintiffs are helped by the Singhanias or the Baglas to institute the suit or in its conduct? What does it matter if either of these two sets of people helps the plantiffs with money or material? There may be various reasons for which pecuniary help may be given to the plaintiffs. But for that only, I cannot hold that the suit is a mala fide one.
It is to be noted, however, that the selling agent and the managing agent of the defendant company have all on a sudden removed their office from Calcutta to Tollygunge. It is not denied that their office is now located at the residence of a member of the firm of solicitors of the defendant company. Why did they remove their office? It has been suggested on behalf of the appellants that the defendant company has removed the office in order to deprive the plaintiffs of a contention that the suit has been properly filed in this court inasmuch as the defendant company carries on business within the jurisdiction of this court. This point is of minor importance in view of the broad facts of the case, which I have already analysed. But we have mentioned it as it was suggested by counsel.
Since the learned Judge in exercise of his discretion revoked the leave, we have taken great care to consider the matter, and have given it our fullest consideration. But we are constrained to hold that the learned Judge was not right in the exercise of his discretion. We must, therefore, set aside the order revoking the leave, with the result that the leave granted to the plaintiffs to file the suit under clause 12 of the Letters Patent remains.
The appellants are entitled to the costs of this appeal. Certified for two counsel.
There is another appeal which was preferred from an order of the learned Judge refusing to grant an injunction. The learned Judge revoking the leave, rightly held that he could not grant the injunction, because the court had no jurisdiction to entertain the suit, and therefore, naturally had no jurisdiction to make any order in the suit. The learned Judge accordingly dismissed the application for injunction. He has not expressed his views on the merits of that application. We send back that application to be heard by the learned Judge according to his convenience. We set aside the order of the learned Judge dismissing the application for injunction. The costs of the appeal preferred from the order refusing the injunction will be costs in the suit.
Harries,
C.J.-—I agree.
[1972] 42 COMP. CAS. 29 (CAL.)
HIGH COURT OF CALCUTTA
v.
Sitaram Jaipuria
S.K. MUKHERJEA, J.
SUIT NO. 451 OF 1970
MARCH 16, 1971
Prabir
Sen for the Petitioner.
S.C.
Sen for the Respondents.
JUDGMENT
S.K.
Mukherjea, J.—This
is an application in a representative action by a shareholder for an injunction
restraining the respondent company, Swadeshi Cotton Mills Co. Ltd., and its directors
from holding any meeting pursuant to a notice dated September 14, 1970, or from
passing any of the resolutions set out in the said notice or from giving effect
to the resolutions, if passed.
The
history of the litigation may be briefly indicated. On January 29, 1970, a
notice was given by the secretary of the respondent-company intimating that a
general meeting of the company would be held on February 27, 1970, to consider
and if thought fit to pass the following resolution among others.
“Resolution
No. 1.—Resolved that subject to the necessary approval of the Central
Government being obtained pursuant to the provision of section 372 and all
other applicable provisions, if any, of the Companies Act, 1956, the company
hereby sanctions investment by it in the shares of the Swadeshi Polytex Ltd.,
Kanpur, to the extent of the aggregate face value of Rs. 1 crore by way of
subscribing and/or purchasing to the extent of 10,00,000 equity shares of the
value of Rs. 10 each at par on such terms and conditions as the board of
directors think fit notwithstanding the fact that the investment in the shares
of the said Swadeshi Polytex Ltd. exceeds 10 per cent. of the subscribed
capital of the said Swadeshi Polytex Ltd. and shall exceed 30 per cent. of the
subscribed capital of this company and the board of directors of the company be
and are hereby authorised to do and/ or cause to be done all such acts, deeds
or things as they may think expedient for the purpose. The explanatory
statement annexed to the said notice stated:
The
company had received a letter of intent from the Government of India for
establishment of a new undertaking for the manufacture of polyester fibre. As a
considerable amount of capital will have to be raised it was considered
expedient to promote a new company.............Accordingly a company under the
name and style of Swadeshi Polytex Company Ltd. is being incorporated.
Considering the future prospects and the profitability of the company, Swadeshi
Polytex Ltd., it is considered desirable that this company should invest
liberally in the shares of the aforesaid company. It is proposed to acquire
equity shares to the extent of the aggregate value of Rs. 1 crore in the new
company aforesaid.”
The
petitioner instituted a suit against the respondent-company and its directors
for a permanent injunction restraining the respondents from holding any meeting
pursuant to the said notice and from passing the resolutions mentioned in the
said notice on the ground that the notice did not disclose material facts. On
February 26, 1970, on an application moved ex parte, Mr. Justice, S. C. Ghose,
passed an order of injunction restraining the respondents from giving effect to
any resolution that might be passed pursuant to the said notice. The
resolutions in question were passed at a meeting held on February 27, 1970. The
application was finally disposed of by Ghose J. by an order dated September 7,
1970. By the said order, the directors of the respondent-company were
restrained from acting on the resolution No. 1 until the same was confirmed or
approved at a meeting properly notified. The said order of injunction was
issued by the learned judge on the ground that the explanatory statement did
not disclose a material fact, viz., that the offer contained in the letter of
intent had lapsed on January 24, 1970, and was no longer in force when the
notice was issued.
Subsequently
Swadeshi Polytex Ltd. decided to increase the issue of initial capital from Rs.
4 crores to Rs. 4 crores 40 lakhs divided into 33,00,000 equity shares of Rs.
10 and 1,10,000 preference shares of Rs. 100 each.
Thereafter,
in pursuance of the order of Ghose J , the respondent-company on September 14,
1970, gave notice to the members that a general meeting of the
respondent-company would be held on the 12th day of October, 1970, to consider
and, if thought fit, to pass with or without modification, the following
resolution:
“Resolved
that resolution No. 1 which had been unanimously passed as an ordinary
resolution at a general meeting of the company held on February 27, 1970, in
pursuance of the notice dated the 29th January, 1970, be and is hereby
confirmed and approved.”
The
explanatory statement stated:
“The
letter of intent which has been revalidated by the Central Government has been
transferred by the Central Government to the name of Swadeshi Polytex Ltd. and
accordingly the plant is being put up by them at Ghaziabad in collaboration
with Messrs. Vickers Zimmer AG. Frankfurt.
Terms
of collaboration have been approved by the Central Government and the work has
already commenced. The plant is likely to go into production in early 1973.”
The
petitioner instituted a representative suit against the respondent-company and
its directors for a declaration that the notice dated September 14, 1970, and
the explanatory statement annexed thereto convening a general meeting of the
respondent-company for the purpose of passing the resolution set out in the
said notice were void and the said resolution, if passed, is void and
inoperative and of no effect and for a permanent injunction restraining the
respondents from holding any meeting pursuant to the said notice or giving any
effect to the resolution if passed. The present application has been made in
aid of the suit.
On
the 12th October, 1970, the said resolution was unanimously passed at a general
meeting held in pursuance of the said notice.
The
notice and the explanatory statement are impugned by the petitioner on three
grounds, viz.:
(i) Neither documents disclosed whether permission
had been obtained from the Central Government as required under the Monopolies
and Restrictive Trade Practices Act for establishing the undertaking of
Swadeshi Polytex Ltd. which when established would be an inter-connected
undertaking of the respondent-company.
(ii)The
said documents informed the members that work of the said polyester fibre plant
had commenced. No disclosure was made whether a licence had been obtained in
respect thereof as required by section 11 of the Industries (Development and
Regulation) Act.
(iii)None
of the terms and conditions of the collaboration agreement, financial,
technical or otherwise were disclosed.
The
only other objection of the petitioner is not an objection to the notice but to
the resolution itself. It is urged that by reason of increase of share capital
of the Swadeshi Polytex Ltd. subsequent to the order of Ghose J., the basis of
the resolution which was sought to be confirmed had disappeared and a new state
of affairs had come into existence. Therefore, the resolution could not have
been validly confirmed.
The
respondents contend that the Monopolies and Restrictive Trade Practices Act has
no application in the facts of this case.
The
preamble to the Monopolies and Restrictive Trade Practices Act, 1969, declares it
to be an Act to provide that the operation of the economic system does not
result in the concentration of economic power to the common detriment. Chapter
III of the Act is intituled “Concentration of Economic Power”. Sections 20 and
22 occur in Part A of Chapter III. The relevant portions of sections 20 and 22
may be set out:
“20.
Undertakings to which this part applies:—This part shall apply to—
(a) an
undertaking, if the total value of—
(i) its
own assets, or
(ii) its own assets together with the assets
of its interconnected undertakings, is not less than twenty crores of
rupees.................
Explanation.—The
value referred to in this section shall be—
(i) in the case of an undertaking referred
to in clause (a) or clause (b), as
the case may be, the value of its assets on the last day of its financial year
which closes during the calendar year immediately preceding the calendar year
in which the question arises as to whether this part does or does not apply to
such undertaking; ..........
22.
Establishment of new undertakings.—(1) No person or authority, other than
Government, shall, after the commencement of this Act, establish any new
undertaking which, when established, would become an interconnected undertaking
or an undertaking to which clause (a) of section 20 applies except under, and
in accordance with the previous permission of the Central Government.
(2)
Any person or authority intending to establish a new undertaking referred to in
sub-section (1) shall, before taking any action for the establishment of such
undertaking make an application to the Central Government in the prescribed
form for that Government’s approval to the proposal of establishing any
undertaking................”
The
respondent-company has a subsidiary of the name of Swadeshi Mining and
Manufacturing Ltd. It is conceded that the undertaking of the subsidiary
company is an inter-connected undertaking within the meaning of the statute.
It
is clear that section 22 is not attracted to an undertaking unless its own
assets or its own assets together with the assets of its inter-connected
undertakings is not less than Rs. 20 crores. It is not in dispute that the
question as to whether Part I of Chapter III of the Act applies to the
undertaking of the respondents arose in 1970. Therefore, the relevant point of
time at which value of its assets and the assets of its inter-connected
undertakings has to be computed is 31st December, 1969, that is to say, the
last day of their financial year.
Section
2 of the Act provides that “value of assets” in relation to an undertaking
means the value of its assets as shown in its books of account after making
provision for depreciation or for renewals, or diminution in value. The
balance-sheets of the respondent-company and of its subsidiary are prepared on
the basis of their books of account. In the balance-sheet of the
respondent-company for the year 1969, its assets have been valued at rupees
15,47,61,029 and the assets of the subsidiary at Rs. 5,15,32,205 aggregating
Rs. 20,62,93,234. If one is to go by these figures the conclusion is
inescapable that Part A of Chapter III is attracted to the undertaking of the
respondent-company.
On
behalf of the respondents it was contended by Mr. S. C. Sen that in computing
the aggregate of the values of the assets of a holding company and of its
subsidiary, the value of the shares of the subsidiary company held by the
holding company should be ignored because if the two undertakings are treated
as one for the purpose of valuation, the shares of the subsidiary company held
by the holding company lose all significance. The balance-sheet of the
respondent-company assesses the value of the shares of the subsidiary held by
it at Rs. 1,69,56,121. If the value of these shares is left out, the aggregate
comes to less than rupees twenty crores. In that view of the matter, section 22
can have no application.
In
my opinion, there is considerable force in the contention raised by Mr. Sen.
The object of the Act, professedly, is to prevent the concentration of economic
power in the hands of individuals, associations, groups or corporate bodies.
Section 20 indicates that the degree of concentration of economic power in an
undertaking or a group of undertakings is to be judged by the value of its or
their assets. The Monopolies and Restrictive Trade Practices Act is concerned
with the substance of a transaction, not with its form, with the real
constitution of an association, a group, or a corporate body, not with its
facade.
The
statute seeks to tear the veil and not merely of corporate bodies. It aims at
demolition of fictions. It is concerned with the actual magnitude of
concentration of economic power, no matter how the concentration is achieved,
by creation of partnerships, associations of persons or corporate bodies, or by
taking recourse to devices or subterfuges. It is not among the objects of the
statute, and it is certainly against its spirit, to endorse or sanction the
validity of fictions. If the values of the assets of the holding company and of
its subsidiary have to be added for the purpose of determining the degree of
concentration of economic power, what ought to be considered is the real value
of the total assets. Once the assets of the holding and of the subsidiary
company are treated as one, the shares of the subsidiary company held by the
holding company cease to be real assets and the question of valuing those
shares does not arise. This will become clear if one visualises amalgamation of
the subsidiary company with the holding company in which case the shares of the
subsidiary company held by the holding company have to be written off. To
include the value of shares of the subsidiary company held by the holding
company in computing the total value of the assets of the two companies will be
to inflate the total value by including fictional assets. The spirit of the Act
militates against such inflation by the use of fiction. But for the definition
of “value of assets” given in the Act itself, I would have deducted the value
of the shares in the subsidiary company held by the respondent-company, but,
having regard to the definition, I am unable to do so. I feel that in denning
“value of assets” the legislature has overlooked the anomaly which underlies a
situation like the one with which I am concerned in this case. Be that as it
may, to exclude the value of the shares in the subsidiary company held by the
respondent-company will not be proper in the face of the clear directive of the
definition. I am, therefore, of the opinion that if the undertaking of Swadeshi
Polytex Ltd. transpires to be an inter-connected undertaking of the
respondent-company, section 22 will apply.
On
behalf of the respondents, Mr. Sen submitted that the Monopolies and
Restrictive Trade Practices Act is a piece of public legislation brought into
existence to give effect to the economic policy of the State in public
interest; it has not been enacted for the benefit of an individual or a class.
Only the State can seek to enforce its provisions; no person or class is
competent to do so by an action ; at the most, the petitioner may invoke the
writ jurisdiction of the court and ask for an order directing the State to
enforce the statute. Counsel relied on Craies on Statute Law, 6th edition,
Chapter 11, pages 229-249. He also relied on Vallance v. Folk, Clegg,
Parkinson & Co. v. Earby Gas Co., Cutler v.
Wandsworth Stadium Ltd. and Newman v. Francis. It is not
necessary for me to go into the question raised by counsel. It is true that the
Act has not been enacted for the benefit of shareholders of bodies corporate
which own, control or manage inter-connected undertakings. On the contrary, the
statute seeks to restrict the powers of those bodies, and, therefore, of their
shareholders. That does not, however, detract from the legal right of a
shareholder to bring an action against the company of which he is a shareholder
to restrain it from committing an illegal act or from questioning the
sufficiency or validity of the notice of a resolution. Here the petitioner is
not asking for an injunction restraining the respondent-company from acquiring
shares of the polytex company; he is contending that the notice of the meeting
at which the resolution proposing the acquisition of shares was passed was
invalid and asking for an injunction restraining the respondent-company from
implementing the resolution. A shareholder is competent to ask for such an
order. In that view of the matter, I reject the contention that the petitioner
has no locus standi to make the application.
In
clause (v) of section 2 of the Act the word “undertaking” has been defined to
mean an undertaking which is engaged in the production, supply, distribution or
control of goods of any description or the provision of services of any kind.
Therefore, an “undertaking” in the sense of the statute, has to be an
undertaking in its grammatical signification. The Oxford English Dictionary
assigns to the word “undertaking” the meaning of a “a thing undertaken or
attempted”. The word does not mean the owner of a thing undertaken. This
construction is supported by the use of the neuter relative pronoun “which” in
section 2(v) which can never be used in relation to a natural person.
Although
“undertaking” has been denned, it seems that in the use of the word in the
statute the definition has been occasionally lost sight of, and the term
“undertaking” has been used loosely in some places to mean the owner of an
enterprise. For example, in section 2(g)(i) “one” can only mean “the owner of
an enterprise”, though the “other” means the other enterprise. Section 25
speaks of “Directors of undertakings” ; there “undertaking” means a corporate
body which owns an undertaking. Be that as it may, an examination of the
statute reveals that the term “under taking” is used in the statute, by and
large, in the sense of “a thing undertaken” as defined in the Act. The word
“undertaking”, therefore, should be read in the sense of “a thing undertaken”
unless the context requires otherwise.
The
term “interconnected undertaking” has been denned in section 2(g) of the Act to
mean two or more undertakings which are inter-connected with each other in any
of the following manner, namely:
“(i) if
one owns or controls the other,.............................
(iii) where
the undertakings are owned by bodies corporate,—
(a) if
one manages the other, or
(b) if
one is a subsidiary of the other, or
(c) if they are under the same management
within the meaning of section 370 of the Companies Act, 1956,
(d) if
one exercises control over the other in any other manner.
(vi)
if the undertakings are owned or controlled by the same person or group of
persons...
Explanation.—For
the purpose of clause (g), two or more undertakings shall be deemed to be
inter-connected...................
(b) if one or more individuals together with
their relatives, or firms in which such individuals or their relatives are
partners, jointly or severally own, manage or control the other.”
As
in this case, the undertakings are owned by bodies corporate the tests
prescribed in sub-clause (iii) of clause (g) of section 2. will apply. The
respondent-company does not manage the polytex company; it is not its managing
agent. The polytex company is not a subsidiary of the respondent-company nor
are the companies under the same management within the meaning of section 370
of the Companies Act, 1956. Mr. Prabir Sen, counsel for the petitioner,
strongly relied on paragraph (d) of sub-clause (iii) of clause (g) of section
2. The term, “control”, he argued, is of the widest amplitude. He relied on
Commissioner of Income-tax v. Nandlal Gandalal, where at
page 1150, the court observed:
“It
is settled, we think, that the expression ‘control and management’ means de
facto control and management and not merely the right or power to control and
manage.”
Mr.
S.C. Sen, on behalf of the respondent-company, relied on British American
Tobacco Co. Ltd. v. Inland Revenue Commissioners and urged
that “control”, in the context of section 2 (g) of the Monopolies Act, can only
mean the control of the majority of the voting power in a company. He submitted
that the words “any other manner” in paragraph (d) refer to the machinery
through which the control of the majority of voting power is exercised.
“Control”, he argued, does not mean minority control or managerial control.
I
am inclined to agree that “control”, in the context of paragraph (d), means any
species of de facto control, majority control, minority control or managerial
control. Now de facto control obviously means lawful de facto control. Majority
control, minority control or managerial control are all cases of de facto
control. If, apart from majority control, minority control and managerial
control, there are other species of control, though I do not know of any, I
agree that such species of control will come within the ambit of paragraph (d).
In any event, the court will have to be satisfied that the respondent-company
exercises or will exercise control over the polytex company. Section 22
contemplates only those undertakings which when established would become
inter-connected undertakings. The word used in section 22, sub-section (1), is
“would” and not “might”. A certainty, though prospective, and not a mere
possibility of inter-connection has to be established. There has to be evidence
that the respondent-company will exercise control over the polytex company.
Suspicion is not proof. As the respondent-company does not intend to hold a
majority of shares in the polytex company it will not exercise majority
control. It will hold a minority of shares but that by itself does not prove
that it will exercise minority control. In order to establish the case for
minority control, the court will have to be satisfied that a sufficient number
of shares will remain dormant and the respondent-company will be in a position
to ensure that a larger number of votes than the votes it commands will not be
cast against any resolution which it seeks to pass at a meeting. No such
evidence is available. As the respondent-company does not manage or intend to
manage the polytex company, it is not possible to hold that it will exercise
managerial control over the affairs of the other company. In the absence of any
evidence, I am unable to hold that paragraph (d) has any application in this
case.
Counsel
on behalf of the petitioner relied on paragraph (vi) of clause (g) of section
2. There is no evidence again that the undertakings are owned or controlled by
the same group of persons. It was contended that the polytex company is
controlled by the same group of persons. namely, the members or some members of
the Jaipuria family who also control the respondent-company. The board of
directors of each of the companies consists of seven directors. There are three
common directors, namely, Mr. Rajaram Jaipuria, Mr. Sitaram Jaipuria and Mr. R.
Chaudhuri. Mr. Rajaram Jaipuria is the managing director of the respondent-company
and Mr. Sitaram Jaipuria is the managing director of Swadeshi Polytex Ltd. Be
that as it may, the majority of the directors of one company are not the
majority of the directors of the other. Therefore, it is difficult to see how
it can be said that the Jaipuria group or the Jaipuria group together with Mr.
Chaudhuri will control the undertaking of the polytex company.
Reliance
was placed on the fact that the letter of intent, which was originally granted
to the respondent-company has been transferred to the polytex company. In that
connection, counsel relied on a letter dated May 20, 1970, from the
Under-Secretary to the Government of India, addressed to the
respondent-company. The Under-Secretary wrote :
“The
Government has no objection to your implementing the project for the
manufacture of ‘polyester fibres’ under the name of Swadeshi Polytex Ltd.
Accordingly, the said letter of intent of even number dated 24th July, 1969, is
transferred to the name of Messrs. Swadeshi Polytex Ltd., Kanpur.”
Transfer
of the letter of intent does not confer control or management of the transferee
undertaking on the transferor and therefore in my judgment the transfer is not
a relevant consideration. The reason for transfer has been explained in the
explanatory statement.
Counsel
relied on the report of the monopoly enquiry commission in support of his
contention that the group which controls the respondent-company also controls
the polytex company. The ways of control, he said, are devious as indicated in
the report. At page 390 of the report, the respondent-company is enumerated
among the companies comprising the group or the house of Jaipurias. There is no
evidence that the Polytex company belongs to the said group. At page 2 of the
report, it is said:
“So,
it frequently happened, as we have already mentioned, that an industrialist
contributing a small amount of capital himself was able to obtain control of
big enterprises and the snowballing process gathered strength as it proceeded.”
At
page 5, it is said:
“Even
where investment in another corporation is not of an extent to give it a
control over the voting power, it is sometimes sufficient to enable it to have one or more directors on the board of directors
of the investee company. This helps to give the investor company some voice in
the decisions of the investee and also makes important information available to
it. Where such interlocking of directors is achieved in a company in the same
line of production, or a company engaged in the distribution of its products or
one engaged in the production of an allied product, or of raw materials, it has
clearly a tendency to increase concentration of economic power.”
At page 34, it is said:
“It is proper to mention
that in each case we have tried to ascertain the substance of the control and
have not adhered to the deeming provisions about the same management and the
same group as contained in the Companies Act. Nor have we followed the concept
of ‘outer circle’ as has found favour with some authorities. For the purpose of
the present study a ‘business group’ has been taken to comprise all such
concerns which are subject to the ultimate and decisive decision making power
of the controlling interest in the group, the group master.”
As I have already said,
there is no evidence of minority control exercised by the Jaipurias over the
polytex company. There is no evidence again of any group master having the
ultimate and decisive decision making power in the affairs of the polytex
company. There are common directors. That may or may not lead to concentration,
of economic power. It all depends on the facts and circumstances of a
particular case. The question before me is not whether having regard to the
constitution of the two companies, concentration of economic power has taken
place or is likely to take place. The question is whether the undertakings are
inter-connected undertakings within the meaning of the statute. The tests of
inter-connection which the statute lays down are ownership, control and
management. Unless one of the three tests is satisfied by legal evidence,
inter-connection cannot be predicated. It may not be out of place to mention
that a great deal of the observations in the report was not reflected in the
relevant bill and the bill itself suffered many alterations during its passage
through the legislature.
It was submitted that the
directors of the respondent-company are the promoters of the polytex company.
That, it was urged, is an evidence of inter-connection. The explanatory
statement fully explained why the respondent-company had promoted the new
company. Its directors decided to establish a polyester fibre plant having
regard to its profitability. They received a letter of intent from the
Government. As it was necessary to raise a considerable amount of capital, it
was considered expedient to promote a new company. In the light of the future
prospects of the new company, the directors considered it desirable to invest
Rs. 1 crore in its shares. The large sum of money proposed to be invested in
the new company is sufficient reason for transfer of the letter of intent and
also for promoting
the polytex company. The promoters of a company do not necessarily control or
manage its affairs or own the majority or even a substantial quantity of its
shares.
Then
it was said that the two companies have a common secretary. The secretary is a
ministerial or an administrative officer. He does not control or manage the
company. The statute does not say that if two corporate bodies have a common
secretary, their undertakings will be deemed to be interconnected undertakings.
In any event, Mr. Sitaram Bhowsingka, the common secretary, has stated in his
affidavit affirmed on March 4, 1971, that since January 1, 1971, he has ceased
to be the secretary of the Polytex company.
Reliance
was placed by counsel on an article by Mr. S. R. Bhowsingka which appeared in
the Statesman on October 12, 1970, under the caption “Role of Jaipurias in
Industrial Development”. There it is stated “on October 12, 1970, the President
of India will lay the foundation stone of India’s first continuous process
polyester staple fibre plant of Swadeshi Polytex Ltd., another Jaipuria
enterprise with an authorised capital of Rs. 10 crores”. The article is of a
laudatory nature and full of generalities. Apart from the question whether a
company is bound by a statement made by its secretary with regard to its
constitution, control and management, I feel that the character of the article
is such that it will be unsafe to rely on it and hold that Swadeshi Polytex
Ltd. is controlled or managed by the same group of persons who control and
manage the respondent-company in the absence of any evidence.
Counsel
for the petitioner relied on paragraph (h) of the Explanation to clause (g) of
section 2 of the Monopolies and Restrictive Trade Practices Act which provides
that for the purpose of clause (g) two or more undertakings shall be deemed to
be inter-connected if one or more individuals together with their relatives,
jointly or severally, own, manage or control the other. A distinction is made
in the explanation between management and control. Mr. Rajaram Jaipuria is the
managing director of the respondent-company. His relative, Sitaram Jaipuria, is
the managing director of the polytex company. The term “manage” or “management”
has not been defined in the Monopolies and Restrictive Trade Practices Act or
in the Companies Act.
Be
that as it may, I am unable to hold that the managing director of a company
does not manage its undertaking, within the meaning of clause (g) of section 2.
In my judgment, on a proper construction of paragraph (b) of the Explanation,
it must be held that if a relative of the managing director of a company is the
managing director of another company, their undertakings must be deemed to be
inter-connected undertakings in the sense of the statute; they will be
inter-connected because the managing directors who are relatives will be
managing either undertaking severally. The undertakings may have nothing to do
with each other; their constitutions and organs of control may totally differ;
and yet only because their managing directors happen to be relatives, they will
be deemed to be inter-connected by virtue of the Explanation though, in fact,
they are not. This may be bad logic and poor law but it is good Monopolies and
Restrictive Trade Practices Act. I do not think that by use of the words
“together with”, the Explanation requires that the relatives must act in unison
in the management of either undertaking or, in other words, that the
undertakings must be managed directly or indirectly by both of them. The use of
the words “jointly or severally” militates against such a construction.
Mr.
Sen submitted that clause (b) of the Explanation is incomplete; grammatically
and syntactically it makes no sense ; it makes no sense unless words are
supplied which are not there. No doubt clause (b) is one of the glaring
instances of bad drafting in an ill-drafted statute. The syntax is defective
but nevertheless the sense is clear. It means that two or more undertakings shall
be deemed to be inter-connected, if one or more individuals who own, manage or
control one undertaking, together with his or their relatives, jointly or
severally own, manage or control the other undertaking or other undertakings.
In
view of the Explanation, I am constrained to hold that the undertaking of
Swadeshi Polytex Ltd. will be an inter-connected undertaking of the
respondent-company and therefore the former cannot be lawfully established
except under the previous permission of the Central Government as required by
section 22. I desire to make it clear that I hold the new undertaking to be an
inter-connected undertaking on the sole and solitary ground that the respective
managing directors are relatives and for no other reason.
If
no application has been made as required under section 22(2) and no permission
has been obtained as required by section 22(1), as is admittedly the case,
those are material facts which ought to have been disclosed in the notice. An
application for approval by the Central Government to the pro-prosal of
establishing the undertaking is a prerequisite to any step taken for
establishment of the undertaking and, before it was resolved to invest one
crore of rupees in the undertaking, the shareholders ought to have been told that
no such application had been made and the necessary permission was yet to be
had. After all, the Central Government may or may not grant the permission. In
the absence of such disclosure, the notice must be held to be invalid having
regard to section 173 of the Companies Act.
One
of the grounds taken in the petition is that the notice and the explanatory
statement are bad because none of the terms and conditions of the collaboration
agreement, financial or technical, have been disclosed. At the hearing counsel
conceded on the authority of East India Commercial Co. Ltd. v. Raymon
Engineering Works Ltd., that the technical
aspect of the collaboration agreement need not have been disclosed. In that
case, there were two sets of agreements, one for financial participation in the
enterprise by the foreign parties and the other for technical collaboration.
The terms for financial participation were disclosed in the explanatory
statement; the terms of the collaboration agreements were not disclosed nor was
their inspection offered. The court held that the agreement for technical
collaboration is a matter peculiarly within the competence of the directors and
ordinary shareholders are not to be treated as experts on the technical aspects
of manufacture. The non-disclosure complained of did not vitiate the notice.
The court also found that the plea of non-disclosure of the technical
collaboration agreement was not bona fide. In their correspondence the
appellants never asked for inspection of those agreements. In the present case,
the plea of non-disclosure of the terms and conditions of the agreement is
equally lacking in bona fides. Here inspection, though offered, was not taken.
Counsel
argued that, in any event, the financial aspect of the agreement should have
been disclosed. Counsel for the respondents produced a copy of the
collaboration agreement at the request of the petitioner’s counsel. The
agreement is intituled “purchase agreement”. The date is September 7, 1970. It
is an agreement for supply of plant and machinery and for technical assistance.
There is no provision for financial participation in the project by the foreign
collaborator, though, naturally, provision has been made for payment for goods
and services. In my judgment, it is a purely technical collaboration agreement,
the terms and conditions of which do not require disclosure on the principles
laid down in East India Commercial Co. Ltd. v. Raymon Engineering Works Ltd. I need only add that the petitioner’s counsel
did not admit that the agreement disclosed by the petitioner is the one spoken
of in the explanatory statement.
It
was submitted on behalf of the petitioner that the notice and the explanatory
statement should have disclosed that no licence under the Industries
(Development and Regulation) Act had been obtained for establishing the ploytex
undertaking. In fact, the licence was obtained on October 7, 1970. The meeting,
it will be remembered, was held on October 12,1970. It can hardly be said that
the industrial undertaking had been established on or before September 14,
1970, the date of the notice. The explanatory note stated that the plant was
being put up by the polytex company in collaboration with Messrs. Vickers
Zimmer A.G.; that the terms of collaboration had been approved by the Central
Government and the work had already commenced. It appears from the article
written by the secretary of the polytex company in the Statesman to which
reference has been made that the foundation stone of the new undertaking was
laid on October 12, 1970.
It
was contended by counsel appearing on behalf of the petitioner that under
section 11 of the Industries (Development and Regulation) Act a licence is
required before any steps could be lawfully taken for establishment of an
industrial undertaking; that a licence is required even before laying the
foundation of the undertaking or even before preparation of the blueprint. In
that view of the matter, action taken before the licence was obtained, namely,
the work of putting up the plant or any other work done in connection with the
establishment of the undertaking was not permissible under the law. The
explanatory note, therefore, should have at least disclosed that the requisite
licence under section 11 had not been obtained.
Sub-section
(1) of section 11 of the Act provides that no person or authority other than
the Central Government, shall, after the commencement of this Act, establish
any new industrial undertaking except under or in accordance with a licence
issued in that behalf by the Central Government.
In
my opinion, all that section 11 requires is that a licence must be obtained
before the undertaking is established. An industrial undertaking is not
established on the preparation of a blue-print or on laying the foundation of
its factory or even at the stage when the work of establishment has made some
progress. The statute does not prohibit taking steps for establishing a new
industrial undertaking except under a licence. Under the proviso to sub-section
(1), a Government other than the Central Government requires previous
permission to establish a new industrial underaking. It is not without
significance that the words “previous permission” are not used in the relevant
part of sub-section (1).
In
this connection reference may be made to a provision in pari materia, namely,
section 22 of the Monopolies and Restrictive Trade Practices Act, which
prohibits establishment of a new undertaking in certain cases except with the
previous permission of the Central Government. Sub-section (2) of section 22
specifically enjoins that before taking any action for establishing a new
undertaking an application has to be made for approval of the Government to the
proposal of establishing a new undertaking referred to in sub-section (1). In
the Monopolies and Restrictive Trade Practices Act, a distinction is made
between establishing an undertaking and action taken for its establishment;
there is a prohibition in sub-section (1), a direction in sub-section (2).
There is no provision in section 11 of the Industries (Development and
Regulation) Act analogous to sub-section (2) of section 22 of the Monopolies
and Restrictive Trade Practices Act.
Learned
counsel for the petitioner referred to sub-section (2) of section 11 which
provides that a licence under sub-section (1) may contain such conditions
including, in particular, conditions as to the location of the undertaking as
the Central Government may deem fit to impose. He also alluded to sub-section
(2) of section 12 which provides that subject to any rules that may be made,
the Central Government may also vary or amend any licence issued under section
11 provided that no such power shall be exercised after effective steps had
been taken to establish the new industrial undertaking in accordance with the
licence. Relying on these provisions, he argued that before any step is taken
for establishment of the undertaking, the permission required under section
11(1) must be had. In my judgment until and unless an undertaking is
established, no question of a license under section 11(1) can arise. An
undertaking is not established at a stage when the work of establishment has
merely commenced. The language of sub-section (1) of section 11 is clear and
unequivocal. As for sub-section (2) if the Central Government does not approve
of the proposed location of the undertaking it cannot be established there. It
does not imply that any step taken for establishing it is in contravention of
the statute. Moreover, the license required under the Industries (Development
and Regulation) Act was obtained in this case, before the meeting was held. The
shareholders, therefore, have sufferred no prejudice. In that view of the
matter, the contention raised by the petitioner fails.
I
may now briefly deal with the objection that after increase of share capital of
the polytex company it was no longer open to the members of the
respondent-company to confirm the resolution in pursuance of the order of Ghose
J. It is true, that by increase of share capital the proposed holding of the
respondent-company in the polytex company will be reduced to less than thirty
per cent. of its equity capital. The explanatory statement fairly disclosed the
proposed increase in the share capital. The resolution which was sought to be
confirmed was the same resolution in respect of which the order of Ghose J. was
made. I fail to see why the resolution could not be confirmed merely because
the capital of the polytex company is proposed to be increased. It was said
that the polytex company seeks to increase its share capital to reduce the
proportion of the holding of the respondent-company so as to avoid the mischief
of section 370 of the Companies Act and also to avoid being deemed to be an
inter-connected undertaking within the meaning of the Monopolies and
Restrictive Trade Practices Act. That, in itself, counsel submitted, is
evidence of inter-connection. I do not agree. To increase the share capital to
avoid inter-connection is a perfectly legitimate procedure. It is no evidence
of inter-connection ; on the contrary, it is evidence of the desire on the part
of the polytex company and, may be, also of the respondent-company, to avoid
such a situation.
Mr.
S.C. Sen submitted that in the application heard by Ghose J. the petitioner had
raised the same objections on the score of non-compliance with the provisions of
the Industries (Development and Regulation) Act and non-disclosure of the terms
of the collaboration agreement; the learned judge having disposed of the
application, it is no longer open to the petitioner to urge the same grounds
over again. It appears from the judgment of Ghose J. that he disposed of the
application on a different point. The learned judge did not find it necessary
to consider the other grounds of objection nor did he go into their merits.
In
any event, apart from the question whether an interlocutory order can operate
as res judicata in an application in a different suit, it is necessary to
remember that the present application is not at all concerned with the notice
which Ghose J. had to consider. For more reasons than one, I am unable to
uphold the contention raised by Mr. Sen.
In
the view I have taken, the application succeeds. There will be an order for an
injunction restraining the respondents and each of them from giving effect to
the resolution set out in the notice dated September 14, 1970. The order is
made without prejudice to the rights of the respondents and the members of the
respondent-company to pass a fresh resolution according to law in terms of or
similar to the resolution No. 1 which is the subject-matter of this application.
There will be no order for costs.
Upon the
respondents giving an undertaking to the court through their counsel, Mr. Nag,
that they will not invest in the shares of Swadeshi Polytex Ltd. for a period
of three weeks, there will be a stay of operation of the order made herein for
the same period. The previous undertaking given by the respondents on the 12th
of October, 1970, is hereby discharged.
[1970] 40 COMP. CAS. 458
(CAL)
HIGH COURT OF CALCUTTA
v.
Hoolungooree Tea Co. Ltd.
A.N. RAY AND S.K. MUKHERJEA, JJ.
A. F. O. O. NO. 135 OF 1968
AUGUST 16, 1968
A.N.
Ray, J.—This
appeal is against the judgment and order of Sen J., dated 10th June, 1968. The
order was made on the notice of motion dated 25th April, 1968, taken out by the
plaintiff, inter alia, for an order of injunction restraining the defendants
and each one of them, their servants, agents and assigns from holding the
proposed extraordinary general meeting of the company on April 29, 1968, and
passing any resolution thereat pursuant to the purported notice dated March 30,
1968, and the explanatory statement annexed thereto and also injunction
restraining the defendants and each one of them, their servants, agents and
assigns from holding any shareholders' meeting of the company pursuant to any
purported notice such as or similar to the said notice dated March 30, 1968,
and the purported explanatory statement annexed thereto, and further injunction
restraining the defendants from giving effect to or acting upon any resolutions
which may be passed in any such meeting, and injunction restraining the
defendants, their servants and agents from committing any further violation of
the provisions of section 342 of the Companies Act, 1956, and from having the
affairs of the defendant No. 1 managed by any person or persons other than
defendant No. 2.
The
defendant No. 1 is Hoolungooree Tea Co. Ltd. and the defendant No. 2 is Andrew
Yule and Co. Ltd. and the plaintiff-appellant is a shareholder in the
defendant, Hoolungooree Tea Company. The defendant No. 2, Andrew Yule and Co.
Ltd., is the managing agent of the said tea company. The appellant is a
registered shareholder of 300 ordinary shares of the defendant tea company. The
appellant alleges that through his friends and relatives he holds more than 10
per cent, shares of the tea company.
The
plaintiff instituted Suit No. 1009 of 1968 on 25th April, 1968, inter alia, for
a declaration that the notice dated 30th March, 1968, and the explanatory
statement annexed thereto are illegal, void and not binding against the
plaintiff and for an injunction restraining the defendant from holding any
extraordinary general meeting of the company on April 29, 1968, and passing any
resolution thereat pursuant to the purported notice dated 30th March, 1968, and
for other injunctions. The appellant's case in short is that the defendant,
Andrew Yule and Co. Ltd., managing agents, are alone entitled to manage the
affairs of the company. The plaintiff alleged that the defendant-company
mismanaged the sum of Rs. 23,10,000. The plaintiff challenged the notice dated
30th March, 1968, whereby the extraordinary general meeting of the company was
called to be held on 29th April, 1968. The plaintiff also alleges that on a
perusal of the notice and the explanatory statement it appears that the
defendant No. 1 proposes to alter the memorandum and articles of association
and the same are sought to be altered in order to amalgamate the defendant No.
1 with three other companies, viz., Basmatia Tea Co. Ltd., Murphulani Tea Co.
Ltd. (Assam) and Rajgarh Tea Co. Ltd. The plaintiff alleges that the said
purported notice dated March 30, 1968, and the explanatory statement annexed
thereto are misleading, tricky, and do not furnish the requisite or necessary
information for consideration of the resolution. The notice is also impeached
to be ultra vires the Companies Act and the articles of the company. The
plaintiff also alleges that the managing agents were to retire with effect from
1st April, 1968, but the notice dated 30th March, 1968, is not signed by the
managing agents and therefore the notice is illegal. It was contended before
the learned judge first that the notice of the meeting was not valid as it was
signed by the director, secondly, the explanatory statement was said to be
tricky and, thirdly, the notice was said to be mala fide. The learned judge
repelled all the contentions advanced.
Counsel
for the appellant contended that there was a prima facie case that the company
could not act on the basis of the notice which was challenged by the plaintiff
as illegal and ultra vires of the Companies Act and the memorandum of articles.
It was said that if there was a prima facie case, there should be an
injunction.
It
was contended by counsel for the appellant, first, that without a specific
power of amalgamation in the memorandum the company could not amalgamate with
any company. Counsel for the respondent on the other hand contended that the
company in the present case gave a notice that the company wanted now the bare
power to amalgamate. That is why a meeting was called. It was also said on
behalf of the respondent that the company would later on have to make the
necessary application for actual amalgamation. The notice impeached in the suit
was said by counsel for the respondent not to be anything more than a notice
for the proposed power of amalgamation. The notice also suggests that the
company sought the bare power to amalgamate in aid of subsequent actual amalgamation
with three other companies.
It
is not necessary on an interlocutory application to decide this question as to
whether a company can amalgamate with other companies without specific power in
the memorandum. The question is academic for the reason that the company seeks
first to have the power to amalgamate and the company will thereafter make the
necessary application for actual amalgamation.
Interesting
and elaborate arguments were made by counsel for both the parties as to various
types of amalgamation. The various provisions of the Companies Act and, in
particular, sections 391 to 396 and 494, were referred to by counsel for both
parties in aid of their rival contentions. Counsel for the appellant contended
that the provisions contained in section 17 of the Companies Act indicated that
if a company wanted to amalgamate with another company and if no such power was
found in the memorandum it would not be lawful for the company to amalgamate
without incorporating such power in the memorandum. Counsel for the respondent
on the other hand contended that the provisions contained in sections 391 to
396 and 494 of the Companies Act would indicate that amalgamation would be a
statutory right in certain cases and in other cases amalgamation would be
resorted to by the company on the strength of specific power in the memorandum.
For the purpose of the present appeal it need be only said that if a company by
virtue of its power in the memorandum desires to amalgamate with another
company without coming to a court of law such amalgamation would be valid and
there could be cases where a company desiring to amalgamate would have to come
to a court of law. The power to amalgamate may flow from the memorandum or it
may be acquired by resorting to the statute. Section 17 of the Companies Act
indicates that a company which desires to amalgamate with another company will
take necessary steps to come before a court for alteration of its memorandum in
aid of such amalgamation. The statute confers a right on a company to alter its
memorandum in aid of amalgamation with another company. The provisions
contained in sections 391 to 396 and 494 illustrate some instances of statutory
power of amalgamating a company with another company without any specific power
in the memorandum.
It
will again appear how a company under section 394 of the Companies Act may
apply to the court for sanctioning of a compromise between a company and any
such persons as are mentioned in section 391 of the Act and if it is shown to
the court that the compromise has been proposed for the purpose of or in
connection with any scheme for the reconstruction of any undertaking, the court
may either by the order sanctioning the compromise or arrangement or by a
subsequent order make provisions, inter alia, for all or any of the following
matters, namely :
(i) the transfer to the transferee
company of the whole or part of the undertaking;
(ii) continuation by or against the
transferee company of any legal proceedings pending by or against any
transferor company ;
(iii) the
dissolution without winding up of any transferor company.
It
was said that a company would not have in its memorandum as one of its objects
dissolution of the company. An order for dissolution of a company without
winding up is thus made by the court in sanctioning compromise or arrangement
which are forms of amalgamation. Reference may be made to Buckley on the
Companies Arts, 12th edition, page 592, where in a discussion under section 287
of the English Companies Act, which corresponds to section 494 of the Companies
Act, 1956, and section 213 of the Companies Act, 1913, and section 208C of the
Companies Act, 1913, as amended in 1930, it is stated that a company cannot by
clauses in its memorandum of association take power to effect that which section
287 authorises upon terms other than those which section 287 imposes. The sale
of some part of a company's assets may be but the sale of all its undertaking
and assets and the distribution of proceeds cannot be a corporate object.
Buckley, therefore, states that the latter cannot under a clause for that
purpose introduced into the memorandum be made without regard to the provisions
of section 287 of the English Act. In other words, the requirements of section
287 of the English Act or section 494 of the Companies Act are supreme and
cannot be controlled by the memorandum.
In
order to amalgamate there has to be a scheme of amalgamation and it is to be
stated which company is to be amalgamated with which company and it is also to
be stated why an amalgamation is sought for. The company in the present case
has proposed a meeting to be held for a bare power of amalgamation. The company
has also made an application for alteration of the memorandum. The company will
afterwards make an application under section 391 of the Companies Act when the
company will have the actual scheme of amalgamation. The court will not
consider the resolution unless 3/4th of the majority of the company will pass
that resolution. There are provisions in the Companies Act for public advertisement
and notice to the Central Government and everything is subject to sanction by
the court. Therefore, it cannot be said that in such cases where a company is
required to obtain an order of court there could be any amalgamation without an
order of court. In the present case, counsel for the respondent rightly
contended that a bare power was being sought and if thereafter the plaintiff or
any shareholder would not approve of the scheme which the company would propose
there would be room for such protest. The company has not come with any actual
scheme of amalgamation at the present moment,
It
may be said that there are four methods for effecting reorganisation of a
company. One of the methods is to be found in section 391 following, a second
method is compulsory amalgamation by the Government under section 396, the
third method would be what is contemplated in section 494 of the Companies Act
and the fourth method is amalgamation without coming to court. In order to have
voluntary amalgamation without coming to court there must be power in the
memorandum for that purpose.
The
contention on behalf of the appellant was that without power in the memorandum
there could be no amalgamation. Counsel for the respondent on the other hand contended
that there could be amalgamation without coming to court if such a power
appeared in the memorandum itself. The other method would be to come before the
court whenever there would be an amalgamation. The provisions to which
reference has been made indicate that in all cases where a company desires to
amalgamate under an order of court necessary application is to be made to a
court. There are instances in the Companies Act of amalgamation by virtue of
power in the statute and sections 396 and 494 illustrate that statutory power
without recourse to power in the memorandum. In the present case, the company
started with a resolution asking for power to amalgamate. It also appears to be
a fact that the company has made an application for alteration of objects.
Counsel for the respondent company rightly contended that in view of the fact
that the company was only asking for a bare power of amalgamation in the
resolution and the company would later on come with the necessary application
before the court for amalgamation there was no scope for interlocutory relief
of injunction.
It
is not necessary to express any opinion on the rival contentions of the parties
as to whether the plaintiff's case is correct and as to whether the plaintiff
is entitled to an injunction in the suit. Suffice it for the purposes of the
present appeal to say that the company has asked only for a bare power to
amalgamate and that the company has also made the necessary application for
amendment of the memorandum of the company. The shareholders and all persons
affected by any proposed amalgamation will have sufficient opportunity of
meeting the case of actual amalgamation when the company will apply and the
court will issue notice to the shareholders as also to the other persons as contemplated
in the Companies Act.
The
other contention on behalf of the appellant was that the notice in the present
case, namely, the explanatory statement, was not adequate. It has been the
accepted view in various decisions starting from the decision in Henderson v.
Bank of Australasia,
as will appear also in the Bench decision in East India Commercial Co. Private
Ltd. v. Raymon Engineering Works Ltd.,
that the notice would have to be considered in the circumstances of each case
as to whether it is adequate and reasonable. One of the tests is whether notice
would be adequate or sufficient as far as an absent person is concerned.
Another test is how the meeting itself would understand the notice. In the
present case the notice stated that the company proposed to amalgamate with
other companies and the company gave the names and the company also issued
circulars giving information. Counsel for the appellant contended that the
notice in the present case did not indicate as to whether the amalgamation was
financially advisable or whether it was commercially proper. It was said that
the financial position of the companies should have been given as to enable the
shareholders to find out the necessity as well as the basis of amalgamation.
There again, it must be said that the explanatory statement that was given was
in aid of the resolution which wanted a bare power to amalgamate. When the
company would make the necessary scheme for amalgamation the company would have
to give proper and sufficient materials in order to enable the shareholders to
express their views. The entire scheme then would come before the court. The
court would scrutinise it and the statute recognises adequate safeguards as to
whether the scheme should be accepted. That stage has not yet arisen.
The
third contention on behalf of the appellant was that the explanatory notice was
not signed by the managing agents but was signed by a member of the board. It
was said, relying on the articles of the company, that there was management
vested in the board and by reason of articles 124, 125, 127 and 129 the
management of the whole affairs of the company was delegated to the managing
agents and the board could not issue any notice. Reliance was placed on the
decision in Haycroft Gold Reduction and Mining Co. case,
in support of the contention. It will appear in the present case that there is
no challenge as far as the notice is signed by the board. The notice appears to
be by order of the board. The notice is issued with the authority of the board.
Articles 66 and 67 of the company empower the board to call an extraordinary
general meeting. The board can call a meeting and sign the notice there for.
The managing agency agreement further says in clause 12 that the managing
agents are to work subject to the superintendence, control and directions of
the board. Article 137 and section 368 of the Companies Act also state that the
managing agents are subject to the superintendence, control and directions of
the board. It was said on behalf of the respondent that the issue of notice in
the present case was a ministerial act. In the present case, it appears, first,
that there is power of the board to issue notice, secondly, the managing agents
are subject to control, superintendence and directions of the board and,
thirdly, the notice informs the holding of the meeting and there was no
violation of the statute and the managing agents did not complain. Counsel for
the respondent rightly contended, on the authority of the decision in Browne v.
La Trinidad
that if there was any irregularity it could be cured.
Some
arguments were advanced as to the distinction between individual rights on the
one hand, and corporate rights on the other with regard to the affairs of the
company. It is not necessary to decide that aspect of the case. They will be
decided in the suit.
The
present appeal raises the only question whether there should be an injunction
or not. The questions in suit are all left open to be decided at the trial. The
other question is whether there should be an interim injunction or not pending
the determination of the suit. As I have indicated, the matter which has been
kept in the forefront is that the company has asked for a bare power and there
is an application pending for alteration of the memorandum and thereafter the
company will take steps for amalgamation. There does not exist any necessity
for injunction. Counsel appearing on behalf of the appellant also contended
that the company proceeded mala fide in the present case. It was said that a
certain amount or that a sum of Rs. 23,10,000 was obtained by the company and
that there has been mismanagement. It was also said that the dividends were not
declared. There is no allegation in the petition about the depression of
profits or that the amalgamation is not for any real purpose but for an
ulterior purpose. There is no averment that the scheme is mala fide. There is
no allegation that the directors represented incorrect statement. It appears
that one of the grounds in appeal is that the scheme is mala fide but there is
nothing in the pleading and there is no allegation. The allegation that is made
with regard to the mismanagement may be relevant in other proceedings under the
Act. Further, allegation of mismanagement would not be relevant at this stage
because the statute provides sufficient safeguards on the application of the
company before the court for amalgamation. Sections 17, 391 and 394 of the
Companies Act are statutory safeguards. The court will investigate the matters
and if relevant the court will express its opinion on the scheme. The statute,
particularly sections 17, 391 and 394, contemplate notice to the Registrar in
one case and notice to the Central Government in the other case.
For
these reasons I am of opinion that the learned judge was correct in his order.
The judgment is affirmed. The appeal is dismissed. Costs of the appeal will be
costs in the cause. Certified for two counsel. Interim order is vacated.
S.
K. MUKHERJEA J.— I agree.
Appeal
dismissed.
[1931] 1 COMP CAS 377 (BOM)
HIGH COURT OF
BOMBAY
v.
Maneckji
Petit Mfg. Co. Ltd.
BAKER, J.
ORIGINAL CIVIL SUIT NO. 482 OF 1926
DECEMBER 16, 1930
Billimoria and
Taraporevala for the Plaintiffs.
Khergamwala and
Sir Jamshed Kanga for the Defendants.
This suit raises an important and rather difficult question, and although no evidence has been recorded, the arguments have lasted several days. This is a suit by a shareholder in the Maneckji Petit Manufacturing Company, Limited, on behalf of himself and all other shareholders against the company for a declaration that the extraordinary general meeting of February 15, 1927, was not duly convened in accordance with the law, and that the resolutions purporting to have been passed there at are invalid and inoperative and void, and that the company, its directors, servants and agents may be restrained by an order and injunction from carrying into effect the said resolutions. The issues are: —
1. Whether the notice referred to in the plaint
dated February 4, 1927, was insufficient, invalid or
ineffective in law?
2. the meeting of February 15, 1927, was duly
convened in accordance with law, and whether the
resolutions passed threat are valid and operative?
The only
question in this case is of the sufficiency of the notice convening the
meeting. The meeting in question was convened for the purpose of adopting new
articles of association and entering into an agreement with the managing agents
of the company. The case for the plaintiff is that the notice convening the
meeting and the circular accompanying it did not give the shareholders
information that important changes were in contemplation. Consequently they did
not attend the meeting, and in their absence resolutions were passed bringing
into force new articles of association and sanctioning an agreement with the
managing agents by which the interests of the shareholders were seriously
affected to their detriment. It is admitted that three of the directors are
members of the firm of the managing agents, D. N. Petit Sons & Co., and it
is argued that this fact was concealed from the shareholders. The managing
agents of the company have admittedly been the agents for fifty years, ever
since the mills were started, but up till now there had been no formal
agreement between them and the company. It was at this meeting that a formal
agreement was entered into, and the articles of association were brought up to
date. There is no doubt that the alteration of the articles of association and
the agreement entered into with the managing agents are matters of the greatest
importance to the interests of the company. In the course of the
arguments in this case, counsel had dealt in detail with the numerous articles which have been altered, and the new
articles and the terms of the agency agreement. It will be necessary to go into
details, but put broadly, the changes in the articles are alleged to increase
the powers and lessen the responsibilities of the directors and servants of the
company, imposing a corresponding obligation upon the shareholders, and with
regard to the agreement with the managing agents, the two main points
are, first, that an agreement for compensation in the event of the mills being wound up has been made by which the agents are
entitled to receive as compensation their average bonus for seven years prior
to the date of winding up, and what is almost as important, a clause has been inserted
by which in the event of the mills changing hands, it is to be a condition of
the sale that the purchaser should employ the same managing agents. The
managing agents are also given the power to assign or transfer the agency, and
the company is compelled to employ as agents their transferees or assigns. Of
course, if the shareholders so desire, they can enter into any agreement
they like with the managing agents and we are only
concerned with the question of notice, but in considering the sufficiency of
notice it is necessary to go into some of these details especially in view of
the large number of decisions of the Court of Chancery and the Court of Appeal
in England which have been quoted in this case. I shall begin by setting out
the notice and the circular accompanying it, because in judging of the
sufficiency of the notice, the terms of the notice and circular are
material. The notice, Ex. A, states the resolutions which are to be put before
the shareholders, viz., (1) the adoption of the new articles of association and
sanctioning the agency agreement referred to in Art. 147 of the new articles,
and (2) alteration of the provisions of the
memorandum of association of the company by authorising the investment of the
funds in banks. No objection has been taken to the latter. The notice states
that "A copy of the new articles of association together with a copy of
the said agency agreement may be inspected at the registered office of the
company at any time during office hours prior to the date of the meeting."
This is a provision on which very great stress has been laid by the learned
counsel for the company. This notice was accompanied by a circular, Ex. B, and
as the case depends to a great extent on the terms of the circular, it will be
necessary to give the substance of it. The circular says:
"Accompanying
this letter is a notice convening an extraordinary general meeting of
the company for February 15, 1927, to consider, and, if thought fit, to approve the adoption of new articles of association
in substitution for and to the exclusion of all the existing articles of
association, to approve an agency agreement between the company and the agents
and to alter certain of the provisions of memorandum of association.
The shareholders
of the company will, no doubt, desire to know the reason for the proposed
changes.
The company was incorporated and
registered in the year 1876 with the existing
articles of association as its regulations since when the Indian Companies
Act, 1882, and the Indian Companies Act, 1913, have been passed and considerable alteration in the law of companies
has been made.
Your directors have, therefore, thought it advisable to bring the articles of association of the company more up to date and into line with the provisions of the Indian Companies Act, 1913, as amended up to 1920.
Your directors would assure you in the first instance that no greater powers are conferred upon the board by the new articles except as regards the proposal to increase the power of investment of surplus funds, which is confined at present to Government securities, so as to permit the placing of surplus funds on deposit at interest with banks.
The principal
alterations in the existing articles are as follows:—
Provision is
now made for the holding of shares in joint names and also for the holding of
as many shares as may be desired in any one or more name or names. The existing
articles oblige a member who desires to sell his shares to offer them in the
first instance to the board of directors. This article has now been omitted.
Under the
existing articles the voting power of members was according to a graduated
scale, but opportunity has now been taken to follow the more usual practice of
giving to each member one vote upon a show of hands and upon a poll one vote
for every share held by him.
Under the existing articles, the vote of
a member being a lunatic, an idiot, or a minor cannot
be recorded, but under the new articles the more usual practice of permitting a
vote in such a case to be recorded by the comittee, curator bonus or other
legal guardian of the member, has been adopted.
The
opportunity has been taken of including in the new articles the usual
provisions for the creation of a Provident Fund and for granting pensions and
annuities to employees and ex-employees of the company.
Opportunity
has also been taken of incorporating in the new articles the usual provision
for the appointment of a debenture director, which appointment is usually now
required if and when a debenture loan is raised.
The agents of
the company having expressed a desire to have an agreement with the company
which will fix the duration of their agency and define more clearly their
powers, the directors recommend to the approval of the shareholders an agreement
on the lines of the draft agreement which has been prepared and has been
approved by the agents and is open to inspection by any shareholder at the
registered office of the company at any time during office hours, when the
draft new articles of association can also be inspected.
Apart from the
fixing of the duration of the agency at thirty years from January I,
1927, the only real difference between the existing terms of the agency and the
proposed agreement will be found in cl. 17 which provides for the payment of
compensation to the agents in the event of the company
being wound up except for the purpose of reconstruction or amalgamation. This
is in accordance with the present day practice in Bombay which practice your
directors consider should be followed in the case of this company more
particularly having regard to the long and valuable services extending over
more than fifty years rendered by the agents and their predecessors in business
to the company.
As regards the
proposed alteration in the memorandum of association, paras. (o) and (p)
of cl. 3 have become illegal and, therefore, inoperative by reason of s. 55 (1)
of the Indian Companies Act, 1913. Paragraph (n) restricted the investment of
surplus funds to Government securities. The directors
are of opinion that this restriction is too narrow under present day conditions
and that better use can be made of surplus funds of the company if the power of
investment is enlarged so as to permit the surplus funds to be placed on
deposit at interest with banks."
It is contended
that the notice and the circular give the shareholders sufficient notice of
what was intended to be done at the meeting. It is contended on behalf of the
plaintiff that the notice is misleading or tricky, in the words of the Court of
Chancery; it is designed to lead the shareholders to believe that the business
to be placed before the meeting was of a formal character. I may here say that
with regard to the question of notice, we are governed in this case not by
Table A in the Indian Companies Act, but by the old articles of association of
the Maneckji Petit Manufacturing Company, Ex. E, cls. 48 and 52. Clause 48
says:—
"Seven
days' notice at least of every genaral meeting ordinary or extraordinary and of
every meeting for taking a pool shall be given by advertisement in any two
English and two Vernacular daily newspapers published in Bombay or by writing
sent to the registered addresses of the shareholders respectively, through the
post or by a messenger. The notice shall specify the day, place and hour of
meeting, and the objects and business of the meeting, and, save as hereafter is
mentioned no business other than the business specified in the notice shall be
transacted at the meeting."
Clause 52
says:—
"With the
exceptions mentioned in the foregoing articles as to the business which may be
transacted at any ordinary general meeting without notice, no general
meeting ordinary or extraordinary, shall be competent to enter upon, discuss, or transact any business which has not been
specially mentioned in the notice or notices upon which such meeting was
convened."
It is contended
that the notice and the circular comply with these articles, the object of the
meeting, viz., to sanction the new articles of association and the agreement
with the agents, and the changes in the memorandum are mentioned and the
business of the meeting, viz., the details of the resolutions that are to be
put before the meeting, are mentioned in the circular. Now putting all details
aside, there can be no doubt that extensive changes are made in the
constitution of the company by the new articles of association, and so far as
the agreement with the agents of the company is concerned, the arrangement to
pay seven years' average profits as compensation and the clause regarding the
right to assign and the right to, require that the agency should be continued
in the event of the company changing hand's are matters of the greatest
importance to the shareholders, and can by no stretch, of imagination be
described as formal business. Probably this was the
most important meeting that the company has ever held in the course of its
fifty years of existence and the question is whether the notice indicates to
the shareholders in the company the importance of the subjects which were to be
discussed at the meeting. If it did, then the fact that shareholders did not
attend is their own fault. If it did not, that is to say, if the
shareholders were misled into supposing that the
matters in question were merely formal, then they are entitled to have these
resolutions set aside, and the matter submitted for reconsideration. The
difficulty which arises in this case and which has led to the length of time
which the case has occupied, is due to the fact that it is not possible to apply
general principles to a case of this character. Each case has to be considered
on its own merits with reference to the nature of the articles of the company
concerned, the nature of the notice given, and the nature of the business
placed before the meeting.
It has been
contended that the average commission earned by the agents of two and a half
per cent. on the sales of the company
is rupees four lakhs and that the seven years' compensation would, therefore,
amount to about rupees thirty lakhs. That, however, depends on the amount of
sales of the company. In the present state of the textitle industry the
commission might be little or nothing. I understand the mill is not working at
present. It is common knowledge that the Bombay mill industry is passing through
a time of depression. The notice, as I have already said, refers to the passing
of new articles of association and of the sanctioning of the agency agreement,
the resolutions to be passed being annexed to it. The first resolution
regarding the passing of the new articles of association and the agency
agreement did not give any details as to the nature of the changes. The second
resolution with regard to the memorandum of association gives in detail the
changes necessitated by reason of s. 55 of the Indian Companies Act,
1913, and the paragraph relating to the investment of the funds of the company in banks. No objection is taken to the
alteration in the memorandum, and this clearly gives sufficient notice of the
proposed changes in that respect. Prima facie it might be supposed that an
intimation given to a shareholder that new articles of association were to be
approved would put him on inquiry as to what the differences were between the
new and the old articles. But that has not always been held to be sufficient by
the Court of Chancery. The notice ends by saying that a copy of the agreement
may be inspected at the registered office of the company. Turning to the
circular, this begins by saying "The shareholders of the company will, no
doubt, desire to know the reason for the proposed changes," and
after referring to the incorporation of the company in 1876, and subsequent alterations in the law, it goes on to say:
"Your directors have, therefore, thought it advisable to bring the
articles of association of the company more up to date and into line with the
provisions of the Indian Companies Act, 1913, as amended up to 1920. And
the next paragraph is one which has given rise to a
great deal of controversy, viz.," Your directors would assure you in the first
instance that no greater powers are conferred upon the board by the new
articles except as regards the proposal to increase the power of investment of
surplus funds, which is confined at present to Government securities so as to
permit the placing of surplus funds on deposit at interest with
banks."The contention of the plaintiffs is that
this a misleading statement, because as a matter of fact the new articles
confer greater powers upon the board, a fact which they say it is designed to
conceal from the shareholders. The circular goes on to give the principal
alterations in the existing articles, and the contention of the plaintiffs is
that while dealing with unimportant matters, the circular omits any reference
to various important changes tending to increase the power of the directors to
the detriment of the shareholders. The references in the circular to the new
articles are to the holding of shares in joint names, the abolition of the rule
by which a member is obliged to offer his shares in the first instance to the
board of directors, alterations in the voting power, provisions for the
recording of votes of lunatics, idiots and minors, provision in the new
articles to the creation of a provident fund and appointment of a debenture
director. Secondly, as regards the proposed agency agreement, the circular goes
on to state that the only real difference between the existing terms of the
agency and the proposed agreement will be found in cl. 17 which provides
for the payment of compensation to the agents in the
event of the company being wound up except for the purpose of reconstruction or
amalgamation. Now, although this part of the circular calls attention to
cl. 17 of the proposed agency agreement, it is
contended that it should have stated that the compensation provided for is
seven years' commission prior to the winding up, and no reference is made to
the very important clauses by which the managing agents had the power of
assigning their agency, and the still more important clause by which they bind the
company in the event of a transfer, to stipulate for the continuance of the
agency by the new company, and it is contended that this clause would have a
serious effect on the purchase price to be paid by the acquiring company,
inasmuch as they might not wish to continue the same agents and would be
compelled to do so against their will. The remaining paragraph of the circular
refers to the investment of surplus funds, as to which, I have already said,
there is no dispute.
It has been contended by the learned counsel for the company that all the cases quoted by the learned counsel for the plaintiffs are cases in which the shareholders had no opportunity of seeing what the proposed changes were before the meeting, with the sole exception of a case which has been frequently referred to during the hearing of this case, viz., Normandy v. Ind., Coope & Co., Limited and that in all these cases there was a secret agreement between the directors to get an advantage for themselves at the expense of and without the knowledge of the shareholders. In order to see whether this contention is correct, it will be necessary to go into the various cases quoted, of which there are many. Prima facie it would appear that where the directors give the shareholders notice of a copy of the proposed alterations including the agreement relating to the remuneration of directors (there are no managing agents in any of these English cases), that would be a sufficient notice and that it is the shareholders' own fault if they do not take the trouble to go to the office of the company and examine the proposed alterations. But unfortunately, in at least two cases where a similar notice was given, that has been held by the Court not to be sufficient, and in order to meet that difficulty very elaborate arguments have been put forward. I think that it would be better to deal separately with the question relating to the managing agents and the question relating to the new articles of association, which are referred to in separate portions of the circular and stand on rather a different basis. In my opinion, the interests of the shareholders will be more affected by the new agreement with the managing agents than by the alteration in the articles of association most of which are of a minor character, and in any event would not involve the company in the payment of large sums of money. With regard to the contention that three of the directors are members of the firm of the managing agents and that the shareholders might not be aware of that, I do not think there is very much in it. The company is called 'The Maneckji Petit Manufacturing Company, Limited.' Three of the directors, Sir Dinshaw Maneckjee Petit, Baronet, Jehangir Bomanji Petit, and Maneckjee Cowasji Petit, are also members of the firm of managing agents, D. M. Petit Sons & Co., and I can hardly suppose that the shareholders are not aware that the company is controlled by the Petit family, and in view of the very eminent position which that family holds in the business world, I should think it extremely probable that shareholders would regard that as an asset and would be induced to take shares in the company by reason of the connection of the Petit family with it. This is not a case where the directors are unknown people and the agency firm an unknown firm so that it might fairly be argued that the shareholders did not know that some of the directors were members of the agency firm, nor can I for a moment accept the suggestion put forward by the learned counsel for the plaintiff that any intelligent person would buy shares in the company without knowing who the directors were, and there is this further fact that admittedly this firm had been the managing agents of this company ever since 1876, i.e., for over fifty years. The facts in Normandy v. Ind., Coope & Co., Limited, were peculiar. The directors had been, as a matter of fact, receiving half as much again as their authorised remuneration over a considerable period, and the meeting was called for the purpose of sanctioning those payments with retrospective effect and also sanctioning an extra payment of £1,000 a year to Mr. Edwarn Murray Ind., one of the directors, and in those circumstances, the company not being in a good financial position, Kekewich, J., held that the fact that a copy of the resolutions to be put to the meeting was available to the holders at the registered office of the company was not sufficient, and that it was the duty of the directors to have sent a copy of the proposed resolutions before the meeting was held, and that will be found in the first portion of the judgment, but the learned Judge was careful to say that that proposition was meant to apply to the facts of that particular case; and the point in this case is whether the changes introduced by the new agreement with the managing agents were so far-reaching that it was necessary for the directors to send a copy of the agreement or the essential portions of it to each shareholder prior to the holding of the meeting. The form of the circular, unfortunately, does not seem to be given in the report in Normandy v. Ind., Coope & Co., Limited (supra p. 389). So far as regards the changes introduced by the agreement between the managing agents and the company are concerned, prior to this meeting for fifty years there was no formal agreement, and the position of the agents was regulated by cls. 98 and 99 of the old articles. Clause 98 said:—
"The
general management of the ordinary business affairs of the company shall,
subject to the control of the board, be in persons called the agents of the
company, and such agents shall be the persons, for the time being members of
the firm of Messrs. Dinshaw Maneckjee Petit Sons & Company, and their
remuneration shall be two and a half per cent. on the gross proceeds of sale of
all yarn, cloth and other goods articles and things sold by the company."
Clause 99
says:—
"The
agents, for the time being of the company, shall, subject to the sanction and
supervision of the board of directors, have the power of appointing,
removing and remunerating all officers, workmen and servants of the company, and of fixing their salaries, and of making
payments in respect of all purchases, and receiving moneys in respect of all
sales effected by, or on behalf of the company, in accordance with the
provisions hereinbefore contained."
The principal change made by the memorandum of agreement was the provision as to compensation in the event of the company being wound up, in which event they would be entitled to compensation on the basis of their average commission for seven years preceding the winding up. And that alteration is one to which the attention of the shareholders was pointedly called by the directors in the circular, which says after referring to the proposed draft agreement, that—
"Apart
from the fixing of the duration of the agency at thirty years from January
1, 1927, the only real difference between the existing terms of the agency and
the proposed agreement will be found in cl. 17 which provides for the payment of compensation to the agents in the event
of the company being wound up except for the purposes of reconstruction or
amalgamation. This is in accordance with the present day practice in Bombay,
which practice your directors consider should be followed in the case of this
company, more particularly having regard to the long and valuable services
extending over more than fifty years rendered by the agents and their
predecessors in business to the company."
The directors, therefore, plainly put before the shareholders the fact that the proposed agreement included a clause for compensation and even the number of the cl. 17 is intimated to the shareholders, and it is stated in the preceding paragraph that the proposed agreement is open to inspection by any shareholder at the registered office of the company during office hours. I should ordinarily regard this as sufficient notice of the proposed agreement, but it is contended by the learned counsel for the plaintiff that the circular should have stated that the compensation proposed to be given was calculated on the average commission for seven years. I am of opinion that inasmuch as the question of compensation to the - agents was specifically brought to the notice of the shareholders, even the clause in which it was to be found being stated, the omission to state the amount of compensation which is not a fixed amount but dependent on the average commission for seven years preceding the winding up, was not a fatal defect, and if that were the only objection on this point, I should have put aside this objection as not sufficient in law to invalidate the notice in spite of the ruling in Normandy v. Ind. Coope & Co., Limited (supra p. 389). There are numerous other rulings to which I shall refer later, in which it has been held that notices should not be too strictly construed. Unfortunately the statement in the circular that this clause as to compensation is the only real difference between the existing terms of the agency and the proposed agreement is not strictly correct in view of the clauses to which I have already referred in the agency agreement. The commission remains the same. Clause 4 of the agreement refers to the powers of the managing agents in conducting the business and affairs of the company, and I am not prepared to hold, although the powers are more particularly stated, that they go substantially beyond the powers in Art. 99. It is contended that cl. 4(k):
"To purchase and sell and for that purpose to sign endorse and transfer Government promissory notes or other securities issued by the Government of India and standing in the name of the company or any bonds of any public authority and to collect and give receipts for the dividends or interest from time to time due or to become due on any such securities," gives power to the managing agents to raise money, but it is contended that it is not so. Clause 10 of the proposed agreement says:—
"It
shall be lawful for the said firm to assign this agreement and the right of the
said firm hereunder to any person, firm or company having authority by its
constitution to become bound by the obligations undertaken by the said firm
hereunder and upon such assignment being made and notified to the company, the
company shall be bound to recognise the person, firm or company aforesaid as
the agents of the company in like manner as if the name of such person, firm or
company had appeared in these presents in lieu of the names of the partners of
the said firm, and as if such person, firm or company had entered into this
agreement with the company, and the company shall forthwith upon demand by the
said firm enter into an agreement with the person, firm or company aforesaid
appointing such person, firm or a company the agent of the company for the then
residue of the term outstanding under this agreement and with the like powers
and authorities, remuneration and emoluments and subject to the terms and
conditions as are herein contained."
This means that the managing agents are at liberty to subsitute their assignees as managing agents, and the company are bound to accept the assignees as such. Clause 16 provides:—
"In
the event of the company being at any time during the continuance of the agency
wound up for the purpose and with the object of transferring its business to
another company, the company shall make it one of the terms and stipulations of
the agreement for transfer of its property and business to such other company
as aforesaid that such other company shall appoint the said firm its successors
and assigns to be the agents of such new company for the residue of the term
aforesaid and with the like powers and authorities to the said firm, and on the
same terms and conditions as to the remuneration emoluments and otherwise as
are herein contained. And it is hereby expressly agreed and declared that save
and except with such condition and stipulation as one of the terms of the sale
and transfer thereof the company will not sell and transfer its business to any
other company."
This means that any company buying the Maneckjee Petit Mill or amalgamating with them is obliged to take the managing agents as its own managing agents and it is contended that this might seriously affect the purchase price or the terms of the amalgamation in the event of an amalgamation taking place, as the new company or the purchasing company would be compelled to take over the managing agents whether they wanted to or not. There is a third clause to which exception is taken, viz., cl. 2, which gives the managing agents liberty:
"To draw
out of the funds of the company at the end of each half year 01a account of
their commission such sum not exceeding ninety per cent. of the sum which the
said firm may fairly consider on the taking out of a trial balance sheet for
that half year to have been earned by the said firm by way of commission during
that period.
It is contended that by thus drawing the major portion of their commission half yearly the company is deprived of interest on the amount. This, I think, is a minor point, but it is very doubtful whether the clause in the circular, which says that the only real difference between the existing terms of the agency and the proposed agreement in cl. 17 for the payment of compensation, can be regarded as sustainable in view of the omisson to refer to the clauses regarding the power of assignment of the managing agency during its continuance in the same firm in the case of a transfer of the company. There is some dispute as to whether this clause refers to sale or amalgamation. It is not necessary to go into that. The cases on which the learned counsel for the plaintiff has relied are: Normandy v. Ind, Coops & Co., Limited, to which I have already referred, Baillie v. Oriental Telephone and Electric Company, Limited, MacConnell v. E. Prill & Co., Limited. Tiessen v. Henderson and Kaye v. Croydon Tramways Company. The learned counsel for the company has argued that the terms of the notice should not be strictly construed, and he refers to Palmer on Companies, pages 166 and 168, at which the learned author refers to Normandy v. Ind., Coope & Co., Limited, as being contrary to this proposition. He further refers to Young v. South African and Australian Exploration and Development Syndicate, Pashuram D. Shamdasani v. Tata Industrial Bank, (Shah. J.'s judgment), Henderson v. Bank of Australasia, Alexander v. Simpon, Grant v. United Kingdom Switchback Railways Company, and his main submissions are as follows:—
1. The notice must be in conformity with the
articles of each particular company.
2. Sufficiency of the
notice must be decided with reference to the particular circumstances of each
case.
3. Where the notices
have been challenged, there was some arrangement for secret commission.
4. Except in Normandy v. Ind., Coope &
Company, Limited (supra p. 394), the proposed
resolutions were never offered for inspection prior to the meeting.
This last statement is not quite correct, as there is at least one case, Pacific Coast Coal Mines, Limited v. Arbuthnot, in which the notice stated that the proposed resolutions were deposited with the Registrar of Companies at Victoria B. C, and it was held that this was not sufficient, apparently on the ground that shareholders residing in other parts of America might not be able to go to Victoria to inspect them. The plaintiff in the present case, who owns a number of shares, resides in Bombay. It is not in evidence where the other shareholders of the company reside, but presumably they or most of them would be in a position to go to the registered office of the company in Bombay and inspect the proposed resolutions, as intimated by the circular. I think myself that the notices are in accordance with the articles of the company but that does not completely meet the argument which has been put forward that the circular is misleading, inasmuch as while mentioning certain changes, it omits other very important ones. I have already given the details so far as the agency agreement is concerned at an earlier portion of this judgment, and I will deal later with the changes in the articles of association, which are of less importance than those in the agency agreement. It has been further argued by the learned counsel for the company that the form of notice and most of the changes in the articles of association are of a usual character and are taken from Palmer's Precedents in Company Law, Vol. I. He has referred to them in detail. I am not prepared to hold that because a change in articles or a clause in an agreement is of a usual character, that, therefore, a shareholder is precluded from expressing his opinion on it or rather that he should not be given an opportunity of objecting to it if he thought fit. And in this Court we have experience, unfortunately, that shareholders can and do object to all sorts of provisions, usual or not. The present case presents a great deal of difficulty, and the point I am on now is whether the circular is misleading inasmuch as it would give a shareholder—and the cases show that in matter of this nature a shareholder must be taken to be an ordinary business man of ordinary intelligence, not an astute financier or on the other hand, a person of a deficient intellect—notice of the extent and the result of the proposed changes, and if we are to follow Kekewich, J.'s judgment in Normandy v. Ind., Coope & Co., Limited (supra p. 394). I think there would be some difficulty in holding that the circular did give sufficient notice. Now, considering the other cases given above in Baillie v. Oriental Telephone and Electric Company, Limited (supra p. 394), the directors were also directors of a subsidiary company in which the principal company held practically the whole of the shares. The directors were drawing remuneration from the subsidiary company without the sanction of the shareholders of the principal company. An extraordinary meeting was convened to pass resolutions ratifying what had been done and authorising them to retain the remuneration received by them in the past and for the future as directors of the subsidiary company. The notice was accompanied by a circular, which set out the proposed resolutions, but neither the notice nor the circular give particulars of the amount, which was very large, of the remuneration which had been received by the directors in respect of the subsidiary company. It was held that the notice did not give a sufficiently full and frank disclosure to the shareholders of the facts upon which they were asked to vote; and that the resolutions were invalid and not binding upon the company. This was a case in which a sum of upwards of £40,000 had been received by the directors in respect of the subsidiary company, a fact which was not referred to in the circular, and it was held by the Master of the Rolls that if any attempt is to be made by the directors to get the sanction of the shareholders, it must be made on a fair and reasonably full statement of the facts upon which the directors are asking the shareholders to vote, and that the notice coupled with the circular was not frank, not open, not clear, and not in any way satisfactory. In MacConnell v. E. Prill & Co., Limited (supra p. 394), it was held that notice of a meeting of a company to increase or sanction, the increase of the share capital of a company is not sufficient if it merely refers generally to a proposed resolution to increase the share capital; it must show an intention to make the specific increase embodied in the resolution that is actually passed. In Tiessen v. Henderson (supra p. 394), it was held that notice of an extraordinary general meeting must disclose all facts necessary to enable the shareholders receiving it to determine in their own interest whether or not they ought to attend the meeting, and pecuniary interest of a director in the matter of a special resolution to be proposed at the meeting is a material fact for this purpose. Kaye v. Croydon Tramways Company (supra p. 394), was a case in which part of the purchase money of the company was to be paid not to the shareholders but to the directors, and it was held that the notice was artfully framed to mislead the shareholders. That is a very extreme case. The learned counsel for the company has referred to Young v. South African and Australian Exploration and Development Syndicate (supra p. 394), in which there was a notice of a special general meeting and thereby given in general terms notice of the character of the business to it. That seems to be sufficient within Art. 35 of Table A; and besides that, it was apparent on the face of the notice that the intention was to substitute new regulations, and the members of the company were told that they were at liberty to inspect a copy of the proposed regulations at the office of the solicitors of the company, whose address was given, and it was held to be a sufficient notice. Henderson v. Bank of Australasia (supra p. 394), only says that the notice fairly and reasonably expressed to the shareholders what matters were going to be discussed at the meeting. (In Alexander v. Simpson (supra p. 394),), is laid down that the test is, what is the fair business like construction which business men in the position of the shareholders would place on the document when they received it. Grant v. United Kingdom Switchback Railways Company (supra p. 394), held that the resolution of the general meeting was not invalidated by the fact that the notice convening it did not suggest any reason why the contract could not be carried into effect without the sanction of a general meeting. In Parshuram D. Shamdasani v. Tata Industrial Bank (supra p. 394), it was held by Shah, J., after a reference to most of the cases to which I have referred (page 1003):—
"The
net result is that where there is any secret agreement or any interest of the
directors in the agreement not disclosed in the circular, or in the notice, the
Court will view with strictness any omission to refer to it in the notice or in
the circular accompanying the notice; and the omission to mention any secret
arrangement would constitute a serious defect in the notice. But where no
secret agreement is proved or suggested and where there is no indication that
there was anything to conceal, the court will as far as possible take a liberal
view of the terms of the notice and will not upset the proceedings taken on a
notice for some defect, which might have been avoided, but which was not
avoided on account of some honest mistake."
And reference is made to an observation
of Cotton, L.J., in Henderson v. Bank of Australasia
(supra p. 394) that (page 343):
"I
do not think that a notice calling a meeting ought to be treated very
critically in order to see whether we cannot pick out some defect in it."
In that case,
however, it was held that there was no essential matter which could be said to
have been omitted. In this case the real difficulty is that while the circular
pointedly calls the attention of the shareholders to the proposed arrangement
for compensation to the managing agents in the event of the company being wound
up, it refers to para. 17 of the proposed agreement as containing the only real
difference between the existing terms of the agency
and the proposed agreement. I hold that so far as the question of compensation
to the managing agents is concerned, the shareholders had sufficient notice and
the omission to mention the amount of compensation is not sufficient to
invalidate the notice. The shareholders were put on inquiry to see what the
nature and extent of the proposed compensation was. They were given an
opportunity of inspecting the resolutions to be proposed at the meeting, and if
they did not avail themselves of it and did not attend the meeting, that is
their own fault. But the difficulty arises from the fact that no
reference is made in the circular to the other
alteration in the terms of agreement with agents, viz., the power of assignment
and the compulsory continuance of the same agency by any company which took over
the business. And the question is whether the omission to refer in this
circular to these alterations renders the notice insufficient. It might be
contended that a shareholder might approve of the proposal to compensate the
managing agents for the cessation of their interest, and, therefore, he might
not think it necessary to attend the meeting, but it does not necessarily
follow that he would approve of the clauses regarding assignment and the
compulsory continuation of the agency in the event of a sale of the mill by the
new proprietors, and it might, therefore, be argued that he was misled by this
reference in the circular to cl. 17 as constituting the only real
difference between the existing terms of the agency
and the proposed agreement. On the other hand, it is quite clear that the
directors did give notice to the shareholders that there was to be a change in
the terms on which the managing agents were working for the company by the
introduction of an agreement with them which contained one important clause
regarding compensation which might conceivably involve the company in a large
payment, and, therefore, shareholders were put upon inquiry, and given an
opportunity of examining the proposed memorandum of agreement. There is no
question of any secrecy here, because any shareholder who went to the company's
office to see the proposed memorandum of agreement with a view to examine the
proposals regarding compensation would in all probability look at the
other terms so that the other" proposals regarding assignment and the continuance of the agency would be brought to his
notice. I think myself it would have been better if in the circular the
directors in calling attention to cl. 17 of the proposed memorandum of
agreement had also called attention to the clauses regarding the powers of
assignment and the compulsory continuance of the
agency in all events. The question is whether this is sufficient to
invalidate the notice. There is no question of a secret
agreement here as in some of the cases above quoted, but there is an interest
of the directors in the agreement which is not disclosed in the circular or
notice, an interest apart from the compensation clause.
Now, turning to
the alterations in the articles of association they are of a minor character. It
was at one time contended that by the new articles of association the directors
were given power to raise money on behalf of the company which they did not
possess under the old articles of association, but that argument has had to be
given up since under arts. 75-A and 75-B of the old articles, and cls. 2(k) and
3(l) of the old memorandum of association the power of raising money by
debentures was given to the directors, [cf. page 19 of the old articles,
s. 75, cl. (i).] The learned counsel for the plaintiff had to admit this was a
complete answer to his argument on that point.
Various objections have been taken to the alterations in the articles of
association, but they are really none of them of very great importance. The one
to which much argument has been devoted is the question of the indemnity of the
directors under the old and the new articles. Under the old arts. 85 and
86 and the new arts. 183 and 184 the exceptions to
wilful acts and defaults have been omitted, and the words wilful dishonesty substituted.
There is nothing about this in the circular. The restrictions on the right of
transfer, old art. 30, new art. 44, and the regulations as to the
appointment of directors, old art. 78, new art. 133, also the restrictions on the inspection of accounts and
discovery of trade secrets, arts. 161 and 180, which are not in the old
articles, are all minor points, but the new indemnity
clauses undoubtedly go further than the old by the omission of the clause as to
wilful default, there being a considerable difference in law between wilful
negligence and dishonesty, as laid down in In re Brazilian Rubber
Plantations and Estates, Limited. It is further contended that the restrictions on transfer
in art. 44, where the directors have a new power of affecting the shareholders'
rights and the right is again restricted by art. 130, which, however
requires fourteen clear days' notice of candidates for the office of director
confer new powers. The assurance in the circular that
"no greater powers are conferred upon the board by the new articles except
as regards the proposal to increase the power of investment of surplus
funds" is not strictly correct, because in the circumstances I have given
above the new articles increased the power of the directors, although many of
them such as the power of restriction on transfer, are powers which are usually
exercised in modern articles of association, and it has been contended that
ordinary shareholders would imagine from this notice that that the proposed
alterations were merely formal, designed to modernise the articles. It has been
contended that there is no disclosure of the interest of three directors in the
agency agreement, but the old articles showed the names of the directors, and
the names of the agency firm, and I do not think that the plaintiffs can
succeed on that point.
However liberal
a view is taken of the notice and circular, and eliminating those of the
changes in the articles of association which are more or less of a formal
character or such as are usually found in modern articles, there are two
points, first, alteration in the indemnity given to the directors and
officers of the company; and, secondly, as regards
the agency agreement, the omission to mention the power of assignment and the
power conferred on the managing agents to insist on the continuance of their
agency in the event of a transfer, both of which are, in my opinion, changes of
which no notice was given to the shareholders, and are even proposals which the
terms of the circular might be said to conceal and in that respect the circular
is misleading. To put the matter as simply as possible, if the directors issue
a circular in which they refer to certain alterations, and say that the only
important alteration is with regard to cl. X, whereas there are equally
important alterations in cl. Y, can it be said that
the shareholders have sufficient notice of the proposed alteration in cl. Y? I
do not think so.
The result is that I find on Issue No. 1
that the notice was insufficient, and consequently,
on Issue No. 2 that the meeting was not duly convened and the resolutions are
not valid and operative. The plaintiff will be granted the declarations and
injunctions sought in prayers (a) and (b) of the plaint together with costs of
the suit.
GUJARAT HIGH COURT
Companies Act
High Court of Gujarat
v.
Official
Liquidator of Shri Ambica Mills Ltd.
H.L. Gokhale, J.
C.A. No. 143 of 1997 in C.P. No. 121 of 1995
December
22, 1998
Section 446 of the
Companies Act, 1956 - Windig up - Suits stayed on winding up order - In matter
of dispute pertaining to dues of ONGC Supreme Court injuncted company not to alienate,
charge or encumber any of its immovable assets except with leave of Supreme
Court and further ordered that property would be made available for discharging
dues of ONGC - Company did not disclose fact of injunction in explanatory notes
circulated for purpose of GM and resolution was passed by shareholders to sell
property to applicant - Pursuant thereto sale agreement was made with
applicant who took possession and invested huge amount - Subsequently, winding
up proceedings were initiated against company - Applicant, claiming to be bona
fide purchaser, sought exclusive ownership over said property and prayed for
permission to file civil suit for specific performance of agreement entered
into - Whether agreement to sell entered subsequently was contrary to and
violative of injunction of, and undertaking given to, Supreme Court and,
therefore, opposed to public policy - Held, yes - Whether, since as per
agreement date of putting applicant into possession was like a ‘cut off’ date
and from that date liabilities would go over to purchasing party, it was an
agreement almost in nature of conveyance and had not caused any alienation
while it created an encumbrance or burden on property - Held, yes - Whether
party seeking execution of conveyance deed and in alternative seeking to file a
suit for specific performance of an agreement must show that consideration and
objects of agreement were lawful and same were not forbidden by law including a
court order - Held, yes - Whether applicant itself having made only part
payment against agreed price and thereby having committed breach of terms of
agreement, it could not claim execution of conveyance or specific performance
of agreement - Held, yes
Section 173 of the
Companies Act, 1956 - Meetings & proceedings - Explanatory statement to be
annexed to notice - Whether on fact stated under ‘Winding up - Suit stayed on
winding up order’ resolution passed in flagrant violation of section 173 was
void and entire action on basis of such resolution was void - Held, yes
Facts
In a matter of dispute pertaining to dues of ONGC against supply of gas to the company, the Supreme Court injunted the company not to alienate, charge or encumber any of its immovable assets except with leave of the Supreme Court and also directed that the property would also be kept available for discharging liability to ONGC. The company gave an undertaking accordingly. However, with a view to sell impugned property the company called annual general meeting of shareholders, but in the explanatory statement attached to the notice no information about the undertaking was furnished. The annual general meeting passed a resolution for sale of the property.
Subsequently, an agreement for sale was executed between the applicant and the company. It was settled that the applicant would pay Rs. 4.01 crore. However, the applicant paid Rs. 5 lakhs and took possession of mill-property and ran business investing huge amounts. Later on, winding up proceedings were initiated against the company and official liquidator proceeded to take possession of properties. The applicant, claiming itself a bona fide purchaser, challenged against relating the property with winding up proceedings. How-ever, the High Court and, subsequently, the Supreme Court ordered that in view of earlier order of the Supreme Court the property of the company should be kept for realisation of dues of ONGC. In instant application the applicant sought permission for filing civil suit against the company for specific performance of the agreement
Held
Apart from the fact that the entire
order of the Supreme Court (including these restrictions) had to be read
together, the first part of the Supreme Court order also included a restraint
on encumbrance. The definition of encumbrance clearly include an element of
creating a burden on the property. By no stretch of imagination could it be
said that this agreement for sale did not create a burden or an encumbrance on
the property concerned.
However, that was not the only part
of the restrictions. The other part of the direction of the Supreme Court was
that the property would be made available for discharging the respective
liabilities on account of the difference of price of all the gas supplied.
Again in the order of the Supreme Court, what was submitted to the court and
what was contemplated was that the mill company would be run by the then
management. If any alienation of the property to any third party was
contemplated or was to be permitted, firstly the court could have said that.
Thus, on the one hand what was submitted to the court was that in the interest
of the large work-force, ONGC ought to be directed to make available gas on the
concessional rate and the establishment will be run by the very management. On
the other hand, if looked at the entire agreement, it was clear that from the
date on which the possession was handed over to the applicant herein, all the
liabilities were passed on.
Looking to the various clauses of
this agreement, it was clear as if the date of putting the applicant into possession
was like a ‘cut-off’ date, and from that date all the liabilities were passed
over to the purchasing party. Thus, if was apparent that though the document
was styled as an agreement to sell, it was almost in the nature of a
conveyance. It was, therefore, easy to say that the agreement had not caused
any alienation. But that was only on paper and not in reality and, in any case,
it definitely created an encumbrance or burden on the property. Moreover, the
second part of the restrictions imposed by the Supreme Court were also clearly
flouted inasmuch as the property was no longer kept free and available for
discharging the liabilities which would flow subsequently to ONGC. The party
which sought execution of conveyance deed and in the alternative wanted to
file a suit for specific performance of an agreement, must show that the
consideration and objects of the agreement were lawful and the same were not
forbidden by law including a court order. They had failed in the same.
With respect to the claim of ONGC
and the responsibility of company in winding up, the orders of the Supreme
Court had been very clear all throughout. The Supreme Court had granted an
injunction much prior to the disputed agreement. The Supreme Court dismissed
the applicant’s application seeking alienation of the property moved subsequent
to the agreement, and, thirdly, even subsequent to the winding-up order, the
Supreme Court had not changed that position and had maintained that the dues of
the ONGC were to be paid first. In the circumstances, the consideration of the
agreement being unlawful and being forbidden by law and court’s orders, the
agreement would be void at its inception under section 23 read with section 24
of the Indian Contract Act. The plea of the applicant that the agreement was
initially valid and had at the most become voidable subsequently, had to be
rejected. The agreement also had to be considered as opposed to public policy
inasmuch as no such agreement could be permitted which was contrary to and
violative of the injunction and the undertaking given to the court, much less
the Supreme Court of India.
A party seeking specific performance
must show that it had complied with its part of the agreement. All that the
applicant had given in pursuance to the agreement was only Rs. 5 lakhs to the
company in liquidation. They were required to redeem the debentures in August,
1993, by making payment of Rs. 3.95 crores, but that had not been done. It was
clearly or case wherein though the applicant was being given a valuable
property at a throw-away price, whatever was the consideration agreed under the
agreement was not paid by the applicant company. In a circumstance like this,
it could not claim execution of conveyance or specific performance of the
agreement.
The debentures having not been
admittedly redeemed in August, 1993, it was, in fact, a breach and failure on
the part of the applicant to act in accordance with the agreement. The company
had put the applicant in possession of the property in its entirety. It was
clearly disclosed to the applicant that proceedings were pending in the High
Court concerning the claims of ONGC and it was expected of the applicants to
find out as to what was that proceeding. Whether the directors of the company
had deceived the applicants as claimed by them or whether the applicants had
not made the necessary inquires, the fact remained that the company could not
be faulted for the breach of the agreement. No document had been produced to
show that in August, 1993 or thereafter the applicant company ever offered
payment of Rs. 3.95 crores nor was there any letter produced thereafter or
along with the affidavits calling upon the company to execute the conveyance,
the applicants having complied with all the requirements of the agreements as
claimed by them.
Section 293(1)(a) requires a company
not to sell lease or otherwise dispose of the whole, or substantially the
whole, of the undertaking of the company except with the consent of the public
company in its general meeting. That consent was to be obtained after informing
the shareholders accordingly in the meeting to be held for that purpose.
Although a meeting was called, the shareholders were completely kept in dark of
the order passed by the Supreme Court restraining any such disposition of
property and requiring that the property should be kept intact and available
for clearing the dues of ONGC. When a resolution is passed without disclosing
material facts in the explanatory statement in flagrant violation of the
requirement of section 173, it cannot be anything but a void resolution and an
agreement on the strength of a void revolution if permitted would defeat the
provisions of law.
In any case, now there was no
question of permitting this conveyance to be executed in terms of the agreement.
In fact, under the orders of the Supreme Court right from the beginning, the
position was very clear that the property of the mill company was to be kept
available for clearing the dues of ONGC. Even so, once again after the company
having gone into liquidation and the official liquidator having pointed out
the agreement (in due deference to the order passed by the single Judge of this
Court), the Supreme Court again reiterated that even in the liquidation
proceedings,the payment of ONGC was to be cleared first. That being so, there
was no question of acting on this agreement by payment of the amount of Rs.
3.95 crores to the debenture holders at this stage. The dues of ONGC were to be
paid off first and thus the agreement would have to be considered as void as it
would be requiring to do an act impossible of performance or the performance of
which was prohibited by the Supreme Court order and if permitted would be
unlawful. Thus, the agreement would be considered as impossible even under the
second clause of section 56 of the Indian Contract Act by reason of this
subsequent event.
Thus, in the facts of the instant
case, an agreement had been entered into in flagrant violence of the injunction
granted by the Supreme Court and in complete breach of the provisions of the
Companies Act. When the Supreme Court passed injunction earlier and
subsequently rejected the request of seeking/permitting transfer of assets, the
concerned order decided the controversy finally between the parties and they
could not be permitted to re-agitate the issue once again.
Assuming that the conveyance was
required to be executed for any reason as canvassed by the applicant, it was
undoubtedly a disposition of the property after the commencement of the
winding up proceeding and any such disposition of property was void unless the
court otherwise ordered under section 536(2).
The alternate prayer of the
applicant was to permit them to file the suit for specific performance of the
agreement. Permitting filing of such a suit would presuppose that prima facie
the applicant had a case which could be gone into and considered by a court of
law. In the present case, on the face of it, the agreement being void,
contrary to public policy, and hit by various provisions of law and the orders
of the Supreme Court, there was no question of permitting the applicant to
file, or to proceed with, a suit for specific performance of an agreement which
was void.
Hence, the application was to be
dismissed.
Cases referred to
ONGC v. Association of Natural Gas Consuming Industries of Gujarat [1990] (Supp.) SCC 397, Nathulal v. Phoolchand AIR 1970 SC 546, Lal Chand v. Sohan Lal AIR 1938 Lahore 220, Dharam Chand v. Mitsui Bussan Kaisha & Co. AIR 1920 Nag. 12, Pranakrushna v. Umakanta Panda AIR 1989 Ori. 148, Dalbara Singh v. Chhaja Singh AIR 1992 Punj. & Har. 237, Adapa Vittal v. Govula Rama Kistiah AIR 1969 AP 167, Kusuma Dei v. Malati AIR 1969 Ori. 195, Gherulal Parakh v. Mahadeodas Maiya AIR 1959 SC 781, Kedar Nath Motani v. Prahlad Rai AIR 1960 SC 213, S.M. Ganapat Ram v. Shri Sayaji Jubilee Cotten & Jute Mills Co. Ltd. [1964] 34 Camp. Cas. 777 (Guj.), V.G. Balasundaram v. New Theatres Carnabic Talkies (P.) Ltd. 77 Comp. Cas. 324 (Mad.) and Shri Sayaji Jubilee Mills case [1964] 1 Camp. LJ 326 (Guj.).
Judgment
Gokhale, J. - Company Petition No. 66 of 1988 was filed on 12-4-1988 for winding up Shri Ambica Mills Ltd. This was one of several petitions filed for this purpose. During the pendency of that petition, reference under Sick Industrial Companies (Special Provisions) Act, 1985, was filed before the Board for Industrial & Financial Reconstruction (BIFR). The Board forwarded its opinion to this court under section 20 of the said Act to the effect that it was just and equitable that the company be wound up. The opinion from the said Board was registered as Company Petition No. 121 of 1995 and winding up order came to be passed on 17-1-1997 on Company Petition No. 66 of 1988 with Petition No. 121 of 1995 and others. Under that order (Coram : Pandit, J.), the official liquidator attached to this High Court was appointed as the liquidator for that company and the liquidator was directed to take charge of the company together with all its assets, records, books, machineries, spare parts stores, manufactured goods, land and buildings and all other properties after taking an inventory in that behalf. The order stated that he will have all the powers prescribed under sections 456 and 457 of the Companies Act, 1956, and would also be at liberty to seek permission from this Court whenever he felt it necessary.
2. Shri Ambica Mills Ltd. is having its properties situated mainly at four different places :
(i) Unit No. 1 situated in the Khokra
area of Ahmedabad.
(ii) Unit No. 2 which is
situated near Railway Lines at Ahmedabad.
(iii) A textile mill at Baroda.
(iv) Ambica Tubes Division at Vatva.
3. In the present matter, we are concerned with the textile mill at Baroda known as Unit No. 3. In pursuance of the above referred judgment and order, the official liquidator has taken possession of all the aforesaid properties except the textile mill at Baroda. This is because subsequent to the aforesaid judgment and order, initially an appeal was preferred by the present applicant being O.J. Appeal No. 7 of 1997. That came to be dismissed on 31-3-1997 though the status quo was directed to be maintained for a period of four weeks thereafter. The present application has been filed thereafter on 23-4-1997 by the applicant company which claims to be a purchaser of the property situated at Baroda. It is stated in the application that an agreement, dated 2-9-1989 had been executed much earlier between Shri Ambica Mills Ltd. and the applicant company and that this Hon’ble Court ought to issue a direction to the official liquidator to execute the conveyance deed in favour of the applicant in pursuance of that agreement. Alternatively, it is prayed that the applicant company be permitted to file a suit for seeking a specific performance of that agreement, dated 2-9-1989.
4. In the affidavit in support of the application, it is stated in paragraphs 4 and 5 that the agreement referred to above was entered into on 2-9-1989 for a total consideration of Rs. 4,01,00,000. Prior thereto, the said Shri Ambica Mills Ltd. had given an undertaking to the Hon’ble Supreme Court on 27-5-1987 in a matter of dispute pertaining to the dues of Oil and Natural Gas Commission (ONGC). The undertaking stated that the mill company would not alienate, charge or encumber any of its immovable assets except with the leave of the Hon’ble Court in pursuance of the order passed by the Hon’ble Supreme Court in that proceeding on 15-4-1987 and that it shall also keep available its immovable assets for discharging its liability to ONGC. It is further stated in para 5 of application that :
“The
applicants submit that the said undertaking given by Shri Ambica Mills Ltd. to
the Hon’ble Supreme Court was not disclosed to the applicant at the relevant
time, i.e. 2-9-1989 when the agreement for sale of Shri Ambica Mills Textile
Unit No. 3 was entered into by and between Shri Ambica Mills Ltd. and the applicant.”
5. This applicant, however, accepts that in clause No. 14 of the said agreement, there was a specific reference to the proceeding between the ONGC and Shri Ambica Mills Ltd. clause 14 of the agreement reads as follows :
“14.
The vendor has informed the Purchaser that additional price has been claimed by
ONGC for the gas supplied by ONGC to the said undertaking. The said claim is
being disputed by the vendor and a writ petition is pending in the Hon’ble the
Gujarat High Court at Ahmedabad in respect thereof. The vendor agrees and
undertakes to indemnify the purchaser and keep it indemnified from and against
all claims and demands made by ONGC prior to the date of handing over possession
of the said undertaking and from and against all costs, charges and expenses
which the purchaser may have to incur or suffer or be put to on account of such
claim made by ONGC against the purchaser for the period prior to the date of
the handing over of the possession of the said undertaking.”
Thereafter, it is stated in para 10 of the affidavit :
“I
state and submit that, with a view to deceive the applicant, Shri Ambica Mills
Ltd. knowing fully well that it had given the aforesaid undertaking to this
Hon’ble Court had not disclosed the said material fact to the applicant company
and without obtaining leave from this Hon’ble Court agreed to transfer unit
No. 3 to the applicant company under the said agreement, dated 2-9-1989."
(read Supreme Court in place of ‘this Hon’ble Court’)
6. It is further stated in the application that the applicant was put in possession since the month of December 1989 and since then the applicant is running the said unit. Then it is stated that necessary permissions under various statutes such as Urban Land (Ceiling & Regulations) Act, 1976, had been obtained and necessary forms were also submitted for complying with various other legal requirements. Thereafter, it is stated that with a view to run the factory, the applicant company had retrenched approximately 800 employees by paying their legal dues to the tune of Rs. 2 crores and that it has further incurred expenses to the extent of Rs. 4.5 crores for modernisation of the unit by installing new machinery and equipments and that, at the time of application, it was running spinning section by employing 500 employees paying Rs. 15 lakhs per month by way of their wages. It is further stated at the end of paragraph 14 of the application that the applicant company was paying approximately Rs. 2.5 crores per annum by way of revenue.
7. The application then states that, in the meanwhile, Shri Ambica Mills Ltd. had approached the BIFR and in that proceeding, namely, Reference Case No. 46 of 1990, a prima facie opinion was formed on 10-3-1995 that the mill company requires to be wound up. On coming to know of it, the applicant company approached the BIFR on 19-5-1995 and submitted its objections pointing out that it was, in fact, running the unit in the meanwhile and had invested huge amounts and, therefore, it requested the Board to alienate Unit No. 3 from the winding up proceedings.
8. The Board was, however, of the opinion that in view of the undertaking given by Shri Ambica Mills Ltd. to the Supreme Court for not transferring any of its assets, the Board could not do anything in the matter and, if the applicant thought it necessary, they may (might) approach the Supreme Court for appropriate orders. The applicant, therefore, approached the Hon’ble Supreme Court and the Hon’ble Supreme Court rejected Interim Application Nos. 135-45 in Civil Appeals No. 8530-40 of 1983 preferred by the applicant, on 5-2-1996, by passing the following order :
“I.A.
Nos. 135-45 are dismissed.”
9. The BIFR subsequently gave its opinion on 15-9-1995 recommending winding up of this company. An appeal being Appeal No. 60 of 1996 was preferred against that order of winding up by the present applicant. That was also rejected. It is relevant to note that in para 16 of its judgment, the Appellate Authority has observed as follows :
“The
appellants admittedly have paid Rs. 5 lakhs as per the agreement to Shri
Ambica Mills Ltd. The appellant has not given any scheme before the Board.
There is also nothing to show that the appellant is ready to rehabilitate the
company in the appeal memorandum. It is stated that a detailed scheme would be
submitted by them before the Board but was not done. The scheme the appellants
referred to is based on the sale of land of Unit No. 3. As the appellant is
only clothed with the agreement for sale, the appellant’s proposal, in fact,
amounts to succession to a part of assets of Shri Ambica Mills Ltd. at a
throwaway price without regard to the financial liabilities of Shri Ambica
Mills Ltd.”
10. It is also relevant to note that in para 21 of this application, it is averred as follows :
“I
state that at this stage, I beg to point out that the ONGC having come to know
about the breach of the undertaking given to the Hon’ble Supreme Court by the
Ambica Mills Ltd., had also filed a contempt petition against Shri Ambica Mills
Ltd.”
On a query it is also stated that this contempt application came to be filed on 23-4-1997.
11. The present application came up before Balia, J. The order passed by the Hon’ble Supreme Court in the proceeding initiated by the ONGC and the undertaking filed by Shri Ambica Mills Ltd. were brought to the notice of the learned Judge. In these circumstances, the learned Judge after narrating all the aforesaid background passed an order on 6-8-1997 and directed in paras 6, 7 and 8 as follows :
“6.
So far, learned official liquidator has not moved any application for
disposing of the assets of company in liquidation. As per application, sale of
Mill No. 3 has not been completed in accordance with law and the property can
now only be disposed of by the official liquidator as per the direction of this
court under the provisions of the Companies Act.
7.
However, it is also clear that position before this court in no different form
what was before BIER, where such permission was sought. Thereafter, when such
application was moved before the Supreme Court for such permission, the same
was dismissed on 5-2-96.
8.
In these circumstances, it is only desirable without entering into the question
whether said permission as was envisaged in interim order, dated 15-4-87
continues to be condition precedent after disposal of appeals and order of
winding up, before this court exercises its jurisdiction to make an order for
disposing of the property, liquidator seek appropriate direction from the
Supreme Court about the disposal of assets of Shri Ambica Mills Ltd. in the
circumstances narrated above. The liquidator is, therefore, directed to make
application in this regard within one month before Hon’ble Supreme Court in
which ONGC as well as applicant company may also be impleaded as party after
furnishing advance copies to all the concerned parties who are to be impleaded
therein.”
12. It has so happened that as referred to above, there was a prior litigation between ONGC on the one hand and the Association of Natural Gas Consuming Industries (including Ambica Mills Ltd.) on the other hand regarding the unpaid dues to ONGC for supply of gas. The matter was initially contested in this High Court and, subsequently, the order passed by the learned single Judge was carried to the Hon’ble Supreme Court being Civil Appeal No. 8350-40 of 1983. During the pendency of those appeals, the Hon’ble Supreme Court had directed ONGC on 15-4-1987 to continue to supply gas to these companies including Shri Ambica Mills Ltd. at the rate of Rs. 1,000 for one thousand cubic metres. That was subject to an undertaking to be given by the companies concerned that they will not charge, encumber or alienate except with the leave of the Supreme Court any of the immovable assets and they will make their immovable assets available for discharging their respective liabilities on account of the difference in the price of all the gas supplied which will be governed by the orders to be made by the court while disposing of the appeals. The order passed by the Supreme Court on 15-4-1987, reads as follows :
“These
appeals will be listed peremptorily on 21-7-1987, as the very first case for
regular hearing and above all other causes.
We
direct that during the pendency of the appeals, the Oil and Natural Gas
Commission will not disconnect the supply of gas to the respondents, namely,
the Association of Natural Gas Consuming Industries of Gujarat, M.S. Jayant
Paper Mills Ltd., Alembic Glass Industries Ltd., Alembic Chemical Works Co.
Services Ltd., New India Industries Ltd., Punjab Steel Rolling Mills (P.) Ltd.,
Chandan Metal Products Ltd., and Shri Ambica Mills Ltd., Mill No. 2, and will
continue to supply gas as hitherto charging at the rate of Rs. 1,000 for one
thousand cubic meters subject however, to the undertaking by the respondents
which has been given and has been accepted here, that the said respondents will
not charge, encumber or alienate, except with the leave of this court, any of
their immovable assets included in the respective undertakings and that they
will make their immovable asset available for discharging the respective
liabilities on account of the difference in the price of all the gas supplied
to and further during the pendency of the appeals as permitted by orders made
by the Court while disposing of the appeals. The undertaking will be filed
within four weeks from today.”
13. Pursuant to that order, an undertaking was given by Mr. Prahladbhai S. Brahmbhatt, who was the secretary of this company. The undertaking, dated 27-5-1987 reads as follows :
Undertaking
“I,
Prahladbhai S. Brahmbhatt, do hereby solemnly affirm, undertake and state as
under :
1. I am working as
secretary in Shri Ambica Mills Ltd. respondent No. 10 herein which is one of
the members of the respondent No. 1 i.e., Association of Natural Gas Consuming
Industries of Gujarat.
2. I am conversant
with the facts and circumstances leading to the present proceedings and,
therefore, I am competent as well as authorised to give this undertaking on
behalf of the respondent No. 10 company pursuant to their Hon’ble Court’s
order, dated 15-4-1987 passed in Civil Misc. Petitions No. 7875-85 of 1987 in
the present civil appeals. I state that the copy of the said order was made
available to the respondent No. 10 company by the office of this Hon’ble Court
only on 14-5-1987.
3. I state that
respondent No. 10 company undertake that none of immovable assets of the
company will be further charged and encumbered hereafter with effect from
15-4-1987 i.e., from the date of order of this Hon’ble court except with the
leave of this Hon’ble court.
4. I state that
respondent No. 10 company further undertake not to alienate any
of its immovable assets hereafter
with effect from 15-4-1987 except with the leave of this
Hon’ble Court. Respondent No. 10 company further undertakes to make available
all its immovable assets in the event of discharging the liabilities which may
arise on account of the difference between the price at which all the gas being
supplied in the company during the pendency of the proceedings in this
connection and the price which may be determined by this Hon’ble Court while disposing
of the present appeals finally.
Solemnly affirmed on 27th day of May 1987 at Ahmedabad.
|
Dated
: 27 May, 1987 |
Signed P.S.
Brahmbhatt, Secretary”. |
14. It is relevant to note that, subsequently, those appeals filed by ONGC came to be allowed and the prices charged by ONGC for supply of gas to various respondents were upheld. The said judgment, dated 4-5-1990 ONGC v. Association of Natural Gas Consuming Industries of Gujarat [1990] (Supp.) SCC 397 and the interim order passed by the Hon’ble Supreme Court on 15-4-1987 is recorded in para 11 of the judgment appearing in the aforesaid report of the Supreme Court Cases.
15. Inasmuch as an application was to be moved to the Hon’ble Supreme Court (as directed by Balia, J.) and orders were to be sought, interim protection of the properties was necessary. The properties were in the custody of the applicant, Sunil Mills Ltd., in the meanwhile. Therefore, in para 10 of that order, the learned Judge further directed as follows :
“10. The liquidator will place the orders of the
Supreme Court as soon as they are obtained. Meanwhile, the status quo as it
exists today as to the possession of the said Unit No. 3 of the company in
liquidation shall be maintained, subject to the claim of the liquidator of the
company to the said mills and claim to usufruct of the property as may be
directed by the court. It is further ordered that the applicant company shall
not alienate, encumber or part with possession of the undertaking in question
in any manner whatsoever without prior permission of this court and shall
furnish undertaking within a week to that effect and also to the effect that it
shall reimburse official liquidator for usufruct and other charges that may be
ultimately decided by the Court. A personal undertaking to that effect shall
also be furnished on behalf of the directors of the applicant company alongwith
undertaking on behalf of the applicant company.”
16. In pursuance to that order, one undertaking affirmed on 21-8-1997 has been filed by one Jayeshbhai R. Shah, who claims to be the director of this mill on behalf of Sunil Mills Ltd. He has also filed another undertaking affirmed on the same day in his personal capacity. The order of the learned Judge required personal undertakings to be furnished on behalf of the directors of the applicant company. The applicant is a public limited company and under section 252(1) of the Companies Act, 1956 (‘the Act’) a public limited company shall have at least three directors. The undertaking given by Shri Jayeshbhai R. Shah is only in his personal capacity and it does not state anywhere that it is on behalf of the other directors of the applicant company. No other director has filed any undertaking pursuant to that order.
17. Pursuant to the aforesaid order passed by the learned Judge, an application was moved for directions to the Hon’ble Supreme Court which came to be numbered as I.A. Nos. 168-178 in Civil appeal No. 8530-40 of 1983. In that application filed by the official liquidator, the aforesaid circumstances were placed before the Hon’ble Supreme Court including the order passed by the single Judge. In para 10 of the application, it was everred as follows :
“10. The present application is being made by
the applicant pursuant to the aforesaid order of the High Court of Gujarat
praying that the applicant herein be permitted to sell the immovable assets of
the company as may be directed by the Honourable High Court of Gujarat and to
disburse the sale proceeds in accordance with law.”
The principal prayer in that application, namely, 12(A) was as follows :
“In the premises aforesaid, the applicant most
humbly and respectfully prays that :
(A) This Hon’ble Court would be pleased to permit
the official liquidator to sell the immovable properties of the said company as
may be directed by the Gujarat High Court and to disburse the sale proceeds in
accordance with law.”
18. Thereafter, the matter was considered by the Hon’ble Supreme Court on 17-10-1997 where the court passed the following order :
“Upon hearing counsel, the Court made the
following :
Order.—All that is necessary to be said is that
out of the assets of the company under liquidation, the dues of ONGC Ltd. are
required to be paid off first and the question of making any payment to any
other creditor can arise only out of the surplus if any remaining after the
full dues of the ONGC have been paid off. The High Court is, therefore, to
proceed with the matter in this manner.
IAs stand disposed of.”
19. In the circumstances, it was submitted on behalf of the applicant that the applicant company was deceived as stated in para 10 of their application and the order and the undertaking given to the Supreme Court was not disclosed to the applicant. It is stated that the applicant tried to revive the unit and had approached the BIFR for that. It had applied that the textile unit at Baroda be excluded from the winding up proceedings. That request came to be rejected. It is further stated that subsequent to the winding up order, all the circumstances were brought to the notice of the learned Judge who was taking this application and pursuant to the order passed by the learned Judge, the official liquidator was directed to move the Supreme Court where upon, as per the above order, dated 17-10-1997, impliedly a leave to sell the assets of the mill company was granted by the Hon’ble Supreme Court so long as the dues of ONGC are paid first. It is, therefore, submitted that the applicant had a pre-existing agreement entered into with Shri Ambica Mills Ltd. which was entered prior to the winding-up of the mill company and it would be in the fitness of things that now when an implied leave to sell the assets has been granted by the Hon’ble Supreme Court, the official liquidator ought to be directed to execute the conveyance in terms of that pre-existing agreement, dated 2-9-1989. It is submitted that in the facts as narrated above, such an order would be a perfectly equitable and legal order. Alternatively, however, it is submitted that in the event the official liquidator opposes the prayer for executing the conveyance, the applicant company ought to be permitted to file a suit seeking specific performance of that agreement.
20. An affidavit-in-reply has been filed on behalf of the official liquidator affirmed on 15-12-1998. A copy of this affidavit was served in advance on the applicant’s advocate on 11-12-1998 and, hence, on the same day i.e. on 15-12-1998 they filed a rejoinder which is styled as a ‘Preliminary Affidavit in Rejoinder’. They also gave a notice calling up on the official liquidator to produce the following two sets of documents :
(i) A copy of the resolution dated 30-3-1989 passed in the extraordinary general meeting
of the company in liquidation for transfer of unit No. 3 to the applicant
company ; and
(ii) Copies
of the annual reports for the year 1989-90 onwards.
Pursuant to that notice, a further affidavit was filed by the official liquidator which is affirmed on 21-12-1998.
21. It would be convenient to complete the recording of applicant’s submissions first. Hence, if the rejoinder filed by the applicant is referred first, it is seen that it, principally, contends that the reply of the official liquidator was belatedly filed and that many of the necessary documents have not been annexed. It is further submitted that provisions of section 441(2) of the Companies Act would not be relevant as far as this proceeding is concerned inasmuch as the winding up order is passed in pursuance to the order of BIFR under section 20 of the SIC Act. Thereafter, it is contended that the company having derived the benefits under the agreement, it is estopped from challenging the validity thereof. In para 6 of its rejoinder, it is stated as follows :
“Failure
to mention the factum of the interim injunction granted by the Hon’ble Supreme
Court of India in the explanatory statement would not render the resolution
passed at the extraordinary general meeting held on 30-3-1989 invalid. Such a
plea in any case is not open to the official liquidator.”
It is further stated therein that by the order, dated 17-10-1997, the
Hon’ble Supreme Court has granted a general permission and the agreement is
perfectly valid and enforceable. With respect to the submissions that
the debenture holders are not discharged, it is stated in para 9 of the
rejoinder :
“It
ought to be appreciated that the conveyance could not be completed because of the
default on the part of the company. The applicant, therefore, cannot be called
upon to make the payment in terms of the agreement or get the company released
and discharged of its obligations to the debenture-holders or the debenture
trustees”.
22. Now,
if we refer to the affidavit-in-reply filed on behalf of the official
liquidator as also his further affidavit, it is firstly submitted therein that
the winding-up proceedings
are deemed to
have commenced from
12-4-1988 inasmuch as the first winding up petition No. 66 of 1988 was filed
on 12-4-1988. Secondly, the agreement, dated 2-9-1989 is in complete violence
[violation ?] of the injunction issued by the Hon’ble Supreme Court on
15-4-1987 and the undertaking given on 27-5-1987. Thus, the agreement is void
under section 24 read with section 23 of the Indian Contract Act, 1872, and
therefore, no rights flow therefrom. It is further stated in para 5 of the
reply that while passing the resolution in the extraordinary general meeting of
shareholders held on 30-3-1989 for seeking sanction for sale of the assets of
the mill company, the explanatory statement accompanying the notice did not
disclose the fundamental and material fact that the Hon’ble Supreme Court had
issued an injunction, dated 15-4-1987 and that an undertaking had also been
given in pursuance thereto. It is, therefore, submitted that the resolution
passed is bad in law under section 293(1)(a) and section 173(1)(b) read with
section 173(2) of the Companies Act.
23. It
is further submitted in the affidavit-in-reply that all that the applicant
company gave to the respondent company was an amount of Rs. 5 lakhs by way of
earnest money. The applicant took over from the vendor the liability to
discharge the debenture-holders who held debentures worth Rs. 3,95,00,000.
These debentures were to be redeemed by 13-8-1993. The agreement clause 2(c)
refers to these debentures as 15% Non-convertible Debentures Issue (1993). In
clause 6(j) of the agreement it is mentioned that these debentures were
redeemable on 13-8-1993. This is also recorded at page 18 in Schedule III which
mentions the secured loans in the annual report of 1989-90. To this agreement,
a Schedule is annexed which is marked as ‘Schedule-A’ which gives the names of
the debenture holders. They are split into three parts. The first part pertains
to Army Goup Insurance Fund. The second part includes various Financial
Institutions and the third part is of GENERAL PUBLIC. The ICICI was the lead
manager for these debentures as stated in para 8 of the application and by
their letter, dated 31-8-1989, ICICI agreed in principle vide para (ii) thereof
that redemption date of the debentures (other than those held by the public)
may be extended upto 31-3-1995. The debentures held by the public together with
interest would, however, be redeemed on due date. It is stated in the
affidavit-in-reply that these payments were not made either in August, 1993 to
the general public or in March, 1995 to the financial institutions. It is
further stated in para 13 of the reply that the so-called permission under the
Urban Land (Ceiling & Regulations) Act, 1976, is not produced. In para 14
of the reply it is stated that the statement in the application regarding
various expenses incurred by the applicant for the company is not accepted and
in any case if any such expenses are incurred, the same were incurred for
profit and for running its own business. It is further asserted that if the
applicant was paying approximately Rs. 2.5 crores per annum by way of revenue
(as claimed in para 14 of the application), it must have been getting huge
production with the use of properties of the company, the possession of which
is acquired with the payment of a meagre amount of Rs. 5 Lakhs. That apart, in
para 7 of the reply it is further affirmed that, whereas the agreement
requires Rs. 3.95 crores to be paid to the debenture holders, firstly, the
applicant has nowhere stated that it ever was and is ready and willing to
perform its part of obligation under the agreement ; secondly, such a course
was not open in view of the undertaking given to the Hon’ble Supreme Court and
the injunction granted by the Supreme Court and, lastly, in any case, it has
become void by reason of it becoming unlawful on account of an event which could
not be prevented by the promiser and thus it has become impossible or unlawful
of performance in view of the subsequent
Supreme Court order of 17-10-1997. The further affidavit affirmed on 21-12-1998
encloses therewith a photo copy of the minutes of the general body meeting held
on 30-3-1989. It shows that the subject concerning sale of this particular
unit was taken up for consideration on that day. Form No. 23 whereunder
resolution is required to be forwarded to the Registrar of Companies is also
produced. That form is signed by the above-referred Shri Prahladbhai S.
Brahmbhatt who had earlier given the above-referred undertaking to the Hon’ble
Supreme Court. Along with the form, the resolution is annexed as also the
explanatory statement as required by section 173. The explanatory statement
runs into two pages, but there is no mention whatsoever therein of the
injunction granted by the Supreme Court and the undertaking given thereafter.
24. In the light of this factual narration, Mr. Nanavati, the Senior Advocate, as well as Mr. Chudgar appearing for the applicant company submitted that the applicant company was in dark in respect of the injunction granted by the Supreme Court and the undertaking given on behalf of Shri Ambica Mills Ltd. It is submitted by Mr. Nanavati that all that was informed to the applicant company was what was contained in para 14 of the agreement. Para 14 of the agreement refers to the dispute between ONGC and Shri Ambica Mills Ltd. and that a writ petition was pending in the Gujarat High Court in respect thereof. This para also contains an indemnity by the vendor that, in the event any claims are raised by ONGC on the purchaser, the vendor agrees and undertakes to indemnify the purchaser. It was, therefore, submitted by Mr. Nanavati and Mr. Chudgar that the applicant company was a bona fide purchaser and should not be made to suffer inasmuch as it was deceived by Shri Ambica Mills Ltd. as stated in para 10 of their application. The second submission is that assuming that there was any such injunction or undertaking, if one closely scrutinizes the order passed by the Hon’ble Supreme Court, what was directed was that the company will not charge, encumber or alienate except with the leave of the Supreme Court any of their immovable assets. It was submitted that the company had entered into an ‘agreement for sale’ and ‘no outright sale’ was effected by effecting conveyance deed which could be done with the leave of the court. It was further submitted that this cannot be considered as encumbering the property. Mr. Chudgar relied upon the definition of the word ‘charge’ as appearing in the Transfer of Property Act, 1882, and submitted that ‘charge’ is an act ‘where immovable property is made security for the payment of money to another and the transaction does not amount to a mortgage’. As far as encumbrance is concerned, Mr. Chudgar relied upon the definition of this concept in various dictionaries including Concise Oxfard Dictionary (Ninth Edition), Black’s Law Dictionary (Fifth edition) and Random House Dictionary (unabridged edition). The third submission of the applicant was that the agreement was not void but at the most voidable. Comparing the injunction granted by the Supreme Court with the restriction created under section 43(1) of the Bombay Tenancy and Agriculture Lands Act (prior to its amendment of 1997), Mr. Chudgar submitted that a subsequent sanction could be granted under that Act and similarly in the present case as well. He relied upon two decisions of this court in 16 (1975) GLR 247 and 24(2) (1983) GLR 1165 in this behalf. He has also relied on the judgment of the Supreme Court in the case of Nathulal v. Phoolchand AIR 1970 SC 546 to contend that when a statute prescribes a prior permission of an authority before sale, an agreement to transfer is not void but it must be deemed to be subject to implied condition that the transferer will obtain sanction of the authority concerned. The next submission of Mr. Chudgar in this behalf was that failure to mention the injunction and the undertaking in the explanatory statement would even otherwise also not make the resolution passed under section 293 (1)(a) bad. He submits that, at the most, the agreement could be said to be a voidable one but not void ab initio. He further submitted that the applicant has put in a good amount of money and they have also taken efforts to run the enterprise for a substantial period and, therefore, it was desirable and necessary that the official liquidator be directed to execute the conveyance in favour of the applicant. Mr. Chudgar also submitted that violation of the injunction may at the highest invite penal consequences against the vendor. Mr. Chudgar relied upon various judgments in support in Lal Chand v. Sohan Lal AIR 1938 Lah. 220; Dharamchand v. Mitsui Bussan Kaisha & Co. AIR 1920 Nag. 12; Pranakrushna v. Umakanta Panda AIR 1989 Ori. 148, Dalbara Singh v. Chhaja Singh AIR 1992 Punj. & Har. 237; Adapa Vittal v. Govula Ramakistaiah AIR 1969 AP 167; Kusuma Dei v. Malati AIR 1969 Ori. 195 in that behalf. The fourth submission of Mr. Chudgar was that the agreement cannot by any stretch of imagination be said to be opposed to public policy or prohibited by any law. He also relied upon the judgment of the Supreme Court in Gherulal Parakh v. Mahadeodas Maiya AIR 1959 SC 781 and Kedar Nath Motani v. Prahlad Rai AIR 1960 SC 213 in this behalf.
25. As against the aforesaid submissions of Mr. Chudgar, Mr. Shah submitted that the applicant’s first submission that the applicant company was a bona fide and innocent ‘purchaser’ itself is very doubtful. The agreement clearly informed the applicant that a dispute with respect to the price to be paid to ONGC was pending in the High Court. Even if one takes the agreement on the face of it, the applicant company had agreed to pay an amount of Rs. 4,01,00,000. It is true that only Rs. 5 lakhs were to be paid as down payment but the applicant was taking over the responsibility to pay Rs. 3.95 cores towards the debenture holders and had agreed to pay Rs. 1 lakhs at the time of conveyance. Any party which agrees to take such responsibility is bound to make full inquiries with respect to the litigation that was, to its knowledge, then pending in the High Court and as to what happened in that matter and what has happened subsequent thereto. If on the date of agreement, the applicant knew that the said litigation was pending, it would certainly follow it up because it would become successor in interest to the mill company and it was expected to follow it up. It cannot, therefore, lie in the mouth of the applicant to say that they were not aware of the orders passed by the Hon’ble Supreme Court. If it did not make any such inquiries and in consequence thereof the whole truth was not known, it would be doing so at their own peril. As observed by the single Judge of this Court in Jaisingh (supra) 13 GLR 779, by merely saying that he was a bona fide purchaser, one does not become a bona fide purchaser. In the instant case, the applicant had approached the appellate authority, i.e., AAIFR which in terms observed that the property of the mill was purchased at a throwaway price. Those observations were not at all disturbed by challenging that order or by getting it set aside. The property which was being sold was admeasuring in the aggregate to 76,175 sq. mtrs. It is situated near Old Padra Road, Near Baroda Railway Station. The area when converted into square yards comes to 91,118 square yards. Mr. Shah appearing for the official liquidator submits that, even on a very conservative estimate, the price of the land in that area in the year 1989 was at least Rs. 1,000 per square yard. Thus, the land would be worth at least Rs. 9.1 crores. This value is arrived at excluding plant, machinery, factory building and employees’ quarters which were also sought to be sold, and if their value is added, the value of Unit No. 3 would be at least Rs. 12 crores. In the circumstances, the plea of innocence cannot be permitted to be taken by a purchaser of such a huge property. The contention of Mr. Shah is well taken. The law requires any such purchaser to make the necessary inquiry particularly, when it was informed of a litigation between the parties and also particularly, when possession of such a huge property consisting of land, factory, machinery and the employees’ quarters was being handed over at the down payment of only Rs. 5 lakhs. On the other hand, the other possibility is that the applicant was in collusion with the former directors of the company in liquidation, without which it would not get this huge and expensive property at the down payment of Rs. 5 lakhs (and for an agreed price of Rs. 4.1 crores) which is rightly described as a ‘throwaway price’ by the AAIFR. If the apparent consideration of the agreement is so negligible, the intentions of the applicant can certainly not be called as innocent and bona fide. The applicants are pretending too much. That is the least that can be said with respect to their first submission.
26. With respect to the submission of Mr. Chudgar that the agreement was a valid one at its inception and had subsequently become voidable at the most and not void, Mr. Shah submitted that the same was not tenable also for two main reasons; firstly, as stated above, the agreement was entered in flagrant violation of the order of injunction granted by the Supreme Court and the solemn undertaking given to the Apex Court. It is very material to note that the very same Mr. Prahaladbhai S. Brahmbhatt who has given the undertaking to the Hon’ble Supreme Court has signed the explanatory statement under section 173(2) which is totally silent about the order of the Supreme Court as also the undertaking given to it. It is also very relevant to note that Mr. Brahmbhatt has signed the explanatory statement by the order of the Board of directors. If that was so, all the members of the Board were also responsible for this violation of the order and the undertaking given to the Supreme Court. The very same Mr. Brahmbhatt has signed the requsite Form No. 23 and the forwarding letter sending the form with the resolution to the Registrar of Companies. Mr. Chudgar sought to contend that what was prevented under the order of the Supreme Court was creation of a charge or encumbrance or alienation except with the leave of the court. It is perhaps possible to contend that the agreement entered into did not amount to a ‘charge’ because, admittedly, it was an agreement for sale and it is also possible to contend that an ‘alienation’ has not taken place inasmuch as the conveyance was yet to be executed. However, in my view, apart from the fact that the entire order (including these restrictions) has to be read together; the first part of the Supreme Court order also includes a restraint on encumbrance. The definitions of encumbrance referred to and relied upon by Mr. Chudgar clearly include an element of creating a burden on the property. By no stretch of imagination can it be said that this agreement for sale did not create a burden or an encumbrance on the property concerned.
27. However, that is not the only part of the restrictions. The other part of the direction of the Supreme Court was that the property will be made available for discharging the respective liabilities on account of the difference of price of all the gas supplied and further, during the pendency of the appeals as permitted by orders made by the court while disposing of the appeals. Again, if we look to the order of the Hon’ble Supreme Court, what was submitted to the court and what was contemplated was that the mill company will be run by the then management. If any alienation of the property to any third party was contemplated or was to be permitted, firstly the court could have said that. Thus, on the one hand what was submitted to the court was that in the interest of the large work-force, ONGC ought to be directed to make available gas on the concessional rate and the establishment will be run by the very management. On the other hand, if we look to the entire agreement, it is clear that from the date on which the possession was handed over to the applicant herein, all the liabilities were passed on. At the end of Clause 13 of the agreement it is specifically provided :
“After
the date of possession, the purchaser shall be bound and liable to clear, pay
and discharge all outgoing liabilities in respect of the said undertaking.”
If one looks to the various clauses of this agreement, it is clear as if the date of putting the applicant into possession was like a ‘cut-off’ date, and from that date, all the liabilities go over to the purchasing party. It is stated in the application that possession was handed over in December, 1989. Thus, it is apparent that though the document is styled as an agreement to sell, it is almost in the nature of a conveyance. It is, therefore, easy to say that the agreement has not caused any alienation. But, that is only on paper and not in reality and, in any case, it definitely creates an encumbrance or burden on the property. Moreover, the second part of the restrictions imposed by the Hon’ble Supreme Court are also clearly flouted inasmuch as the property is no longer kept free and available for discharging the liabilities which would flow subsequently to ONGC. The party which seeks execution of conveyance deed and in the alternative wants to file a suit for specific performance of an agreement, must show that the consideration and objects of the agreement are lawful and the same are not forbidden by law including a court order. They have failed in the same.
28. With respect to the claim of ONGC and the responsibility of company in winding-up, the orders of the Hon’ble Supreme Court have been very clear all throughout Initially, there was an injunction restraining the company from creating any charge, encumbrance or alienation of the property and the company was directed to keep its assets available for clearing the dues of ONGC. Subsequently, the applicant moved an application before the BIFR to alienate unit No. 3 from the winding-up proceeding as is stated in para 16 of the affidavit of Jayesh R. Shah, dated 23-4-1997, in support of the present application. Para 17 of the affidavit says that the Board was of the opinion that since Shri Abmica Mills Ltd. had given the undertaking to the Supreme Court for not transferring any of its assets, the applicants should approach the Hon’ble Supreme Court. Para 18 of the affidavit states that the applicants thereafter moved the Supreme Court by filing an application. Thus, the application to the Supreme Court was seeking transfer of the assets to the applicant as can be seen from paras 16, 17 and 18 of their affidavit. In para 19 of the affidavit it is mentioned that the said interim application was numbered as 135-45 in Civil Application No. 8530-40 of 1983 and that the said interim application was subsequently rejected by the Hon’ble Supreme Court on 5-2-1996. That order alone has been produced but not the I.A. No. 135-45. But, in any way, from the reading of these three paras, it is clear that the application was moved seeking/permitting transfer of the assets to the applicant and that application was dismissed by the Hon’ble Supreme Court. Thereafter also, when the official liquidator moved the application to the Hon’ble Supreme Court subsequent to the order of Balia, J., it cannot be said that the Supreme Court has permitted or directed execution of the agreement. The order passed by the Hon’ble Supreme Court on interim application No. 168-178 is also clear enough and it states that the ONGC is required to be paid off first out of the assets of the company under liquidation. The High Court is, therefore, to proceed with the matter in this manner. Thus, the Supreme Court had granted an injunction much prior to the disputed agreement. The Supreme Court dismissed the applicant’s application seeking alienation of the property moved subsequent to the agreement and, thirdly, even subsequent to the winding-up order, the Hon’ble Supreme Court has not changed that position and has maintained that the dues of the ONGC are to be paid first. In the circumstances, the consideration of the agreement being unlawful and being forbidden by law and court’s orders, the agreement would be void at its inception under section 23 read with section 24 of the Indian Contract Act. The plea of the applicant that the agreement was initially void and had at the most become voidable subsequently, has to be rejected.
29. The agreement will also have to be considered as opposed to public policy inasmuch as no such agreement can be permitted which is contrary to and violative of the injunction and the undertaking given to the court, much less the Hon’ble Supreme Court of India. The two judgments cited by Mr. Chudgar concerning public policy do not help him. In Gherulal Parakh v. Mahadeodas Maiya AIR 1959 SC 781, the Supreme Court was concerned with wagering contract. The Hon’ble Supreme Court held that though wager was void, it was not forbidden by law and in that context, the Supreme Court observed as under :
“There
is no definite head or principle of public policy evolved by courts or laid
down by precedents which would directly apply to wagering contracts. Even if it
is permissible for courts to evolve a new head of public policy under
extraordinary circumstances giving rise to incontestable harm to the society,
wager is not one of such instances of exceptional gravity, for it has been
recognised for centuries and has been tolerated by the public and the State
alike”.
30. In Kedar Nath Motani v. Prahlad Rai AIR 1960 SC 213, the Hon’ble Supreme Court observed that it is necessary to see as to whether there was a conspiracy to defraud third parties and whether the illegality goes to the root of the matter. One does not know how this authority in any way helps the applicant. The Hon’ble Supreme Court in this matter observed :
“A
strict view, of course, must be taken of the plaintiff’s conduct, and he should
not be allowed to circumvent the illegality by resorting to some subterfuge or
by misstating the facts.”
In the facts of the present case, the aforesaid observations will, in fact, apply with full force against the applicant and the attempt to enforce the agreement in violation of court’s injunction and statutory provisions will have to be held as opposed to public policy.
30A.Besides, a party seeking specific performance must show that it has complied with its part of the agreement. As is seen earlier, all that the applicants have given in pursuance to the agreement is only Rs. 5 lakhs to the company in liquidation. They were required to redeem the debentures in August, 1993, by making payment of Rs. 3.95 crores, but that has not been done. It is clearly a case wherein though the applicant was being given a valuable property at a throwaway price, whatever was the consideration agreed under the agreement—was not paid by the applicant company. In a circumstance like this, it cannot claim execution of conveyance or specific performance of the agreement. It was sought to be contended by Mr. Nanavati that the occasion to redeem the debentures has not come and the applicant was still ready to make that payment to the debenture-holders. Now, as has been recorded in the agreement itself, the debentures were to be redeemed in August, 1993, and that having not been admittedly done, there is, in fact, a breach and failure on the part of the applicant to act in accordance with the agreement. What is interesting to note is that, in para 9 of their preliminary affidavit-in-rejoinder, the applicants have clearly stated that the conveyance could not be completed because of default on the part of the company and therefore, the applicants cannot be called upon to make the payment in terms of the agreement or get the company released and discharged of its obligations to the debenture-holders or debenture-trustees. Now, one does not know what was the default on the part of the company. The company had put the applicant in possession of the property in its entirety. It was clearly disclosed to the applicant that proceedings were pending in the High Court concerning the claims of ONGC and it was expected of the applicants to find out as to what was that proceeding. Whether the directors of the company have deceived the applicants as claimed by them or whether the applicants have not made the necessary inquiries, the fact remains that the company cannot be faulted for the breach of the agreement. No documents has been produced to show that in August, 1993, or thereafter the applicant company ever offered payment of Rs. 3.95 crores nor is there any letter produced thereafter or along with the affidavits calling upon the company to execute the conveyance, the applicants having complied with all the requirements of the agreement as claimed by them.
31. It is further material to note that in the affidavit in support of the application a few statements have been made with respect to some subsequent payment. Thus, for example, it is stated in para 14 of the application that with a view to make the unit viable, the applicant retrenched some 800 employees and paid their legal dues to the tune of Rs. 2 crores. It is further stated that they incurred expenses to the tune of Rs. 4.5 crores for modernisation of the unit and that they were running the spinning section by employing 500 employees paying Rs. 15 lakhs per month. Mr. Shah for the respondent states that assuming without admitting that any such thing was done, that was as a part of the business enterprise and that cannot be pleaded as something done towards the applicants’ responsibility under the agreement. In fact, what is further interesting to note is that at the end of para 14 of the application it is lastly stated that the applicant company is paying approximately Rs. 2.5 crores per annum by way of revenue. If that is so, the applicants have not been doing any charity to anybody and, if that is the payment made to the Revenue, the applicants must have taken huge production with the use of the said property and must have made huge profits all throughout. That apart, as far as the alleged payments to the workers to pay their dues or their monthly payments are concerned, no document worth the name has been either produced or relied upon in support thereof. Thus, it is clear that the applicant had failed to comply with their part of the agreement and are, in fact, in complete breach thereof.
32. Then, there is another aspect of the matter, as to whether the consideration or the object of the agreement is of such a nature that, if permitted, it would defeat any specific statutory provision. Section 293(1)(a) requires a company not to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company except with the consent of the public company in its general meeting. That consent is to be obtained after informing the shareholders accordingly in the meeting to be held for that purpose. Any such business would be a special business under section 173(1)(b) of the Companies Act and where such a business is to be transacted, it is mandatory that a statement setting out the material facts concerning each such item of business (including any opportunity [sic—in particular ?], the nature of the concern or interest, if any therein, of any director and the manager, if any) is to be annexed to the notice of the meeting. That is the requirement of section 173(2). As seen above, although a meeting was called, the shareholders were completely kept in dark of the order passed by the Supreme Court restraining any such disposition of property and requiring that the property should be kept intact and available for clearing the dues of ONGC.
33. As far as the requirements of sections 173 and 293(1)(a) are concerned, they have long been held to be mandatory in S.M Ganapat Ram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. Ltd. [1964] 34 Comp. Cas. 777 (Guj.). Hon’ble Justice Bhagwati (as he then was in this court) dealt with an almost identical contract and after considering the submissions made by rival parties held as follows :
“It
is, therefore, clear that regard must be had to the whole scope and purpose of
the statute for the purpose of determining whether the statute is mandatory or
directory. Judged by that test, the conclusion is irresistible that section 173
enacts a provision which is mandatory and not directory. The object of enacting
section 173 is to secure that all facts which have a bearing on the question on
which the shareholders have to form their judgment are brought to the notice of
the shareholders so that the shareholders can exercise an intelligent judgment.
The provision is enacted in the interests of the shareholders so that the
material facts concerning the item of business to be transacted at the meeting
are before the share holders and they also know what is the nature of the
concern or interest of the management in such item of business, the idea being
that the shareholders may not be duped by the management and may not be
persuaded to act in the manner desired by the management unless they have
formed their own judgment on the question after being placed in full possession
of all material facts and apprised of the interest of the management in any
particular action being taken. Having regard to the whole purpose and scope of
the provision enacted in section 173, I am of the opinion that it is mandatory
and not directory and that any disobedience to its requirements must lead to
nullification of the action taken. If, therefore, there was any contravention
of the provisions of section 173, the meeting of the company held on 5
September, 1961, would be invalid and so also would be the resolution passed at
that meeting be invalid”.
The same view has been reiterated by a single Judge of the Madras High Court in the case of V.G. Balasundaram v. New Theatres Carnatic Talkies (P.) Ltd. 77 Comp. Cas. 324, the learned Judge has observed as follows :
“Section
173 of the Act deals with the explanatory statement to be annexed to the
notice. The appointment of directors can be under two circumstances : (a)
directors retiring by rotation or (b) being reappointed. In that case, no
explanatory statement is required. The object of enacting section 173 is to
secure that all facts which have a bearing on the question on which the
shareholders have to form their judgment are brought to the notice of the
shareholders so that the shareholders can exercise an intelligent judgment. The
provision is enacted in the interests of the shareholders so that the material
facts concerning the item of business to be transacted at the meeting are
before the shareholders and they also know what is the concern or interest of
the management in any item of business, the idea being that the shareholders
may not be duped by the management and may not be persuaded to act in the
manner desired by the management unless they have formed their own judgment on
the question after being placed in full possession of all the material facts
and apprised of the interest of the management in any particular action being
taken”. (p. 349)
It is relevant to note that the learned Judge has followed the law laid down by the single Judge of this court in the earlier mentioned judgment and concurred with it in its entirety. Thus, when a resolution is passed without disclosing material facts in the explanatory statement in flagrant violation of the requirement of section 173, it cannot be said to be anything but a void resolution and an agreement on the strength of a void resolution if permitted would defeat the provisions of law. As observed in Shri Sayaji Jubilee Mills case [1964] 1 Comp. LJ 326 (Guj.), such a resolution would be invalid and the meeting would also be invalid and, thus, the entire action based on that would be void. The learned Judge of the Madras High Court has called such a meeting as virtually an ‘ex parte meeting’.
34. There is one more aspect of the matter, namely, that, in any case, now there is no question of permitting this conveyance to be executed in terms of the agreement. In fact, it should be said that under the orders of the Supreme Court right from the beginning, the position was very clear that the property of the mill company was to be kept available for clearing the dues of ONGC. Even so, once again after the company going into liquidation and the official liquidator having pointed out the agreement (in due deference to the order passed by the single Judge of this court), the Supreme Court again reiterated that even in the liquidation proceedings, the payment of ONGC is to be cleared first. That being so, there is no question of now acting on this agreement by paying the amount of Rs. 3.95 crores to the debenture holders. The dues of ONGC are to be paid off first and thus the agreement will have to be considered as void as it would be requiring to do an act impossible of performance or the performance of which is prohibited by the Supreme Court order and if permitted would be unlawful. Thus the agreement will have to be considered as impossible even under the second clause of section 56 of the Indian Contract Act by reason of this subsequent event.
35. Thus, as discussed above, in the facts of the present case, an agreement has been entered into in flagrant violation of the injunction granted by the Hon’ble Supreme Court and in complete breach of the provisions of the Companies Act. In view of the above discussion, the various authorities cited by Mr. Chudgar, firstly, relying upon the provisions of the Bombay Tenancy and Agricultural Lands Act and, secondly, to contend that the present agreement is at the most voidable, can be of no avail. In the two cases concerning section 43(1) of the Bombay Tenancy and Agricultural Lands Act, the learned single Judges were concerned with the interpretation of the particular section. In the present case, we are not concerned with the interpretation of any statute but with the order passed by the Supreme Court and this is also in the back ground that when the Supreme Court has in three different occasions passed clear and consistent orders. Initially, an injunction was granted on 15-4-1987. Thereafter, Interim application No. 135-45 seeking/permitting transfer of assets to the present applicant was rejected by the Hon’ble Supreme Court on 5-2-1996 and thereafter once again, subsequent to the order passed by Balia, J., of this Court, the Supreme Court has clarified that the proceeds from the sale of assets have to be, first, used to clear the dues of ONGC. In the two cases under the Bombay Tenancy and Agricultural Lands Act, the question was as to whether sale can be entered into before obtaining sanction of the Collector and whether possession of the person on the basis of an agreement without prior sanction is illegal. These questions arose concerning interpretation of this specific section 43(1) in the facts of those cases. As stated above, in the present case, we are not concerned with any statutory interpretation. What is sought to be canvassed is that in spite of the injunction initially granted by the Hon’ble Supreme Court, the agreement entered into in violation thereof is not a void one but a voidable one and the company should be directed to act in accordance therewith. What is sought to be done is to interpret the order of the Supreme Court in a convenient way. As stated above, we are not concerned with statutory interpretation herein. We are concerned with the successive orders in the facts of this very case which are very clear and which leave no room for any such interpretation as is sought to be canvassed. For the same reason, there can be no quarrel with the proposition in the judgment of the Hon’ble Supreme Court in the case of Nathulal (supra) wherein also, the court was concerned with the interpretation of section 70(8) of the Madhya Bharat Land Revenue Act and wherein the Hon’ble Supreme Court held that permission of the authority concerned can be obtained subsequently. Here, in the facts of the present case, when the Supreme Court passed injunction earlier and subsequently rejected the request of seeking/permitting transfer of assets, the concerned order decided the controversy finally between the parties and they cannot be permitted to reagitate the issue once again.
36. Similar is the position with respect to the other authorities with respect to voidability cited by Mr. Chudgar. These authorities are sought to be relied upon with respect to breach of injunction of the court’s order and the effect thereof. In Lal Chand’s case (supra) a completed sale in contravention of injunction was held not to be a nullity in the facts of that case. In Dharamchand’s case (supra) sale in ignorance of the order of injunction was held only to be irregular in the facts of that case. Similarly, in the case of Pranakrushna (supra) a sale in ignorance of the order of temporary injunction was held to be voidable. In Dalbara Singh’s case (supra), in the facts of that case, the Punjab and Haryana High Court took the view that sale in breach of an injunction was not rendered nullity but the vendor was only liable for penal consequences. In Kusuma Dei’s case (supra), in the facts of that case, sale of property during injunction period was held not to be nullity. What is relevant to note is that all these authorities are concerning concluded sales. In the present case, admittedly, conveyance is not effected. In the facts of the present case, that course of action is not available also for the reason that the application of the applicant seeking/permitting alienation of the property was rejected by the Hon’ble Supreme Court when it rejected Interim Application No. 135-45. The facts of the Andhra Pradesh judgment in the case of Adapa Vittal (supra) are quite different. In that case, on facts, the court held that there was no breach of injunction and, hence, that authority has otherwise also no application to the facts of the present case.
37. The next submission canvassed is that the order passed by the single Judge of this court earlier (Balia, J.) and the order passed by the Hon’ble Supreme Court on the official liquidator’s application have impliedly permitted the execution of the conveyance. This submission cannot be accepted for a moment for the reason that the Supreme Court had turned down the very request earlier when it dismissed interim application Nos. 135-45 on 5-2-1996 and the question of validity of the agreement was not at all canvassed before Balia, J. It was only pointed out to the Hon’ble single Judge that there was an impediment under the orders of the Supreme Court and appropriate orders were necessary. It was in those circumstances that the learned Judge had permitted the official liquidator to move the Supreme Court. Nothing more can be read into the order of single Judge. It is also important to note that assuming that the conveyance is required to be executed for any reason as canvassed by the applicant, it is undoubtedly a disposition of the property after the commencement of the winding-up proceeding. The winding up proceedings have begun in this case on 12-4-1988. Any such disposition of property after the commencement of the winding up proceedings is void unless the court otherwise orders under section 536(2). Until validated, the agreement in question is void under section 536(2). That being so, unless and application for validation is made and entertained, the agreement is void and conveyance cannot be directed to be executed in terms of such a void agreement.
38. The alternate prayer of the applicant is to permit them to file the suit for specific performance of the agreement. As pointed out above, for various reasons, the specific performance cannot be permitted, the agreement being void, against public policy and contrary to various provisions of law. Permitting filing of such a suit would presuppose that prima facie the applicant has a case which could be gone into and considered by a court of law. In the present case, on the face of it, the agreement being void, contrary to public policy, hit by various provisions of law and the orders of the Supreme Court, there is no question of permitting the applicant to file or to proceed with a suit for specific performance of an agreement which is void.
39. For the reasons stated above, the application cannot be entertained any further and the same is dismissed with costs. This matter has been pending for last over two years and has been on board for over twenty times. The applicant will pay costs of Rs. 10,000 (rupees ten thousand) to the official liquidator.
40. When the order of winding-up was passed by Pandit, J., on 17-1-1997, the official liquidator was directed to take charge of the company together with all its assets, records, books, machinery, spare parts, stores, manufactured goods, land and buildings etc. In view of the subsequent order passed by Balia, J., on 6-8-1987, there has been status quo and the order passed on 17-1-1997 has not been enforced qua unit No. 3. In view of the present application being dismissed, the order of status quo will stand vacated and the official liquidator will be at liberty to act in accordance with the order, dated 17-1-1997, passed by Pandit, J. He is expected to move at the earliest in accordance with law so as to safeguard the properties of the company and along therewith he will take steps to make inventory and to provide appropriate security. This application is accordingly dismissed.
41. Mr. Mehta applies for stay of this order. The directors of the applicant (other than one Jayesh R. Shah) have not filed the undertaking to protect the property though directed by Balia, J., on 6-8-1997. It is, therefore, not possible to entertain this request. Mr. Shah for the official liquidator however states that the official liquidator will move to take possession of the property only after a copy of this order is available. He further states that he will wait for 48 hours after receipt of a copy of the order. Hence, no stay as sought for. Liberty to the parties to apply in the event of any difficulty.
GUJARAT HIGH COURT
Companies Act
HIGH
COURT OF GUJARAT
v.
Official
Liquidator of Shri Ambica Mills Ltd.
H.L. Gokhale, J.
C.A. No. 284 of 1997 in C.P.
No. 121 of 1995
December 30, 1998
Section 446
of the Companies Act, 1956 - Winding up - Suits stayed on winding up orders - In
a matter of dispute pertaining to dues to ONGC Supreme Court injuncted company
not to alienate, charge or encumber any of its immovable assets except with
leave of Supreme Court and further ordered that properties would be made
available for discharging dues of ONGC - Company did not disclose fact of
unilateral undertaking given to Supreme Court in explanatory notes attached to
notice issued for convening AGM - Resolution was passed by shareholders to sell
one unit of company - Subsequently winding up order was passed pursuant to
AGM, an agreement to sell unit was entered into between applicant and company
and its possession was handed over - Company did not transfer rights, title,
interest - Applicant claiming itself bona fide and innocent purchaser sought
permission to continue with civil suit for alienating right, title interest, or
alternatively, to claim damages for breach of contract - Whether agreement to
sell entered into was contrary to and violative of injunction of, and
undertaking given to, Supreme Court and, therefore, opposed to public policy -
Held, yes - Whether, since as per agreement date of putting applicant into
possession was like a “cut off” date and from that date liabilities would go
over to purchasing party, it was an agreement almost in nature of conveyance
and had not caused any alienation while it created an encumbrance or burden on
property - Held, yes - Whether applicant seeking execution of conveyance deed
or, alternatively, seeking to file a suit for specific performance of an
agreement must show that consideration and objects of agreement were lawful and
same were not forbidden by law including a court order - Held, yes. - Whether
disposition of property by company being subsequent to commencement of winding
up, was void - Held, yes - Whether since agreement to sell was void ab initio
no right could flow from such agreement and no suit for damages for breach of
contract could be permitted - Held, yes - Whether when company was being wound
up, its assets and liabilities had to be frozen on date of winding up order and
no new rights or debts could be created subsequently - Held, yes - Whether,
therefore, instant application for permission to proceed with civil suit or
claim damages for breach of agreement had to be dismissed - Held, yes
Section
173(1)(b) of the Companies Act, 1956 - Meetings - Explanatory statement to be
annexed to notice - Whether, in view of
facts stated under - ‘Winding up - suit stayed on winding up order’, resolution
passed in AGM being in flagrant violation of section 173, was void and, thus,
entire action on basis of such resolution was void - Held, yes
Facts
In a matter of dispute pertaining to dues of ONGC against supply of gas to a company, the Supreme Court injuncted the company not to alienate, charge or encumber any of its immovable assets except with leave of the Supreme Court and also, the property would be kept available for discharging liability to ONGC. Accordingly ordered that the company gave an unilateral undertaking. However, with a view to sell assets, the company convened AGM but in the explanatory statement attached to the notice no information about the said undertaking was provided. The AGM passed resolution for sale of assets. Subsequently, winding up order, was passed. However, the company managed to enter into an agreement of sale with applicant for sale of one industrial undertaking and possession was handed over to the applicant but no right, title or interest was alienated. The High Court and Supreme Court in appeals continued to hold that the property of the company should be kept for realisation of liabilities. Accordingly the applicant claiming itself a bona fide and innocent purchaser of value of property filed the instant application under section 446, seeking leave to continue to proceed with civil suit for alienation of right, title or interest, or alternatively to file suit for claiming damages for breach of contract on the part of the company.
Held
Apart from the fact that the entire order (including the restrictions) had to be read together, the first part of the Supreme Court order also included a restraint on encumbrance. The definition of ‘encumbrance’ clearly includes an element of creating a burden on the property. By no stretch of imagination could it be said that this agreement for sale did not create a burden or an encumbrance on the property concerned.
However, that was not the only part of the restrictions. The other part of the direction of the Supreme Court was that the property will be made available for discharging the respective liabilities on account of the difference of price of all the gas supplied and, further, during the pendency of the appeals as permitted by orders made by the court while disposing of the appeals. Again, what was submitted to the Court and what was contemplated was that the mill company would be run by the then management. If any alienation of the property to any third party was contemplated or was to be permitted, firstly the court could have said that. Thus, on the one hand what was submitted to the Court was that in the interest of the large work-force, ONGC ought to be directed to make available gas on the concessional rate, and the establishment would be run by very management. On the other hand, looking to the entire agreement, it was clear that from the date on which the possession was handed over to the applicant herein, all the liabilities were passed on to it. If one looked to the various clauses of this agreement, it was clear that the date of putting the applicant into possession was like a ‘cut off’ date, and from that date all the liabilities went over to the purchasing party. Thus, though the document was styled as an agreement to sell, it was almost in the nature of a conveyance. It was, therefore, easy to say that the agreement had not caused any alienation. But, that was only on paper and not in reality and, in any case, it definitely created an encumbrance or burden on the property. Moreover, the second part of the restrictions imposed by the Supreme Court was also clearly flouted inasmuch as the property was no longer kept free and available for discharging the liabilities which would flow subsequently to ONGC. The applicant had failed to show that the consideration and objects of the agreement were lawful and the same were not forbidden by law including a court order.
Thus, in the facts of the instant case, the agreements had been entered into in flagrant violation of the injunction granted by the Supreme Court and in complete breach of the provisions of the Companies Act. When the Supreme Court passed injunction earlier and subsequently rejected the request of seeking permission for transfer of assets, the concerned order decided the controversy finally between the parties and they could not be permitted to reagitate the issue once again.
The agreement would also have to be considered as opposed to public policy inasmuch as no such agreement could be permitted which was contrary to and violative of the injunction and the undertaking given to the court, much less the Supreme Court.
Section 293(1)(a) requires a company not to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company except with the consent of the public company in its general meeting. Although a meeting was called, the shareholders were completely kept in dark of the order passed by the Supreme Court restraining any such disposition of property and requiring that the property should be kept intact and available for clearing the dues of ONGC. Thus, when a resolution was passed without disclosing material facts in the explanatory statement in flagrant violation of the requirement of section 173, it could not be said to be anything but a void resolution and an agreement on the strength of a void resolution, if permitted, would defeat the provisions of law. Such an agreement was one where the object or consideration was forbidden by law or was of such nature that, if permitted, it would defeat the provisions of any law or was opposed to public policy. The said agreement in respect of disposing of the immovable assets of the company was forbidden by an injunction of the Supreme Court, and if such an agreement was permitted, it would be opposed to public policy inasmuch as it would encourage defeating and violating injunction and mandatory orders of the highest court of the land and will also encourage violating solemn undertaking given to the highest court of the land. Such an agreement was void under section 23, read with section 24, of the Contract Act. Thus the winding up was deemed to have commenced under section 441(2).
The disposition sought to be made of the undertaking of the company pursuant to the agreement dated 2-11-1989, being subsequent to the commencement of the winding up was void under section 536 and no leave had been sought as contemplated under section 536(2) till this date.
The agreement was, therefore, void ab initio and no right could flow from such an agreement. The Civil Suit was filed for claiming damages for alleged breach of contract by the company entered through the board of directors. However, the alleged contract being not a contract at all but being merely a void agreement (a contract is an agreement enforceable at law and an agreement which is not enforceable at law remains merely an unenforceable void agreement) and no suit for damages could be filed and if filed, could be ever permitted to be proceeded with.
When a company is being wound up, its assets and liabilities have to be frozen as on the date of the winding up order and assets have to be realised by the liquidator and distributed amongst various creditors and employees as on the date of the winding up order and as per the scheme of distribution prescribed under the Act. No new rights or debts can be created after the date of winding up order and no incomplete rights can be permitted to be completed after the date of winding up order. The status of the creditors of the company which can be recognised is that which existed on the date of the winding up. In the instant case, on the date of the winding up order, the applicant was not a creditor of the company. If at all, it could be a creditor of the company in respect of damages for alleged breach of contract, it could become a creditor only when a decree for damages was passed. At present there was no decree for damages and any decree for damages that might be passed after the date of winding up order was not permissible since it would amount to creating new rights or completing incomplete rights. The present claim being admittedly for damages and compensation for alleged breach of contract and not for any debt existing on the date winding up order, the same was not maintainable and could not be permitted to be proceeded with further. A claim for damages for breach of contract is not a claim for an ascertained amount or for amounts presently due and payable.
One cannot approbate as well as reprobate at the same time. In the instant case, the applicant was put in possession of the unit way back in December, 1989. The applicant used and enjoyed the entire unit for almost seven years ; during the said period it demolished and disposed of several machines and caused depreciation in the value of the machines, etc. The applicant while rescinding the contract could not return to the company the benefits that it received under the said contract during these seven years. Under such circumstances rescission was not permitted and the alleged rescission of the contract by the applicant was illegal and no rights flowed from such rescission and a suit based on such rescission was per se not maintainable.
Cases referred to
ONGC v. Association of Natural Gas Consuming Industries of Gujarat [1990] 2 Comp. LJ 89 (SC), Star Engg. Works Ltd. v. Official Liquidator of Krishnakumar Mills Co. Ltd. [1977] 47 Comp. Cas. 30 (Guj.) Balkrishna Mahadeo Vartak v. Indian Association Chemical Industries Ltd. [1958] 28 Comp. Cas. 179 (Bom.), Sudarshan Chits Fund Ltd. v. Sukumaran Pillai [1984] 3 Comp. LJ 40 (SC ), ICICI v. Srinivas Agencies [1996] 2 Comp. LJ 421 (SC), Indian Bank v. O.L. of Chemmeens Exports (P.) Ltd. [1998] 3 Comp. LJ 211 (SC), Central Bank of India v. Elmot Engg. Co. [1994] 3 Comp. LJ 1 (SC), T.V. Purushottam & Co. v. Provisional Liquidators, Subhodaya Publications Ltd. [1955] 25 Comp. Cas 49 (Mad.), Wilson v. Natal Investment [1867] 36 LJ Ch. 312, Marine Investment Co. In re [1868] 17 LT 535, G.S. Setty & Sons v. Yelamma Cotton, Woollen & Silk Mills Co. [1970] 1 Comp. LJ 184 (Mys), Gram Panchayat v. Shri Vallabh Glass Co. Ltd. AIR 1990 SC 1017, Bansidhar Shankarlal v. Mohammad Ibrahim [1971] 41 Comp. Cas 21 (SC), Nathulal v. Phoolchand AIR 1970 SC 546, Lal Chand v. Sohanlal AIR 1938 Lah. 220, Dharamchand v. Mitsui Bussan Kaisha & Co. AIR 1920 Nag. 12, Pranakrushna v. Umakanta Panda AIR 1989 Ori. 148, Dalbara Singh v. Chhaja Singh AIR 1992 Punj. & Har. 237, Adapa Vittal v. Govula Ramakistiah AIR 1969 AP 167, Kusuma Dei v. Malati AIR 1969 Ori. 195, Gherulal Parakh v. Mahadeodas Maiya AIR 1959 SC 781, Kedar Nath Motani v. Prahlad Rai AIR 1960 SC 213, Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. Ltd. [1964] 34 Comp. Cas. 777 (Guj.), Firestone Tyre & Rubber Co. v. Synthetics & Chemcials Ltd. [1971] 41 Comp. Cas. 377 (Bom.), Shalagram Jhajharia v. Natinal Co. Ltd. [1965] 35 Comp. Cas. 706 (Cal.), V.G. Balasundaram v. New Theatres Carnatic Talkies (P.) Ltd. [1993] 77 Comp. Cas. 324 (Mad.), Abdul Sameed v. Mohd. Ishaq AIR 1975 All. 166, Iron & Hardware India Co. v. Shamlal & Bros. AIR 1954 Bom, 423, Union of India v. Rama Iron Foundry AIR 1974 SC 1265 and J.K. (Bombay) (P.) Ltd. v. New Kaiser-i-Hind Spg. & Wvg. Co. Ltd. [1970] 40 Comp. Cas. 689 (SC).
Judgment
Gokhale, J. - Company Petition No. 66 of 1988 was filed on 12-4-1988, for winding up Shri Ambica Mills Ltd. This was one of several petitions filed for this purpose. During the pendency of that petition, reference under Sick Industrial Companies (Special Provisions) Act, 1985, was filed before the Board for Industrial & Financial Reconstruction (BIFR). The Board forwarded its opinion to this Court under section 20 of the said Act to the effect that it was just and equitable that the company be wound up. The opinion from the said Board was registered as Company Petition No. 121 of 1995 and winding up order came to be passed on 17-1-1997 on Company Petition No. 66 of 1988 with petition No. 121 of 1995 and others. Under that order, (Coram : Pandit, J.), the official liquidator attached to this High Court was appointed as the liquidator for that company and the liquidator was directed to take charge of the company together with all its assets, records, books, machineries, spare parts, stores, manufactured goods, land and buildings and all other properties after taking an inventory in that behalf. The order stated that he will have all the powers prescribed under sections 456 and 457 of the Companies Act, 1956 (‘the Act’) and would also be at liberty to seek permission from this Court whenever he felt it necessary.
2. Shri Ambica Mills Ltd. is having its properties situated mainly at four different places :
(i) Unit No. 1 situated in the Khokra area of Ahmedabad.
(ii) Unit No. 2 which is situated near Railway Lines at Ahmedabad.
(iii) A textile mill at Baroda.
(iv) Ambica Tubes Division at Vatva.
3. In the present application, we are concerned with unit No. 2 which is situated near railway lines at Ahmedabad. The present application is an application under section 446 which seeks leave through prayer (B) to continue to proceed with civil suit No. 4780 of 1995 filed by the applicant against the company in winding-up on 14-9-1995 in the City Civil Court at Ahmedabad. Alternatively, it is prayed in the later part of the said prayer clause (B) that the said suit may be transferred to this court for proceeding further. For that purpose, it is prayed in prayer clause (A) that the applicant may be permitted to join official liquidator as a party in that suit.
4. An affidavit of one Shri P.K. Jain who is described as the authorised representative of the applicant company affirmed on 9-7-1997 is filed in support of this application. Para 1 of the affidavit states that the said suit is filed for recovery of a sum of Rs. 23,99,81,507 against Shri Ambica Mills Ltd. (now in liquidation). Para 2 of the affidavit states that a memorandum of understanding had been executed on 2-11-1989 and, thereafter, a supplementary agreement on 6-12-1989 between the applicant company (which was then known as Y.S. Syntext Projects Ltd.) and Shri Ambica Mills Ltd. (now in liquidation) which provided for purchase of unit No. 2 of Shri Ambica Mills Ltd. by the applicant for a sum of about Rs. 6.2 crores. It is further stated that the applicant was handed over possession of the said unit on 9-12-1989. In para 3 of the affidavit, it is stated that although some four years passed after signing of the aforesaid agreement, Shri Ambica Mills Ltd. was not in a position to transfer any right, title or interest in the said unit No. 2 to the applicant. Later on, the applicant came to know that Shri Ambica Mills Ltd. had given a ‘unilateral’ undertaking on 27-5-1997 (the correct date is 27-5-1987) to the Hon’ble Supreme Court in a dispute pertaining to the dues of ONGC that it would not alienate any of its immovable assets with effect from 15-4-1997 (the correct date is 15-4-1987) except with the leave of that court. It is stated therefore, that the applicant company rescinded the memorandum of understanding and the supplementary agreement dated 2-11-1989 and 6-12-1989 respectively on 24-1-1995 and requested Shri Ambica Mills Ltd. to take back possession of the said unit No. 2. Thereafter, it is stated in para 4 of the application that, in the meanwhile, the said Unit No. 2 was closed down on 24-10-1994 due to disconnection of power supply and that the premises came to be sealed by the order of the Labour Court in November, 1994, for recovery of workers’ dues. In para 5 of the application, it is stated that it was in these circumstances that the applicant was constrained to file Civil Suit No. 4780 of 1995. It was thereafter that the winding up order came to be passed on 17-1-1997 which came to be confirmed on 31-3-1997 in O.J. Appeal No. 7 of 1997 filed by another concern, namely, one Sunil Mills Ltd. In para 6 of the application, it is stated that the official liquidation has taken over possession of Unit No. 2 since then.
5. A copy of the aforesaid Civil Suit No. 4780 of 1995 is produced in this Court. The said civil suit inter alia prays for—
(a) leave to sue under order 2 rule 2 of the Civil Procedure Code;
(b) a declaration that the agreement/contract, dated 2-11-1989, 6-12-1989 and 9-12-1989 are no longer subsisting and have been lawfully rescinded;
(c) a declaration that the plaintiff (applicant) is not liable to perform any obligation in or arising out of the said agreements;
(d) a decree for Rs. 18,28,31,901 (which is principally for the expenditure allegedly incurred by the plaintiff on behalf of the company in winding up);
(e) an inquiry for compensation and charges for the loss incurred and the damage suffered ;
(f) decree for specific delivery of the plant and machinery and equipments in favour of the applicant;
(g) if delivery of the said items cannot be given, then a decree for a sum of Rs. 23,99,81,507 or such an amount as may be deemed [proper] by the court.
6. The official liquidator initially filed a report on 13-2-1998 being OLR No. 35 of 1998. In para 2 of the said report, it was stated that the matter was a complicated one involving various questions of fact as well as law and that legal assistance was necessary in the interest of justice to defend the said proceeding. It was, however, stated later on that alternate prayer (B) made in the application for transfer of the said suit to the High Court may be granted. In para 4 of the report, it was stated that ex-directors of the company had violated the undertaking given to the Hon’ble Supreme Court and hence the ex-directors were personally liable and they should be joined as principal defendants in that suit. The above-referred Mr. Jain thereafter filed another affidavit giving names of these ex-directors who are Jayakrishna Harivallabhadas (Chairman and Managing Director) and 8 others. The official liquidator, however, subsequently took legal advice and filed a further report on 15-12-1998 stating that the earlier report was without any legal assistance and having received legal advice, the official liquidator submitted that the company application cannot be and should not be granted. The official liquidator has filed one more affidavit on 21-12-1998 producing therewith following documents :
Exh. A - Photocopy of the minutes of extraordinary general meeting of the company held on 30-3-1989;
Exh. B - A copy of Form No. 23 along with the resolution passed in the above meeting under section 293(1)(a) of the Act which were forwarded to the Registrar of Companies and the explanatory statement annexed therewith pursuant to section 173 of the Act.
In para 4 of this affidavit, it is stated that the said explanatory statement did not disclose to the shareholders the very material facts inasmuch as it did not at all disclose even the existence of the injunction/prohibitory order, dated 15-4-1987 directing that the company shall not charge, encumber or alienate any of its immovable assets except with the leave of the Supreme Court and that the company shall make its immovable assets available for discharge of its liabilities to the ONGC. The said explanatory statement also did not disclose that the company had accordingly given an undertaking to the Hon’ble Supreme Court, that it shall not charge, encumber or alienate its immovable assets except with the leave of the Supreme Court, and that it shall make available its immovable assets for discharging the liabilities of ONGC that may arise on account of difference in price at which gas was being supplied to the company and the price which may ultimately be determined by the court.
7. It has so happened that as referred to above, there was a prior litigation between ONGC on the one hand and the Association of Natural Gas Consuming Industries (including Ambica Mills Ltd.) on the other hand regarding the unpaid dues to ONGC for supply of gas. The matter was initially contested in this High Court and, subsequently, the order passed by this court was carried to the Hon’ble Supreme Court being Civil Appeal No. 8330-40 of 1983. During the pendency of those appeals, the Hon’ble Supreme Court had directed ONGC on 15-4-1987 to continue to supply gas to these companies including Shri Ambica Mills Ltd. at the rate of Rs. 1,000 for one thousand cubic metres. That was subject to an undertaking to be given by the companies concerned that they will not charge, encumber or alienate except with the leave of the Supreme Court any of the immovable assets and they will make their immovable assets available for discharging their respective liabilities on account of the difference in the price of all the gas supplied which will be governed by the orders to be made by the court while disposing of the appeals. The order passed by the Supreme Court on 15-4-1987, reads as follows :
“These appeals will be listed peremptorily on 21st July, 1987, as the very first case for regular hearing and above all other causes.
We direct that during the pendency of the appeals, the Oil and Natural Gas Commission will not disconnect the supply of gas to the respondents, namely, the Association of Natural Gas Consuming Industries of Gujarat M.S. Jayant Paper Mills Ltd., M/s. Alembic Glass Industries Ltd., M/s Alembic Chemical Works Company Services Ltd., New India Industries Ltd., Punjab Steel Rolling Mills Pvt. Ltd., Chanden Metal Products Ltd., and Shri Ambica Mills Ltd., Mill No. 2 and will continue to supply gas as hitherto charging at the rate of Rs. 1,000 for one thousand cubic meters subject however to the undertaking by the respondents which has been given and has been accepted here, that the said respondents will not charge, encumber or alienate, except with the leave of this court, any of their immovable assets included in the respective undertakings and that they will make their immovable asset available for discharging the respective liabilities on account of the difference in the price of all the gas supplied to and further during the pendency of the appeals as permitted by orders made by the court while disposing of the appeals. The undertaking will be filed within four weeks from today.”
8. Pursuant to that order, an undertaking was given by Mr. Prahaladbhai S. Brahmbhatt, who was the Secretary of this company. The undertaking, dated 27-5-1987, reads as follows :
“Undertaking
I, Prahladbhai S. Brahmbhatt, do hereby solemnly affirm, undertake and state as under :
1. I am working as Secretary in Shri Ambica Mills Ltd. respondent No. 10 herein which is one of the members members of the respondent No. 1, i.e., Association of Natural Gas Consuming Industries of Gujarat.
2. I am conversant with the facts and circumstances leading to the present proceedings and, therefore, I am competent as well as authorised to give the undertaking on behalf of the respondent No. 10 company pursuant to the Hon’ble Court’s order, dated 15-4-1987, passed in Civil Misc. Petitions No. 7875-85 of 1987 in the present civil appeals. I state that the copy of the said order was made available to the respondent No. 10 company by the office of this Hon’ble court only on 14-5-1987.
3. I state that respondent No. 10 company undertake that none of immovable assets of the company will be further charged and encumbered hereafter with effect from 15-4-1987, i.e., from the date of order of this Hon’ble court except with the leave of this Hon’ble Court.
4. I state that respondent No. 10 company further undertake not to alienate any of its immovable assets hereafter with effect from 15-4-1987 except with the leave of this Hon’ble Court. Respondent No. 10 company further undertakes to make available all its immovable assets in the event of discharging the liabilities which may arise on account of the difference between the price at which all the gas being supplied in the company during the pendency of the proceedings in this connection and the price which may be determined by this Hon’ble Court while disposing of the present appeals finally.
Solemnly affirmed on 27th day of May 1987 at Ahmedabad.
|
Dated : 27 May, 1987 |
Signed P.S. Brahmbhatt, |
9. It is relevant to note that, subsequently, those appeals filed by ONGC came to be allowed and the prices charged by ONGC for supply of gas to various respondents were upheld. The said judgment, dated 4-5-1990 ONGC v. Association of Natural Gas Consuming Industries of Gujarat [1990] 2 Comp. LJ 89 (SC) and the interim order passed by the Hon’ble Supreme Court on 15-4-1987 is recorded in para 11 of the judgment appearing in the aforesaid report of the Supreme Court Cases.
10. Mr. Nanavati, the learned senior advocate with Mr. Chugdar have appeared for the applicant whereas Mr. Ashok L. Shah has represented the official liquidator. Mr. D.S. Vasavada appeared for Textile Labour Association representing the workmen as intervener. Mr. Nanavati submitted that scope of proceeding under section 446 was a limited one and under sub-section (1) thereof, the court has to consider whether the permission to proceed with the pending civil suit ought to be granted or not. He submitted that in dealing with such a situation, the court has to consider the interests of the company and has to see that its assets are not wasted in frivolous or unnecessary litigation. However, the section did not impose a total prohibition against the proceeding either being taken or continued against the company in liquidation and leave should ordinarily be granted when the issues in the suit cannot be gone into and decided in winding up proceeding, that is, without holding a full-fledged trial and affording an opportunity to the contesting parties. He submitted that the inquiry contemplated under section 446 is of a summary nature and the court was not expected to go deeply into the merits or demerits of the claim of the plaintiff. In short, Mr. Nanavati submitted that when complicated and triable issues are involved, leave was generally expected to be granted. It would be profitable to refer to section 446 at this stage. It reads as follows :
“446. Suits stayed on winding up order - (1) When a winding up order has been made or the official liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the court and subject to such terms as the court may impose.
(2) The court which is winding up the company shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of—
(a) any suit or proceeding by or against the company;
(b) any claim made by or against the company (including claims by or against any of its branches in India);
(c) any application made under section 391 by or in respect of the company;
(d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company;
whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960).
(3) Any suit or proceeding by or against the company which is pending in any court other than that in which the winding up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that court.
(4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court.”
11. Mr. Nanavati relied upon various judgments in support of the aforesaid submission. Firstly, he relied upon the judgment of a Division Bench of this court in the case of Star Engg. Works Ltd. v. Official Liquidator & Krishnakumar Mills Co. Ltd. [1977] 47 Comp. Cas. 30 (Guj.). That was a case where the petitioner - plaintiff had been supplying goods to the defendant - company. The plaintiff had filed a suit in the Bombay High Court on 13-3-1972 for recovery of certain amounts for those goods with interest and costs. Prior to that, on 7-2-1972, the Gujarat High Court had passed a winding up order and hence an application was made to the Gujarat High Court for leave to proceed with that suit or to transfer it to the Gujarat High Court. After scrutiny of the facts of the case, the Division Bench prima facie came to the conclusion that the goods had been supplied on an ‘approval and return’ basis and since rejection had not been intimated within a reasonable period, the goods had passed to the defendant company in liquidation. The court, however, took the view that the term ‘any claim’ under section 446(2)(b) was wide enough to cover such claims for the goods and the court stated that it would be open for the party to lodge its claim and for the court to decide it. In that context, the Division Bench of this court relied upon an earlier Division Bench judgment of Bombay High Court in the case of Balkrishna Mahadeo Vartak v. Indian Association of Chemical Industries Ltd. [1958] 28 Comp. Cas. 179 (Bom.). In that case, the Division of the Bombay High Court had held that the company in winding up should not be exposed to unnecessary litigation and unnecessary costs. In that context, the Gujarat High Court also held that ‘in dealing with such an application, the court has necessarily to consider the interests of the company and to see that its assets are not wasted in frivolous and unnecessary litigation’. I do not understand as to how this judgment for the proposition in any way helps the applicant.
12. Mr. Nanavati, the learned counsel for the petitioner also relied upon three judgments of the Hon’ble Supreme Court. Firstly, he relied upon the judgment of the Supreme Court in the case of Sudarshan Chits Fund Ltd. v. Sukumaran Pillai [1984] 3 Comp. LJ 40. In that case, the Hon’ble Supreme Court was concerned with a situation wherein the winding up order of the Company Court was kept in abeyance by the appellate court and the Supreme Court had to consider as to whether the Company Court would have jurisdiction under section 446(2) during that period. We are certainly not concerned with such a situation in the present case. It is, however, relevant to note that in this judgment, the Hon’ble Supreme Court has observed that summary remedy under this section had been conferred on the Company Judge to save the company which is ordered to be wound up ‘from prolix and expensive litigation’. In that context, the court observed :
“This was the object behind enacting section 446(2) and, therefore, it must receive such construction at the hands of the court as would advance the object and at any rate not thwart it” (p. 45).
Then Mr. Nanavati relied upon the judgment of the Hon’ble Supreme Court in the case of ICICI v. Srinivas Agencies [1996] 2 Comp. LJ 421. In that case, the court was concerned with the proceedings before the Debt Recovery Tribunal and the court held the Company Court should not transfer suit to itself merely for its own convenience. The Hon’ble Supreme Court laid down that the question as to when the Company Court should grant leave under section 446 would depend upon facts and circumstances of each case. In fact, it was specifically submitted before the court (as can be seen from para 13 at page 427 of Comp. LJ) that as a rule, leave be granted subject to reasonable conditions. In para 13 of the judgment, the Hon’ble Supreme Court observed :
“We are, therefore, of the view that the approach to be adopted in this regard by the Company Court does not deserve to be put in a straight jacket formula”.
Then, Mr. Nanavati relieved upon the judgment of the Hon’ble Supreme Court in the case of Indian Bank v. O.L. of Chemmeens Exports (P.) Ltd. [1998] 3 Comp. LJ 211. In that case, the court was concerned with the question as to whether under the provisions of section 446,the company court could declare the decree of a competent court to be void and the Supreme Court held that it could not. I fail to see as to how any of these judgments advance the proposition sought to be canvassed by Mr. Nanavati. In fact, in Central Bank of India v. Elmot Engg. Co. [1994] 3 Comp. LJ 1 (SC), the Supreme Court has held that the aim of section 446 was to safeguard the asset of the company against wasteful or expensive litigation. It was also observed that while granting leave, the court always takes into consideration whether the company is likely to be exposed to ‘unnecessary litigation and cost’.
13. Mr. Nanavati then relied upon the judgments of other High Courts to canvass that when there are other defendants in a suit, courts would generally grant leave. This is because in the present case, the suit which is sought to be proceeded against Shri Ambica Mills Ltd. has ICICI, Ahmedabad Electricity Co. Ltd. and State of Gujarat as defendant Nos. 2 to 4. In that context, Mr. Nanavati relied upon the observations of the Madras High Court in the case of T.V. Purushottam & Co. v. Provisional Liquidators Subhodaya Publications Ltd. [1955] 25 Comp. Cas. 49 wherein at page 52, a single Judge of that court has culled out some of the general principles which govern such situations. That case was concerning a dispute regarding fixation of fair rent of the premises which the applicant had taken on lease from the voluntary liquidators of the company. The applicant had filed an application before the rent controller for fixing the fair rent. The company was subsequently ordered to be wound up. The applicant had applied to the court for leave to continue the proceedings. Leave was granted and, in that case, the court referred to some of the earlier judgments including English judgments on page 52 of that report. In those observations, the court referred to Wilson v. Natal Investment [1867] 36 LJ Ch. 312 wherein it was held that where the question at issue is such that it cannot be conveniently gone into in the winding up, leave will generally be given. In the case before the Madras High Court, the question was with respect to fixation of fair rent and the court observed :
“The order fixing fair rent has to be made only by the Rent Controller after taking into consideration various factors set out in the section and it is in the exclusive jurisdiction of the Rent Controller to fix the rent”.
In that context, leave was granted. The court, however, noted that in Marine Investment Co., In re [1868] 17 LT 535, it has been held that in cases where company is a necessary party to the action, but there are other defendants as well, the court should generally grant leave. But the learned Judge also added thereafter,—
“The court usually insists however upon an undertaking by the plaintiff that he will not enforce against the company any judgment which he may obtain without the leave of the court. [see, McEwen v. London, Bombay and Mediterranean Bank [1866] 15 LT 495, Hagell v. Currie [1867] WN 75]”.
Mr. Nanavati then referred to a judgment of (then) Mysore High Court in the case of G.S. Setty & Sons v. Yellamma Cotton, Woollen & Silk Mills Co. [1970] 1 Comp. LJ 184. In the facts of that case, the court held that the claim of the party concerned on the guarantee given by him could not be proceeded with in the absence of the first respondent company in liquidation. That was a case where a secured creditor wanted to remain outside the winding up proceeding and wanted to proceed with the suit and it was in that context that the leave sought for was granted.
14. What emerges from these judgments is that the proposition that as a rule leave to sue the company in liquidation ought to be granted is not accepted by the Hon’ble Supreme Court in the ICICI case (supra). On the contrary, the court has held that whether leave should be granted or not will depend upon facts and circumstances of each case. Then, again, as held by the Hon’ble Supreme Court in the case of Elmot Engg. Co. (supra), the Company Court has to take into consideration whether the company is likely to be exposed to unnecessary litigation and cost. Besides, as observed by the Hon’ble Supreme Court earlier in the case of Sudarshan Chits Fund Ltd. (supra) [although in the context of section 446(2)] the object behind the section is to save the company from prolix and expensive litigation and the section must receive such construction at the hands of the court as would advance the object and at any rate not to thwart it. It, in fact, confirmed the approach of this court taken much earlier in the case of Star Engg. Works (supra).
15. Having looked into the judgments which hold the field with respect to the power under section 446 concerning the grant of leave to sue a company in liquidation, we have to find out as to whether in the facts of the present case, the applicant has made out a case to proceed with the suit which it has filed in the City Civil Court at Ahmedabad. To begin with, it must be first noted that this suit No. 4870 of 1995 has been filed in the City Civil Court at Ahmedabad on 14-9-1995. It is the submission of Mr. Nanavati that this suit has been filed prior to the passing of the winding up order which was passed on receipt of the opinion under section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985. The opinion of the Board was registered as petition No. 121 of 1995 and the winding up order came to be passed on 17-1-1997. As against that, Mr. Shah points out that the order passed by this court (Coram : Pandit, J.) on Company Petition No. 121 of 1995 specifically states that it is an order on Company Petition No. 66 of 1988 (and other petitions including Company Petition No. 121 of 1995) which was the earliest petition filed against this company and that petition had been kept in abeyance in view of the reference to the BIFR. Mr. Shah submits that commencement of the winding up proceedings is defined in section 441(2) of the Act as deemed to have commenced at the time of presentation of the petition for winding up. Petition No. 66 of 1988 was presented on 12-4-1988 and it had only remained in abeyance due to the reference to BIFR. The said proceeding was ‘suspended and was not dismissed’ in the words of the Hon’ble Supreme Court as held by it in Gram Panchayat v. Shri Vallabh Glass Co. Ltd. AIR 1990 SC 1017. In fact, while passing the winding up order after receiving the opinion, Pandit, J., had referred to the aforesaid Supreme Court judgment and had specifically held while disposing of petition No. 66 of 1988 along with the petition (on opinion) No. 121 of 1995 that it was the order on the earliest petition thereby making it clear that the winding up proceedings were pending through petition No. 66 of 1988 since 12-4-1988. That order has been confirmed in appeal and the appellate order has not been disturbed in any way thereafter. Thus, it is clear that the suit filed by the applicant company is, undoubtedly, filed after the commencement of the winding up proceedings under section 441(2) and the winding up order will relate back to the date of filing of the first winding up petition.
16. That apart, the question as to whether the applicant ought to be granted leave to proceed with the suit requires to be examined. It is clear that the suit has been instituted without leave of the court but, as held by the Hon’ble Supreme Court in the case of Bansidhar Shankar Lal v. Mohammad Ibrahim [1971] 41 Comp. Cas. 21, though the suit is instituted without leave of the court, still if leave is granted, it can be deemed to be instituted from the date of granting leave. The question, however, has to be gone into as to whether in the facts of the present case, leave is required to be granted.
17. In that context, it is necessary to glance through the plaint of Suit No. 4780 of 1995 and the documents annexed therewith. As stated above, Shri Ambica Mills Ltd. (now in liquidation), ICICI, Ahmedabad Electricity Co. Ltd. and State of Gujarat are the defendants to this suit. In para 3 of the plaint, it is stated that the said Unit No. 2 of defendant No. 1 mill company was incurring heavy losses in 1988-89 and that the mill company was indebted to several financial institutions led by ICICI. In para 6, it is stated that in June 1989, there were discussions between the financial institutions led by ICICI, Government of Gujarat and the applicant and it was agreed that the mill company will sell Unit No. 2 to the applicant subject to the mill company getting the necessary statutory clearances amongst others. In para 9 it is stated that upon these negotiations, the applicant decided to purchase the said Unit No. 2 free from all charges and encumbrances. It is, however, stated that during these discussions, the applicant had no knowledge and it was not disclosed to the applicant that defendant No. 1 had given an undertaking to the Hon’ble Supreme Court of India that it would not effect sale or transfer of its assets without the leave of the Hon’ble Supreme Court. It is important to note what is stated thereafter in para 9 which is as follows :—
Although the defendant No. 2 was a party to the proceedings before the Hon’ble Supreme Court of India in which the said undertaking had been given as was subsequently discovered by the plaintiff, the fact of such undertaking was never disclosed to the plaintiff either by the defendant No. 1 or by the Defendant No. 2. From the minutes and the resolution of the extraordinary general meeting and from the various correspondence and minutes of the proceedings, it never appeared that there was any impediment to the completion of the sale. The necessity for obtaining leave from the Hon’ble Supreme Court for the purpose of completing the proposed sale was never disclosed to the plaintiff.” [Emphasis supplied].
18. From what is narrated above, it is clear that as per their own say of the applicant, the applicant had gone through the minutes and the resolution of the extraordinary general meeting and that from the various corres-pondence and minutes of the proceedings, there appeared no impediment to the completion of the rate. It is further averred as seen in the above paragraphs that the applicant was never otherwise also disclosed that there was an undertaking given by the mill company to the Hon’ble Supreme Court, thereby the applicant was also never informed of the necessity to obtain any leave from the Supreme Court for completion of the proposed sale. Thereafter it is stated that an agreement was entered into on 2-11-1989, then a further agreement on 6-12-1989 and one more agreement on 9-12-1989 which was described as the working agreement. On 9-12-1989, a power of attorney and deed of indemnity were also executed. It is further averred in para 11 that Defendant No. 1 mill company had represented to the applicant that it had made full disclosure concerning all matters in respect of the undertaking which was being sold and these representations were recorded in the agreement, dated 2-11-1989. The plaint further states that the applicant bona fide believed these representations and acted on them in good faith.
19. Then it is stated in para 15 that after taking possession, the applicant spent about Rs. 2.75 crores for the repairs of plant and machinery; they purchased additional machinery and also took on lease other machinery in order to run the mill; they brought in additional funds for the working of the unit to the extent of about Rs. 1.4 crores; they invested additional capital to the extent of Rs. 3 crores. Thereafter it is stated—
“The plaintiff had to dismantle and remove the old machinery, plant and equipment. The plaintiff had also to carry out repairs, renovation, replacement of the plant and machinery. The plaintiff had to add and install new and other necessary machinery, plant and equipment at considerable expense.” [Emphasis supplied]
Thereafter, it is stated in para 16 of the plaint that the total agreed consideration for the proposed sale was to the tune of Rs. 6.2 crores, but a substantial part of it was to be paid directly to the specific creditors. This was nearly in the range of Rs. 4.25 crores. Apart from this amount, the payment to be made to the workers towards gratuity and retrenchment compensation was quantified and the final consideration was also fixed in a particular manner as stated in the said paragraph. The plaintiff thereafter went into possession and started running the mill.
20. Thereafter, it is stated in the plaint that defendant No. 1 (mill company) obtained the clearance under section 230A of the Income-tax Act, 1961 for completing the sale and also the required permission from the Ministry of Textiles. However, with respect to the applicant’s requisition concerning the title to the property, no clearances were given by the mill company. It is thereafter stated in para 26 that it was only in the balance sheet of the year 1991-92 (which became available in September, 1992) that the applicant found that in the auditor’s report—there was a mention of the order of injunction granted by the Hon’ble Supreme Court of India by reason of which execution of the deed of conveyance in favour of the plaintiff was remaining pending. In the balance sheet it was mentioned that defendant No. 1 had disposed of Mill No. 2, but the final sale could not be completed because of certain ‘technicalities’. It was only thereafter on making inquiries that the applicant came to know for the first time about the previous litigation with ONGC pending since 1979 and the undertaking given by the respondent mill company to the Hon’ble Supreme Court.
21. Thereafter, it is disclosed in para 28(d) to (f) that the appeals preferred by ONGC were disposed of subsequently on 4-5-1990 and the judgment and order of the Gujarat High Court was set aside by the Supreme Court. It is stated thereafter that ONGC filed a contempt petition on 17-8-1990 and on 26-8-1990, the defendant No. 1 tendered an unconditional apology for the breach of the order. Thereafter, it is stated in para 28(g) & (h) that the defendant No. 1 had approached the Hon’ble Supreme Court on 5-11-1991 for modification of the order, dated 15-4-1987. The Supreme Court disposed of that application on 6-1-1992 and noted that the affairs of defendant No. 1 were before the BIFR and the best course was to approach that authority. In paras 31 to 34, it is stated that the applicant also approached BIFR for leave to participate in the proceedings. In July, 1993, the defendant No. 1 made an application before the Supreme Court seeking permission to execute the documents of transfer of Unit No. 2. ‘The said application was disposed of by an order, dated 10-8-1993. The defendant failed to obtain such permission.’ Thereafter, in paras 35 and 36 it is mentioned that since BIFR had expressed its inability to give any direction, defendant No. 1 made another application to the Hon’ble Supreme Court, but no prayer with respect to Unit No. 2 was made at that time. Para 37 thereafter states amongst others as follows :
“In May, 1994, the plaintiff thereafter made an independent application to the Hon’ble Supreme Court of India for leave to be given to the defendant No. 1 for transferring the Unit No. 2 by executing and registering the necessary documents in favour of the plaintiff. The application came up for hearing before the Hon’ble Supreme Court on 9-1-1995. The Hon’ble Supreme Court dismissed the said application after recording that the allegations made in the counter affidavit filed by defendant No. 1 were not admitted by the plaintiff. In the said counter-affidavit, defendant No. 1 had falsely stated that the fact of the said undertaking was disclosed to the plaintiff at the material time”.
Thereafter, it is stated in para 38 that, in these circumstances by a letter, dated 24-1-1995, the plaintiff rescinded the agreement with defendant No. 1 and called upon them to take back possession of Unit No. 2. Then, in the subsequent para, more particularly, in para 43, it is specifically contended that the plaintiff was deceived and defrauded by defendant No. 1.
22. Thereafter in paras 49 to 56,the applicant has sought to make out a case for an amount of Rs. 23,99,81,507. In these paras, the claim made is as follows :
A. Para 49 Rs. 7,89,39,100
B. Para 50 Rs. 6,44,10,000
C. Para 52 Rs. 5,71,49,606
D. Para 53 Rs. 3,94,82,801
Para 49 includes the claim for compensation for the loss incurred and damages suffered through non-fulfilment of the contract. The items of para 49 are as follows :
(a) Payment made towards wages, privilege
leave, provident fund, ESI, on account of the defendant No. 1 as per clause No.
2(a) Group (d) (i) (ii)
(iii) (iv) of the agreement dated 2-11-1989 Rs. 44,56,000
(b) Payment to Union Bank of India on account of the defendant No. 1 as per clause No. 2(a) Group (d)
(v) of the said agreement Rs. 22,44,000
(c) Payment of gratuity and retrenchment com-
pensation on account of the defendant No. 1 Rs. 2,63,40,000
(d) Amount paid to ICICI on account of the defen-
dant No. 1 Rs. 5,00,000
(e) Amount paid on account of municipal tax and
land revenue on account of the defendant Rs. 21,67,000
No. 1
(f) Amount spent on repairs, maintenance/removal of building plant and machinery so as to put in
use Rs. 3,12,84,048
(g) Amount spent on construction Rs. 23,00,802
(h) Liability incurred on account of leasing equipment and machinery (payment already
made) Rs. 86,81,000
(i) Amount paid by the plaintiff on behalf of the defendant No. 1 and credit amounts received from the defendant No. 1 :
(a) Leave encashment prior to take over Rs. 7,29,374
(b) ESI contribution for the period 1 Rs. 7,474
December to 9 December, 1989, prior to takeover.
(c) TDS interest on security deposit for the year 1990-91 with Ahmedabad electricity Co. (since the certificate was issued in the name of Shri Ambica Mills, as such,
TDS, credited to Ahmedabad Elec. Co.) Rs. 29,402
____________
Rs. 7,89,39,100
23. Para 50 of the plaint claims an interest at the rate of 18 per cent on the aforesaid amount upto the date of rescinding of the contract, i.e., 24-1-1995 and then up to 31-8-1995 (since the suit was filed on 14-9-1995). Paras 51 and 52 include the claim for items of machinery, equipment, motor vehicles and other vehicles which are brought into the mill premises and which are lying over there. The applicant claims that those articles should be returned to the applicant failing which the value thereof is claimed which is to the tune of Rs. 5,71,49,606. In para 53 various liabilities which were incurred by the plaintiff for the purpose of running the said unit, such as, electricity dues, sales-tax dues, municipal tax and land revenue are claimed. They are totalling to Rs. 3,94,82,801. Paras 58 and 61 of the plaint are also very relevant. In para 58, it is stated that the amount (of Rs. 23,99,81,507) which is claimed earlier is not the full claim and the plaintiff has not been able to fully ascertain the amount of compensation recoverable. In para 61 it is stated that ICICI and Ahmedabad Electricity Co. are joined in the suit since it is proper that the declarations which are sought are obtained in their presence ‘though no other relief is sought against them.’ Though there is no mention as to why the State of Gujarat is joined as defendant, no relief is sought against the State of Gujarat whatsoever in this plaint as initially filed. These two paras 58 and 61 read as follows :
“Para 58
The plaintiff has been unable to fully ascertain the amount of compensation recoverable by reason of the loss incurred and damages suffered by the plaintiff. With the passage of time, more and more liabilities are coming to light which the defendant No. 1 is wrongfully denying and seeking to foist upon the plaintiffs in spite of the fact that the contracts have been rightly rescinded. In these circumstance, the plaintiff prays for leave under order 2 rule 2 of the Code of Civil Procedure to file subsequent suits for recovery of further amounts by way of compensation and by way of further relief arising out of the same transactions and cause of action.
Para 61
Inasmuch as the declarations have been sought regarding the obligations under the aforesaid agreements which have been rescinded, it is just and proper that such declarations are sought in the presence of ICICI and Ahmedabad Electricity Co. Ltd. Apart from the declaratory decrees claimed herein no other relief is sought against those defendants.”
24. The applicants have produced copies of the agreement, dated 2-11-1989, supplemental agreement dated 6-12-1989, working agreement dated 9-12-1989, power of attorney, dated 9-12-1989 and a copy of the deed of indemnity dated 9-12-1989 along with the plaint. The first agreement, dated 2-11-1989 runs into some 58 pages. In the agreement dated 2-11-1989, the first four paras contain recitals. Then in para 5 it is stated that the parties are desirous of recording the said terms and conditions and the agreement witnesseth and it is agreed by and between the parties as provided in the subsequent clauses (which are in all 40). In clause No. 1, it is stated that the vendor shall sell, grant, convey and assign and the purchaser shall purchase and acquire from the vendor the said Unit Mill No. 2 consisting of freehold and leasehold land together with factory, building and other structures standing thereon and more particularly described in the First Schedule on a plan annexed thereto, and also plant and machinery, electrical and other assets, more particularly, described in the Second Scheduled along with fixtures and fittings installed as a going concern free from all claims, charges and encumbrances in a lump sum price of Rs. 4.25 crores. Thereafter in clause 2, it is provided as to in what manner the purchase price of Rs. 4.25 crores is to be paid. In that, the liabilities are divided into four heads. Group A consists of loans of IDBI, ICICI and IFCI. Group B consists of deposits of General Insurance and Unit Trust of India. Group C consists of liabilities of debenture holders and Group D consists of various other existing liabilities including salary, wages, contribution towards Provident Fund, ESI, leave pay, DPG (deferred payment of guarantee) liability to Union Bank of India. Then, in sub-clause (c) of clause 2, it is provided that all liabilities in excess of the above amounts on the date of making over possession shall always be the liabilities of the vender. In clause 9, it is provided that the purchaser shall pay the retrenchment compensations and gratuity to the workers who have expressed their intention to be retrenched. The details of workers who have expressed to be retrenched have been worked out and understood between the vendor and the purchaser. Then in clause 10, it is provided that the purchaser shall have no liability to pay Provident Fund, PF, ESI and all other dues of the workers, employees and the staff upto the date of receiving possession. In clause 11, it is provided that upon payment of the said gratuity, the vendor shall make over possession of the said undertaking and the vendor shall hand over to the purchaser possession of the said undertaking and all lands together with the factory building and other structures, plant and machinery, furniture, fixtures, fittings etc. What is provided thereafter in this clause is as follows :
“AND the purchaser shall be entitled to exercise all rights of ownership in respect of the said properties and rights, etc., notwithstanding that the sale deed has not been made and executed and the documentation in respect of transfer of all the properties, rights etc. or some of them have not taken place until then and the purchaser company shall not be bound to part with possession of the same for any reason and under any circumstances whatsoever.”
Clause 12 thereafter records what the vendor has informed, represented and warranted to the purchaser. Sub-clause (p) of clause 12 states : ‘at the extraordinary general meeting of the shareholders of the vendor held on 30-3-1989 at Ahmedabad, the shareholders of the vendor have passed the necessary resolution under section 293(1) of the Act for the sale of the said undertaking by the vendor’. Clause 18 of the agreement reads :
“The vendor shall bear, pay and discharge all debts, liabilities including statutory liabilities, taxes under any act,order, rule or regulation of both the State Government and the Central Government as also local body or authority all in respect of the said unit upto the date of handing over possession thereof to the purchaser and shall keep the purchaser and the said unit/undertaking at all time fully and effectually indemnified from and against all claims and demands in respect of all such liabilities accruing and/or payable for the period prior to the date of handing over possession of the said undertaking and from and against the said debts liabilities and payments and also all costs charges expenses loss and damages as the purchaser may have to suffer or incur or be put to on account of non-payment of any of the aforesaid liabilities as also against all suits actions and proceedings and/or any other order that may be taken against the purchaser or against the said unit on account of any act done or omitted to be done by the vendor prior to the handing over possession of the said undertaking. As from and after the date of the possession, the purchaser shall be bound and liable to bear, pay and discharge all outgoings, and liabilities in respect of the said undertaking.”
Clause 22 provides that on and from the date of taking over possession of the undertaking, the purchaser shall continue to employ the existing staff as if their services are continuous service and not interrupted. Clause 23(a) provides that the vendor shall be liable to pay all dues of all employees who have left the services of the vendor prior to the date of handing over possession of the said undertaking. Sub-clause (b) of clause 23 provides that the purchaser shall be bound and liable to pay from the date of taking over possession with respect to the dues of the employees. Clause 29 further clarifies that all income, profit and loss upto the date of handing over possession shall belong to the vendor.
25. Thereafter, the supplemental agreement, dated 6-12-1989 is produced. It states in clause 1 that the quantification of lump sum price of Rs. 4.25 crores and payment to be made to the workers towards gratuity and retrenchment compensation as stated in the earlier agreement have been agreed and these are quantified as provided in agreement. Clause 2 of this supplemental agreement gives the figure of gratuity and retrenchment compensation to 771 employees which comes to Rs. 1,95,45,918. In the earlier agreement, the price of Rs. 4.25 had been mentioned as the price of the earlier agreement. Thus, both together, the amounts come to Rs. 6,20,45,918. The value of the property which is sought to be sold including the amount of plant and machinery is also provided in this agreement which is shown as Rs. 6.20 crores. Then it is provided that the parties will approach the Income-tax authorities under section 269(UC) of the Income-tax Act for the No Objection Certificate. Thus, the entire property is to be sold at about Rs. 6.20 crores out of which Rs. 4.25 crores are supposed to go towards various liabilities as described in 4 sub-groups of clause 2 of the earlier agreement and Rs. 1,95,45,918 is to be given to 771 employees to be retrenched. Thereafter, the working agreement, dated 9-12-1989 and the deed of indemnity (whereunder the vendor has agreed to indemnify the purchaser) is produced.
26. The applicant has then produced the notice of motion and the affidavit in support taken out in the suit. Thereafter, a copy of the written statement, dated 22-4-1996 filed by the State of Gujarat is produced wherein it is stated in para 4 thereof that an amount of Rs. 2,50,67,746.36 regarding the deferment of electricity duty and sales tax on electricity was to be recovered from the company. It is further stated that the dues of Rs. 64.88 lakhs are regarding interest free loan given to the company through GIIC and they are yet to be recovered. It is further submitted in that reply that the deferment amount of sales tax has not been paid by the company. Then it is stated that in view of the above, either the plaintiff or the defendant No. 1 has to pay the Government dues with interest as per the Government resolutions while giving the reliefs and concessions. Thereafter, the applicant has produced the application for amendment moved in the suit to add para 57-A to state that the State of Gujarat is not entitled to recover the electricity duty as well as the sales tax from the plaintiff. They also sought a declaration that the plaintiff is not liable for the said amount of electricity duty as well as sales tax to defendant No. 4 and the defendant No. 4 be permanently restrained from demanding those amounts from the plaintiff.
27. The applicant has thereafter produced a compilation of the interlocutory application No... of 1994 (number not given) in Civil Appeal No. 8530-40 of 1983 which was moved by the applicant to the Supreme Court. This application narrates various facts as stated above including entering into the agreement and subsequently coming to know about the injunction granted by the Hon’ble Supreme Court and being ‘tricked’ by Shri Ambica Mills Ltd. Para 32 of this application begins as follows :
“Under these circumstances, the applicant is now approaching this Hon’ble Court for completing the transfer of unit No. 2 by execution and registration of the conveyance”.
In para 38 of this application it is stated that,—
“In the facts and circumstances of the case, the Court should be pleased to direct the execution and registration of the conveyance of unit No. 2 in favour of the applicant. The conveyance of unit No. 2, if permitted, will not adversely affect the claim of ONGC in any manner and no other party will suffer any prejudice thereby. In fact, it would enure to the benefit of all parties concerned” [Emphasis supplied]
In para 39, it is stated that the applicant has performed all its obligations under the agreements. Prayer (b) of this application is for ex post facto leave for alienation of unit No. 2 in favour of the applicant and prayer (c) is to seek modification of the order, dated 15-4-1987 and to direct Shri Ambica Mills Ltd. to execute and register the necessary documents for completing the transfer. The applicant has thereafter produced various documents which were annexed to the appeal memo as well as the orders passed by the Hon’ble Supreme Court from time to time.
28. In the circumstances, Mr. Nanavati, the learned senior counsel appearing for the applicant, submitted that the applicant was a bona fide purchaser for value of unit No. 2 and the applicant had acted on the agreements which were valid when they were signed. Mr. Nanavati submitted that the injunction of the Hon’ble Supreme Court or non-compliance of some of the provisions of the Act with respect to disclosure of full particulars to the shareholders in the extraordinary general meeting by Shri Ambica Mills Ltd. would not make the agreements bad in law at the outset. The applicant had invested huge amounts to run the said unit. It had spent about 2.75 crores for repair of plant and machinery; it had purchased additional machinery and took on lease other machinery to run the mill; it had brought in additional funds for working of the unit to the extent of Rs. 1.40 crores. The applicant had invested additional capital to the extent of Rs. 3 crores; the applicant had to dismantle and remove the old machinery plant and equipment. The applicant had also to carry out repairs, renovation, replacement of the plant and machinery and it had to add and install new and other necessary machinery plant and equipment at considerable expense as stated in para 15 of the plaint. The applicant paid substantial amounts to the employees who were retrenched by paying to them retrenchment compensation and gratuity. The applicant incurred various expenses for running of the unit and incurred various other liabilities like electricity dues, sales tax, municipal rates and taxes and land revenue, etc. Mr. Nanavati submitted that the applicant was, therefore, entitled to recover all these amounts from the mill company. He submitted that the applicant was entitled to damages and compensation over and above some of the claims of actual expenditure and also interest at the rate of 18 per cent totalling in all nearly to Rs. 24 crores as on the date of filing the suit. The submission of Mr. Nanavati was that the applicant should be permitted to claim these costs against the company in liquidation and for that the leave was necessary.
29. The submission of Mr. Nanavati is that the agreements as entered into initially were valid and the applicant tried to act upon them honestly and in accordance with the spirit of those agreements. However, the applicant was kept in dark and was not informed about the injunction issued by the Hon’ble Supreme Court and the undertaking given by the mill company. When the mill company did not get any clearance from the Hon’ble Supreme Court, the applicant tried to seek the same by making necessary application to the Hon’ble Supreme Court. However, when that also failed, it decided to avoid the agreement. Mr. Nanavati submitted that the agreements became voidable when the applicant came to know that they could not be acted upon to complete the conveyance because of the injunction granted by the Hon’ble Supreme Court. As far as the applicant is concerned, the applicant was not knowing anything about the injunction or the undertaking and therefore, qua the applicant, the agreements became voidable when the applicant acquired the knowledge about the injunction and the undertaking at a later point of time. The applicant, therefore, decided to avoid the agreements and in the submission of Mr. Nanavati, that agreements will have to be treated as voidable at the instance of the party which suffered. He submitted that a fraud had been played upon the applicant and on coming to know about it, as provided under section 19 of the Indian Contract Act, the agreements became voidable at the option of the applicant which had suffered in this bargain. The applicant, therefore, rescinded the agreement by issuing a notice on 24-1-1995 and called upon the company to compensate and to pay damages and to take over the unit No. 2. The reaction of the mill company to this notice was however a negative one. As stated in para 47 of the plaint, the mill company replied by their letter, dated 4-2-1995, that unit No. 2 had been sold to the applicant and the mill company was under no obligation to take it back. In fact, what they submitted was that it was the applicants who are under an obligation to run the unit as all the assets thereof had been passed on to the applicant. Not only that, but the mill company proceeded to file a suit against the applicant in the City Civil Court at Ahmedabad bearing No. 2865 of 1995 wherein they prayed :
(A) to declare that the action of closure of the said unit by the defendant was in breach of the contract and that the applicant is under an obligation to continue to carry on the running of the said unit No. 2; and
(B) a mandatory order of injunction directing the applicant to continue to carry on the running of the said unit No. 2 be passed.
It is thereafter that the applicant has filed civil suit No. 4780 of 1995 in the same court. Mr. Nanavati, therefore, submitted that if leave to proceed with civil suit No. 4780 of 1995 is not granted, the applicant will not be able to proceed with the suit that it had filed against the mill company. It was necessary for the applicant to prosecute the said suit along with the suit filed by the mill company, otherwise, the applicant will be rendered incapable in defending the civil suit filed by Shri Ambica Mills Ltd. It was submitted that to defend the suit filed by Shri Ambica Mills Ltd. effectively, it was absolutely necessary for the applicant to seek the declaration as sought in Civil Suit No. 4780 of 1995 to the effect that the agreements entered into by and between the applicant and Shri Ambica Mills Ltd. had been lawfully rescinded and that the applicant was not liable to perform any of the obligations under or arising out of the said agreements.
30. Mr. Nanvati then submitted that apart from Shri Ambica Mills Ltd., there were other defendants Nos. 2, 3 and 4 in the suit, viz., ICICI, A.E. Co. Ltd. and State of Gujarat. He pointed out that by way of amendment of the suit, a declaration had also been sought that the applicant was not liable for the amount of electricity duty as well as sales tax to be paid to the State of Gujarat and an injunction to that effect had also been prayed. Mr. Nanavati submitted that the suit for compensation and damages was very much maintainable against the company in liquidation and he relied upon the wordings of section 446(2)(a) which provides for ‘any suit or proceeding by or against the company’. In his submission, the Legislature had not made any distinction between the suit for damages and compensation on the one hand and the other suits, and therefore the suit already instituted should be permitted to be proceeded with. Alternatively, he submitted that, in any case, assuming without admitting that a suit for damages does not fall within the purview of section 446, the suit which was instituted was also for various other declaratory reliefs against the company in liquidation as also against the other defendants such as the State Government. He, therefore, submitted that it will be in the interest of justice and in consonance with equity that the application ought to be allowed.
31. Mr. Ashok L. Shah, the learned counsel appearing for the official liquidator on the other hand, submitted that the agreements (including the initial one, dated 2-11-1989) were void right at the outset for various reasons as provided under section 24, read with section 23 of the Indian Contract Act. Mr. Shah submitted that this was a case—
(a) firstly, where the agreements were entered into in clear violation of the injunction, dated 15-4-1987 issued by the Hon’ble Supreme Court and in violation of the undertaking, dated 27-5-1987 given by the company to the Hon’ble Supreme Court. Thus, the agreements were forbidden by law and opposed to public policy and, therefore, their consideration and object were unlawful;
(b) secondly, the agreements were entered into on 2-11-1989, 6-12-1989 and 9-12-1989, i.e., much after the commencement of the winding up proceedings which were initiated by filing of the first winding up petition No. 66 of 1988 on 12-4-1988 which were duly advertised as provided by law. The agreements provided for disposition of the property of the company and such disposition of the property made after the commencement of the winding up proceedings is void under section 536(2) of the Companies Act unless the court otherwise orders and no such application for validation has been filed in the Company Court till this date; and
(c) thirdly, the agreements are entered into without there being proper authority for the same inasmuch as all material facts including the injunction and the undertaking were not disclosed to the shareholders in the extraordianry general meeting of Shri Ambica Mills Ltd. which was held to seek the sanction to these agreements on 30-3-1989. The notice calling the said meeting was in breach of the mandatory requirement of section 173(2) of the Act and, therefore, the consent obtained in the said meeting, as required under section 293(1)(a) of the Act was not a valid consent in the eyes of law.
32. Mr. Shah also submitted that assuming (for the sake of argument) without accepting that the agreement was in any way a valid one at its inception and became voidable at a later point of time, there are certain limits to the right to rescind it and one has to avoid the agreement at the earliest. In the present case, the facts were to the contrary. Mr. Shah submitted that right from the time the applicant was put in possession of unit No. 2, i.e., on 9-12-1989, it was in full control of the said unit and it continued to run it. Even after coming to know about the alleged deception in September, 1992 (as stated in their plaint) when they became aware of the injunction and the undertaking not only that they represented to the Hon’ble Supreme Court that the applicants were ready and willing to complete the conveyance but sought directions to the mill company to execute the conveyance. It was only when that attempt failed that the notice to rescind was given on 24-1-1995. Mr. Shah submitted that the applicant cannot approbate and reprobate at the same time. The applicant must have made good profits during this period. Otherwise, it would not have invested so much amounts to run the unit. It had, in fact, tampered with the property of unit No. 2 and as it averred in para 15 of the plaint, it had dismantled and removed old machinery, plant and equipment. If that was so, a party which had received advantage under the agreement which had become void (according to it) was bound to restore the advantage and to compensate for the dismantling and removal of machinery as required under section 65 of the Contract Act. Mr. Shah submitted that although a hue and cry was raised with respect to the expenses incurred by the applicant and compensation and damages were sought, in fact, there was no merit in any of the claims sought to be canvassed through the plaint. Mr. Shah lastly submitted that, in any case, a suit for compensation and damages against company in liquidation cannot lie. He submitted that the winding up court has to decide the liabilities as they existed at the commencement of the winding up and no new rights can thereafter be created nor can any incomplete rights be completed. Doing so would be contrary to the creditors’ rights.
33. To counter the above submissions of Mr. Shah and to advance his first contention that the agreement at its inception was a valid one, Mr. Nanavati and Mr. Chudgar submitted that the injunction granted by the Hon’ble Supreme Court was not a blanket one. He submitted that the applicant company was a bone fide purchaser and it should not be made to suffer inasmuch as it was deceived by Shri Ambica Mills Ltd. as stated in their application. The second submission is that assuming that there was any such injunction or undertaking, if one [were to] closely scrutinise the order passed by the Hon’ble Supreme Court, what was directed was that the company will not charge, encumber or alienate except with the leave of the Supreme Court any of their immovable assets. It was submitted that the company had entered into an ‘agreement for sale’ and ‘no outright sale’ was effected by effecting conveyance deed which could be done with the leave of the court. It was further submitted that this cannot be considered as encumbering the property. Mr. Chudgar relied upon the definition of the word ‘charge’ as appearing in the Transfer of Property Act, 1882, and submitted that ‘charge’ is an act ‘where immovable property is made security for the payment of money to another and the transaction does not amount to a mortgage’. As far as encumbrance is concerned, Mr. Chudgar relied upon the definition of this concept in various dictionaries including Concise Oxford Dictionary (Ninth Edition), Black’s Law Dictionary (Fifth Edition) and Random House Dictionary (unabridged Edition). The third submission of the applicant was that the agreement was not void but at the most voidable. Comparing the injunction granted by the Supreme Court with the restriction created under section 43(1) of the Bombay Tenancy and Agriculture Lands Act (prior to its amendment of 1997), Mr. Chudgar submitted that a subsequent sanction could be granted under that Act and similarly, in the present case as well. He relied upon two decisions of this court in 16 [1975] GLR 247 and 24 (2) [1983] GLR 1165 in this behalf. He has also relied on the judgment of the Supreme Court in the case of Nathulal v. Phoolchand AIR 1970 SC 546 to contend that when a statute prescribes a prior permission of an authority before sale, an agreement to transfer is not void but it must be deemed to be subject to implied condition that the transferor will obtain sanction of the authority concerned. The next submission of Mr. Chudgar in this behalf was that failure to mention the injunction and the undertaking in the explanatory statement would even otherwise also not make the resolution passed under section 293(1)(a) bad. He submits that, at the most, the agreement could be said to be a voidable one but not void ab initio. He further submitted that the applicant has put in a good amount of money and they have also taken efforts to run the enterprise for a substantial peirod. However, having failed in that, the applicant had rescinded the agreement and they were entitled to compensation and damages. Mr. Chudgar also submitted that violation of the injunction may at the highest invite penal consequences against the vendor. Mr. Chudgar relied upon various judgments in support reported in Lal Chand v. Sohan Lal AIR 1938 Lah 220; Dharmchand v. Mitsui Bussan Kaisha & Co. AIR 1920 Nag 12, Pranakrushna v. Umakanta Panda AIR 1989 Ori 148 ; Dalbara Singh v. Chhaja Singh AIR 1992 (Punj & Har.) 237; Adapa Vittal v. Govula Ramakistiah AIR 1969 AP 167; Kusuma Dei v. Malati AIR 1969 Ori 195 in that behalf. The fourth submission of Mr. Chudgar was that the agreement cannot by any stretch of imagination be said to be opposed to public policy or prohibited by any law. He also relied upon the judgment of the Supreme Court in Gherulal Parakh v. Mahadeodas Maiya AIR 1959 SC 781 and Kedar Nath Motani v. Prahlad Rai AIR 1960 SC 213 in this behalf.
34. As against the aforesaid submission of Mr. Nanavati and Mr. Chudgar, Mr. Shah submitted that the applicant’s submission that the applicant company was a bona fide and innocent purchaser and it suffered in the transaction was itself a very doubtful one. He pointed out that the applicant company took possession of unit No. 2 on 9-12-1989 and although it was only an agreement to sell (not a full conveyance) on the basis of which the applicant was put in possession, all acts of ownership were permitted and were, in fact, done. It cannot be said by any stretch of imagination that the applicant ran the enterprise for nearly five years from 9-12-1989 to 24-10-1994 when the unit was closed down, as stated by them for disconnection of power supply. During this period, if the applicant had installed machinery and brought about any innovations, it was a part of the business risk that it was taking. In clause 11 of the agreement, it was specifically stated that after the payment of gratuity to the workmen as provided therein and after the purchaser is put into possession,—
“the purchaser shall be entitled to exercise all rights of ownership in respect of the said properties and rights, etc., notwithstanding that the sale deed has not been made and executed and the documentation in respect of transfer of all the properties, rights etc. or some of them have not taken place until then, the purchaser company shall not be bound to part with the possession of the same for any reason and under any circumstances whatsoever.”
The applicant was entitled to all the profits thereafter which it must have earned. Mr. Shah submitted that, if one correlates various averments in the plaint with the provisions of the agreement, no averments can also be noted with respect to all the parts of the responsiblities under the agreement having been performed by the applicant. It is, undoubtedly, true that the applicant was put in possession on 9-12-1989 which is what is accepted by the applicant. But as far as the payment to be made by the applicant towards the liabilities of the company or to the workmen (were concerned), there were averments made in the plaint only with respect to some of the items which could be correlated to the provisions of the agreement. Thus, for example, an amount of Rs. 5 lakhs is claimed to have been paid to ICICI against the liability of Rs. 18.75 laksh. Then, there is a claim with respect to wages, some payment towards leave encashment, ESI contribution and grantuity as also some payment to Union Bank of India. There is, however, no clear averment that the entire amount of Rs. 6.2 crores was in any particular manner cleared/paid to the creditors of the company in liquidation or to the employees nor are any documents produced in support thereof along with the plaint. Mr. Chudgar submits that it is a matter of evidence and it will be produced in the court when the trial begins. Surely, when a submission is being made that the applicant has fully acted in accordance with the obligations under the agreement, the necessary documents ought to have been produced along with the plaint. In any case, as of now, all that we have are some averments having some correlation with respect to some of the liabilities under the agreement. In the circumstances, it is not possible for this court to infer that the applicant has discharged all its obligations under the agreement. Mr. Chudgar sought to suggest that some of the liabilities of the workmen even for the period prior to 1989 were cleared by the applicant. Mr. Shah, on the other hand, points out that there is no clear assertion in this behalf but, even so, if that be the case, the applicant is at liberty to lodge the claim witht the official liquidator if they deem it fit. For the time being, on merits, it is difficult to say that the applicant has made out a case that it has acted fully in accordance with the agreements performing all its obligations.
35. With respect to the submission of Mr. Chudgar that the agreement was a valid one at its inception and had subsequently become voidable at the most and not void, Mr. Shah submitted that the same was not tenable also for two main reasons : firstly, as stated above, the agreement was entered in flagrant violation of the order of injunction granted by the Supreme Court and the solemn undertaking given to the apex court. It is very material to note that the same Mr. Prahaladbhai S. Brahmbhatt who has given the undertaking to the Hon’ble Supreme Court has singed the explanatory statement under section 173(2) of the Act which is totally silent about the order of the Supreme Court as also the undertaking given to it. It is also very relevant to note that Mr. Brahmbhatt has signed the explanatory statement by the order of the Board of Directors. If that was so, all the members of the Board were also responsible for this violation of the order and the undertaking given to the Supreme Court. The very same Mr. Brahmbhatt has signed the requisite Form No. 23 and the forwarding letter sending the form with the resolution to the Registrar of Companies. Mr. Chudgar sought to contend that what was prevented under the order of the Supreme Court was creation of a charge or encumbrance or alienation except with the leave of the court. It is perhaps possible to contend that the agreement entered into did not amount to a ‘charge’ because, admittedly, it was an agreement for sale and it is also posible to contend that an ‘alienation’ has not taken place inasmuch as the conveyance was yet to be executed. However, in my view, apart from the fact that the entire order (including these restrictions) has to be read together; the first part of the Supreme Court order also includes a restraint on encumbrance. The definitions of encumbrance referred to and relied upon by Mr. Chudgar clearly include an element of creating a burden on the property. By no stretch of imagination can it be said that this agreement for sale did not create a burden or an encumbrance on the property concerned.
36. However, that is not the only part of the restrictions. The other part of the direction of the Supreme Court was that the property will be made available for discharging the respective liabilities on account of the difference of price of all the gas supplied and further, during the pendency of the appeals as permitted by orders made by the court while disposing of the appeals. Again, if we look to the order of the Hon’ble Supreme Court, what was submitted to the court and what was contemplated was that the mill company will be run by the then management. If any alienation of the property to any third party was contemplated or was to be permitted, firstly, the court could have said that. Thus, on the one hand what was submitted to the court was that in the interest of the large work-force, ONGC ought to be directed to make available gas on the concessional rate and the establishment will be run by very management. On the other hand, if we look to the entire agreement, it is clear that from the date on which the possession was handed over to the applicant herein, all the liabilities were passed on to them. If one looks to the various clauses of this agreement, it is clear as if the date of putting the applicant into possession was like a ‘cut off’ date, and from that date all the liabilities go over to the purchasing party. It is stated in the application that possession was handed over in December, 1989. Thus, it is apparent that though the document is styled as an agreement to sell, it is almost in the nature of a conveyance. It is, therefore, easy to say that the agreement has not caused any alienation. But, that is only on paper and not in reality and, in any case, it definitely creates an encumbrance or burden on the property. Moreover, the second part of the restrictions imposed by the Hon’ble Supreme Court are also clearly flouted inasmuch as the property is no longer kept free and available for discharging the liabilities which would flow subsequently to ONGC. The applicant must show that the consideration and objects of the agreement are lawful and the same are not forbidden by law including a court order. They have failed in the same.
37. Thus, as discussed above, in the facts of the present case, the agreements have been entered into in flagrant violence [violation ?] of the injunction granted by the Hon’ble Supreme Court and in complete breach of the provisions of the Companies Act. In view of the above discussion, the various authorities cited by Mr. Chudgar, firstly, relying upon the provisions of the Bombay Tenancy and Agricultural Lands Act and, secondly, to contend that the present agreement is at the most voidable, can be of no avdil. Besides, in the two cases concerning section 43(1) of the Bombay Tenancy and Agricultural Lands Act, the learned Single Judges were concerned with the interpretation of the particular section. In the present case, we are not concerned with the interpretation of any statute but with the order passed by the Supreme Court and this is also on the background that when the Supreme Court has in three different occasions passed clear and consistent orders. In the two cases under the Bombay Tenancy and Agricultural Lands Act, the question was as to whether sale can be entered into before obtaining sanction of the collector and whether possession of the person on the basis of an agreement without prior sanction is illegal. These questions arose concerning interpretation of this specific section 43(1) of the Act in the facts of those cases. As stated above, in the present case, we are not concerned with any statutory interpretation. What is sought to be canvassed is that in spite of the injunction initially granted by the Hon’ble Supreme Court, the agreement entered into in violation thereof is not a void one, but a voidable one and the company should be directed to act in accordance therewith. What is sought to be done is to interpret the order of the Supreme Court in a convenient way. As stated above, we are not concerned with statutory interpretation herein. We are concerned with the successive orders in the facts of this very case which are very clear and which leave no room for any such interpretation as is sought to be canvassed. For the same reason, there can be no quarrel with the proposition in the judgment of the Hon’ble Supreme Court in the case of Nathulal (supra) wherein also, the court was concerned with the interpretation of section 70(8) of the Madhya Bharat Land Revenue Act and wherein the Hon’ble Supreme Court held that permission of the authority concerned can be obtained subsequently. Here, in the facts of the present case, when the Supreme Court passed injunction earlier and subseqently rejected the request of seeking/permitting transfer of assets, the concerned order decided the controversy finally between the parties and they cannot be permitted to reagitate the issue once again.
38. Similar is the position with respect to the other authorities with respect to voidability cited by Mr. Chudgar. These authorities are sought to be relied upon with respect to breach of injunction of the court’s order and the effect thereof. In Lal Chand’s case (supra), a completed sale in contravention of injuction was held not to be a nullity in the facts of that case. In Dharamchand’s case (supra) a sale in ignorance of the order of injunction was held only to be irregular in the facts of that case. Similarly, in the case of Pranakrushna’s case (supra) a sale in ingnorance of the order of temporary injunction was held to be voidable. In Dalbara Singh’s case (supra) in the facts of that case, the Punjab & Haryana High Court took the view that sale in breach of an inunction was not rendered nullity but the vendor was only liable for penal consequences. in Kusuma Dei’s case (supra) in the facts of that case, sale of property during injunction period was held not to be nullity. What is relevant to note is that all these authorities are concerning concluded sales. In the present case, admittedly, conveyance is not effected. In the facts of the present case, that course of action is not available also for the reason that the application of the applicant seeking/permitting alienation of the property was rejected by the Hon’ble Supreme Court when it rejected interlocutory application (number not provided by the applicant) in Civil Appeal No. 8530-40 of 1983. The facts of Andhra Pradesh judgment in the case of Adapa Vittal’s case (supra) are quite different. In that case, on facts, the court held that there was no breach of injunction and hence that authority has otherwise also no application to the facts of the present case.
39. The agreement will also have to be considered as opposed to public policy inasmuch as no such agreement can be permitted which is contrary to and violative of the injuction and the undertaking given to the court, much less the Hon’ble Supreme Court of India. The two judgments cited by Mr. Chudgar concerning public policy do not help him. In Gherulal Parakh’s case (supra) the Supreme Court was concerned with wagering contract. The Hon’ble Supreme Court held that though wager was void, it was not forbidden by law and in that context, the Supreme Court observed as under :
“There is no definite head or principle of public policy evolved by courts or laid down by precedents which would directly apply to wagering contracts. Even if it is permissible for courts to evolve a new head of public policy under extraordingary circumstances giving rise to incontestable harm to the society, wager is not one of such instances of exceptional gravity, for it has been recognised for centuries and has been tolerated by the public and the State alike”. In Kedar Nath Motani v. Prahlad Rai reported in AIR 1960 SC 213, the Hon’ble Supreme Court observed that it is necessary to see as to whether there was a conspiracy to defraud third parties and whether the illegality goes to the root of the matter. One does not know how this authority in any way helps the applicant. The Hon’ble Supreme Court in this matter observed :
“A strict view, of course, must be taken of the plaintiff’s conduct, and he should not be allowed to circumvent the illegality by resorting to some subterfuge or by mis-stating the facts.”
In the facts of the present case, the aforesaid observations will, in fact, apply with full force against the applicant and the attempt to enforce the agreement in violation of court’s injunction and statutory provisions will have to be held as opposed to public policy.
40. Then, there is another aspect of the matter, as to whether the consideration or the object of the agreement is of such a nature that, if permitted, it would defeat any specific stautory provision. Section 293(1)(a) reads as under :
“293. Restrictions on powers of Board - (1) The Board of Directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting,—
(a) sell, lease or otherwise dispose of the whole, or substantially the whole of the undertaking of the company, or where the company owns more than one undertaking, of the whole or substantially the whole, of any such undertaking”.
Section 173 reads as under :
“173. Explanatory statement to be annexed to notice - (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 bsuiness 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, and the manager, if any;
Provided that where any item of special business as aforesaid to be transacted at a meeting of the company relates to, or affects, any other company, the extent of shareholding interest in that other company of every director and the manager, if any, of the first mentioned company shall also be set out in the statement if the extent of such shareholding interest is not less than twenty per cent of the paid-up share capital of that other company.
(3) Where any item of business consists of the according of approval to any document by the meeting, the time and place where the document can be inspected shall be specified in the statement aforesaid.”
Section 293(1)(a) requires a company not to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company except with the consent of the public company in its general meeting. That consent is to be obtained after informing the shareholders accordingly in the meeting to be held for that purpose. Any such business would be a special business under section 173(1)(b) and where such a business is to be transacted, it is mandatory that a statement setting out the material facts concerning each such item of business (including any opportunity, nature of the concern or interest, if any therein, of any director and the manager, if any) is to be annexed to the notice of the meeting. That is the requirement of section 173(2). As seen above, although a meeting was called, the shareholders were completely kept in the dark of the order passed by the Supreme Court restraining any such disposition of property and requiring that the property should be kept intact and available for clearing the dues of ONGC.
41. As far s the requirements of sections 173 and 293(1)(a) are concerned, they have long been held to be mandatory in Sheth Mohanlal, Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. Ltd. [1964] 34 Comp. Cas. 777 (Guj.) Hon’ble Justice Bhagwati (as he then was in this court) dealt with an almost identical contract and after considering the submissions made by rival parties held as follows :
“It is, therefore, clear that regard must be had to the whole scope and purpose of the statute for the purpose of determining whether the statute is mandatory or directory. Judged by that test, the conclusion is irresistible that section 173 enacts a provision which is mandatory and not directory. The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in section 173, I am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to nullification of the action taken. If, therefore, there was any contravention of the provisions of section 173, the meeting of the company held on 5 September, 1961, would be invalid and so also would be the resolution passed at the meeting be invalid”; (p. 841)
The above observations were also quoted with approval by Madon, J. (when he was in Bombay High Court) in Firestone Tyre & Rubber Co. v. Synthetics & Chemcials Ltd. [1971] 41 Comp. Cas. 377 (Bom.). That was in the context of the shareholders not being made aware that a particular director had an interest or concern in the contract of appointment of a private company for further term. The company had not placed that fact at any time before the shareholders. The learned Judge held the provision of section 173(2) to be mandatory one. Earlier, of the said report, the learned Judge observed—
“The object underlying section 173(2) is that the shareholders may have before them all facts which are material to enable them to form a judgment on the business before them. Any fact which would influence them in making up their mind one way or the other would be a material fact under section 173(2). . .” (p. 435)
This view regarding mandatory nature of section 173(2) has also been taken by the Division Bench of the Calcutta High Court in Shalagram Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706, which was a case of a resolution to approve under section 294 the appointment of a sole selling agency. In that case, Mitter, J., observed :
“As the Legislature has thought it fit, to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to given their sanction. . . .” (p. 740)
The same view has been reiterated recently by a Single Judge of Madras High Court in the case of V.G. Balasundaram v. New Theatres Carnatic Talkies (P.) Ltd. [1993] 77 Comp. Cas. 324 the learned Judge has observed as follows :
“Section 173 of the Act deals with the explanatory statement to be annexed to the notice. The appointment of directors can be under two circumstances : (a) directors retiring by rotation or being reappointed. In that case, no explanatory statement is required. The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the concern or interest of the management in any item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all the material facts and apprised of the interest of the management in any particular action being taken”. (p. 349)
It is relevant to note that the learned Judge has followed the law laid down by the Single Judge of this Court in the earlier mentioned judgment and concurred with it in its entirety. Thus, when a resolution is passed without disclosing material facts in the explantory statement in flagrant violation of the requirement of section 173, it cannot be said to be anything but a void resolution and an agreement on the strength of a void resolution, if permitted, would defeat the provisions of law. As observed in Sheth Mohanlal Ganpatram’s case (supra) such a resolution would be invalid and the meeting would also be invalid and thus the entire action based on that would be void. The learned Judge of the Madras High Court has called such a meeting as virtually an ‘ex parte meeting’.
42. With respect to the submission that the agreement is void because it is forbidden by law and law includes orders passed by a competent court, Mr. Shah relied on a judgment of the Full Bench of the Allahabad High Court in the case of Abdul Hameed v. Mohd. Ishaq AIR 1975 All. 166 wherein the court held :
“On the application of the principles contained in the definitions in section 3(29), General Clauses Act, 1898, and Article 13(3) read with Article 366 (10) of the Constitution of India, it can safely be laid down that the term `law’ includes an order by a competent authority having the force of law. Consequently, where any agreement is forbidden by an order of the competent authority having the force of law, it shall be an agreement forbidden by law as contemplated by section 23 of the Contract Act.”
Such an agreement is one where the object or consideration is forbidden by law or is of such nature that if permitted, it would defeat the provisions of any law or is opposed to public policy. The said agreement in respect of disposing of the immovable assets of the company was forbidden by an injunction of the Hon’ble Supreme Court, dated 15-4-1987 and if such an agreement is permitted, it would be opposed to public policy inasmuch as it would encourage defeating and violating injunction and mandatory orders of the highest court of the land and will also encourage violating solemn undertaking given to the highest court of the land. Such an agreement is void under section 23, read with section 24 of the Indian Contract Act, 1872. Section 23 of the Contract Act reads as under :
“23. What considerations and objects are lawful and what not.—The consideration or object of an agreement is lawful, unless—
- it is forbidden by law; or
- is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent; or
- involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy.
- In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.”
Section 24 of the Contract Act reads as under :
“24. Agreements void, if considerations and objects unlawful in part - If any part of a single consideration for one or more objects, or any one or any part of any one of serveral considerations for a single object, is unlawful, the agreement is void.”
43. Mr. Shah submitted that the agreement, dated 2-11-1989, was void also on account of the provisions of section 536(2), read with section 441(2) of the Act. Section 536(2) reads as under :
“(2) In the case of a winding up by or subject to the supervision of the court, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise orders, be void”.
Section 441 of the Act reads as under :
“441. Commencement of winding up by court - (1) Where, before the presentation ofa petition for the winding up of a company by the court, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and unless the court, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.
(2) In any other case, the winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for the winding up.”
This Hon’ble court (Coram : S.D. Pandit, J.) by its order, dated 17-1-1997, passed in various company petitions including company petition No. 66 of 1988 directed the company to be wound up. The company petition No. 66 of 1988 was filed on 12-4-1988. Thus, the winding up is deemed to have commenced on 12-4-1988 under the provisions of section 441(2) of the Act. This court (Coram : H.L. Gokhale, J.) by its judgment and order, dated 26-11-1998, passed mainly in company applications Nos. 99 of 1998 and 524 of 1997 also held that the winding up of the company commenced on 12-4-1988. The disposition sought to be made of the undertaking of the company pursuant to the agreement, dated 2-11-1989, being subsequent to the commencement of the winding up is void under section 536 of the Act and no leave has been sought as contemplated under section 536(2) till this date.
44. In view of what is stated above, the agreement, dated 2-11-1989, is void ab initio and no rights can flow from such an agreement. The Civil Suit No. 4780 of 1995 is filed for claiming damages for alleged breach of contract by the company entered through the Board of Directors. However, the alleged contract being not a contract at all but being merely a void agreement (a contract is an agreement enforceable at law and an agreement which is not enforceable at law remains merely an unenforceable void agreement not acquiring the status of a contract), no rights flow from such a void agreement and no suit for damages can be filed and if filed, can be ever permitted to be proceeded with.
45. Mr. Shah then submitted that, assuming without admitting that the said agreement, dated 2-11-1989 had become voidable or that the applicant was defrauded by the company, no fresh suit for ‘damages or compensation for breach of the contract’ can be filed after passing of the winding up order and if the same is pending on the date of passing of the winding up order, nor can the same be permitted to be proceeded further under section 446. Mr. Shah submitted that a suit for damages is not like a suit for unpaid price of goods sold or a similar suit. In a suit for damages, the court has to examine whether there is any breach of contract, whether on account of such breach of contract the plaintiff has suffered any actual damage and has to assess actual damage and only when a decree for damages is passed, the debt comes into existence. When a company is being wound up, its assets and liabilities have to be frozen as on the date of the winding up order and assets have to be realised by the liquidator and distributed amongst various creditors and employees as on the date of the winding up order and as per the scheme of distribution prescribed under the Act. No new rights or debts can be created after the date of winding up order and no incomplete rights can be permitted to be completed after the date of winding up order. The status of the creditors of the company which can be recognised is that which existed on the date of the winding up. In the present case, on the date of the winding up order, the applicant was not a creditor of the company. If at all, it can be a creditor of the company in respect of damages for alleged breach of contract, it can become a creditor only when a decree for damages is passed. At present there is no decree for damages and any decree for damages that may be passed after the date of winding up order is not permissible since it would amount to creating new rights or completing incomplete rights and the same is not permissible under the scheme of the Act relating to winding up. The present claim being admittedly for damages and compensation for alleged breach of contract and not for any debt existing on the date of winding up order, the same is not maintainable and cannot be permitted to be proceeded with further. The submission of Mr. Shah is well-taken. A claim for damages or breach of contract is not a claim for an ascertained amount or for amounts presently due and payable. With respect to the nature of a suit for damages, way back in the case of Iron & Hardware India Co. v. Shamlal & Bros. AIR 1954 Bom. 423 Chagla, C.J., stated the law on this issue as follows :
“In my opinion it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party.
As already stated, the only right which he has is the right to go to a court of law and recover damages. Now, damages are the compensation which a court of law gives to a party for the injury which he has sustained. But, and this is most imprtant to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the court. Therefore, no pecuniary liability arises till be court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the court is doing is ascertaining a pecuniary liability which already existed. The court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination, there is no liability at all upon the defendant.”
The Hon’ble Supreme Court in the case of Union of India v. Rama Iron Foundry AIR 1974 SC 1265 quoted these observations with approval and added on page 1273 ( of AIR) :
“This statement in our view represents the correct legal position and has our full concurrence. A claim for damages for breach of contract is, therefore, not a claim for a sum presently due and payable.”
46. Again, in the context of winding up order in J.K. (Bombay) (P.) Ltd. v. New Kaiser-i-Hind Spg. & Wvg. Co. Ltd. [1970] 40 Comp. Cas. 689, the Hon’ble Supreme Court held :
“The effect of a winding-up order is that except for certain preferential payments provided in the Act the property of the company is to be applied in satisfaction of the liabilities pari passu. Pari passu distribution is to be made in satisifaction of the liabilities as they exist at the commencement of the winding-up (section 528 and 529 of the Act; Ghosh on Indian Company Law 11th Ed. Vol. 2, page 1073). The effect of a winding-up order on rights already completed as aganst rights yet to be completed is succinctly stated by Lord Halsbury In Bank of Scotland v. Macleod [1914] AC 311 : as follows :
‘Rights in security which have been effectually completed before the liquidation must still receive the effect which the law gives to them. But the company and his liquidators are just as completely disabled by the winding-up from granting new or completing imperfect rights in security as the individual bankrupt is by his bankruptcy. . .” (p. 713).
The Hon’ble Supreme Court later observed in the same judgment :
“It is thus well established that once a winding-up order is passed under-taking and the assets of the company pass under the control of the liquidator whose statuory duty is to realise them and to pay from out of the sale proceeds its creditors. Such creditors acquire on such order being passed the right to have the assets realised and distributed among them pari passu. No new rights can thereafter be created and no uncompleted rights can be completed, for doing so would be contrary to the creditors’ right to have the proceeds of the assets distributed among them pari passu. . . .” (p. 714).
47. Thus, the position is clear that once a winding up order is made, no permission can be granted under section 446 which has the effect of creating new rights or to completing of incomplete rights. That is what is precisely sought to be done in the proposed suit. The proposed suit is not for any crystallised or ascertained amounts. In para 58 of the plaint (which is quoted above) it is very clearly stated that the plaintiff has been unable to ascertain the amount of compensation recoverable as claimed by them. It is clearly a claim for an unascertained amount. Such a suit for an incomplete right cannot be permitted to be proceeded.
48. The next submission of Mr. Shah was that, when a person at whose option a contract was sought to be avoided wants to rescind it, he must restore the benefits received by him under the contract to the person from whom it was received. That is also the mandate of section 65 of the Contract Act. Mr. Shah submitted that if the party seeking rescission of a voidable contract is not in a position to restore the former state of things, it cannot be permitted to rescind the contract. The submission of Mr. Shah is well taken. One cannot approbate as well as reprobate at the same time. In the present case, the applicant was put in possession of the unit No. 2 way back in December, 1989. The applicant used and enjoyed the entire unit No. 2 for almost seven years; during the said period it demolished and disposed of several machines and caused depreciation in the value of the machines, etc. The applicant while rescinding the contract cannot return to the company the benefits that it received under the said contract during these seven years. Under such circumstances, rescission is not permitted and the alleged rescission of the contract by the applicant on 25-1-1995 is illegal and no rights flow from such rescission and a suit based on such rescission is per se not maintainable.
49. Mr. Shah them submitted that assuming that the agreement had become voidable, one has to avoid it at the earliest and in any case within a reasonable time after coming to know of the fact that some deception had been practised upon it and that it was necessary to avoid it. According to the applicant (as stated in the plaint of civil suit No. 4780 of 1995), it was defrauded and deceived by the company to enter into the agreement dated 2-11-1989 inasmuch as the company had not disclosed to it the existence of the Hon’ble Supreme Court’s injunction as also of the undertaking given by the company to the Hon’ble Supreme Court and, consequently, according to the applicant, the agreement was voidable; that it came to know of the said injunction and the said undertaking only in September, 1992 (when the Annual Report of 1991-92 became available) and that after making various efforts before the BIFR and the Hon’ble Supreme Court to get the conveyance executed and the said efforts having failed, it rescinded the ‘contract’ on 25-1-1995. Mr. Shah pointed out that after it became aware of the alleged fraud and misrepresentation, the applicant made an application on 15-3-1993 to the BIFR to be permitted to participate in the proceedings; the company made ( to the knowledge of the present applicant) an application in July 1993 to the Hon’ble Supreme Court seeking its permission to execute the conveyance and the said application was rejected by the Hon’ble Supreme Court by its order, dated 10-8-1993 (para 34 of the plaint). Another application was made by the company (again to the knowledge of the present applicant) to the Hon’ble Supreme Court in January, 1994, but the same was also rejected by the Hon’ble Supreme Court (para 36 of the plaint). The applicant itself also made an application to the Hon’ble Supreme Court in May, 1994, for permission to transfer unit No. 2 to the applicant. The said application was also rejected by the Hon’ble Supreme Court by its order, dated 9-1-1995 (para 37 of the plaint) (No copy of the application of the Hon’ble Supreme Court’s order is produced by the applicant). Mr. Shah submitted that when three applications (including the one made by the present applicant itself) were made, the present applicant was aware of the alleged misrepresentation and fraud; however, instead of exercising its option to avoid the contract it affirmed the said agreement by its conduct inasmuch as permission of the Hon’ble Supreme Court was sought to execute the conveyance pursuant to the said agreement. No application for permission to execute the conveyance could have been made unless the validity of the agreement, dated 2-11-1989, was affirmed (and not avoided) by the present applicant. The present applicant having thus affirmed and approbate the agreement cannot be permitted to later on reprobate the contract or avoid it.
50. In may view, this submission of Mr. Shah deserves to be accepted also for the reason that certain limits to the rights to rescind have come to be accepted in the field of law of contract. Anson in his Principles of English Law of Contract has observed in this behalf as follows :
“The remedy of rescission is common to all classes of operative misrepresentation. When a person has been induced to enter into a contract by a misrepresentation of any description, the effect on the contract is not to make it void, but to give the party misled an option, either to avoid it, or, alternatively, to affirm it. If the party misled elects to avoid the contract, he may take steps to have it set aside by the courts; or he may resist an action for specific performance, or for damages, brought against him in respect of the contract. But this option to affirm or avoid will be lost in certain events, the law having laid down certain limits to the right to rescind. First, if after becoming aware of the misrepresentation he affirms the contract either by express words or by an act which shows an intention to affirm it, rescission cannot be obtained. So, for example, if a person who has purchased shares on the faith of a misrepresentation subsequently becomes aware of its falsity, but neglects to remove his name from the register of shareholders, or accepts dividends paid to him, he will not be permitted to avoid the contract.”
51. The substance of the suit and the present application is that had the company performed its agreement/s and executed the conveyance, the applicant would not have any claim against the company. Thus, in effect, almost the entire claim of the applicant is based on or arising out of the alleged non-performance of the agreement/s. The claims of the applicant are in the nature of compensation or damages for the alleged breach of contract or arising from avoidance of a contract which is alleged to be voidable. As observed earlier herein, the agreements were void ab initio and no rights can flow from them. A suit which is mainly for compensation or damages against a company in liquidation will create, if at all, a liability only when a decree is passed which will obviously be subsequent to the date of passing of the winding up order. As observed earlier, after the passing of a winding up order no new rights can thereafter be created and no incomplete rights can be completed. Permitting the applicant to proceed with such a suit which has no substance at all and is based on patently void agreements would expose the company in liquidation to unnecessary litigation and unnecessary costs. Such a course cannot be permitted under section 446.
52. With respect to the submission of Mr. Nanavati that the applicant is required to face the suit filed by Shri Ambica Mills Ltd. wherein the prayers have been made to the effect that the applicant be directed to continue to run the unit No. 2, Mr. Shah on instructions of the official liquidator has made a statement that the said suit has become infructuous and now there is no occasion of the unit being conducted by afflux of the event. The official liquidator will not, therefore, proceed with that suit any further and withdraw it. This statement obviates the submission of Mr. Nanavati in that behalf. Even with respect to the submission of Mr. Nanavati that there were other defendants in the suit No. 4780 of 1995, which was sought to be proceeded by the applicant, Mr. Shah submitted that the official liquidator had no objection to the applicant proceeding with that suit against other defendants so long as no prayer is pressed against the comany in liquidation and the suit is restricted only with respect to the averments and prayers vis-a-vis other defendants. Mr. Nanavati was naturally not inclined to accept this offer. Mr. Shah also submitted that the applicant may proceed against the former directors of Shri Ambica Mills Ltd. (now in liquidation) if according to the applicant they practised any deception as a result of which the applicant had suffered. If the applicant has any claim in respect of its properties alleged to have been left at the company’s premises (it is not the case of the applicant that it ever demanded from the company and the company ever refused it to take away its properties), it can lodge its claim for the same with the liquidator who will decide the same in accordance with law. However, for such a claim, a suit involving avoidable and unnecessary costs cannot be permitted.
53. In view of what is stated above, in my view, leave as sought for cannot be granted.
54. Mr. Vasavada appearing for the Textile Labour Assoication representing the workmen also supported Mr. Shah’s submissions.
55. For the reasons stated
above, Prayer (B) for continuation with Civil Suit No. 4780 of 1995 pending in
the city civil court at Ahmendabad instituted by the applicant company against
Shri Ambica Mills Ltd. or for transferring that suit to this court for further
proceeding therewith is rejected. Consequnelty, there is no occasion to join
the official liquidator as a party respondent in that suit which is the prayer
in prayer clause (A). Accordingly, this company application is dismissed.
[1995] 83 COMP.
CAS. 150 (MAD.)
HIGH COURT OF MADRAS
v.
Purasawalkam
Permanent Fund Ltd.
Ar
Lakshmanan, J.
O.A.
No. 708 of 1994, Application No. 5055 of 1994
And
C.S. No. 919 of 1994
FEBRUARY
16, 1995
JUDGMENT
AR. LAKSHMANAN,
J. - The applicants in O. A.
No. 708 of 1994 are the plaintiffs in the suit. The prayer in the suit is as
follows :
(a) For a declaration that
the notice dated June 29, 1994, issued by the first respondent for the proposed
annual general body meeting of the first respondent to be held on August 4,
1994, in so far as it relates to items Nos. 7 and 8 of the said notice is
illegal and void.
(b) For permanent
injunction restraining the respondents in any manner considering the said
subjects, viz., items Nos. 7 and 8 of the notice dated June 29, 1994, issued
for the proposed annual general body meeting of the first respondent to be held
on August 4, 1994, or on any other day.
The first
respondent is a company and is also a nidhi. The second respondent is a person
who was proposed for election as a director of the first respondent in the
annual general body meeting to be fixed on August 4, 1994. Items Nos. 7 and 8
in the notice have been proposed as "special business".
Along with
the suit, the applicants have filed O. A. No. 708 of 1994, for the grant of
interim injunction restraining the respondents in any manner considering the
subjects, viz., items Nos. 7 and 8 of the notice dated June 29, 1994, issued by
the first respondent. On August 3, 1994, the injunction application was moved
before me. The first respondent's counsel took notice and submitted that the
meeting as proposed could go on including the special business, viz., items
Nos. 7 and 8 of the agenda but the first respondent would not give effect to
the same until further orders if carried on in the said annual general meeting.
On the same day, I passed an order. Instead of granting injunction, I allowed
the first respondent to proceed with the annual general meeting with the agenda
already printed and circulated to all the shareholders. I made it clear that
any decision taken regarding items Nos. 7 and 8, if carried on, will not be
given effect to until further orders of this court. I also permitted all the
applicants to attend the annual general meeting and participate in the
discussions. The first respondent has now filed application No. 5055 of 1994,
for vacating the order passed on August 3, 1994, in O. A. No. 708 of 1994. In
support of the said application, the first respondent relied upon the
counter-affidavit filed in O. A. No. 708 of 1994. The first respondent
contended that the two subjects, viz., items Nos. 7 and 8, were passed with
huge majority in the annual general meeting held on August 4, 1994.
The first
respondent was incorporated in the year 1922. It is a nidhi which could have
transactions only with its members. According to the applicants, on August 7,
1988, a director by name Giripal Mudaliar died and the second respondent N. G.
Manavalan, who is the son of the said Giripal Mudaliar, was appointed by the
board of directors of the first respondent as a director on August 11, 1988, in
the casual vacancy caused by the death of Giripal Mudaliar. The second
respondent could hold office only up to the period to which Giripal Mudaliar
would have held the office of director. In the annual general meeting held on
September 4, 1990, the second respondent was treated as a retiring director and
he was re-elected. There was no nomination for his election as a director of
the first respondent and a sum of Rs. 500 was not paid under the provisions of
section 257 of the Companies Act, 1956.
It is
contended that one Gopalratnam, a director of the first respondent, resigned
his post and in his place Mohanakrishnan was appointed in the casual vacancy.
In the annual general meeting for 1990-91, he was proposed as a retiring
director and controversy arose on that account. Subsequently, before the
meeting could take place, the first respondent refused to treat him as a
retiring director and controversy arose on that account. The first respondent
sought legal opinion and its counsel gave an opinion on September 5, 1991,
stating that since Mohanakrishnan was only appointed in the casual vacancy, he
could not be treated as a retiring director, and since he did not comply with
the provisions of section 257 of the Companies Act, his candidature was
invalid. It appears that he was intimated by the first respondent by letter
dated September 7, 1991, about the rejection of his candidature as a director seeking
re-election.
On September
9, 1991, the said Mohanakrishnan wrote to the first respondent stating that the
contention of the first respondent was wrong. He also accused the first
respondent of negligence in not verifying the provisions of section 257 of the
Companies Act before announcing his candidature. He had further stated that he
was entitled to seek re-election and in support of this contention he mentioned
that on an earlier occasion when a director was co-opted in a casual vacancy,
the said person was not called upon to remit the sum of Rs. 500. Mohanakrishnan
also tendered a demand draft for Rs. 500. The first respondent by its letter
dated September 10, 1991, rejected the contention of Mohanakrishnan and
returned the draft sent by him, as, according to the first respondent, the
tender was in violation of the provisions of the Companies Act. It also appears
that the said Mohanakrishnan did not pursue the matter further.
In the annual
general meeting held on June 21, 1993, the second respondent was treated as a
retiring director and he was said of have been re-elected. By letter dated
December 30, 1993, the first applicant enquired whether the second respondent
had remitted a sum of Rs. 500 when he sought election and mentioned that if he
had not deposited the amount towards his appointment, which took place on
September 4, 1990, his appointment would be invalid and is in violation of
section 257 of the Companies Act. According to the applicants, the first
respondent did not reply to the said letter. The first applicant again wrote a
letter on February 9, 1994, stating that even after 45 days, there was no reply
to his letter. The first respondent by its letter dated February 24, 1994,
mentioned that the second respondent did not deposit the sum of Rs. 500 and
that he had not complied with the provisions of section 257 of the Companies
Act at the annual general meeting held on September 4, 1990, and that the first
respondent had obtained legal advice and due to the same, the second respondent
resigned his post as a director, but in view of his services, the other
directors of the first respondent had co-opted him as an additional. director.
In reply to
the said letter, the first applicant wrote a letter stating that there was
suppression of vital facts from the shareholders and also informed the first
respondent that there was no power vested in the board of directors of the
first respondent to appoint the second respondent as an additional director.
The first applicant also stated that the first respondent had no power to waive
any amount of remuneration, sitting fees and other payments to a person who
held the office of a director illegally, and called upon the first respondent
to take corrective action. This was followed by letters dated March 15, 1994,
and April 24, 1994, but the first respondent did not take any action. On this
background, the notice dated June 29, 1994, was issued in which item No. 7
related to the election of the second respondent as a director, and item No. 8
to waive the remuneration paid to the second respondent of a sum of Rs. 97,320
paid between September 4, 1990, and February 23, 1994, was sought. Since these
two resolutions were under the category of "special business" an
explanatory statement was annexed to the said notice.
The first
respondent filed a counter-affidavit through its secretary. The following are
its contentions :
(a) The suit is not
maintainable. The suit is not filed in a representative capacity and there is
no individual wrong done to shareholders.
(b) The cardinal principle
of corporate law that the courts will not interfere with the internal
management of the company will apply to the facts alleged in the present
petition.
(c) The applicants are
guilty of laches. The first respondent did not permit one Mohanakrishnan from
seeking appointment as a director because of the non-compliance of section 257
of the Companies Act and that the first respondent has not adopted a different
stand against the second respondent. The second respondent was appointed as a
director in the casual vacancy and he was treated as a retiring director and he
was re-elected on September 4, 1990.
(d) The shareholders of
the first respondent thought it fit to reappoint the second respondent
unanimously and again his term for reappointment came up for consideration at
the annual general meeting held on June 21, 1993. The applicants, who were the
shareholders even at that relevant point of time, did not choose to object to
such appointment or bring to the notice of the first respondent that the first
respondent has not followed the procedure under section 257 of the Companies
Act.
(e) The first applicant is
the father-in-law of one S. R. Kishore, who was an employee of the first
respondent, and the third applicant is the brother of S. R. Kishore. The said
S. R. Kishore was suspended and later dismissed for the misconduct arising out
of the misappropriation of the funds of the first respondent. The matter is
sub-judice as S. R. Kishore has taken the matter to the Labour Court and the
matter is pending disposal. As the father-in-law of the said S. R. Kishore, the
first applicant and as the brother of the said S. R. Kishore, the third
applicant along with another is causing interference with the affairs of the
first respondent by making allegations which are untenable. Section 290 of the
Companies Act saves acts of directors whose appointment is found to be
defective.
(f) The first respondent
has applied to the Central Government for waiver of remuneration paid to the
second respondent inasmuch as the second respondent has acted as a director and
rendered service to the first respondent. It is entirely for the shareholders
of the first respondent to decide whether recovery should be made or the same
should be waived. It is an internal management of the first respondent and
there is no illegality attached to the consideration by the shareholders of the
matter concerning the waiver of the recovery of remuneration. If the
shareholders of the first respondent or the Central Government rejects the
proposal for waiver of recovery of the remuneration, then the first respondent
would take steps to recover the same from the second respondent subject to any
defence that are open to the second respondent.
(g) The appointment of the
second respondent, which is found to be defective, has come to an end with the
resignation of the second respondent on February 23, 1994. At the time when the
present suit came to be filed, the second respondent has acted as additional
director pursuant to the appointment as additional director on February 23,
1994, under section 260 of the Companies Act, and that the power to appoint the
second respondent as additional director is contained in regulation 72 of Table
A to the Companies Act. The particulars set out in the explanatory statement
give full and correct material particulars about the special business to be
considered by the members.
A reply
affidavit was filed to the counter-affidavit of the first respondent stating
that the shareholders of the first respondent have every right to see that the
legal provisions are strictly adhered and the rights of the shareholders are
protected. Regulation 72 of Table A has no application at all as the articles
of association of the first respondent clearly say that only Table A in the
modified form alone would apply. In paragraph 27 of the reply affidavit, it is
stated as follows :
"I
submit that the fabrication of the minutes of the meeting can be very easily
understood from the fact that the minutes itself states that the number of
shareholders present were only 1411. Paragraph 25 of the counter-affidavit
states that 244 shareholders took part in the poll. However, the result of the
poll mentioned states that Manavalan had fetched a vote of 7,392 votes. There
is no mention about any proxy at all in the minutes of the meeting. In the
circumstances it is not clear as to how only with 1,411 shareholders, there
could be a possibility of 7,392 votes being polled and when the minutes itself
does not say anything about proxies. It is cardinal principle of the meetings
that if proxies were received by the company, there should be verification of
the proxies and there should be an announcement about the number of proxies
received which are valid. No such statement has been made. The conclusion is
that the company had not received any proxies. In the circumstances, it is
impossible for Manavalan to get 7,392 votes unless the minutes themselves are
concocted and fabricated."
On the above
pleadings, Mr. C. Harikrishnan, learned counsel for the appellants, argued
three points : They are,
(a) The explanatory statement
for items Nos. 7 and 8 do not satisfy the requirement of section 173 of the
Companies Act.
(b) The waiver sought for in
item No. 8 is ultra vires the company/first respondent and, therefore, cannot
be permitted, and
(c) Even otherwise, the claim of
the first respondent that the said items were passed in the annual general
meeting held on August 4, 1994, cannot be accepted.
Point (a) :
Mr. C. Harikrishnan submitted that an explanatory statement is mandatory under
section 173 of the Companies Act and not directory as held by the Supreme Court
in Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370;
[1986] 59 Comp Cas 548 at 636, and also the decision in Balasundaram (V. G.) v.
New Theatres Carnatic Talkies Pvt. Ltd. [1993] 77 Comp Cas 324 at 349 rendered
by AR. Lakshmanan J. Learned counsel for the applicants relied on the following
passage at page 349 of the decision second cited, which is as follows :
"The
object of enacting section 173 is to secure that all the facts which have a
bearing on the question on which the shareholders have to form their judgment
are brought to the notice of the shareholders so that the shareholders can
exercise an intelligent judgment. The provision is enacted in the interest of
the shareholders so that the material facts concerning the items of business to
be transacted at the meeting are before the shareholders and they also know
what is the concern or interest of the management in any item of business, the
idea being that the shareholders may not be duped by the management and may not
be persuaded to act in the manner desired by the management unless they have
formed their own judgment on the question after being placed in full possession
of all material facts and apprised and the interest of the management in any
particular action being taken."
According to
Mr. C. Harikrishnan, the above passage makes it clear that the explanatory
statement is not an empty formality but one requiring the management to make a
fair and full disclosure. He laid particular emphasis on the word not to be
duped by the management. According to him, the following facts are material for
items Nos. 7 and 8 of the notice of the annual general meeting, which items
have been impugned in the present application.
(a) In the explanatory
statement, the directors have recommended to the shareholders to elect the
second respondent as he is said to possess expertise and experience in nidhi
matters. No particulars of any expertise or experience have been set out.
(b) The second respondent was
allowed to continue as a director notwithstanding the defect in the appointment
and notwithstanding the fact that the company knew about the defect in his
appointment but on the other hand, in the case of Mohanakrishnan prompt action
was taken about the defect even at the time of his candidature. The company was
informed about the defect in the appointment of the second respondent by the
first applicant's letter dated September 9, 1991. These facts ought to have
been disclosed.
(c) So far as the second
respondent was concerned, the first applicant had raised the objection in his
being appointed as an additional director but in spite of the objection, he was
allowed to continue as additional director. According to the first applicant,
there is no provision in the articles of association for the appointment of
additional director.
(d) The second respondent was
paid much more than what has been mentioned in the explanatory statement. In
the explanatory statement, the waiver was sought only for a sum of Rs. 97,000
but the second respondent had drawn nearly a sum of rupees one lakh in addition
to the aforesaid amount.
(e) Even before the resolution for
waiver was placed before the general body meeting, the first respondent had
made an application to the Central Government for waiver of the amounts paid to
the second respondent.
According to
Mr. C. Harikrishnan, a shareholder decides to attend the meeting and make an
intelligent and meaningful participation only after seeing the contents of the
notice. The explanatory statement provided for items Nos. 7 and 8 is not only
defective but also misleading and contains full of misstatements. Learned counsel
contends that the above facts ought to have been disclosed in the explanatory
statement, more particularly by company which is a nidhi and which can have
transactions only with its members. Therefore, he contends that, the omission
is deliberate and as such, the resolutions should be set aside.
Mr. T. K.
Seshadri, learned counsel for the first respondent, denied that the first
respondent adopted a different stand when the second respondent was appointed
in a casual vacancy and he was treated as a retiring director and was
re-elected on September 4, 1990. The correspondence exchanged between the first
applicant and the first respondent would not at any point of time disclose that
the applicants put an issue before the first respondent, that the first respondent
adopted a different stand to Mohanakrishnan and another stand to the second
respondent. It is stated in the counter that at the time when the second
respondent's election came up for consideration on September 4, 1990, the first
respondent was under the bona fide belief that by virtue of article 22 of the
articles of association, the second respondent was only a retiring director
and, therefore, when the second respondent's election for reappointment came up
for consideration at the meeting held on September 4, 1990, the shareholders of
the first respondent thought fit to reappoint him unanimously and again his
term for reappointment came up for consideration at the annual general meeting
held on June 21, 1993. The shareholders approved his reappointment unanimously.
The applicants were shareholders at the relevant point of time and they did not
choose to object to such appointment or bring to the notice of the first
respondent that the first respondent has not followed the procedure under
section 257 of the Companies Act.
According to
Mr. T. K. Seshadri, at a later point of time when the election of
Mohanakrishnan came up for consideration, the first respondent thought fit to
obtain an opinion from counsel and intimated Mr. Mohanakrishnan of the requirement
of the compliance of section 257 of the Companies Act. Mohanakrishnan realised
the difficulty and did not pursue the matter. Since the second respondent was
appointed as a director unanimously at two annual general meetings held on
September 4, 1990, and June 21, 1993, by the shareholders, it escaped the
attention of the first respondent of the earlier defect in the appointment on
September 4, 1990. However, when it was brought to the notice of the first
respondent during December, 1993, the first respondent referred the matter to
its legal advisor and obtained an opinion. On the basis of the legal opinion,
it is noticed that there is a defect in the appointment of the second
respondent as a director as a result of non-compliance with section 257 of the
Companies Act, and, therefore, the first respondent informed the second
respondent who in turn submitted his resignation on February 23, 1994. The
board of directors thought fit that the service of the second respondent was
necessary and since the violation was of a technical nature, the board of
directors thought fit to appoint the second respondent as an additional
director on and from February 24, 1994.
Mr. T. K.
Seshadri would then submit that the first respondent has also written to the
Central Government for waiver of recovery of remuneration subject to the
approval of the general meeting on April 12, 1994. The Central Government on
September 5, 1994, was pleased to remit the waiver of recovery of a sum of Rs.
8,373, which is paid to the second respondent as remuneration subject to the
approval of the general body. In paragraph 2 of the communication, the Central
Government is specific that the approval was accorded subject to the approval
of the company in the general meeting as required by section 309(2) of the
Companies Act. So, it is for the shareholders to consider whether the recovery
should be made or waived and that it is the internal management of the company.
It is further stated in the counter-affidavit that there is no illegality
attached to the consideration by the shareholders in the matter of waiver of
the recovery of the remuneration.
With regard
to the allegation of payment of rupees one lakh to the second respondent
towards survey fees, etc., it is submitted by the first respondent that
whenever a member makes an application for loan, as per the articles of
association and the bye-laws framed by the first respondent, a director of the
first respondent is deputed to make an inspection and survey the property and
in relation thereto, expenditure is met by the member who makes the application
for loan. The expenditure met in connection with the survey, preliminary and
inspection fees are paid in the course of business, which is a business
expenditure and the said expenditure is not a remuneration. Therefore, in my
view, the expenditure incurred towards survey fees, preliminary and inspection
fees are not remuneration and it cannot be recovered from the director. It is
not denied in the counter-affidavit that factually the first respondent had not
paid rupees one lakh to the second respondent.
In this
context, it is useful to extract the two items mentioned as "Special
business", which are items Nos. 7 and 8, as they are the bone of
contention of the applicants for seeking relief in the plaint as well as in the
application. They are,
"Item
No. 7 : To consider and if thought fit, to pass with or without modification
the following resolution as an ordinary resolution :
'Resolved
that Thiru N. G. Manavalan be and is hereby appointed as director of the
company.'
Item No. 8 :
To consider and if thought fit, to pass, with or without modification the
following resolution as an ordinary resolution :
'Resolved
that the recovery of a sum of Rs. 97,320 paid/payable as remuneration and
sitting fees Thiru N. G. Manavalan (the details of which are set out in the
explanatory statement), director of the company the period from September 4,
1990, to February 23, 1994, be and is hereby waived subject to the waiver being
approved by the Central Government'."
The first
respondent has furnished an explanatory statement under section 173(2) of the
Companies Act for both the items.
Item No. 7 :
Thiru N. G. Manavalan was appointed as additional director of the company with
effect from February 23, 1994. According to the provisions of section 260 of
the Companies Act, 1956, Thiru N. G. Manavalan will be holding office until the
conclusion of this annual general meeting. Notice under section 257 of the
Companies Act, 1956, together with deposit of Rs. 500 has been received by the
company from a member signifying his intention to propose the candidature of
Thiru N. G. Manavalan as a director of the company. In the explanatory
statement, it is stated that Thiru N. G. Manavalan is the son of late Thiru N.
C. Giripal Mudaliar (former director of our fund) and has vide experience and
expertise in mutual benefit society matters and have been found beneficial to
our company. Therefore, it is considered appropriate that he should be
appointed as a director of the company. Hence, the board recommends passing of
the resolution under item No. 7. Thiru N. G. Manavalan is willing to act as
director, if so appointed and has filed with the fund his consent under section
264(1) of the Companies Act, 1956. None of the directors except Thiru N. G.
Manavalan is interested in the above resolution.
In the
explanatory statement for item No. 8, it is stated that on August 7, 1988,
Thiru N. C. Giripal Mudaliar, who was then a director of the company, died. In
the casual vacancy caused by his death, the board of directors appointed Thiru
N. G. Manavalan as a director of the company on August 11, 1988. The said Thiru
N. G. Manavalan came for retirement by rotation in the year 1990 (being the
date when the late Thiru N. C. Giripal Mudaliar would have retired.) He was
duly elected by the shareholders in 1990. Again, after a period of three years,
Thiru N. G. Manavalan came for retirement by rotation and once again he was
duly re-elected as a director of the company. However, in 1990, inadvertently the
said Thiru N. G. Manavalan omitted to make a deposit of Rs. 500 as required
under section 257 of the Companies Act. The company is now advised that the
appointment is defective in view of the aforesaid omission. During the period
from September 4, 1990, to February 23, 1994, Thiru N. G. Manavalan has been
paid/to be paid his eligible remuneration, sitting fees as under :
|
Year ending |
Remuneration |
Sitting fee |
Total |
|
|
(Rs.) |
(Rs.) |
(Rs.) |
|
31-3-1991 |
1,322 |
5,350 |
6,672 |
|
31-3-1992 |
4,183 |
9,450 |
13,633 |
|
31-3-1993 |
7,331 |
25,600 |
32,931 |
|
31-3-1994 |
13,584 |
30,500 |
44,084 |
The
board is of the opinion that since the appointment became defective only on a
technical ground and since Thiru N. G. Manavalan has rendered valuable service
to the company, the recovery of the aforesaid remuneration/sitting fees paid to
him may be waived. The board recommends this resolution. None of the directors
except Thiru N. G. Manavalan is interested in the above resolution.
According
to Mr. T. K. Seshadri, on the date of the said allegation, the applicants
sought for a declaration that the notice dated August 29, 1994, issued by the
first respondent of the proposed annual general meeting scheduled to be held on
August 4, 1994, in relation to items Nos. 7 and 8 is illegal and void and for
consequential permanent injunction restraining the first respondent from in any
manner considering the subjects, viz., items Nos. 7 and 8 of the notice dated
June 29, 1994, issued of the annual general meeting scheduled to be held on
August 4, 1994. In the injunction application, the applicants sought for an
interim injunction restraining the first respondent from in any way considering
those items in the meeting scheduled to be held on August 4, 1994. When the
application came up for consideration before this court on August 3, 1994, the
first respondent took notice. On the same day, I passed an order permitting the
first respondent to transact the businesses mentioned in items Nos. 7 and 8.
But, I made it clear that if resolutions are passed, the same should not be
given effect to until the disposal of the injunction application. Subsequently,
the first respondent filed its counter-affidavit and also pointed out that the
resolutions mentioned as items Nos. 7 and 8 were carried and as per the
resolutions of the elections on poll, the votes polled for and against are as
under :
|
RESOLUTION
NO. 7 |
|
|
N. G. Manavalan |
7,396 votes |
|
A. B. Sudarsanam |
15 votes |
|
J. V. Sunderrajan |
4 votes |
|
Invalid votes |
22 votes |
|
RESOLUTION
NO. 8 |
|
|
Votes polled in favour of
the resolution |
7,392 votes |
|
Votes polled against |
10 votes |
|
Invalid votes |
19 votes |
On
the basis of the resolution submitted by the scrutineers, the chairman of the
meeting declared the resolutions passed. Further, in view of the order of this
court, the chairman informed that the resolutions would not be given effect to
until further orders of this court in O.A. No. 708 of 1994.
Mr.
T. K. Seshadri, learned counsel for the first respondent submits that the
resolutions relating to item Nos. 7 and 8 are sought to be challenged by the
applicants on the ground that the explanatory statement for items Nos. 7 and 8
is misleading and it is not in proper compliance with the Companies Act. It is
mentioned in the plaint as well as in the affidavit filed in support of O.A.
No. 708 of 1994, that the explanatory statement did not contain the information
that on an earlier occasion Mohanakrishnan's candidature was rejected on
account of non-compliance with section 257 of the Companies Act and that the
candidature of the second respondent was accepted earlier without compliance
with section 257 of the Companies Act. It is further stated that the
explanatory statement also does not say that the second respondent was
illegally treated as a retiring director in both the meetings held on September
4, 1990, and June 21, 1993. It is stated that the explanatory statement does
not contain or disclose that the second respondent was co-opted with the board
of directors in the absence of the board to co-opt when he resigned. It is
further mentioned that the explanatory statement would state about the
experience and expertise of the second respondent in mutual benefit society and
that his election would be in the interest of the company. The said statement
would not specifically state as to what was expertise and what beneficial
service the second respondent rendered to the first respondent. The said
statement would amount to canvass the support of the second respondent by the
first respondent.
The
above is the objection in relation to the explanatory statement for items Nos.
7 and 8. The applicants have not stated as to what is the provision of law
under which the first respondent shall be entitled to waive. The explanatory
statement would not also mention about the additional sum of rupees one lakh
paid to the second respondent. The explanatory statement, according to the
applicants, should have mentioned that all the sums of money paid to the second
respondent are recoverable and the director should be personally liable for the
said amount. It is stated by the applicants that the object of the first
respondent proposing the subject without proper disclosure is to get through
the subject with the mala fide intention of conferring special benefit to the
second respondent and to cover up the illegality.
In
the above background, I shall now consider point (a) raised by Mr. C.
Harikrishnan. His objection is that the explanatory statement does not satisfy
the requirements of section 173(2) of the Companies Act. Section 173(2) is
extracted hereunder :
"173.
(2) Where any items of business to be transacted at the meeting are deemed to
be special as aforesaid, there shall be annexed to A 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 (managing agent, if any, the secretaries and
treasurers, if any, and the manager, if any) :
Provided
that whether any item of special business as aforesaid to be transacted at a
meeting of the company relates to or affects any other company, the extent of
shareholding interest in that other company of every director (the managing
agent, if any, the secretaries and treasurers, if any) and the manager, if any,
of the first mentioned company shall also be set out in the statement if the
extent of such shareholding interest is not less than 20 per cent. of the paid
up share capital of that other company."
It
is the contention of Mr. C. Harikrishnan that section 173(2) of the Companies
Act is mandatory and non-compliance with the said provision is a fatal and
incurable defect. He seeks to rely on the decision of mine in Balasundaram
(V.G) v. New Theatres Carnatic Talkies Pvt. Ltd. [1993] 77 Comp Cas 324 (Mad)
in support of his contention that compliance with section 173(2) of the
Companies Act is mandatory. There is no dispute with regard to the proposition
laid down therein since there was no explanatory statement to the notice in
that case. But, in the instant case, as rightly pointed out by Mr. T. K.
Seshadri, there is an explanatory statement given in accordance with section
173(2) of the Companies Act. There is, therefore, no non-compliance with the
provisions of the Companies Act as contended by the learned counsel for the
applicants. The question is, whether the material facts concerning each item of
business are set out in the explanatory statement or not. Mr. T. K. Seshadri,
in support of his contention, has relied on a Bench decision of the Calcutta
High Court in East India Commercial Co. Pvt. Ltd. v. Raymon Engineering Works
Ltd., AIR 1966 Cal 232, wherein the Bench has observed that the courts do not
scrutinise these notices with a view to exercise criticism or to find out
defects, but it looks at them fairly. The Bench has also pointed out that the
solution of the problem as to whether all material facts were disclosed in an
explanatory statement, depends upon the facts of each case.
It
is settled law that the notice must specify the business to be done. The object
of the notice was to be a fair notice, intelligible to the minds of the
ordinary man, the class of men who were the shareholders in the company and to
whom it was addressed. In the above Calcutta case, the Bench took note of the
director's reports also along with the facts set out in the explanatory
statement and found that the material facts necessary for the purpose of the
proposed resolution were given in the explanatory statement. The Bench has
further held that it is not the function of the explanatory statement to travel
beyond the proposed resolution. It is then stated by the Bench that material
facts have to be given but not detailed particulars.
Mr.
T. K. Seshadri also referred to the following decisions with regard to the
proposition that material facts are facts which are relevant to the resolution
and not detailed particulars to be given. Seth Mohan Lal v. Grain Chambers Ltd.
[1968] 38 Comp Cas 543 at 553 (SC); Firestone Tyre and Rubber Co. v. Synthetics
and Chemicals Ltd. [1971] 41 Comp Cas 377 at 434 (Bom); Sitaram Jaipuria v.
Banwarilal Jaipuria, AIR 1972 Cal 105 at 114 and 115; Life Insurance
Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 at 618 (SC); Gopal
Das Gujarati v. Titaghar Paper Mills Co. Ltd. [1986] 60 Comp Cas 920 at 928
(Cal)) and Meenakshi Amma v. Sree Rama Vilas Press and Publications (P) Ltd.
[1992] 73 Comp Cas 275 at 282. In the decision reported as Sitaram Jaipuria v.
Banwarilal Jaipuria, AIR 1972 Cal 105, a Division Bench of the Calcutta High
Court has held as follows (headnote) :
"Any
and every legal requirement need not be placed before the general meeting of
the general body of the shareholders. It is to be presumed that all legal
requirements, before the venture is undertaken, is carried on properly. The
explanatory statement should not be too strictly construed, but should be given
a liberal construction and the only requirement should be that its contents are
clear to an ordinary person engaged in business."
Section
173(2) of the Companies Act, should not be construed, in my opinion, in a rigid
manner and should not be made so as to hamper the conduct of business. The
notice has to be construed in a realistic business like manner and if it
satisfies the essence of section 173(2) of the Companies Act, the meeting
should not be invalidated on the technical ground that the notice has not
complied with section 173(2) of the Companies Act. If the shareholder is aware
of the material facts pertaining to the transaction to be carried out at the
meeting, he cannot reasonably complain of any insufficiency of notice. If he is
present at the meeting, he must point out to the chairman about the
irregularity before the meeting proceeds with the agenda. In the instant case,
the explanatory statement given under items Nos. 7 and 8 clearly brings out the
material facts in relation to the resolution to be passed. The resolution to be
passed with regard to item No. 7 relates to the appointment of the second
respondent as a director of the first respondent.
What
necessitated the first respondent to place in the meeting the reasons why the
second respondent's election is coming up for appointment as a director ? The
reason is, the second respondent's earlier appointment was defective for
non-conipliance with section 257 of the Companies Act. Under what circumstances
the second respondent was appointed earlier and when his appointment was found
defective, he resigned, how he has appointed as an additional director and that
his term as additional director has come to an end at the annual general
meeting, are the relevant and material facts to the question as to the
appointment of the second respondent as a director. The other objection with
regard to item No. 7 is that the company has mentioned about the experience of
the second respondent as a director of a mutual benefit society and his
appointment will benefit the society. These are the additional facts which will
go to the root of the matter. The material fact as to why this resolution is
coming up for consideration is mentioned. The reference to the first
respondent's views on Mohanakrishnan and the legal advice given are irrelevant
and not material facts.
With
regard to item No. 8, material facts were given, namely, how the appointment of
the second respondent has become defective and how he drew remuneration as a
director of the first respondent, and since this appointment is defective, the
first respondent is seeking the approval of the shareholders to waive the
recovery. These are all the material facts which are relevant for the
resolution. It is urged that the applications who attended the annual general
meeting did not participate in the deliberations when items Nos. 7 and 8 and
placed before the shareholders for consideration. The applicants clam to have
knowledge as to the circumstances under which the resolutions are being brought
before the annual general meeting. As held by a Division Bench of the Kerala
High Court in Meenakshi Amma v. Sree Rama Vilas Press and Publications P. Ltd.
[1992] 73 Comp Cas 285 the applicants being shareholders are aware of the
material facts pertaining to the transactions to be carried out at the annual
general meeting and as such, they cannot reasonably complain of insufficiency
of notice nor did they, having been present at the meeting, point out to the
chairman about the irregularity before the meeting proceeded with the agenda,
nor did they participate in the deliberations and bring to the notice of the
shareholders who attended the meeting about the facts which according to them
are material facts which influence the shareholders in exercising their rights
on the subject. In view of the above decision, I am of the view, the contention
of learned counsel for the applicants that there is non-compliance with the
provisions of section 173(2) of the Companies Act does not merit any consideration.
Point
(b) : Mr. C. Harikrishnan argued that there is no provision in the memorandum
and articles of association of the first respondent to enable the first
respondent to make payment unauthorisedly. The payment which was made to the
second respondent was a payment to a director. The said payment was made with
full knowledge by the first respondent that there was a defect in the
appointment of the second respondent. The first respondent cannot seek
justification by relying upon section 309 of the Companies Act as that section
applies only to managerial remuneration and payment made to a director. Since
the first respondent itself concedes that the original appointment of the
second respondent was defective and that the said position was confirmed by the
legal opinion, the second respondent could never have been a director of the
first respondent. The first respondent knew about the defect in the appointment
of the second respondent as a director. It has been falsely alleged in the
counter-affidavit that the said defect was known only after the first applicant
wrote a letter on December 30. 1993. The first applicant had already pointed
out the defect in his letter dated September 9, 1991. The contention that the
first respondent has power to co-opt a director cannot be true. Such of those
provisions for which there is no specific application is made, Table A,
Schedule I to the Companies Act, cannot apply. This has been made very clear in
article 2 of the articles of association of the first respondent. Therefore,
the co-option of the second respondent is invalid. Even section 290 of the
Companies Act cannot come to the rescue as the defect was known to the first
respondent, and notwithstanding the same, payments were made deliberately.
Therefore, it is a payment made to an unauthorised person and there is no power
in the memorandum or articles of association of the first respondent enabling
such payment. As there is no power to make an unauthorised payment, a
resolution to that effect will have no meaning and therefore, the resolution
was defective even from the inception and cannot be placed before the general
body.
In
reply to the above, Mr. T. K. Seshadri contended that the said objection is
unsustainable for the reason that the remuneration sought to be paid is for the
services rendered. It is on the basis of section 72 of the Contract Act as the
service rendered by the second respondent is not gratuitous. Section 290 of the
Companies Act provide that all the acts of the director, whose appointment is found
to be defective, till the defect is shown to him are valid. I am, therefore, of
the view, that once his actions as director are found to be valid, the
remuneration payable to him during the said period would be only in the
capacity as director and it is only with that object the approval of the
Central Government is sought by the first respondent and on September 5, 1994,
such approval was also obtained, which came to the first respondent after the
annual general meeting was over.
The
first respondent in its application before the Central Government also set out
the reasons for the approval which is sought for under section 309 of the
Companies Act. The Central Government considered the application and granted
approval for waiver of recovery subject to the approval of the shareholders of
the first respondent in the meeting. The remuneration sanctioned by the Central
Government does not include the period when the second respondent acted as
additional director. Therefore, the question whether the second respondent's
appointment as additional director under section 260 of the Companies Act is
valid or not does not arise in these proceedings. The second respondent is
admittedly member. It is in relation to the expenditure which the first
respondent incurred during the management of the affairs of the first
respondent. Therefore, the objection that the payment to the second respondent
is ultra vires the first respondent is, in my view, without any substance.
Point
(c) : Dealing with the last point, Mr. C. Harikrishnan read out the
counter-affidavit wherein it has been stated that the meeting was attended by
1,411 persons. According to learned counsel there is no indication in the
minutes as to how any shareholders attended in person or through proxy and the value
of the shares has not been given. However, in the alleged poll conducted some
like 7,392 votes said to have been cast. Mr. C. Harikrishnan also alleges that
on the letter of the first respondent dated August 17, 1994, which has been
appended to the reply affidavit there was no proposer to the candidature of the
second respondent when his election was taken up. Mr. C. Harikrishnan pointed
out the exact words of the first respondent as found at page 2 of the said
letter, viz.,"In the case of Mr. N. G. Manavalan, there was no proposer at
the time of vote by show of hands made by the chairman". According to
learned counsel for the applicants, the chairman has no jurisdiction under
section 179 of the Companies Act to order a poll straightway when there were no
proposers and, therefore, the entire procedure adopted in the meeting was
wrong. Both factually and legally the first respondent cannot rely on the
minutes produced, which must have been concocted subsequently and they do not
reflect what actually transpired in the meeting. Therefore, he would very
strongly urge that no reliance can be placed on the minutes. According to him,
the letter of the first applicant annexed to the reply affidavit makes it
clear. At any rate, in view of the fact that the resolutions suffer from
infirmities, however much they may be confirmed by the general body, they have
no legal effect and, therefore, the court should not permit the first
respondent to implement the resolutions.
As
pointed out earlier, the first respondent has filed a detailed
counter-affidavit which has already been summarised by me in paragraphs supra.
According to Mr. C. Harikrishnan, the decisions cited by Mr. T. K. Seshadri
will have to be understood on the facts arising in each case. None of the
decisions held that a meeting could go on with a defective and misleading
explanatory statement as in the present case. The adequacy of an explanatory
statement is question of law and the expression "material
particulars" has to be viewed in accordance with the company and the
substance of the resolution proposed. In the present case, the explanatory
statement proposed by the first respondent fails the test. The facts which
ought to have been mentioned in the explanatory statement as pointed out by
learned counsel for the applicants earlier, have been deliberately and with
mala fide objects concealed. Therefore, there cannot be a better example of
duping the shareholders by the management than the present case. In conclusion,
Mr. C. Harikrishnan contended that it has been clearly demonstrated that the
minutes produced are not proper and on the fact of the admission made by the
first respondent in its letter dated August 17, 1994, there cannot be any doubt
that the minutes produced are not true, and even if there is a presumption, the
same stands discharged. He further states that the approval of the Central
Government has been obtained by misrepresentation and hence the same cannot be
relied on by the first respondent, and at any rate, the opinion/approval of the
Central Government cannot be binding on the court nor can it cure the defect of
ultra vires.
Mr.
T. K. Seshadri, while answering the third point of counsel for the applicants,
submitted that there is no discrepancy in the minutes to vitiate the resolution
concerning items Nos. 7 and 8. The minutes are prima facie evidence under
section 193 read with section 195 of the Companies Act. He also invited my
attention to the case reported in Sivaraman (B.) v. Egmore Benefit Society Ltd.
[1992] 75 Comp Cas 198, wherein it has been held by this court that by virtue
of the record of proceedings in the minutes book duly made and filed with the
Registrar of Companies, the applicants were validly elected as directors since
the respondents produced no evidence to dislodge the presumption under section
195 of the Companies Act and that the scrutineers' report contained no evidence
of manipulation of the poll. It is further held that the presumption is
rebuttable and the onus of dislodging the presumption is on the person who has
challenged the resolution on the ground of malpractice or misdeed. In my
opinion, the applicants have failed to discharge the said onus. In my prima
facie view, all the objections of the applicants do not merit any consideration
since they have not made out any prima facie case whatever.
The
balance of convenience also lies in favour of the respondents. The Central
Government have also considered the request made by the first respondent and
ordered waiver of recovery, which was paid to the second respondent as a
remuneration subject to the approval of the general body as required by
sub-section (2) of section 309 of the Companies Act. So, it is for the
shareholders to consider whether the recovery should be made or the recovery
should not be made and it is the internal management of the first respondent.
The board of directors have also approved and passed the resolution. As rightly
pointed out by Mr. T. K. Seshadri, if the resolution passed by the majority of
shareholders is not given effect to, great prejudice would be caused to the
second respondent, who was validly elected as a director at the annual general
meeting, where the majority of shareholders have approved of his appointment.
However, I have rendered the above finding on a prima facie consideration of
the materials placed before me by both sides. This will not in any way affect
the trial of the suit.
For
the foregoing reasons, Application No. 5055 of 1994 is allowed and O.A. No. 708
of 1994 is dismissed and the interim order granted on August 3, 1994, is
vacated.
[1995] 084 COMP. CAS. 534
(BOM)
HIGH COURT OF BOMBAY
v.
Shanta Genevieve Pommeret Parulekar
MRS.
SUJATA MANOHAR AND SHAH, JJ.
APPEAL NOS. 655 AND 1032 OF 1988 IN C.A. NOS. 93
AND 110 OF 1988 IN C.P. NO. 476 OF 1986
APPEAL NO. 710 OF 1988 IN C.A. NOS. 93 AND 110 OF 1988
APPEAL
NOS. 711, 742 AND 1214 OF 1988 IN C. P. NO. 476.OF 1986
APRIL
30 AND MAY 2, 1991
S.D. Parekh and D. H. Nanavati
for the Appellant.
S.J. Shah, Pravin Mehta, A.H.
Desai, Arif Bookwala, J M. Chagla and F. E. Devitre, and B. Panigrahi for the Respondents.
Mrs.
Sujata Manohak, J.—This
group of six appeals is filed against an order and judgment of a learned single
judge dated January 13, 1988,
in Company Petition No. 476 of 1986, as also against an order of the learned
single judge dated March 30, 1988, in two Company Applications Nos. 93 of 1988
and 110 of 1988 in Company Petition No. 476 of 1986.
Company
Petition No. 476 of 1986 was filed by Shanta Genevieve Pommeret Parulekar and
Claude-Lila Parulekar (hereinafter called "the original petitioners")
against Sakal Papers Private Limited and various other respondents as set out
in that petition praying for the rectification of the register of members of
the first respondent company in the following manner :
(i) The names of the
original respondents Nos. 5, 6, 8, 11, 12, 13 and 14 (hereinafter referred to
as "the purchasers") be removed from the register of members of the
first respondent company in respect of the 3,417 shares belonging to the estate
of Dr. N.B. Parulekar and 93 shares belonging to the third respondent ;
(ii)the names.of respondents Nos. 11, 12, 13, 15 and 16 be
removed from the register of members of the first respondent company in respect
of 17,666 shares and for other ancillary reliefs.
The
learned single judge, who heard the petition by his judgment and order dated
January 13, 1988, has allowed the petition. He has however, directed the second
petitioner to bring into the court a sum of Rs. 80,73,000 within a period of
six weeks. He has clarified that his order shall become operative on this
amount being deposited in the court within the stipulated period. If the amount
is not deposited, the petition is dismissed. On such amount being deposited, he
has directed the first respondent company to comply with the directions under
prayers (a) and (b) and he has directed respondents Nos. 5, 6, 8, 11, 12, 13,
14, 15 and 16 to comply with the orders and directions under prayers (c) and
(d). He has also directed respondent No, 1 company to pay back to respondents
Nos. 11, 12, 13, 15 and 16 a sum of Rs. 17,66,600 in respect of the 17,666
shares returned to the company as per prayer (b) and directed that the 17,666
shares shall remain in the custody of the first respondent company till such
time as the board of directors, as reconstituted after rectification, decides
the price and the parties to whom these shares should be allotted. He has also
given certain other directions. The petitioners did not deposit in the court
the said sum of Rs. 80,73,000 within the stipulated period. They applied for
extension of time by taking out Company Applications Nos. 93 of 1988 and 110 of
1988. These applications have been rejected by the learned single judge by his
judgment and order dated March 30, 1988. The present appeals are filed by
various parties in respect of these two judgments and orders of the learned
single judge.
Appeal
No. 742 of 1988 is an appeal filed by the original petitioners against the
judgment of the learned single judge dated January 13, 1988, conditionally
allowing the main Company Petition No. 476 of 1986. Appeal No. 655 of 1988 is
filed by the executors and trustees of the will of Dr. Parulekar against
certain findings given by the learned single judge against them in his judgment
and order dated January 13, 1988. Appeal No. 711 of 1988 is filed by the
purchasers of the 3,417 shares sold by the executors and trustees under the
will of Dr. Parulekar as also of 93 personal shares of some of the executors
sold by them, against the findings given by the learned single judge in his
judgment and order of January 13, 1988. Appeal No. 7,10 of 1988 is another
appeal filed by these purchasers against certain findings given by the learned
single judge in his order dated March 30, 1988, dismissing the company
applications for extension of time. Appeal No. 1214 of 1988 is an appeal filed
by the first respondent company against the findings given by the learned
single judge against it in his judgment dated January 13, 1988, while Appeal
No. 1032 of 1988 is another appeal filed by the first respondent company
against the findings given by the learned single judge against the company in
his judgment rejecting the application for extension of time.
Facts :
In
order to appreciate the contentions raised by the parties in these appeals it
is necessary to examine the relevant facts. The first petitioner in Company
Petition No. 476 of 1986 is the widow of Dr. Parulekar who died on or about
January 8, 1973. Dr. Parulekar was the founder of the first respondent company.
The first petitioner is a shareholder and a permanent director of the first respondent
company. The second petitioner is the daughter of Dr. N.B. Parulekar and the
first petitioner. She is also a Shareholder of the first respondent company.
The first respondent company was incorporated in 1948. It carries on the
business of publishing a newspaper called Sakal from Pune, Bombay and Kolhapur.
Dr. (Mrs.) Banoo J. Coyaji, Jasvantlal Matubhai and Arun Jasvantlal are
respondents Nos. 2, 3 and 4. These respondents and the first petitioner are the
executors of the last will and testament of Dr. N.B. Parulekar. The original
fifth respondent is the managing director of the first respondent company. The
other respondents are the current shareholders and/or directors of the first
respondent company. The tenth respondent is the chairman of the first
respondent company.
The
authorised share capital of the first respondent company is Rs. 25 lakhs
consisting of 25,000 equity shares of the face value of. Rs. 100 each. The
issued share capital of the first respondent company, however, was only 7,334
shares of the face value of Rs. 100 each prior to November, 1985. Disputes in
Company Petition No. 476 of 1986 relate to the 3,417 shares of the deceased,
Dr. Parulekar, which were held in trust by the executors of the will of Dr.
Parulekar at the material time and the 93 shares then held by original
respondents Nos. 3 and 4 jointly in their own right.
As on
September 21, 1985, the shareholding of the first respondent company was as
follows :
|
|
Shares |
|
First petitioner |
560 |
|
Second petitioner |
1,172 |
|
Second respondent |
750 |
|
Third respondent |
93 |
|
Executors of the
will of the deceased |
3,417 |
|
The trustees of
Lila Trust |
1,317 |
|
Image Advertising
and Marketing Pvt. Ltd. |
25 |
making
a total of 7,534 shares. The two petitioners had thus 23 per cent. of the
shares of the first respondent company as of this date.
Under
article 57A of the articles, of association of the first respondent company, it
is provided as follows :
"57A.
In the event any member of the company desires to transfer his shares he shall
be bound to offer the same either to Dr. N.B. Parulekar or to Madam Shanta
Parulekar or such other person or persons as Dr. N.B. Parulekar or Madam Shanta
Parulekar may direct or may nominate and in which event the transferee or
transferees shall pay such price as may be certified by the auditors of the
company."
Article
58 further provides that subject to article 57A no shares shall be transferred
so long as any member or any person selected by the directors as one whom it is
desirable, in the interest of the company, to admit to membership, is willing
to purchase the same at the fair value as mentioned in article 61. Under
article 61, in case any difference arises between the transferor and the
purchaser as to the fair value of a share, the auditors of the company shall
certify in writing the sum which, in their opinion, is the fair value and the
same shall be binding on the transferor and the purchaser.
Under
the terms of the will of Dr. Parulekar, 3,417shares in the first respondent
company which formed a part of Dr. Parulekar's residuary estate, were directed
to be held on trust by the executors/trustees :
"(1) for the
spread of education through newspapers, magazines and periodicals ;
(2) for effecting
improvement of the quality and standard of journalism and training of personnel
in journalism ;
(3) for purchase of
shares of concerns, firms, companies or from person or persons interested in or
concerned with newspapers, magazines, periodicals and otherwise in journalism ;
(4) for publication
of books and literature for the masses at low and reasonable prices ; and
(5) for such other
objects and acts that may be necessary to bring about improvement of
information amongst the masses ......"
The
will directed that the above trust shall be known as the "Sakal Papers
Trust".
The
executors of the will of Dr. Parulekar gave a notice dated November 18, 1984,
of a meeting of the executors to be held on November 27, 1984, for the purpose
of passing resolutions to enable the executors holding 3,417 shares of the
first respondent company to sell these shares at or for the price of Rs. 2,250
per share (which was the offer then received by the executors) or at such price
as may be realised under article 61 of the articles of association of the
company. The second resolution which was proposed was to the effect that the
executors had given a notice to the first petitioner under article 57A for the
sale of these shares. In the event of the first petitioner (being a party named
under article 57A) exercising her rights under article 57A, the executors do
sell the shares to her at the abovementioned price. The resolution further
stated that if the first petitioner exercised her rights under article 57A, but
did not agree to the aforesaid price, then the sale should take place at a
price to be fixed in accordance with article 61. Lastly, it was proposed that
if the first petitioner did not exercise her rights and did not buy the shares
at a price fixed under article 61, then the executors shall sell the shares to
any other person or persons at or for the price of Rs. 2,250 per share.
A
notice of the meeting containing the above agenda was served on all the
executors including the first petitioner. Thereupon, the second petitioner
wrote a letter dated November 27, 1984, to the third respondent stating that
the first petitioner would not be able to attend the meeting convened on
November 27, on account of her illness. She asked for a postponement of the
meeting by two weeks. This request was considered by the executors who were
present at the meeting held on November 27, 1984. They felt that the meeting
need not be postponed because the resolutions proposed to be moved regarding
the sale of 3,417 shares of the first respondent did not jeopardise the
interests of the first petitioner. They proceeded with the meeting. The
proposed resolutions were there after passed at the meeting.
By
notice dated November 29, 1984, addressed to the first petitioner, the
executors of the late Dr. Parulekar gave notice to the first petitioner under
article 57A of the articles of association. The notice mentioned that the
executors desired to transfer the 3,417 shares of the first respondent company
at the offered price of Rs. 2,250 or at a fair value that may be determined by
the auditors under article 61. The notice further stated that if the petitioner
chose not to exercise her rights under article 57A or was not willing to pay
the fair price as may be fixed by the auditors, the executors would be free to
sell the same to any other person in accordance with the articles.
The
first petitioner, by her letter dated December 14, 1984, accepted the offer
made on behalf of the executors. She agreed to purchase the 5,417 shares at a
price as may be certified by the company's auditors. She nominated her
daughter, the second petitioner, as a nominee under article 57A for the
purchase of these shares.
Similarly,
a notice dated November 10, 1984, was given to the first petitioner as well as
the board of directors of the first respondent company by respondents Nos. 3
and 4 in respect of the 93 shares held by them in the first respondent company,
offering to sell these shares to the first petitioner.
Thereupon,
the first respondent company gave a notice to all its shareholders to the
effect that the said 3,417 shares as also the 93 shares of respondents Nos. 3
and 4 were proposed to be sold by these persons. Under article 57A, an offer
had been made to the first petitioner for the purchase of these 3,417 plus 93
shares and the first petitioner had been given time till December 15, 1984, for
indicating her intention. The notice further stated that the board of directors
had resolved that in the event of the first petitioner not exercising her
rights under article 57A, it had been decided to sell the said shares to the
existing shareholders of the company. In accordance with the articles of
association of the first respondent company, each shareholder was, therefore,
asked to send his or her reply to the company by December 28, 1984, as to
whether he/she was willing to purchase the said shares in to in accordance with
the articles of association.
As the
first petitioner and/or her nominee agreed to purchase the said shares at a
price certified by the auditors of the company, the matter was referred to the
company's auditors, G.M. Oka and Co., for determining the fair value of the
shares.
The
auditors, by their letter dated January 28, 1985, asked the first petitioner
whether she wished to submit any information for the purpose of determining the
fair value of these shares; She was requested to make her written submission
within seven days. At the request of the first petitioner, this time was
extended up to February 20, 1985. On February 20, 1985, however, she wrote to
the auditors saying that the auditor's request to make a written submission was
premature. The auditors should have prepared a draft report of the valuation of
these shares along with the draft certificate and sent it to her for her
submissions. This letter is dated February 20, 1985. It is not clear when this
letter was received by the auditors. In any event, the auditors issued a
certificate dated February 21, 1985, under article 57A of the articles of
association certifying that the price to be paid for the transfer of 93 shares
was Rs. 2,10,273 and for 3,417 shares was Rs. 77,25,857. The price was
calculated at the rate of Rs. 2,160 per share. The petitioners protested
against this valuation contending, inter alia, that an adequate opportunity was
not given to them for making submissions and there was denial of natural
justice. They also challenged the fair value as fixed by the auditors.
They
filed a suit on March 2, 1985, in the court of the Civil Judge, Junior
Division, Pune, being Suit No. 624 of 1985 for a permanent injunction
restraining the executors, that is to say, respondents Nos. 2, 3 and 4, from
selling the said shares to any one other than the petitioners. No interim
order, however, was granted in this ; suit. Thereafter, on September 9, 1985,
the executors sold and transferred 3,417 shares to respondents Nos. 8, 11, 12,
13 and 14 for the price of Rs. 78,59,100. The price was arrived at on the basis
of each share being valued at Rs. 2,300. The third and the fourth respondents
also sold their 93 shares at the same price to respondents Nos. 5 and 6. Thus,
the shares actually fetched a higher price than that fixed by the auditors. :
On
September 20, 1985, the transfer forms in respect of the 3,417 and 93 shares
were lodged with the first respondent company. At the meeting of the board of
directors of the first respondent company held on November 21, 1985, the
transfer of these shares was approved. The board of directors resolved to
register these shares in the names of the transferees. At this meeting,
respondent No. 3 ceased to be the chairman and director of the company and
respondent No. 2 was appointed as chairman of the board in his place.
Respondents Nos. 5 and 10 were appointed as additional directors of the first
respondent company. Notice of this board meeting was sent to the petitioners.
The petitioners attended the board meeting. But they walked out after
protesting against the insufficiency of notice of the board meeting. The item
relating to the transfer of these shares was not shown on the agenda of the
board meeting. This business appears to have been transacted under the heading
"any other business".
Prior
thereto, at the annual general meeting of the company held on November 16,
1985, a resolution was passed to increase the issued share capital of the
company from Rs. 7,33,400 to Rs. 25 lakhs. The resolution also authorised the
board of directors to allot and issue 17,160 new shares at par to any person,
whether a member of the company or not. Once again the agenda of the annual
general meeting did not show that any new shares were proposed to be issued or
allotted. Hence, at the annual general meeting it was resolved that in view of
the lack of notice for the resolution, the resolution should be ratified at an
extraordinary general meeting to be convened for this purpose. This has been
done. These resolutions for issuing fresh shares were carried by a majority of
votes. 4,260 votes were cast for the resolutions and 3,104 against the
resolutions. At the board meeting held immediately after this annual general
meeting, the board resolved to issue additional 17,666 shares at par to
respondents Nos. 11, 12, 13, 15 and 16.
As a
result, the purchasers and/or allottees who are admittedly controlled by
respondent No. 5 have now a substantial holding in the first respondent
company. They together hold 21,926 shares out of 25,000 shares of the first
respondent company.
Thereafter,
at a meeting of the board of directors held on February 22, 1986, the fifth respondent
was appointed as the joint managing director of the first respondent company.
At this meeting it was also proposed to appoint the second petitioner as a
joint managing director along with respondent No. 5. The second petitioner
declined to accept the offer. The board, however, decided to keep this offer
for consideration at the next annual general meeting of the company. Although
the petitioner had initially declined to act as joint managing director, she
ultimately accepted the arrangement and she was appointed as joint managing
director. Although she assumed duties as joint managing director, she has not
so far signed the requisite agreement relating to her appointment.
Company Petition No. 476 of 1986
:
The
petitioners filed the present company petition on August 28, 1986, challenging
the transfer of 3,417 shares and the issuance of 17,666 new shares. The
petition is filed under section 155 of the Companies Act. Under section 155,
"if the name of any person is, without sufficient cause, entered in the
register of members of a company, or after having been entered in the register
is, without sufficient cause, omitted there from, .... the person aggrieved, or
any member of the company, or the company, may apply to the court for
rectification of the register." Under sub-section (3), on an application
under this section, the court may decide any question relating to the title of
any person who is a party to the application to have his name entered in or
omitted from the register. The court also has the power to generally decide any
question which it is necessary or expedient to decide in connection with the
application for rectification.
Transfer
of 3,417 shares :
The
first challenge of the petitioners relates to the transfer forms which have
been signed by the executors in respect of 3,417 shares transferred by them. In
the share transfer form, the four executors, namely, the first petitioner and
respondents Nos. 2, 3 and 4 are shown as transferors. The transfer forms,
however, are only signed by three out of four executors, namely, respondents
Nos. 2, 3 and 4. The petitioners contend that as the fourth transferor has not
signed the transfer forms, these transfers are bad in law and ought not to have
been registered. The executors rely upon the fact that under the terms of the
will; the executors have the like powers which are contained in the declaration
of trust dated June 28, 1972, and the deed of settlement dated July 31, 1972.
Under them, the trustees are entitled to act by majority. The petitioners
further submit that the executors of the trust have, at their meeting of
November 27, 1984, passed a resolution to the effect that any one of the
executors may be authorised to implement the resolution and also to take steps
to execute the transfer forms and complete the transaction of sale. According
to the executors, therefore, three of the executors can sign the transfer forms
for the purpose of validly transferring the said shares to the transferees.
Now,
it is true that the transfer forms do not have an endorsement to the effect
that the three executors have signed on behalf of all the executors. Nor does
the transfer form state that the form is signed by the three executors pursuant
to the authority given to them under a resolution passed at their meeting held
on November 27, 1984. But the fact remains that in view of the terms of the
said will, read with the deeds of trust referred to therein, the trustees, for
the purpose of selling these shares and for conducting any other business, were
entitled to act by a majority. The trustees had, therefore, the power to sell
these shares on the basis of a decision taken by the majority of trustees. The
trustees have also passed a resolution authorising any one of them to execute
the transfer forms for the purpose of implementing their resolution to sell the
said shares. It is,' therefore, not necessary for all the trustees to sign the
transfer forms.
Under
section 108 of the Companies Act, a company shall not register a transfer of
shares unless a proper instrument of transfer duly stamped and executed by or
on behalf of the transferor and by or on behalf of the transferee has been
delivered to the company along with the certificate relating to the shares. In
the present case, the transfer form is signed by three transferors. Under the
resolution of the trustees/executors any one of the executors was entitled to
sign the transfer forms. Hence, the three executors who have signed the
transfer forms have done so as transferors in valid exercise of the power under
the said resolution. At the highest, the only defect is that they have not
stated that they have signed the transfer forms on behalf of all the executors
or in exercise of their authority under the said resolution. This, in our view,
is, at the highest, only an irregularity which can be easily corrected by the
transferors. In these circumstances, it would be futile to invalidate the
registration of transfer of these shares when the transferors can immediately
submit fresh transfer forms signed by them on behalf of all the transferors. As
set out in the case of Killick Nixon Ltd. v. Dhanraj Mills P. Ltd. [1983] 54
Comp Cas 432, 465 (Bom) (a judgment to which one of us was a party), the court
should not accept any invitation to indulge in a futile exercise under section
155. The provisions of this section are not meant for correcting procedural
errors.
In the
case of Bentley-Stevens v. Jones [1974] 2 All ER 653, there were irregularities
in convening an extraordinary general meeting of the company at which the plaintiff
was removed as a director. The court held that it would not grant an
interlocutory injunction in respect of the irregularities which could be cured
by going through the proper processes. If, for example, the proceedings that
followed the board meeting were invalid because proper notice had not been
given, the invalidity could be cured by the giving of a valid notice. The
Chancery Court cited with approval the pronouncement of Lindley L.J. in Browne
v. La Trinidad [1887] 37 Ch 1, 17 :
"I
think it is most important that the court should hold fast to the rule upon
which it has always acted, not to interfere for the purpose of forcing
companies to conduct their business according to the strictest rules, where the
irregularity complained of can be set right at any moment."
Applying
the same principles here, the irregularity, if any, in signing transfer forms
can be easily set right by the trustees signing the transfer forms under the
authority given to them under the resolution passed at the meeting of executors
and trustees referred to earlier.
Trustees'
power to act by a majority :
It was
submitted, on behalf of the petitioners by Mr. S.J. Shah, that the majority
cannot ride roughshod over a minority. Even when the trustees have the
authority to act by majority, their decision has to be taken only after
discussion with the minority. In support he cited the case of Fahira Krishnaji
v. Ganpat Sakharam, AIR 1954 Nagpur 92. A learned single judge of this court,
in that case, observed that the majority decision, in order to be binding on
the entire body of the trustees, should have been arrived at after due
deliberation by all the trustees. Where it was an act of the majority alone it
will not be binding on the minority. The ratio of this judgment does not apply
to the present case. Because the notice of the meeting of the
executors/trustees was sent to the first petitioner also. The notice clearly
set out the purpose for which the meeting had been called. The first petitioner
was, therefore, aware of the reason for convening the meeting. She had returned
to the house from hospital at the time when the meeting was called. Her stand
on the subject under discussion was also familiar to all the trustees. In fact,
even now she has not challenged the decision taken by the majority of executors
at this meeting to offer the 3,417 shares for sale. Nor has she challenged the
consequential decision taken by the majority to offer the shares to her in view
of the provisions of article 57A of the articles of association of the company.
There is, therefore, no question of the first petitioner contending that the
majority decision of the trustees is not binding on her. In fact, she has acted
on the decision by accepting the shares offered to her at a valuation to be
fixed by the auditors.
Offer
to other shareholders :
It has
also been contended that the offer made to all the other shareholders of the
company in the, event of the petitioners not exercising their right under
article 57A, is defective. This contention also cannot be accepted. The company
did inform all its shareholders that the trustees were proposing to sell the
shares in question and that, in the event of the petitioners not exercising
their right under article 57A, the shares would be available for purchase by
the other shareholders. None of the other shareholders showed any interest in
purchasing these shares. It was submitted before us that the second petitioner,
being a shareholder, could have purchased these shares in her own right even if
she had declined to purchase these shares as a nominee of the first petitioner
under article 57A. There is, however, no material before us which would
indicate that she had, at any time, informed the company that she proposed to
exercise her rights as a shareholder to purchase these shares. Throughout, even
in various litigations which are pending, her claim has been to enforce her
rights under article 57A as a nominee of the first petitioner. There is,
therefore, no basis for the submission that the second petitioner had exercised
her rights as an ordinary shareholder to purchase these shares.
Valuation
by the auditors :
It is
contended by Mr. S.J. Shah, learned counsel for the petitioners, that the
petitioners were not bound by the valuation of these shares made by the
auditors because the valuation was not fair. Under article 61 of the articles
of association the auditors are required to certify in writing what, in their
opinion, is the fair value of the shares in case there is any difference
between the transferor and the purchaser as to the fair value of a share. The
article further provides that in fixing this fair value the auditors shall be
considered as acting as an expert. As observed in Pennington's Company Law,
fifth edition, at page 817 :
"If
the pre-emption clause requires the shares to be offered to the other members
at a fair value certified by the directors of the company's auditor, the court
cannot enquire into the correctness of the valuation, unless there is evidence
that it was not honestly made, or unless the person who made it set out the
reasons for his valuation, and those reasons show that he did not apply the
proper principles ......... and in that situation the transferor's only remedy
is to sue the person who made the valuation for the difference between the
valuation and the real value of the shares as damages in an action for
negligence."
In the
case of Baber v. Kenwood Manufacturing Co. Ltd. and Whinney Murray and Co.
[1978] 1 Lloyd's Law Reports 175 (CA), at page 179, it is held :
"If
two persons agree that the price of property should be fixed by a valuer on
whom they agree, and he gives that valuation honestly and in good faith, they
are bound by it. If there were fraud or collusion, of course, it would be very
different. Fraud or collusion unravels everything."
The
petitioners were, therefore, bound by the valuation made by the auditors unless
they can establish fraud or collusion. Otherwise, the auditor's certificate is
final and one cannot go into the question whether the valuation is fair or proper
or not.
In the
first place, there is no material before us which would indicate that the
valuation made by the auditors was not fair. On the contrary, while the
auditors valued the shares at Rs. 2,160 each, at the actual sale to the fifth
respondent and the companies controlled by him, the shares fetched a higher
price of Rs. 2,300 per share. We have also to bear in mind that the 3,417
shares held by the trustees as also the 93 shares held personally by some of
the trustees, were sold as a controlling block of shares in the first
respondent company. They would, therefore, fetch a higher price. The trustees
were also duty-bound to obtain the best possible price for the shares because
the sale proceeds were impressed with the public trust created by the settlor.
They were, therefore, entitled to sell these shares as a controlling block of
shares in the first respondent company. As a consequence they seem to have
fetched a good price of Rs. 2,300. The valuation made by the auditors,
therefore, in this context cannot be considered as unfair.
The
petitioners have not relied upon the balance-sheets of the company or any other
financial data of the company to establish that the valuation made by the
auditors was unfair. The petitioners, however, contend that at a subsequent
date, after having obtained control of the first respondent company, the board
of directors issued an additional 17,666 shares at par. This, according to the
petitioners, would indicate that the valuation made by the auditors of the
company was unfair. We do not see how a fresh issue of shares at a subsequent
date at par can, in any manner, affect the valuation, earlier made by the
auditors of the company, of shares which were then available for sale. The
board of directors are within their rights in issuing fresh shares at par. They
could have even issued bonus shares. This does not mean that the earlier share
valuation which was made by the auditors in respect of the shares which were
sold by one group of shareholders to another was unfair. In fact we have not
been shown even the balance-sheets of the company for the relevant dates in
order to establish the petitioner's claim that the valuation made by the
company's auditors was unfair. The petitioners rely upon the, fact that they
have made a complaint to the institution of auditors in respect of the conduct
of the auditors of this company. That by itself cannot establish that the
valuation was unfair.
Collusion
:
The
auditors, according to the petitioners, have acted in collusion with the other
executors and the intending purchasers in order to deprive the petitioners of
their right to purchase these shares. No particulars of such collusion and/or
fraud are set out in the petition. In the absence of any particulars, this plea
cannot be accepted. The petitioners seem to suggest that by valuing the shares
at higher figures, the petitioners were deprived of their right to purchase
these shares. Presumably, therefore, the petitioners did not exercise their
right under article 57A because they did not have enough funds to purchase
these shares at Rs. 2,160 per share. We do not have any necessary material to
indicate what were the funds available with the petitioners, what, according to
the petitioners, was the fair value of the shares and whether the funds with
the petitioners were adequate for the purchase of these shares at the
"fair value" as claimed by the petitioners. The entire argument is,
therefore, purely hypothetical. In fact, in this situation, there appears to be
a clear conflict of interests and duties as far as the petitioners are
concerned. The first petitioner, as an executor/trustee under the will of her
husband was duty-bound to realise the maximum possible price for the shares
held by her along with the other executors so that maximum possible amount can
be made available for purposes of the trust created by her deceased husband. On
the other hand, as a person who was entitled to purchase these shares in
exercise of her right of pre-emption under article 57A of the articles of association,
she was interested in obtaining these shares at as low a price as possible. The
second petitioner was only her nominee for the purpose of purchase of these
shares. Both were, therefore, equally interested in purchasing these shares at
as low a price as possible. The entire challenge to the valuation made by the
auditors of the company indicates the interest of the petitioners in obtaining
these shares at as low a price as possible. Looking at this clear conflict of
interests and duties, it is doubtful, whether the petitioners, so long as the
first petitioner remained an executor/trustee, could have at all purchased
these shares in exercise of their rights under article 57A. In any case we have
no material to arrive at any finding of fraud or collusion on the part of the
auditors, or even any deliberate overvaluation.
The
petitioners next contend that the other executors, namely, respondents Nos. 3
and 4, were also interested in selling their personal holding of 93 shares at a
high price; Hence, they were interested in getting the auditors to make a high
valuation. As earlier stated, there is no material which would indicate that
the executors asked the auditors to overvalue the shares. In fact, the shares
when sold fetched a higher price than that fixed by the auditors. Moreover, in
the case of respondents Nos. 3 and 4, their personal interest does not conflict
with their interest as trustees and executors. Both were equally interested in
getting as good a price as possible for the shares. They are, therefore, not in
the same position as the petitioners.
Natural
justice :
The
petitioners have also challenged the valuation made by the auditors on the
ground that there was a denial of natural justice in determining this
valuation. According to the petitioners, the auditors should have first
prepared a draft valuation giving their reasons and submitted a copy of it to
the petitioners for their comment. After the petitioners were heard on this
draft valuation the auditors should have finalised their valuation. In not
doing so they have violated the principles of natural justice.
The
entire argument is misconceived. The auditors were acting as experts, relying
on their own skill and judgment in giving their valuation of shares. The
question of applying the principles of natural justice in such a case does not
arise. In any case they were not bound to follow the procedure as suggested by
the petitioners. Moreover, before giving their valuation certificate, the
auditors did ask the petitioners whether they would like to make any
submissions or produce any material regarding the valuation of shares. They
extended the time for this purpose at the request of the petitioners. The
petitioners, however, did not avail of this opportunity and on the last day of
the extended time, claimed that natural justice was denied to them because the
draft valuation, etc., were not sent to them for comment. Hence, this
contention of the petitioners has no merit.
Readiness
and willingness of the petitioners to purchase :
It was
next contended by the petitioners that the respondents have acted illegally in
selling these shares to a third party when the petitioners were ready and
willing to exercise their right of pre-emption under article 57A. Undoubtedly,
the petitioners accepted the offer made to them under article 57A to purchase
these shares. The offer was to sell these shares at a price of Rs. 2,250 per
share which was the offer then received by the executors from a third party, or
at a price to be determined by the auditors under article 57A. The petitioners
agreed to purchase these shares at a price to be determined by the auditors.
The price so fixed by the auditors was binding on the petitioners.
Nevertheless, when the auditors determined the price, the petitioners challenged
the price and did not agree to purchase these shares at the price fixed by the
auditors. In these circumstances, the executors were free to offer the shares
for sale elsewhere in accordance with the articles of the company. There is no
breach of any contract on the part of the executors.
After
these shares were sold by the executors to the fifth respondent and the
companies controlled by him to the knowledge of the petitioners, the
petitioners wrote a letter accepting the valuation made by the auditors and
offered to purchase the shares at the valuation made by the auditors. This
belated acceptance at a time when the petitioners were fully aware that the
shares were already sold, does not appear to be genuine.
Validity
of the board meeting of November 21, 1985 :
It was
next contended by the petitioners that the agenda of the meeting of the board
of directors at which the transfer of these shares was accepted by the board,
did not contain this item relating to the transfer of these shares. Hence,
according to the petitioners, the board meeting was invalid. The petitioners,
after objecting to the manner of convening the board meeting, had left the
meeting. The subject-matter of transfer of shares was taken up, after the
petitioners had left, under the heading "to consider any other matter with
the permission of the chairman". In this connection, our attention was
drawn to section 286 of the Companies Act which deals with the meetings of the
board of directors. This section does not say that every item which is
discussed at the board meeting must be specified on the agenda of the board
meeting. In fact, the section does not refer to any agenda. The Punjab and
Haryana High Court in the case of Suresh Chandra Marwaha v. hauls Pvt. Ltd.
[1978] 48 Comp Cas 110 dealing with a similar situation where, at the meeting
of the board of directors, some shares were transferred about which there was
no mention in the agenda of the meeting, said (at page 119) : "No
provision of law or the articles of association of the company has been brought
to our notice obliging the board of directors to only transact that business
for which agenda is issued. It is well-known that every agenda of a meeting has
a residuary clause 'to consider any other matter with the permission of the chairman'.
The matter with regard to the transfer of shares was considered in the meeting
of the board of directors ........ with the permission of the chairman. No
illegality was committed thereby." Similar observations are made by the
Delhi High Court in the case of Smt. Abnash Kaur v. Lord Krishna Sugar Mills
Ltd. [1974] 44 Comp Cas 390. The Delhi High Court also said that the law does
not require an agenda for a meeting of the board of directors and any business
whatsoever can be transacted at the board meeting. In any case, this is, at the
highest, only an irregularity and it would not vitiate the transfer or shares.
The
petitioners have alleged that at the very same meeting of the board of
directors, respondent No. 5 was brought on the board of directors as an
additional director. There was, therefore, a conspiracy between the other
directors of the first respondent company and the purchasers of the transferred
shares to oust the petitioners. In this context, it is necessary to bear in
mind that respondent No. 5 and the companies controlled by him had, by paying
the price of Rs. 2,300 per share, acquired the controlling block of shares in
the first respondent company. All the directors of the first respondent company
were aware of this fact. In these circumstances, if respondent No. 5 desired to
be on the board of directors of the first respondent company, there was nothing
underhand about it. This cannot be considered as a conspiracy against the
petitioners. The petitioners had the first option to purchase this group of
shares. The challenge, therefore, to the transfer of 3,417 plus 93 shares of
the first respondent company fails. The question of rectification of the
register of members in this connection does not arise.
Fresh
issue of 17,666 shares :
The
next ground of challenge is to the fresh issue of 17,666 shares to respondent
No. 5 and his group of companies at par. This was done at the annual general
meeting of the company held on November 16, 1985. At the relevant date the
authorised capital of the first respondent company was Rs. 25 lakhs divided
into 25,000 shares of Rs. 100 each. The issued capital was Rs. 7,33,400 (7,334
shares). At this annual general meeting, it was decided to issue the balance
authorised shares, that is to say, 17,666 shares of Rs. 100 each so as to
increase the issued share capital to Rs. 25 lakhs. The agenda of the annual
general meeting did not show this item of fresh issue of 17,666 shares at par.
The respondents claim that there was urgent financial necessity to obtain additional
share capital for the purposes of this company. They rely upon the need to
purchase certain machinery and so on. We are not very impressed with this
so-called financial necessity.
The
board meeting which immediately followed the annual general meeting decided to
allot these shares at par to respondent No. 5 and certain other companies under
his control. This clearly indicates that respondent No. 5 and his group of
shareholders, who were in control of the respondent company, had decided to
make a fresh issue of share capital to themselves at par so as to strengthen
their control over the company. For this purpose they brought in certain
additional funds, being the price of these shares which they purchased at par.
Can
this action be challenged ? Let us first examine the legal effect of the agenda
of the annual general meeting not showing this item on the agenda. Section 172
of the Companies Act, which deals with the meetings of the company, requires
that the notice of the meeting shall specify the place, the day, and the hour
of the meeting and shall contain a statement of the business to be transacted
at the meeting. Section 172 also requires an explanatory statement to be
annexed to such notice as set out in that section. The respondents certainly
committed an irregularity in not mentioning this item on the agenda of the
annual general meeting. But this irregularity does not, in our view, vitiate
the decision which was taken. As set out earlier, the court will not interfere
in the case of irregularities which can be cured. In the present case, even
without these additional shares which were issued, respondent No. 5 and his
group of shareholders had a majority control over the company. This is clear
from the votes which were cast at the annual general meeting in favour of and
against this fresh issue of shares. 4,260 votes were cast in favour of this
resolution while 3,049 votes were cast against the resolution. Hence, they were
and are in a position to get the fresh issue sanctioned at the meeting of the company
after notice. Moreover, at the same annual general meeting, it was decided that
an extraordinary general meeting of the company would be called after proper
notice to ratify this fresh issue of 17,666 shares at par. Such an
extraordinary general meeting was held after notice on January 31, 1986, when
the issue of these shares at par was ratified. According to the petitioners,
this ratification is invalid as the shareholders of the newly issued 17,666
shares also voted at this extraordinary general meeting in favour of the
resolution. But quite clearly, even if we ignore the 17,666 additional votes
which were cast in favour of the resolution, the remaining votes in favour,
which are 4,260, far exceed 3,049 votes cast against the resolution. The
ratification is valid. We do not see any reason to invalidate this issue.
As
observed by Mellish L.J. in the ease of MacDougall v. Gardiner [1875] 1 Ch 13,
at page 25, "If the thing complained of is a thing which in substance the
majority of the company are entitled to do or if something has been done
irregularly which the majority of the company are entitled to do regularly, or
if. something has been done illegally which the majority of the company are
entitled to do legally, there can be no use in having litigation about it, the
ultimate end of which is only that a meeting has to be called, and then
ultimately the majority gets its wishes". (see also in this connection
Parmeshwari Prasad Gupta v. Union of India, AIR.
1973 SC 2389 ; [1974] 44 Comp Cas 1).
Pro-rata
distribution of the fresh issue :
Under
section 81(1) of the Companies Act where there is a further issue of capital
such further shares shall be offered to the persons who, at the date of the
offer, are holders of the equity shares of the company in proportion, as far as
possible, to the capital paid up on the shares at that date. Section 81(3),
however, provides that section 81 does not apply to a private limited company.
A private limited company, therefore, is entitled to offer such further issue
of shares in such manner as it may determine, subject of course to its articles
of association. The articles of association of the first respondent company do
not require such further issue of shares to be allotted in any particular
manner to the existing shareholders. The allocation of further issue of shares,
therefore, to respondent No. 5 and his group of companies, is not illegal or
contrary to law. Moreover, the respondents have, at the hearing of the
petition, made a "with prejudice" offer to distribute these 17,666
shares at par pro rata to the petitioners so that the petitioners may continue
to have their 41 per cent. holding of shares in the first respondent company.
This "with prejudice" offer has been made again at the hearing of
these appeals before us also. But this offer has not been accepted by the
petitioners. We do not see how this issue of 17,666 shares at par can be
invalidated, although undoubtedly, it has caused prejudice to the petitioners
by strengthening the control of respondent No. 5 and his group over the first
respondent company. If any other remedy at law is available to the petitioners
in this connection, they are free to avail of it. But we fail to see how the
register of members can be rectified under section 155 of the Companies Act in
respect of these shares when the respondents were within their rights in
issuing these shares at par.
Subsequent
events :
We
would also like to refer to some subsequent events which also make it difficult
to set the clock back, so to speak. In the first place, by selling the 3,417
shares the executors received a sum of about Rs. 80 lakhs. After discharging
the liabilities under the will of the deceased, Dr. Parulekar, the net sale
proceeds amounting to about Rs. 60 lakhs have been used to create a public charitable
trust for the purposes set out by the settlor in his will. The fund is now
impressed with a public charitable trust. Secondly, the fund which was brought
into the company by respondent No. 5 and his controlling group of companies by
purchasing the fresh issue of 17,666 shares, has also been utilised by the
company for its expansion, for investments and for the purchase of machinery.
This fund also is not now available for being released to the original buyers.
In
these circumstances, the learned single judge, while allowing the petition, had
directed the petitioners to bring in a sum of Rs. 80,73,000 within the time
stipulated by him under his order. The petitioners, however, failed to deposit
this amount or any part thereof in the court within the stipulated period.
Their application for extension of time was also rejected by the learned single
judge for reasons which are set out by him in his order of March 30, 1988. In
these circumstances and looking to the fact that the petitioners have not been
able to raise the funds within the period given to them by the learned single
judge for acquiring a controlling interest in the first respondent company, we
do not see how any relief can be granted to the petitioners. The direction of
the learned single judge relating to the retention of 17,666 shares with the
company until they are reallotted by the directors also, in our view, is a
relief which is not within the ambit of section 155 of the Companies Act. Be
that as it may, looking to these circumstances, it is difficult to grant any
relief to the petitioners under section 155. They have been unable to avail of
their rights under article 57A to acquire a controlling interest in the first
respondent company. For various reasons, with which we are not concerned,
either they do not have the requisite funds, or for reasons best known to them,
they have not availed of their rights as required by law. We may also mention
in this connection the fact that even initially, the suit which they filed in
the Poona court was not a suit for specific performance of their rights under
article 57A, but only a suit to restrain the executors from selling the shares
to anyone other than the petitioners. Only in August, 1986, they filed the
present company petition which again is for a limited relief under section, 155
of the Companies Act and not a petition under section 397 or 398 of the
Companies Act. It was only after the judgment was delivered by the learned
single judge in this company petition that they have now filed two suits in
March, 1988, for specific performance. Section 155 is a discretionary remedy
which is not normally resorted to when there are allegations of fraud. We need
not, however, go into this aspect of the matter because, in any event, for
reasons which are set out by us in our order, the petitioners are not entitled
to any relief as prayed for by them in the petition.
The
judgment of March 30, 1988 :
The
appeals before us from the judgment of the learned judge dated March 31, 1988,
declining to grant any extension of time, are all filed by either the trustees,
the purchasers from the trustees or by the company in respect of certain
observations made in that judgment and order. The petitioners have not filed
any appeal before us challenging the order refusing to extend the time for the
deposit of Rs. 80,73,000. The impugned observations are in respect of the
readiness and willingness of the petitioners to purchase the shares in
question. The learned judge has observed that on account of the failure of the
petitioners to deposit Rs. 80,73,000 within the stipulated period the petition
stands dismissed. But the observations made in his judgment would continue to
bind the parties. In view of the fact that the appeals from the main judgment
are now allowed, the appellants, from this part of the order, can have no
grievance now.
In his
judgment of March 30, 1988, the learned single judge has also observed that in
the suit for specific performance it would be open to the petitioners to show
their capacity and to convince the court that they are in a position to really
purchase these shares and to enforce specific performance of the contract.
These observations should not be interpreted to mean that the readiness and
'willingness of the petitioners will have to be judged only at the point of
time when the suits for specific performance are decided. The learned judge has
merely referred to the fact that the question of readiness and willingness of
the petitioners, throughout the material period, to purchase these shares will
have to be decided by the court which tries those suits on the basis of the
evidence which is available before the court. These observations cannot be read
to mean that, if the law requires the petitioners to prove their readiness and
willingness throughout the material period, the requirements of law have, in
any manner, been modified by the learned single judge or by us.
In the
premises, Appeal No. 711 of 1988 and Appeal No. 1214 of 1988 are allowed.
Appeal No. 742 of 1988 which is the petitioners' appeal against the conditional
order is dismissed. Appeals Nos. 655 of 1988, 710 of 1988 and 1032 of 1988 are
dismissed with the clarifications we have already made in respect of the order
of the learned single judge dated March 30, 1988.
Appeals
are disposed of accordingly. Looking to the circumstances of the present case
there will be no order as to costs.
Mr.
S.M. Shah, learned counsel for the petitioners, applies for the continuation of
order dated December 21, 1989, in Notice of Motion No. 3109 of 1989, taken out
in Appeal No. 742 of 1988. This notice of motion was, inter alia, to restrain
the respondents from amending the articles of association of the respondent
company as set out therein. In that motion an order was passed whereby, pending
disposal of the appeal, the appellants' right of pre-emption under article 57A
was not to be disturbed and respondent No. 1 company was directed not to issue
or invite any fresh capital till the disposal of the appeal. Certain other
directions were also given as set out therein. This order shall remain in force
for a period of eight weeks from today and no further.
The
petitioners apply for leave to appeal to the Supreme Court. No substantial
question of law of public importance arises in this appeal, and hence the leave
is refused.
Certified
copy expedited.
[1972] 42 COMP. CAS. 29 (CAL.)
HIGH COURT OF
CALCUTTA
v.
Sitaram
Jaipuria
S.K. MUKHERJEA, J.
SUIT NO. 451 OF 1970
MARCH 16, 1971
Prabir Sen for the Petitioner.
S.C. Sen for the Respondents.
JUDGMENT
S.K. Mukherjea, J.—This is an application in a representative action by a
shareholder for an injunction restraining the respondent company, Swadeshi
Cotton Mills Co. Ltd., and its directors from holding any meeting pursuant to a
notice dated September 14, 1970, or from passing any of the resolutions set out
in the said notice or from giving effect to the resolutions, if passed.
The history of the litigation may be briefly indicated. On
January 29, 1970, a notice was given by the secretary of the respondent-company
intimating that a general meeting of the company would be held on February 27,
1970, to consider and if thought fit to pass the following resolution among
others.
“Resolution No. 1.—Resolved that subject to the necessary
approval of the Central Government being obtained pursuant to the provision of
section 372 and all other applicable provisions, if any, of the Companies Act,
1956, the company hereby sanctions investment by it in the shares of the
Swadeshi Polytex Ltd., Kanpur, to the extent of the aggregate face value of Rs.
1 crore by way of subscribing and/or purchasing to the extent of 10,00,000
equity shares of the value of Rs. 10 each at par on such terms and conditions
as the board of directors think fit notwithstanding the fact that the
investment in the shares of the said Swadeshi Polytex Ltd. exceeds 10 per cent.
of the subscribed capital of the said Swadeshi Polytex Ltd. and shall exceed 30
per cent. of the subscribed capital of this company and the board of directors
of the company be and are hereby authorised to do and/ or cause to be done all
such acts, deeds or things as they may think expedient for the purpose. The
explanatory statement annexed to the said notice stated:
The company had received a letter of intent from the Government
of India for establishment of a new undertaking for the manufacture of
polyester fibre. As a considerable amount of capital will have to be raised it
was considered expedient to promote a new company.............Accordingly a
company under the name and style of Swadeshi Polytex Company Ltd. is being
incorporated. Considering the future prospects and the profitability of the
company, Swadeshi Polytex Ltd., it is considered desirable that this company
should invest liberally in the shares of the aforesaid company. It is proposed
to acquire equity shares to the extent of the aggregate value of Rs. 1 crore in
the new company aforesaid.”
The petitioner instituted a suit against the
respondent-company and its directors for a permanent injunction restraining the
respondents from holding any meeting pursuant to the said notice and from
passing the resolutions mentioned in the said notice on the ground that the
notice did not disclose material facts. On February 26, 1970, on an application
moved ex parte, Mr. Justice, S. C. Ghose, passed an order of injunction
restraining the respondents from giving effect to any resolution that might be
passed pursuant to the said notice. The resolutions in question were passed at
a meeting held on February 27, 1970. The application was finally disposed of by
Ghose J. by an order dated September 7, 1970. By the said order, the directors
of the respondent-company were restrained from acting on the resolution No. 1
until the same was confirmed or approved at a meeting properly notified. The
said order of injunction was issued by the learned judge on the ground that the
explanatory statement did not disclose a material fact, viz., that the offer
contained in the letter of intent had lapsed on January 24, 1970, and was no
longer in force when the notice was issued.
Subsequently Swadeshi Polytex Ltd. decided to increase the
issue of initial capital from Rs. 4 crores to Rs. 4 crores 40 lakhs divided
into 33,00,000 equity shares of Rs. 10 and 1,10,000 preference shares of Rs.
100 each.
Thereafter, in pursuance of the order of Ghose J , the
respondent-company on September 14, 1970, gave notice to the members that a
general meeting of the respondent-company would be held on the 12th day of
October, 1970, to consider and, if thought fit, to pass with or without
modification, the following resolution:
“Resolved that resolution No. 1 which had been unanimously
passed as an ordinary resolution at a general meeting of the company held on
February 27, 1970, in pursuance of the notice dated the 29th January, 1970, be
and is hereby confirmed and approved.”
The explanatory statement stated:
“The letter of intent which has been revalidated by the
Central Government has been transferred by the Central Government to the name
of Swadeshi Polytex Ltd. and accordingly the plant is being put up by them at
Ghaziabad in collaboration with Messrs. Vickers Zimmer AG. Frankfurt.
Terms of collaboration have been approved by the Central
Government and the work has already commenced. The plant is likely to go into
production in early 1973.”
The petitioner instituted a representative suit against the
respondent-company and its directors for a declaration that the notice dated
September 14, 1970, and the explanatory statement annexed thereto convening a
general meeting of the respondent-company for the purpose of passing the
resolution set out in the said notice were void and the said resolution, if
passed, is void and inoperative and of no effect and for a permanent injunction
restraining the respondents from holding any meeting pursuant to the said
notice or giving any effect to the resolution if passed. The present
application has been made in aid of the suit.
On the 12th October, 1970, the said resolution was
unanimously passed at a general meeting held in pursuance of the said notice.
The notice and the explanatory statement are impugned by
the petitioner on three grounds, viz.:
(i) Neither documents
disclosed whether permission had been obtained from the Central Government as
required under the Monopolies and Restrictive Trade Practices Act for
establishing the undertaking of Swadeshi Polytex Ltd. which when established
would be an inter-connected undertaking of the respondent-company.
(ii)The said documents informed the members that work of
the said polyester fibre plant had commenced. No disclosure was made whether a
licence had been obtained in respect thereof as required by section 11 of the
Industries (Development and Regulation) Act.
(iii)None of the terms and conditions of the collaboration
agreement, financial, technical or otherwise were disclosed.
The only other objection of the petitioner is not an
objection to the notice but to the resolution itself. It is urged that by
reason of increase of share capital of the Swadeshi Polytex Ltd. subsequent to
the order of Ghose J., the basis of the resolution which was sought to be
confirmed had disappeared and a new state of affairs had come into existence.
Therefore, the resolution could not have been validly confirmed.
The respondents contend that the Monopolies and Restrictive
Trade Practices Act has no application in the facts of this case.
The preamble to the Monopolies and Restrictive Trade
Practices Act, 1969, declares it to be an Act to provide that the operation of
the economic system does not result in the concentration of economic power to
the common detriment. Chapter III of the Act is intituled “Concentration of
Economic Power”. Sections 20 and 22 occur in Part A of Chapter III. The
relevant portions of sections 20 and 22 may be set out:
“20. Undertakings to which this part applies:—This part
shall apply to—
(a) an undertaking, if the total value of—
(i) its own assets, or
(ii) its own
assets together with the assets of its interconnected undertakings, is not less
than twenty crores of rupees.................
Explanation.—The value referred to in this section shall
be—
(i) in the
case of an undertaking referred to in clause (a) or clause (b), as the case may
be, the value of its assets on the last day of its financial year which closes
during the calendar year immediately preceding the calendar year in which the
question arises as to whether this part does or does not apply to such
undertaking; ..........
22. Establishment of new undertakings.—(1) No person or authority,
other than Government, shall, after the commencement of this Act, establish any
new undertaking which, when established, would become an interconnected
undertaking or an undertaking to which clause (a) of section 20 applies except
under, and in accordance with the previous permission of the Central
Government.
(2) Any person or authority intending to establish a new undertaking
referred to in sub-section (1) shall, before taking any action for the establishment
of such undertaking make an application to the Central Government in the
prescribed form for that Government’s approval to the proposal of establishing
any undertaking................”
The respondent-company has a subsidiary of the name of
Swadeshi Mining and Manufacturing Ltd. It is conceded that the undertaking of
the subsidiary company is an inter-connected undertaking within the meaning of
the statute.
It is clear that section 22 is not attracted to an
undertaking unless its own assets or its own assets together with the assets of
its inter-connected undertakings is not less than Rs. 20 crores. It is not in
dispute that the question as to whether Part I of Chapter III of the Act
applies to the undertaking of the respondents arose in 1970. Therefore, the
relevant point of time at which value of its assets and the assets of its
inter-connected undertakings has to be computed is 31st December, 1969, that is
to say, the last day of their financial year.
Section 2 of the Act provides that “value of assets” in
relation to an undertaking means the value of its assets as shown in its books
of account after making provision for depreciation or for renewals, or
diminution in value. The balance-sheets of the respondent-company and of its
subsidiary are prepared on the basis of their books of account. In the
balance-sheet of the respondent-company for the year 1969, its assets have been
valued at rupees 15,47,61,029 and the assets of the subsidiary at Rs.
5,15,32,205 aggregating Rs. 20,62,93,234. If one is to go by these figures the
conclusion is inescapable that Part A of Chapter III is attracted to the
undertaking of the respondent-company.
On behalf of the respondents it was contended by Mr. S. C.
Sen that in computing the aggregate of the values of the assets of a holding
company and of its subsidiary, the value of the shares of the subsidiary
company held by the holding company should be ignored because if the two
undertakings are treated as one for the purpose of valuation, the shares of the
subsidiary company held by the holding company lose all significance. The
balance-sheet of the respondent-company assesses the value of the shares of the
subsidiary held by it at Rs. 1,69,56,121. If the value of these shares is left
out, the aggregate comes to less than rupees twenty crores. In that view of the
matter, section 22 can have no application.
In my opinion, there is considerable force in the
contention raised by Mr. Sen. The object of the Act, professedly, is to prevent
the concentration of economic power in the hands of individuals, associations,
groups or corporate bodies. Section 20 indicates that the degree of
concentration of economic power in an undertaking or a group of undertakings is
to be judged by the value of its or their assets. The Monopolies and
Restrictive Trade Practices Act is concerned with the substance of a
transaction, not with its form, with the real constitution of an association, a
group, or a corporate body, not with its facade.
The statute seeks to tear the veil and not merely of corporate
bodies. It aims at demolition of fictions. It is concerned with the actual
magnitude of concentration of economic power, no matter how the concentration
is achieved, by creation of partnerships, associations of persons or corporate
bodies, or by taking recourse to devices or subterfuges. It is not among the
objects of the statute, and it is certainly against its spirit, to endorse or
sanction the validity of fictions. If the values of the assets of the holding
company and of its subsidiary have to be added for the purpose of determining
the degree of concentration of economic power, what ought to be considered is
the real value of the total assets. Once the assets of the holding and of the
subsidiary company are treated as one, the shares of the subsidiary company
held by the holding company cease to be real assets and the question of valuing
those shares does not arise. This will become clear if one visualises
amalgamation of the subsidiary company with the holding company in which case
the shares of the subsidiary company held by the holding company have to be
written off. To include the value of shares of the subsidiary company held by
the holding company in computing the total value of the assets of the two
companies will be to inflate the total value by including fictional assets. The
spirit of the Act militates against such inflation by the use of fiction. But
for the definition of “value of assets” given in the Act itself, I would have
deducted the value of the shares in the subsidiary company held by the
respondent-company, but, having regard to the definition, I am unable to do so.
I feel that in denning “value of assets” the legislature has overlooked the
anomaly which underlies a situation like the one with which I am concerned in
this case. Be that as it may, to exclude the value of the shares in the
subsidiary company held by the respondent-company will not be proper in the
face of the clear directive of the definition. I am, therefore, of the opinion
that if the undertaking of Swadeshi Polytex Ltd. transpires to be an
inter-connected undertaking of the respondent-company, section 22 will apply.
On behalf of the respondents, Mr. Sen submitted that the
Monopolies and Restrictive Trade Practices Act is a piece of public legislation
brought into existence to give effect to the economic policy of the State in
public interest; it has not been enacted for the benefit of an individual or a
class. Only the State can seek to enforce its provisions; no person or class is
competent to do so by an action ; at the most, the petitioner may invoke the
writ jurisdiction of the court and ask for an order directing the State to
enforce the statute. Counsel relied on Craies on Statute Law, 6th edition,
Chapter 11, pages 229-249. He also relied on Vallance v. Folk, Clegg,
Parkinson & Co. v. Earby Gas Co., Cutler v.
Wandsworth Stadium Ltd. and Newman v. Francis. It is not
necessary for me to go into the question raised by counsel. It is true that the
Act has not been enacted for the benefit of shareholders of bodies corporate
which own, control or manage inter-connected undertakings. On the contrary, the
statute seeks to restrict the powers of those bodies, and, therefore, of their
shareholders. That does not, however, detract from the legal right of a
shareholder to bring an action against the company of which he is a shareholder
to restrain it from committing an illegal act or from questioning the
sufficiency or validity of the notice of a resolution. Here the petitioner is
not asking for an injunction restraining the respondent-company from acquiring
shares of the polytex company; he is contending that the notice of the meeting
at which the resolution proposing the acquisition of shares was passed was
invalid and asking for an injunction restraining the respondent-company from
implementing the resolution. A shareholder is competent to ask for such an
order. In that view of the matter, I reject the contention that the petitioner
has no locus standi to make the application.
In clause (v) of section 2 of the Act the word
“undertaking” has been defined to mean an undertaking which is engaged in the
production, supply, distribution or control of goods of any description or the
provision of services of any kind. Therefore, an “undertaking” in the sense of
the statute, has to be an undertaking in its grammatical signification. The
Oxford English Dictionary assigns to the word “undertaking” the meaning of a “a
thing undertaken or attempted”. The word does not mean the owner of a thing
undertaken. This construction is supported by the use of the neuter relative
pronoun “which” in section 2(v) which can never be used in relation to a
natural person.
Although “undertaking” has been denned, it seems that in
the use of the word in the statute the definition has been occasionally lost
sight of, and the term “undertaking” has been used loosely in some places to
mean the owner of an enterprise. For example, in section 2(g)(i) “one” can only
mean “the owner of an enterprise”, though the “other” means the other
enterprise. Section 25 speaks of “Directors of undertakings” ; there
“undertaking” means a corporate body which owns an undertaking. Be that as it
may, an examination of the statute reveals that the term “under taking” is used
in the statute, by and large, in the sense of “a thing undertaken” as defined
in the Act. The word “undertaking”, therefore, should be read in the sense of
“a thing undertaken” unless the context requires otherwise.
The term “interconnected undertaking” has been denned in
section 2(g) of the Act to mean two or more undertakings which are
inter-connected with each other in any of the following manner, namely:
“(i) if one owns or controls the
other,.............................
(iii) where the undertakings are owned by bodies
corporate,—
(a) if one manages the other, or
(b) if one is a subsidiary of the other, or
(c) if they are
under the same management within the meaning of section 370 of the Companies
Act, 1956,
(d) if one exercises control over the other
in any other manner.
(vi) if the undertakings are owned or controlled by the
same person or group of persons...
Explanation.—For the purpose of clause (g), two or more
undertakings shall be deemed to be inter-connected...................
(b) if one or more
individuals together with their relatives, or firms in which such individuals
or their relatives are partners, jointly or severally own, manage or control
the other.”
As in this case, the undertakings are owned by bodies
corporate the tests prescribed in sub-clause (iii) of clause (g) of section 2.
will apply. The respondent-company does not manage the polytex company; it is
not its managing agent. The polytex company is not a subsidiary of the
respondent-company nor are the companies under the same management within the
meaning of section 370 of the Companies Act, 1956. Mr. Prabir Sen, counsel for
the petitioner, strongly relied on paragraph (d) of sub-clause (iii) of clause
(g) of section 2. The term, “control”, he argued, is of the widest amplitude.
He relied on Commissioner of Income-tax v. Nandlal Gandalal, where at
page 1150, the court observed:
“It is settled, we think, that the expression ‘control and
management’ means de facto control and management and not merely the right or
power to control and manage.”
Mr. S.C. Sen, on behalf of the respondent-company, relied
on British American Tobacco Co. Ltd. v. Inland Revenue Commissioners and urged
that “control”, in the context of section 2 (g) of the Monopolies Act, can only
mean the control of the majority of the voting power in a company. He submitted
that the words “any other manner” in paragraph (d) refer to the machinery
through which the control of the majority of voting power is exercised.
“Control”, he argued, does not mean minority control or managerial control.
I am inclined to agree that “control”, in the context of
paragraph (d), means any species of de facto control, majority control,
minority control or managerial control. Now de facto control obviously means
lawful de facto control. Majority control, minority control or managerial
control are all cases of de facto control. If, apart from majority control,
minority control and managerial control, there are other species of control,
though I do not know of any, I agree that such species of control will come
within the ambit of paragraph (d). In any event, the court will have to be satisfied
that the respondent-company exercises or will exercise control over the polytex
company. Section 22 contemplates only those undertakings which when established
would become inter-connected undertakings. The word used in section 22,
sub-section (1), is “would” and not “might”. A certainty, though prospective,
and not a mere possibility of inter-connection has to be established. There has
to be evidence that the respondent-company will exercise control over the
polytex company. Suspicion is not proof. As the respondent-company does not
intend to hold a majority of shares in the polytex company it will not exercise
majority control. It will hold a minority of shares but that by itself does not
prove that it will exercise minority control. In order to establish the case
for minority control, the court will have to be satisfied that a sufficient
number of shares will remain dormant and the respondent-company will be in a
position to ensure that a larger number of votes than the votes it commands
will not be cast against any resolution which it seeks to pass at a meeting. No
such evidence is available. As the respondent-company does not manage or intend
to manage the polytex company, it is not possible to hold that it will exercise
managerial control over the affairs of the other company. In the absence of any
evidence, I am unable to hold that paragraph (d) has any application in this
case.
Counsel on behalf of the petitioner relied on paragraph
(vi) of clause (g) of section 2. There is no evidence again that the
undertakings are owned or controlled by the same group of persons. It was
contended that the polytex company is controlled by the same group of persons.
namely, the members or some members of the Jaipuria family who also control the
respondent-company. The board of directors of each of the companies consists of
seven directors. There are three common directors, namely, Mr. Rajaram
Jaipuria, Mr. Sitaram Jaipuria and Mr. R. Chaudhuri. Mr. Rajaram Jaipuria is
the managing director of the respondent-company and Mr. Sitaram Jaipuria is the
managing director of Swadeshi Polytex Ltd. Be that as it may, the majority of
the directors of one company are not the majority of the directors of the
other. Therefore, it is difficult to see how it can be said that the Jaipuria
group or the Jaipuria group together with Mr. Chaudhuri will control the
undertaking of the polytex company.
Reliance was placed on the fact that the letter of intent,
which was originally granted to the respondent-company has been transferred to the
polytex company. In that connection, counsel relied on a letter dated May 20,
1970, from the Under-Secretary to the Government of India, addressed to the
respondent-company. The Under-Secretary wrote :
“The Government has no objection to your implementing the
project for the manufacture of ‘polyester fibres’ under the name of Swadeshi
Polytex Ltd. Accordingly, the said letter of intent of even number dated 24th
July, 1969, is transferred to the name of Messrs. Swadeshi Polytex Ltd.,
Kanpur.”
Transfer of the letter of intent does not confer control or
management of the transferee undertaking on the transferor and therefore in my
judgment the transfer is not a relevant consideration. The reason for transfer
has been explained in the explanatory statement.
Counsel relied on the report of the monopoly enquiry
commission in support of his contention that the group which controls the
respondent-company also controls the polytex company. The ways of control, he
said, are devious as indicated in the report. At page 390 of the report, the
respondent-company is enumerated among the companies comprising the group or
the house of Jaipurias. There is no evidence that the Polytex company belongs
to the said group. At page 2 of the report, it is said:
“So, it frequently happened, as we have already mentioned,
that an industrialist contributing a small amount of capital himself was able
to obtain control of big enterprises and the snowballing process gathered
strength as it proceeded.”
At page 5, it is said:
“Even where investment in another corporation is not of an
extent to give it a control over the voting power, it is sometimes sufficient
to enable it to have one or more directors on
the board of directors of the investee company. This helps to give the investor
company some voice in the decisions of the investee and also makes important
information available to it. Where such interlocking of directors is achieved
in a company in the same line of production, or a company engaged in the
distribution of its products or one engaged in the production of an allied
product, or of raw materials, it has clearly a tendency to increase
concentration of economic power.”
At
page 34, it is said:
“It
is proper to mention that in each case we have tried to ascertain the substance
of the control and have not adhered to the deeming provisions about the same
management and the same group as contained in the Companies Act. Nor have we
followed the concept of ‘outer circle’ as has found favour with some
authorities. For the purpose of the present study a ‘business group’ has been
taken to comprise all such concerns which are subject to the ultimate and
decisive decision making power of the controlling interest in the group, the
group master.”
As I
have already said, there is no evidence of minority control exercised by the
Jaipurias over the polytex company. There is no evidence again of any group
master having the ultimate and decisive decision making power in the affairs of
the polytex company. There are common directors. That may or may not lead to
concentration, of economic power. It all depends on the facts and circumstances
of a particular case. The question before me is not whether having regard to
the constitution of the two companies, concentration of economic power has
taken place or is likely to take place. The question is whether the
undertakings are inter-connected undertakings within the meaning of the
statute. The tests of inter-connection which the statute lays down are
ownership, control and management. Unless one of the three tests is satisfied
by legal evidence, inter-connection cannot be predicated. It may not be out of
place to mention that a great deal of the observations in the report was not
reflected in the relevant bill and the bill itself suffered many alterations
during its passage through the legislature.
It
was submitted that the directors of the respondent-company are the promoters of
the polytex company. That, it was urged, is an evidence of inter-connection.
The explanatory statement fully explained why the respondent-company had
promoted the new company. Its directors decided to establish a polyester fibre
plant having regard to its profitability. They received a letter of intent from
the Government. As it was necessary to raise a considerable amount of capital,
it was considered expedient to promote a new company. In the light of the
future prospects of the new company, the directors considered it desirable to
invest Rs. 1 crore in its shares. The large sum of money proposed to be
invested in the new company is sufficient reason for transfer of the letter of
intent and also for promoting
the polytex company. The promoters of a company do not necessarily control or
manage its affairs or own the majority or even a substantial quantity of its
shares.
Then it was said that the two companies have a common
secretary. The secretary is a ministerial or an administrative officer. He does
not control or manage the company. The statute does not say that if two
corporate bodies have a common secretary, their undertakings will be deemed to
be interconnected undertakings. In any event, Mr. Sitaram Bhowsingka, the
common secretary, has stated in his affidavit affirmed on March 4, 1971, that
since January 1, 1971, he has ceased to be the secretary of the Polytex
company.
Reliance was placed by counsel on an article by Mr. S. R.
Bhowsingka which appeared in the Statesman on October 12, 1970, under the
caption “Role of Jaipurias in Industrial Development”. There it is stated “on
October 12, 1970, the President of India will lay the foundation stone of
India’s first continuous process polyester staple fibre plant of Swadeshi
Polytex Ltd., another Jaipuria enterprise with an authorised capital of Rs. 10
crores”. The article is of a laudatory nature and full of generalities. Apart
from the question whether a company is bound by a statement made by its
secretary with regard to its constitution, control and management, I feel that
the character of the article is such that it will be unsafe to rely on it and
hold that Swadeshi Polytex Ltd. is controlled or managed by the same group of
persons who control and manage the respondent-company in the absence of any
evidence.
Counsel for the petitioner relied on paragraph (h) of the
Explanation to clause (g) of section 2 of the Monopolies and Restrictive Trade
Practices Act which provides that for the purpose of clause (g) two or more
undertakings shall be deemed to be inter-connected if one or more individuals
together with their relatives, jointly or severally, own, manage or control the
other. A distinction is made in the explanation between management and control.
Mr. Rajaram Jaipuria is the managing director of the respondent-company. His
relative, Sitaram Jaipuria, is the managing director of the polytex company.
The term “manage” or “management” has not been defined in the Monopolies and
Restrictive Trade Practices Act or in the Companies Act.
Be that as it may, I am unable to hold that the managing
director of a company does not manage its undertaking, within the meaning of
clause (g) of section 2. In my judgment, on a proper construction of paragraph
(b) of the Explanation, it must be held that if a relative of the managing
director of a company is the managing director of another company, their undertakings
must be deemed to be inter-connected undertakings in the sense of the statute;
they will be inter-connected because the managing directors who are relatives
will be managing either undertaking severally. The undertakings may have
nothing to do with each other; their constitutions and organs of control may
totally differ; and yet only because their managing directors happen to be
relatives, they will be deemed to be inter-connected by virtue of the
Explanation though, in fact, they are not. This may be bad logic and poor law
but it is good Monopolies and Restrictive Trade Practices Act. I do not think
that by use of the words “together with”, the Explanation requires that the
relatives must act in unison in the management of either undertaking or, in other
words, that the undertakings must be managed directly or indirectly by both of
them. The use of the words “jointly or severally” militates against such a
construction.
Mr. Sen submitted that clause (b) of the Explanation is
incomplete; grammatically and syntactically it makes no sense ; it makes no
sense unless words are supplied which are not there. No doubt clause (b) is one
of the glaring instances of bad drafting in an ill-drafted statute. The syntax
is defective but nevertheless the sense is clear. It means that two or more
undertakings shall be deemed to be inter-connected, if one or more individuals
who own, manage or control one undertaking, together with his or their
relatives, jointly or severally own, manage or control the other undertaking or
other undertakings.
In view of the Explanation, I am constrained to hold that
the undertaking of Swadeshi Polytex Ltd. will be an inter-connected undertaking
of the respondent-company and therefore the former cannot be lawfully
established except under the previous permission of the Central Government as
required by section 22. I desire to make it clear that I hold the new
undertaking to be an inter-connected undertaking on the sole and solitary
ground that the respective managing directors are relatives and for no other
reason.
If no application has been made as required under section
22(2) and no permission has been obtained as required by section 22(1), as is
admittedly the case, those are material facts which ought to have been
disclosed in the notice. An application for approval by the Central Government
to the pro-prosal of establishing the undertaking is a prerequisite to any step
taken for establishment of the undertaking and, before it was resolved to
invest one crore of rupees in the undertaking, the shareholders ought to have
been told that no such application had been made and the necessary permission
was yet to be had. After all, the Central Government may or may not grant the
permission. In the absence of such disclosure, the notice must be held to be
invalid having regard to section 173 of the Companies Act.
One of the grounds taken in the petition is that the notice
and the explanatory statement are bad because none of the terms and conditions
of the collaboration agreement, financial or technical, have been disclosed. At
the hearing counsel conceded on the authority of East India Commercial Co. Ltd.
v. Raymon Engineering Works Ltd., that the
technical aspect of the collaboration agreement need not have been disclosed.
In that case, there were two sets of agreements, one for financial
participation in the enterprise by the foreign parties and the other for
technical collaboration. The terms for financial participation were disclosed
in the explanatory statement; the terms of the collaboration agreements were
not disclosed nor was their inspection offered. The court held that the
agreement for technical collaboration is a matter peculiarly within the
competence of the directors and ordinary shareholders are not to be treated as
experts on the technical aspects of manufacture. The non-disclosure complained
of did not vitiate the notice. The court also found that the plea of
non-disclosure of the technical collaboration agreement was not bona fide. In
their correspondence the appellants never asked for inspection of those
agreements. In the present case, the plea of non-disclosure of the terms and
conditions of the agreement is equally lacking in bona fides. Here inspection,
though offered, was not taken.
Counsel argued that, in any event, the financial aspect of
the agreement should have been disclosed. Counsel for the respondents produced
a copy of the collaboration agreement at the request of the petitioner’s
counsel. The agreement is intituled “purchase agreement”. The date is September
7, 1970. It is an agreement for supply of plant and machinery and for technical
assistance. There is no provision for financial participation in the project by
the foreign collaborator, though, naturally, provision has been made for
payment for goods and services. In my judgment, it is a purely technical
collaboration agreement, the terms and conditions of which do not require
disclosure on the principles laid down in East India Commercial Co. Ltd. v.
Raymon Engineering Works Ltd. I need only add that the petitioner’s counsel
did not admit that the agreement disclosed by the petitioner is the one spoken of
in the explanatory statement.
It was submitted on behalf of the petitioner that the
notice and the explanatory statement should have disclosed that no licence
under the Industries (Development and Regulation) Act had been obtained for
establishing the ploytex undertaking. In fact, the licence was obtained on
October 7, 1970. The meeting, it will be remembered, was held on October
12,1970. It can hardly be said that the industrial undertaking had been
established on or before September 14, 1970, the date of the notice. The
explanatory note stated that the plant was being put up by the polytex company
in collaboration with Messrs. Vickers Zimmer A.G.; that the terms of
collaboration had been approved by the Central Government and the work had
already commenced. It appears from the article written by the secretary of the
polytex company in the Statesman to which reference has been made that the
foundation stone of the new undertaking was laid on October 12, 1970.
It was contended by counsel appearing on behalf of the
petitioner that under section 11 of the Industries (Development and Regulation)
Act a licence is required before any steps could be lawfully taken for
establishment of an industrial undertaking; that a licence is required even
before laying the foundation of the undertaking or even before preparation of
the blueprint. In that view of the matter, action taken before the licence was
obtained, namely, the work of putting up the plant or any other work done in
connection with the establishment of the undertaking was not permissible under
the law. The explanatory note, therefore, should have at least disclosed that
the requisite licence under section 11 had not been obtained.
Sub-section (1) of section 11 of the Act provides that no
person or authority other than the Central Government, shall, after the
commencement of this Act, establish any new industrial undertaking except under
or in accordance with a licence issued in that behalf by the Central
Government.
In my opinion, all that section 11 requires is that a
licence must be obtained before the undertaking is established. An industrial
undertaking is not established on the preparation of a blue-print or on laying
the foundation of its factory or even at the stage when the work of
establishment has made some progress. The statute does not prohibit taking
steps for establishing a new industrial undertaking except under a licence.
Under the proviso to sub-section (1), a Government other than the Central
Government requires previous permission to establish a new industrial
underaking. It is not without significance that the words “previous permission”
are not used in the relevant part of sub-section (1).
In this connection reference may be made to a provision in
pari materia, namely, section 22 of the Monopolies and Restrictive Trade
Practices Act, which prohibits establishment of a new undertaking in certain
cases except with the previous permission of the Central Government.
Sub-section (2) of section 22 specifically enjoins that before taking any
action for establishing a new undertaking an application has to be made for
approval of the Government to the proposal of establishing a new undertaking
referred to in sub-section (1). In the Monopolies and Restrictive Trade
Practices Act, a distinction is made between establishing an undertaking and
action taken for its establishment; there is a prohibition in sub-section (1),
a direction in sub-section (2). There is no provision in section 11 of the
Industries (Development and Regulation) Act analogous to sub-section (2) of
section 22 of the Monopolies and Restrictive Trade Practices Act.
Learned counsel for the petitioner referred to sub-section
(2) of section 11 which provides that a licence under sub-section (1) may
contain such conditions including, in particular, conditions as to the location
of the undertaking as the Central Government may deem fit to impose. He also
alluded to sub-section (2) of section 12 which provides that subject to any
rules that may be made, the Central Government may also vary or amend any
licence issued under section 11 provided that no such power shall be exercised
after effective steps had been taken to establish the new industrial
undertaking in accordance with the licence. Relying on these provisions, he argued
that before any step is taken for establishment of the undertaking, the
permission required under section 11(1) must be had. In my judgment until and
unless an undertaking is established, no question of a license under section
11(1) can arise. An undertaking is not established at a stage when the work of
establishment has merely commenced. The language of sub-section (1) of section
11 is clear and unequivocal. As for sub-section (2) if the Central Government
does not approve of the proposed location of the undertaking it cannot be
established there. It does not imply that any step taken for establishing it is
in contravention of the statute. Moreover, the license required under the
Industries (Development and Regulation) Act was obtained in this case, before
the meeting was held. The shareholders, therefore, have sufferred no prejudice.
In that view of the matter, the contention raised by the petitioner fails.
I may now briefly deal with the objection that after
increase of share capital of the polytex company it was no longer open to the
members of the respondent-company to confirm the resolution in pursuance of the
order of Ghose J. It is true, that by increase of share capital the proposed
holding of the respondent-company in the polytex company will be reduced to
less than thirty per cent. of its equity capital. The explanatory statement
fairly disclosed the proposed increase in the share capital. The resolution
which was sought to be confirmed was the same resolution in respect of which
the order of Ghose J. was made. I fail to see why the resolution could not be
confirmed merely because the capital of the polytex company is proposed to be
increased. It was said that the polytex company seeks to increase its share
capital to reduce the proportion of the holding of the respondent-company so as
to avoid the mischief of section 370 of the Companies Act and also to avoid
being deemed to be an inter-connected undertaking within the meaning of the
Monopolies and Restrictive Trade Practices Act. That, in itself, counsel
submitted, is evidence of inter-connection. I do not agree. To increase the
share capital to avoid inter-connection is a perfectly legitimate procedure. It
is no evidence of inter-connection ; on the contrary, it is evidence of the
desire on the part of the polytex company and, may be, also of the
respondent-company, to avoid such a situation.
Mr. S.C. Sen submitted that in the application heard by
Ghose J. the petitioner had raised the same objections on the score of
non-compliance with the provisions of the Industries (Development and
Regulation) Act and non-disclosure of the terms of the collaboration agreement;
the learned judge having disposed of the application, it is no longer open to
the petitioner to urge the same grounds over again. It appears from the
judgment of Ghose J. that he disposed of the application on a different point.
The learned judge did not find it necessary to consider the other grounds of
objection nor did he go into their merits.
In any event, apart from the question whether an
interlocutory order can operate as res judicata in an application in a
different suit, it is necessary to remember that the present application is not
at all concerned with the notice which Ghose J. had to consider. For more
reasons than one, I am unable to uphold the contention raised by Mr. Sen.
In the view I have taken, the application succeeds. There
will be an order for an injunction restraining the respondents and each of them
from giving effect to the resolution set out in the notice dated September 14,
1970. The order is made without prejudice to the rights of the respondents and
the members of the respondent-company to pass a fresh resolution according to
law in terms of or similar to the resolution No. 1 which is the subject-matter
of this application. There will be no order for costs.
Upon the
respondents giving an undertaking to the court through their counsel, Mr. Nag,
that they will not invest in the shares of Swadeshi Polytex Ltd. for a period
of three weeks, there will be a stay of operation of the order made herein for
the same period. The previous undertaking given by the respondents on the 12th
of October, 1970, is hereby discharged.
[1937] 7 COMP CAS 66 (MAD)
HIGH COURT OF
MADRAS
v.
Official
Liquidator of South Indian Film Corpn. Ltd.
VARADACHARIAR, J. AND HORWILL, J.
O.P. NO. 306 OF 1935
APPLICATION NO. 501 OF 1936
OCTOBER 12, 1936
K. Rajah Ayyar and T.M. Venugopal Mudaliar for Appellants.
K. Ramanatha Shenoi and K.P. Sarvothama Rao for Respondents.
JUDGMENT
Varadachariar, J.—In the course of the winding-up of the South Indian Film Corporation Limited, the Official Liquidator took out an application under Section 189 of the Indian Companies Act, for a direction to the Managing Agent Mr. P.S. Venkatarama Ayyar that he should pay up immediately a sum of Rs. 5,400 odd representing the amount overdrawn by him from the Company while he was in charge as Managing Agent. The Managing Agent by his counter affidavit claimed (1) that he was entitled to retain a sum of Rs. 2,800 towards arrears of salary due to himself, (2) that he was also entitled to the sums of Rs. 976-0-9 and Rs. 1,083 which were according to him improperly debited against him on 15th November 1935 and (3) that he was entitled to retain moneys which might be required to enable him to meet the expenses of certain suits filed against him as Mananging Agent. The learned Judge has disallowed these claims and given a direction for payment as asked for by the Liquidator. Hence this appeal by the Managing Agent.
An objection was taken before us on behalf of the appellant that the case is not one that can be dealt with under Section 185 of the Companies Act, as it is not the intention of the Legislature that matters in respect of which there is a contest should be dealt with under that section. Stress was laid upon the use of the words prima facie in the section and reference was made to certain observations in In Re Palace Restaurants Limited [1914 1 Ch. at page 500] and to a concession said to have been made by Counsel in Billimoria v. Mrs. De-Souza [I.L.R. 8 Lahore at page 551]. A point was also made of the fact that the appellant has ceased to be the Agent of the Company from November 1935, i.e., even before the date of the commencement of the liquidation proceedings. We are not satisfied that these considerations exclude the application of Section 185 to the case (Cf. Haribans Prasad v. National Sugar Mills Ltd., In liquidation; I.L.R. 14 Lah. 68). It is true, the section does not contemplate an elaborate enquiry but the discretion must be left to the Court to decide whether any particular claim can or cannot be conveniently dealt with under that section. The observation in In re Palace Restaurants Ltd., itself lends some support to this conclusion, because the learned Judge in that case actually held that as the counter claimant had submitted to the jurisdiction of the Court it was not open to him to take exception to the proceedings at a later stage. In the same way, we may point out in this case also, the appellant did not take exception to the maintainability of the application under Section 185 in the lower court, but was only anxious and we dare say rightly anxious that his claims to credit under various heads shall be considered. We do not also think that the mere fact of his having ceased to be an Agent before the commencement of the liquidation proceedings excludes action under Section 185. It seems to us the test is whether the money now claimed came into his hands in his character as Agent or not. It is not denied .in the present case that the money did so come into his hands.
Proceeding now to the items of credit claimed by the appellant, the claim for Rs. 2,800, under the head of arrears of salary has in our opinion been rightly disallowed by the learned Judge and the same has not been seriously pressed before us. The second head of claim viz., that relating to the two sums of Rs. 976-0-9 and Rs. 1083, seems to us to be equally untenable. It has not been disputed that, at a meeting of the Directors held on 9-4-1935 these items were disallowed after discussion and the resolutions recorded on that date give the reasons for the disallowance. The argument advanced by the appellant's counsel in this connection is that a sum inclusive of these two items had been shown in the report and presented to the statutory meeting on that day and that therefore under Section 77 (cl. 8) of the Companies Act it acquires a finality which cannot be affected except by proceeding in accordance with the formalities prescribed in the section. We do hot see any force in this contention. The question of items to be allowed or disallowed as between the Company and its Agent is certainly within the powers of the Directors. What appears from the representation made before us is that in the report printed beforehand for being placed before the meeting the figures as originally submitted by the Managing Agent had been printed but that in due course when the matter came up before the Directors these two items were disallowed. We do not see that the mere accident of the original figures appearing in the report placed before the meeting of the shareholders prevented the Directors from considering the propriety or otherwise of the various items of credit claimed by the Managing Agent. So far as one can gather from the resolutions themselves it is clear that the appellant also was present at the meeting of the Directors and there is nothing on record to show that he took exception to the disallowance. The mere fact that these items of disallowance were actually brought into the account only later on, in November, i.e., after the appellant's resignation, does not warrant the suggestion that they have been fraudulently debited against the appellant. Once the disallowance was authorised by a formal resolution of the Directors, it was merely a question of account keeping as to when the items are actually carried into the accounts. We are therefore of opinion that the learned Judge's decision disallowing these items is also correct.
The third however has to be considered in some detail. From the learned Judge's judgment it would appear as if the claim was •pressed before him en bloc without splitting it up into the various sub-heads comprised in it. If all that the learned Judge meant was that the Agent was not entitled to retain moneys in his hands merely to meet prospective claims against him he was of course perfectly right, if we may say so, but both under section 217 of the Contract Act and under clause 10 of the Agreement between the Managing Agent and the Company, the Agent has got a right of retainer in respect of various charges and expenses and under clause 191 of the Articles of Association he is given a lien over the property of the Company for certain claims. Of the suits referred to in the 4th paragraph of the appellant's counter affidavit it is stated that the 'two' are suits filed against the Directors for alleged fraud in the matter of the issue of the prospectus. If this is so it would be very doubtful if any of the items of expenditure incurred by any of the Directors or by the appellant as one of them in connection with such a suit will come within the right of indemnity or retainer which the appellant will be entitled to as against the company either under the law or any of the terms of his agreement. More than that we do not wish to say at this stage. The third suit is said to be one filed by the Kodak Limited against the appellant in respect of goods purchased by him for the Company on his own personal guarantee. As the facts relating to this suit are not before us we do not wish to say more in respect of the appellant's claim even under this head except to say that if a claim like that made by the liquidator against the appellant can be dealt with under Section 185 of the Companies Act, it is only fair that the claims which the appellant may have against the Company must also be considered at the same time and it will not be proper to drive the appellant to a separate suit in respect of claims that he may have against the Company,
It represented that the decree in the suit brought by the Kodak Limited was passed only subsequent to the date of the application to the lower court. We do not think we will be justified in dealing with an application of this kind as if it were an ejectment suit and seek to ascertain the rights of the parties only as on the date of the intimation of the proceedings. It will probably be in the best interests of all concerned to direct that accounts be taken up to 1st November 1936, in respect of such of the items as the appellant will be entitled to retain either under the terms of Section 217 of the Contract Act or the terms of clause 10 of the Agreement and Article 191 of the Articles of Association and the balance alone out of the amount claimed by the liquidator be directed to be paid to him as the amount "prima facie" payable by the appellant to the liquidator in these proceedings.
As the appellant has failed in part and has succeeded in part so far as this appeal is concerned, we do not make any other order as to costs in this appeal except that the Official Liquidator will be entitled to take his costs of this appeal out of the estate.
Appeal allowed in part.