Sections 188 and 189

 

Circulation of members’ resolution/Ordinary
and special resolu­tion

[1990] 68 COMP. CAS. 516 (CAL.)

HIGH COURT OF CALCUTTA

Gopal Vyas

v.

Sinclair Hotels and Transportation Ltd.

MRS. PADMA KHASTGIR AND MAHITOSH MAJUMDAR J J.

APPEAL NO. NIL OF 1986, SUIT NO. 934 OF 1986

MARCH 16, 1989 

Dipankar Ghosh for the Applicant.

Mrs. S.B. Mukherji for the Respondent.

JUDGMENT

Mrs. Padma Khastgir J. —The only point which calls for consideration in this application arises under the following facts and circumstances.

The petitioner, Gopal Vyas, filed a suit under Order I, rule 8 of the Code of Civil Procedure. In the said suit, the petitioner moved an application before Mr. Justice R.N. Pyne (as his Lordship then was) whereupon, the learned judge directed that the annual general meeting of the company, Sinclair Hotels and Transportation Ltd., be held under the chairmanship of a member of the Bar but for adjournments of the same until further orders. The petitioner, being aggrieved thereby, preferred this appeal; apart from the usual prayers, the petitioner prayed for an order directing the company to hold the fourteenth annual general meeting and at such meeting to consider the notices and the proposal made by the petitioner under section 257 of the Companies Act.

The petitioner, Gopal Vyas, proposed the candidature of one Navin Chand Suchanti for the office of a director of respondent No. 1 at such annual general meeting. The petitioner had given a notice under section 257 of the Companies Act, 1956. The petitioner contended that the company was under an obligation to inform its members of such proposal made by the petitioner at such annual general meeting due to be held on December 29, 1986. But the company, being respondent No. 1 herein, according to the petitioner, wrongfully refused to comply with the said proposal on the alleged ground of non-compliance with the provisions of section 188 of the Companies Act.

There have been many proceedings so far as this company is concerned, for various reliefs. After protracted litigations, the matter went before the Supreme Court of India and, ultimately, the learned judges of the Supreme Court directed that all pending matters before the High Court should go on but no effect be given to any of such orders till the matter is finally decided by the learned judges of the Supreme Court.

Section 257 of the Companies Act, 1956, provides as follows:

"257. Right of persons other than retiring directors to stand for directorship. —(1) A person who is not a retiring director shall, subject to the provisions of this Act, be eligible for appointment to the office of director at any general meeting, if he or some member intending to propose him has, not less than fourteen days before the meeting, left at the office of the company a notice in writing under his hand signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office, as the case may be.

(1A) The company shall inform its members of the candidature of a person for the office of director or the intention of a member to propose such person as a candidate for that office, by serving individual notices on the members not less than seven days before the meeting:

Provided that it shall not be necessary for the company to serve individual notices upon the members as aforesaid if the company advertises such candidature or intention not less than seven days before the meeting in at least two newspapers circulating in the place where the registered office of the company is located, of which one is published in the English language and the other in the regional language of that place.

(2) Sub-section (1) shall not apply to a private company, unless it is a subsidiary of a public company".

Under this section, if a person other than a retiring director desires to be appointed as a director, a notice of his candidature may be given to the company. Such notice may be given by the candidate himself or by any member intending to propose him as a candidate. This candidate may be an outsider or a member of the company. He need not be even a shareholder but such notice has to be given fourteen clear days before the meeting. On receipt of such notice, the company shall inform the members at least seven days before the meeting either by individual notice or by an advertisement.

Section 188 of the Companies Act makes the provision for circulation of the members' resolutions in the following manner:

"188. Circulation of members' resolutions.—(1) Subject to the provisions of this section, a company shall, on the requisition in writing of such number of members as is hereinafter specified and (unless the company otherwise resolves) at the expense of the requisitionists:

(a)    give to members of the company entitled to receive notice of the next annual general meeting, notice of any resolution which may properly be moved and is intended to be moved at that meeting;

(b)    circulate to members entitled to have notice of any general meeting sent to them any statement of not more than one thousand words with respect to the matter referred to in any proposed resolution, or any business to be dealt with at that meeting.

(2) The number of members necessary for a requisition under sub section (1) shall be—

(a)    such number of members as represent not less than one- twentieth of the total voting power of all the members having at the date of the requisition a right to vote on the resolution or business to which the requisition relates; or

(b)    not less than one hundred members having the right aforesaid and holding shares in the company on which there has been paid up an aggregate sum of not less than one lakh of rupees in all.

(3) Notice of any such resolution shall be given, and any such statement shall be circulated, to members of the company entitled to have notice of the meeting sent to them, by serving a copy of the resolution or statement on each member in any manner permitted for service of notice of the meeting; and notice of any such resolution shall be given to any other member of the company by giving notice of the general effect of the resolution in any manner permitted for giving him notice of meetings of the company:

Provided that the copy shall be served, or notice of the effect of the resolution shall be given, as the case may be, in the same manner and, so far as practicable, at the same time as notice of the meeting, and where it is not practicable for it to be served or given at that time, it shall be served or given as soon as practicable thereafter.

(4) A company shall not be bound under this section to give notice of any resolution or to circulate any statement unless —

(a)    a copy of the requisition signed by the requisitionists (or two or more copies which, between them, contain the signatures of all the requisitionists) is deposited at the registered office of the company—

        (i)         in the case of a requisition requiring notice of a resolution, not less than six weeks before the meeting;

        (ii)        in the case of any other requisition, not less than two weeks before the meeting; and

(b)    there is deposited or tendered with the requisition a sum reasonably sufficient to meet the company's expenses in giving effect thereto:

Provided that if, after a copy of a requisition requiring notice of a resolution has been deposited at the registered office of the company, an annual general meeting is called for a date six weeks or less after the copy has been deposited, the copy, although not deposited within the time required by this sub-section, shall be deemed to have been properly deposited for the purposes thereof.

(5) The company shall also not be bound under the section to circulate any statement if, on the application either of the company or of any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; and the court may order the company's costs on an application under this section to be paid in whole or in part by the requisitionists, notwithstanding that they are not parties to the application.

(6) A banking company shall not be bound to circulate any statement under this section, if, in the opinion of its board of directors, the circulation will injure the interests of the company.

(7) Notwithstanding anything in the company's articles, the business which may be dealt with at an annual general meeting shall include any resolution of which notice is given in accordance with this section, and for the purposes of this sub-section, notice shall be deemed to have been so given, notwithstanding the accidental omission, in giving it, of one or more members.

(8) If default is made in complying with the provisions of this section, every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees".

Under this section, members' resolutions are intended to be moved at an annual general meeting or at any other meeting after the circulation to members in each case of the text of the proposed resolution with explanatory statement, if any, in respect of the resolution or other business. This section has conferred on all shareholders an important right to give through the company machinery publicity among all the members of the company the resolution which he intends to propose or for statements which he wants to make at the annual general meeting.

The question which calls for determination in this appeal is as to whether the company was justified in refusing to circulate the notice given by the petitioner under section 257 of the Companies Act on the ground that such proposal was made by one member for the candidature of directorship of Navin Chand Suchanti on the ground that it was not proposed either by 100 shareholder-members or by l/20th strength of the members. The provision of section 257 is an independent section. It is not subject to the provision of section 188. Section 257 is a specific provision giving a right to an individual member to give such notice. It is a self-contained provision and, under section 257, there is no scope for introduction of any other qualification which the Legislature, in its wisdom, did not think it necessary to incorporate. The specific right that had been given under section 257 does not provide that the implementation of such right will have to be in accordance with the procedure as laid down under section 188 of the Companies Act. In fact, the provision of sections 188 and 257 of the Companies Act cover two different fields. A comparative perusal of the provisions of the two sections indicates that, under section 257, any person can apply by giving the requisite notice whereas under section 188, some specific percentage of shareholding, that is, either l/20th or hundred members are the necessary requisite for such requisition. Not only is there a difference as to who can apply under both the sections but also there is a difference in respect of the subject-matter of such notice. Under section 257, such notice is given when a proposal is given for appointment to the office of director at any general meeting provided it has given not less than fourteen days before the meeting and the consent signifying his candidature for the office of the director has been given whereupon it shall be the duty of the company to inform its members of such candidature, whereas, under section 188, any matter can be transacted. There is also a difference in respect of time, which has to be given within fourteen days before the meeting under section 257 of the Companies Act. Whereas, under subsections (3) and (4) of section 188, different times have been provided. The conditions for such application under section 257 are different from the conditions as provided under section 188 inasmuch as, under the previous provision of section 257, the member was not required to deposit any sum whereas, under section 188, specific provision has been made for deposit and/or tender of the requisite amount reasonably sufficient to meet the company's expenses in giving effect to such members' requisition. Under section 257, it has been specifically provided that individual notice of such requisition under section 257 will have to be given by the company to its members or if the company decides to advertise such candidature in two newspapers having circulation at the place where the registered office of the company is located either in the English language or in any other regional language of that place. Such provision has not been made under section 188. The provision of section 257 shall not apply to a private company unless it is a subsidiary of a public company. There is no such corresponding restriction so far the provision of section 188 is concerned. Under section 257, as soon as the notice complying the provision of section 257 is served, the company has no discretion in the matter inasmuch as it has been provided under section 257(1A) that the company shall inform its members of the candidature of a person for the office of a director or the intention of a member to propose such a person as a candidate of the office by serving individual notice or by advertisement as provided in the said section.

The provision of section 173 of the Companies Act does not seem to be necessary in the instant case inasmuch as section 173 of the Companies Act provides as follows:

"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 business shall be deemed special.

(2) Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein, of every director, 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".

Under the circumstances, it appears that the transaction proposed by the appellant at such meeting was an ordinary business and not a special one in view of sub-clause (iii) of sub-section (1)(a). Moreover, section 173 provides that, in the case of annual general meeting, all business to be transacted at the meeting shall be deemed, specially with the exception of the business as provided under sub-clauses (i), (ii), (iii) and (iv) and under clause (b) in case of any other meeting, as special and it is only where any items of business to be transacted at the meeting are deemed to be special that there shall be annexed to the notice of the meeting a statement setting out all material facts as provided under clause (b). The appointment of a director in the place of those retiring is an item of ordinary business to be transacted at the annual general meeting of the company. The petitioner has not called for the meeting. It is at a meeting called by the company that the petitioner has given the notice for transaction of the business, which is ordinary in nature at such meeting. Under section 237, any member is entitled to take advantage of such provisions as contained in section 257.

The petitioner's name appears in the register of shares, so until his name is removed by rectification of such share register, his right remains. The very fact that there are proceedings pending before the company court challenging the petitioner's membership which matter is going on for a pretty long time will not disentitle the petitioner from giving such notice In any event, in view of the order passed by the learned judges of the Supreme Court that no effect be given to any of the orders passed in these proceedings relating to Sinclair Hotels and Transportation Ltd. whether the petitioner has the right to give notice would be determined finally by the learned judges of the Supreme Court. This proceeding before this court only relates to the construction of two particular sections of the Companies Act.

This is not an appeal from an interlocutory order passed by the learned court below but it is only pursuant to the leave granted by the learned judges of the Division Bench, the present application had been taken out. The case cited by Mrs. S.B. Mukherjee appearing on behalf of the company Pedley v. Inland Waterways Association Ltd. [1977] 1 All ER 209 (Ch D) does not seem to have any application to the facts and circumstances of this case. That was a case of removal of a director. The articles of the company in that case did not confer any power on any individual member to require such a resolution to remove the director be included in the agenda. Under the circumstances, the company could not be compelled to give such notice of resolution proposed by the member to be included in the agenda. The company also rejected the said notice on the ground that he had not complied with the provisions of section 140 of the Companies Act of 1947. There, section 142 did not confer on any individual member the right to compel the inclusion of a resolution in the agenda of a company meeting. At page 212, it was observed that the company's articles of association conferred no express right on any one individual member to have any item included in the notices of the agenda. Therefore, the plaintiff had to claim the right to compel the company to include the notices in the agenda of the annual general meeting of an intended resolution, had to come under some provisions of the Act giving him the right. Section 140 of the Act plainly gave him this right if he could find members representing him not less than 1/20th of the total voting rights complying with the conditions as to time and other matters as set out under section 140, sub-sections (4) and (5). Then, it was the company's duty under section 140(1) at the expense of the requisitionists unless the company otherwise resolved to give to its members the notice. The procedure for removal of a director has been specially provided in our Companies Act. Section 284 makes specific provision for such removal where special notice is required for any resolution of removal of a director or for appointment of somebody instead of that director so removed at the meeting at which he is removed. But, there is no corresponding provision given in the English Act as provided under section 257 of the Indian Companies Act. Under the special facts and circumstances of this case, the case in Pedley v. Inland Waterways Association Ltd. [1977] 1 All ER 209 (Ch D) has no application.

By allowing this application in favour of the petitioner, this court does not pass a mandatory order upon the company to pass such resolution. It is only a direction to enable the petitioner to express before the members of such meeting his intention as contained in the notice. In the case of Indian Cable Co. Ltd. v. Sumitra Chakraborty, AIR 1985 Cal 248, the learned judges of the Division Bench of this court, after discussing various cases, were of the view that, if a court is called upon to grant any relief on any interlocutory application which, when granted, would mean granting substantially the relief claimed in the suit, the court will be very slow and circumspect in the matter of granting any such prayer. It is indeed true that such a relief should be granted only in exceptional cases. Though exercise of such a discretion should be limited to rare and exceptional cases, still, at the same time, no court should think that, in law, there is any absolute bar to the court granting such a relief. In deserving cases, the court should not hesitate to come in aid of a litigant and uphold the cause of justice by granting such a relief.

The observation of the learned judges of the Supreme Court at paragraph 100 of the case LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548 indicates that a duty is cast on the management to disclose in the explanatory note all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolution, which they proposed to move at the meeting. It was further observed that every shareholder of a company has the right, subject to the statutory prescribed procedure and numerical requirement, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolution proposed to be moved at the meeting. Factually, the present case is different inasmuch as the petitioner, being a shareholder, has not called an extraordinary general meeting but, at a meeting called by the company, he has only proposed for the candidature of a particular person in the place of the retiring director. In our view, to hold that the provision of section 257 is subject to the provision of section 188 will render the provisions of section 257 nugatory and redundant. Under the circumstances, there will be an order directing the company to consider the notice given by the petitioner in accordance with law at its fourteenth annual general meeting.

The meeting was scheduled to be held on March 18, 1989: In any event, the meeting cannot be held on March 18, inasmuch as clear 21 days' notice is required to be given. Under these circumstances, the meeting is to be held on April 20, 1989.

Mrs. Mukherji, learned lawyer appearing on behalf of the company, prays for stay of the operation of this order. Such prayer is allowed. There will be a stay for a period of a fortnight.

Mahitosh Majumdar J.—I agree.

[1993] 77 COMP. CAS. 324 (MAD)

HIGH COURT OF MADRAS

V.G. Balasundaram

v.

New Theatres Carnatic Talkies Pvt. Ltd.

LAKSHMANAN J.

C.P. NO. 10 OF 1981.

DECEMBER 12, 1991

T. Raghavan for the Petitioner.

T.R. Rajagopalan for the Respondent.

JUDGMENT

Lakshmanan J.—The first respondent company is a private limited company incorporated under the provisions of the Indian Companies Act, 1913. Respondents Nos. 2 to 6 are brothers and son of one Balaswamy Naidu. The petitioners are the sons of late Guruviah Naidu. Guruviah Naidu and Balaswamy Naidu are brothers. The capital of the company is Rs. 1 lakh divided into 100 shares of Rs. 1,000 each. The amount of capital paid up or credited as paid up is Rs. 50,000 made up of 50 shares of Rs. 1,000 each.

The petitioners, who are the sons of Guruviah Naidu, have filed this petition under sections 397 and 398 of the Companies Act, 1956. The petitioners herein are the shareholders of the first respondent company holding between themselves 25 fully paid-up shares of Rs. 1,000 each out of the total issued and subscribed and paid-up capital of 50 shares of Rs. 50,000 each. They have been holding these shares ever since 1967. The petitioners thus held 50 per cent, of the issued capital of the company and as such they are entitled to invoke section 399 of the Companies Act, 1956, for relief under sections 397 and 398 of the Act. The company constructed a theatre known as Carnatic Talkies situated in Big Bazaar Street, Coimbatore, which is the subject-matter of the present proceedings. The company has been carrying on only the business of exhibiting motion pictures in the said theatre. As stated above, the petitioners' father, V. Guru-viah Naidu, became the holder of 25 shares on and from April 27, 1951, and the remaining shares came to be held by his brother, V. Baluswamy Naidu. The late V. Guruviah Naidu was functioning as the managing director of the company from April 27, 1951, till June, 1962, while the late V. Baluswamy Naidu was the only other director of the company throughout the said period and he was acting as the managing director till his death. Subsequent to the death of Baluswamy Naidu, Guruviah Naidu was acting as the managing director of the company till his death on January 10, 1970. The 25 shares which were held by Baluswamy Naidu which were held in the name of a firm, V. Baluswamy Naidu and Sons, and registered as such in the share register of the company transmitted into the following names of his six sons in or about 1967 :

SI. No.

Names

No. of shares

1.

V.B. Gopalakrishnan

4

2.

V.B. Jagadeesan

4

3.

V.B. Devaraj

4

4.

V.B. Padmanabhan

5

5.

V.B. Rangaraj

4

6.

V.B. Selvaraj

4

Likewise Guruviah Naidu transferred his shares to his three sons in equal proportion of six shares each and he retained seven shares in his own name. The transfer of 18 shares made in favour of the petitioners were duly registered in the books of the company.

According to the petitioners, certain oppressive tactics were practised on them by respondents Nos. 2 to 5 even as early as 1972, and that the third respondent, V.B. Gopalakrishnan, at the instigation of his brothers refused to co-operate with the first petitioner herein in running the theatre for the full time of lease granted to the first petitioner and the third respondent was running the theatre on lease as per the said arrangement. At the time of the death of V. Guruviah Naidu, the other director of the company was the second respondent, V.B. Padmanabhan, as he was appointed as a director of the company after the demise of his father, V. Baluswamy Naidu. By a resolution of the board dated February 21, 1970, the first petitioner was appointed as a director and also managing director of the company till December 5, 1971. On that date, the first petitioner resigned his managing directorship and, therefore, in his place the second respondent, V.B. Padmanabhan, was appointed to that office, while the first respondent continued as a director of the company. According to the petitioners, respondents Nos. 2 to 5 herein were scheming to have complete control of the company and the theatre exclusively for themselves and to prevent the petitioners from exercising any right as members of the said company. It is stated that the second respondent taking advantage of the fact that he was the managing director of the company removed all the records to his residence and kept them for himself. The respondents, particularly the second respondent was preventing the first petitioner from continuing the lease of the theatre by making his brother, the third respondent, who was the co-lessee, to refrain from co-operating with the first petitioner to obtain the licence for running the theatre, although the first petitioner was put in possession of the theatre. The second respondent was interfering with the running of the theatre of the first petitioner from May, 1972, onwards with the result that the first petitioner was forced to institute O.S. No. 43 of 1972 on the file of the Sub-Court, Coimbatore, for restraining his co-lessee, V.B. Gopalakrishnan, from interfering with the theatre by him. The licence granted could not be renewed after its expiry because of the non-co-operating attitude of the respondents, with the result that the theatre had to be closed down and consequently, the company had incurred heavy loss, there was no income from the theatre and the delicate machinery got rusted and deteriorated in value. By preventing the third respondent from co-operating with the first petitioner for renewing the licence, the second respondent was responsible for such an oppressive management and he was also responsible for such oppressive management and oppressive conduct of the affairs of the company. The theatre was closed for want of a licence right from September 10, 1972, onwards. The second respondent, who was the then managing director had deliberately flouted the decision of the board contained in its resolution dated February 4, 1972, for transmission of the seven shares standing in the name of the petitioners' father, the late Guruviah Naidu, in the names of his legal representatives, viz., the petitioners herein by refusing to effect the transfer and register the names of the petitioners in the registers of the company. He had also set up one Rukmini Ammal to file a suit against the company, which was then represented by the second respondent as the managing director, claiming falsely that the shares then standing in the name of late Guruviah Naidu in the registers of the company belonged to her.

The suit was dismissed and even thereafter the transmission of the shares was not effected by the second respondent.

The petitioners also purchased the four shares standing in the name of Rangaraj, the sixth respondent, on February 25, 1972, and lodged the transfer application and the shares with the company for registration in March, 1972. The second respondent deliberately omitted to register the transfer on false and untenable grounds and instigated a collusive suit to be instituted by his brothers against the said Rangaraj and the petitioners herein for a declaration that the sale by the sixth respondent was void, not valid and binding upon the third, fourth and fifth respondents and the petitioners herein should transfer the shares to them and the second respondent for a sum of Rs. 8,000 and for an injunction restraining the petitioners herein from applying for the registration of the shares of their names with the first respondent company and from acting adversely to their interest and that of the second respondent on the basis of the transfer of the four shares. In the suit, the respondents set up an oral agreement between the brothers and also between the parties to the suit and also between late Guruviah Naidu and his brothers, Baluswamy Naidu, that each of the families should maintain the same number of shares, viz., twenty five shares, to each branch and that if any member of the two branches wished to sell their shares, the first option to purchase the same should be given to the members of the other branch and if the offer so made to the members of the other branch is also not accepted, then the sale should be effected to third parties. When the trial court decreed the suit, appeals were preferred by the petitioner and the sixth respondent to the District Court at Coimbatore in A. S. Nos. 57 of 1977 and A. S. No. 112 of 1977, which were dismissed. Second Appeals Nos. 1994 of 1978 and 2163 of 1978 filed by the petitioners and the sixth respondent respectively to this court were disposed of by a common judgment. While dismissing the second appeals this court directed a modification of the decree of the trial court by substituting the names of respondents Nos. 3 to 5 herein in the place of the petitioners. In other respects, it was held that all other terms of the decree of the trial court would stand. Aggrieved by the judgment and decree passed in the said two appeals, both the petitioners herein and the sixth respondent preferred special leave petitions to the Supreme Court and the Supreme Court granted leave to the petitioners as well as to the sixth respondent to prefer appeals. The said civil appeals were numbered as Civil Appeals Nos. 1946-47 of 1980. When the company petition was filed, the said two appeals were pending. Even at the time of reserving orders in his company petition, the said two appeals were pending. In the meanwhile, the appeals were taken up and disposed of by the Supreme Court on November 28, 1991. Allowing the appeals preferred by the petitioners and the sixth respondent, the Supreme Court held as under :

"Hence, the private agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the article. Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and, secondly, the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member's right to transfer his shares which are contrary to the provisions of article 13. They are, therefore, not binding either on the shareholders or on the company. In view of this legal position, the finding recorded by the courts below that the sale by the first defendant of his shares to defendants Nos. 4 to 6 is invalid as it is in breach of the agreement, is erroneous in law. In view of our above finding, it is unnecessary to go into the question whether the High Court was justified in directing the transfer of shares by defendants Nos. 4 to 6 to the plaintiffs even if its finding that the sale was invalid was correct.

In the circumstances, the appeals are allowed, the decree of the High Court is set aside, and the plaintiffs' suit is dismissed with costs".

It is seen that as a result of the several deliberate acts of commission and omission on the part of the respondents, the first and third petitioners herein filed Company Petition No. 88 of 1973 on the file of this court against the first and second respondents herein for various reliefs including those for superseding the board of directors of the first respondent company and appointing one or more administrators to carry on the business of the company. The said company petition was ordered on October 4, 1974, by this court in terms of the joint memorandum of compromise filed by the parties to the said company petition, pursuant to which the company was managed by the board constituted, viz., the second petitioner and the second respondent as the only two directors of the company in accordance with the articles of association of the company. As per the said orders, the term of office of the board of directors of the company was to come to an end on December 27, 1980. The second respondent, who was acting as the managing director of the first respondent company, failed to convene either the meeting of the board of directors or the general body meeting of the company and the first and third petitioners were, therefore, obliged to file Company Application No. 2048 of 1980 in the said Company Petition No. 88 of 1973 against respondents Nos. 1 and 2, praying for directions to the board of directors for convening a general body meeting of the company for the purpose of electing directors and also for appointment of a chairman for the purpose of conducting the proceedings of the general body meeting and also for necessary directions for electing the directors in the general body meeting for constituting a board consisting of at least three directors. The second petitioner filed his counter-affidavit, supporting the application while the second respondent filed a counter affidavit, resisting the said application. However, during the hearing of the said application, the second respondent herein offered to file a supplemental affidavit undertaking to convene a meeting of the board of directors on December 1, 1980, for considering and approving of the draft profit and loss account for the year June 30, 1978, and for convening the annual general body meeting. Thereafter, the said company petition was closed in view of the undertaking given by the second respondent that he would hold the general body meeting after convening a meeting of the board of directors on December 1, 1980.

A board of directors meeting was held on December 1, 1980, and in that meeting the second petitioner herein insisted that the second respondent convene the general body meeting of the company at least on December 27, 1980, since the terms of office of the second respondent as managing director as per the orders passed in Company Petition No. 88 of 1973 would come to an end. But the second respondent refused to do so stating that he would hold the general body meeting only on January 5, 1981, and that he would hold another meeting of the board of directors on December 8, 1980, for setting the agenda for the general body meeting. On that day, the second petitioner noticed some writing dated October 8, 1980, in the minutes book under the caption PROCEEDINGS OF THE MANAGING DIRECTOR. Thereafter, the second petitioner addressed a letter on the same day to the second respondent stating that the minutes book should contain only the proceedings of the meeting of the board of directors and not any proceedings of the managing director alleged to have taken place on October 8, 1980. The second petitioner also asked for a copy of the writing dated October 8, 1980, and also the circumstances under which the same found a place in the minutes book. The second respondent has neither furnished a copy of the writing dated October 8, 1980, nor sent any reply. According to the petitioners, the second respondent had unauthorisedly and illegally introduced the said writing in the minutes book of the first respondent company with the full knowledge that the appeals filed by the petitioners and the sixth respondent herein were pending in the Supreme Court.

The petitioner has also filed Company Petition No. 1 of 1981, for rectification of the register of members since it became necessary to have the register of members rectified since the second respondent removed from the register of members of the company the name of the sixth respondent without any reasonable cause. It is, therefore, stated that the second respondent taking advantage of his position as managing director of the company at the relevant time pursuant to the order passed in Company Petition No. 88 of 1973 by compromise had interpolated the alleged proceedings dated October 8, 1980, in the minutes book of the company without even bringing it to the notice of the second respondent, who was during the relevant time, the only other director of the company. This act on the part of the second respondent is harsh, oppressive burdensome, wrongful and prejudicial to the interest of the petitioners herein and the object of the second respondent in meddling with the records of the company is only to gain complete control of the company for himself and his brother by excluding the petitioners from having any control or participation in the administration of the company.

The second respondent did not take any steps to convene the meeting of the board of directors as per the order of the court in Company Petition No. 88 of 1973 and also to convene a general body meeting for passing accounts. The arrangement pursuant to the compromise order had come to an end as early as on December 27, 1980, and that the second respondent as the managing director had taken advantage of continuing to remain the managing director of the company with the active assistance and collusion of his brothers, viz., the respondents in this case. As a matter of fact even in the general body meeting held on January 5, 1981, the second respondent and his brothers who were having an upper hand refused to consider the objections raised by the second petitioner herein. The second respondent, who presided over the meeting declared that the general body meeting was adjourned. Since the second respondent declared that the meeting was adjourned, the petitioner left the meeting as they were under the impression that the general body meeting would be held again on some other date to be fixed. During the general body meeting and before it was adjourned by the second respondent, the petitioners handed over to the second respondent some proposals to be considered and passed in the general body. It was only after these proposals were submitted the second respondent thought it fit to adjourn the meeting and immediately thereafter the petitioners herein sent a telegram to the second respondent. The second respondent sent a reply telegram falsely alleging that the petitioners herein participated in the election of the chairman and that the adjournment motion was lost and at that stage, the petitioner walked out of the meeting though the second respondent told them that the meeting would go on with its business, etc. The petitioners submitted that the meeting was adjourned by the second respondent in collusion and in conspiracy with his brothers, viz., respondents Nos. 3 to 5, and prepared some resolutions as if they were passed in the general body meeting and as if three directors were elected in the meeting, viz., the second respondent, the second petitioner and the third respondent. According to the petitioners, the general body meeting was adjourned and as such no business could have been transacted thereafter and in any event the resolutions said to have been passed in the general body meeting after the petitioners left the meeting, are mere make-believe affairs prepared by the second respondent in collusion and conspiracy with his brothers. It is pertinent to point out that more than two directors cannot be elected inasmuch as in the articles of the company, there is provision for electing only two directors. The petitioners stated that no business was transacted at the meeting convened and held on January 5, 1981, and that in any event the third respondent has not been elected as a director of the first respondent company and is not a director of the company. The petitioners submitted that the articles of association of the first respondent company provide only for two directors and that there is no provision for a third director and that, therefore, the allegation of the third respondent as a director cannot be taken up without amending the articles of association of the first respondent company, by increasing the strength of the board as required by the provisions of the Companies Act.

The petitioners filed Company Petition No. 1 of 1981 under section 155 of the Companies Act for rectification of the register of members deleting the names of respondents Nos. 2 to 5 in respect of the shares bearing Nos. 23 to 26, and originally standing in the name of the sixth respondent. It is seen from the typed set of documents filed by the first and second respondents, that the articles of association included therein did not correspond with the articles of association of the first respondent company. Hence the petitioners submit that the respondents have created documents to suit their purpose. The records of the Registrar of Companies relating to the first respondent company was inspected and the inspection of the records has revealed that the second respondent had filed Form No. 23 under section 192 of the Companies Act, on June 21, 1973, in his capacity as the managing director of the first respondent company. The said Form would disclose that at the general body meeting said to have been held on June 11, 1973, certain resolutions amending the articles of the first respondent company were passed. The resolution said to have been passed at the general meeting on June 11, 1973, are to the effect that the number of directors of the company shall be not less than 2 and not more than 4 and that the said resolution was substituted in the place as article 31. Likewise Sri V.B. Padmanabhan shall hold office for life or until they voluntarily resign. Subject No. 3 relates to the articles of association 35 and substitution of the resolution that the business of the company shall be carried on by the board of directors, subject to the direction, control and superintendance of the board of directors at all time. Subject No. 4 relates to the deletion of article 36 and substitution of article 35 in its place to the effect that Sri V.B. Padmanabhan shall be the managing director of the company entrusted with substantial power of the management of the company and shall hold office as managing director for the period up to June 30, 1975. Thereafter, Sri V.G. Balasundaram shall be the managing director of the company for a period of two years from July 1, 1975, until June 30,1977. Thereafter Sri V.B. Padmanabhan and Sri V.G. Balasundaram shall hold office as managing director of the company in turn and in the alternative for a period of two years each commencing from July 1, 1977. The said return further disclosed that a notice of the meeting was said to have been despatched on May 31, 1973, and resolutions were said to have been passed on June 11, 1973. The petitioners submit that no notice of the meeting purported to have been held on June 11, 1973, was ever sent to the petitioners or their group or any meeting was really held on June 11, 1973. When the petitioners instituted proceedings under sections 397 and 398 of the Companies Act on the file of this court in Company Petition No. 88 of 1973, no whisper has been made about the amendment of the articles of the company. The petitioners filed the articles of association in the said proceedings and no objection was ever taken that the articles of association filed by the petitioner did not represent the correct position. For the first time the present articles of association in the alleged form came to light when the second respondent filed a typed set of documents in C.P. No. 1 of 1981. The petitioners had till then no knowledge of the return filed by the second respondent with the Registrar of Companies and there was no occasion for the petitioners to be apprised of the said amendment and they came to know of the same only on inspection of the relevant records with the Registrar of Companies and in view of the compromise entered into in C.P. No. 86 of 1973. The petitioners, therefore, submit that the meeting purported to have been held on June 11, 1973, was not really held and the resolution purported to be passed in the said meeting is illegal and void. Therefore, the articles of association of the first respondent will be one that stood prior to the alleged meeting dated June 11, 1973. It is, therefore, submitted by the petitioners that they are entitled to a declaration that the purported meeting held on June 11, 1973, was illegal, void and that any resolutions passed thereat are not valid and binding on the first respondent company. Hence, the third respondent, who is purported to have been appointed at the meeting held on January 5, 1981, cannot function as such a director of the first respondent company. The petitioners further submit that even alternatively and assuming but not conceding that proceedings of the meeting purported to have been convened on January 5, 1981, were to be correct and that the articles were amended on June 11, 1973, even then the third respondent cannot be said to be legally appointed as a director of the company, the said purported amendment of the articles of association would contemplate that any director other than the one mentioned in the alleged amended articles under article 32 of the association should be appointed in the general meeting by a special resolution. If that be the case the appointment of the third respondent should be considered as a special business and the provisions of section 173 of the Companies Act shall apply to the first respondent company. The notice issued for holding the meeting on January 5, 1981, should disclose the intention to move the election of the third respondent as a director as and by way of a special resolution by setting out the special resolution as such. The notice did not disclose any such resolution as required under section 189 of the Companies Act and there is no explanatory statement attached to the notice as required under section 173 of the Companies Act. The provisions of sections 173 and 189 are mandatory and in the absence of compliance with the said provisions the purported resolutions are illegal and void.

According to the petitioners, they are entitled to have the affairs of the company managed properly and for that purpose have a general body meeting convened and the company being managed properly by a duly appointed board of directors in accordance with the provisions of the Companies Act. It is also essential in the interest of the company and its shareholders that the board of directors of the company should be superseded and the affairs of the company administered by one or more administrators to be appointed by this court for such period as may be decided by this court. As the action of the second respondent has resulted in serious loss to the company and its shareholders, it is necessary to give directions for appropriate proceedings being instituted against the second respondent pursuant to section 406 read with sections 539 to 544 of the Companies Act so that the second respondent may be surcharged and the company compensated for the loss sustained by the acts and omissions of the second respondent.

With these averments, the petitioners have filed the above company petition praying :

(1)            to supersede the board of directors of the first respondent company and appoint one or more administrators to carry on the business of the company ;

(2)            to assess the damages sustained by the company by reason of the wrongful acts of the second respondent and to make an order surcharging the second respondent and directing payment of compensation of the first respondent company ;

(3)            to direct the administrators to convene one or more general meetings of the company after complying with such directions as this court may deem fit, for appointment of a new board of directors to take charge of the affairs of the company and to vest the management with such board ;

(4)            for declaring that the extraordinary general meeting of the first respondent company held on June 11, 1973, as illegal and void and that the resolutions said to have been passed thereat are not binding on the company ;

(5)            for declaring that the proceedings of the annual general body meeting held on January 5, 1981, and as recorded by the second respondent in the minutes book of the first respondent company are illegal and void and not binding on the first respondent company ;

        (6)            for declaring that the third respondent is not a director of the first respondent company ;

        (7)            for ad interim injunction restraining the third respondent from acting or functioning as a director of the first respondent company pending disposal of the company petition and for other reliefs.

The company petition was resisted by the respondents. The second respondent filed a counter-affidavit for himself and on behalf of the respondent company. He also filed an additional counter-affidavit to the amended petition under sections 397 and 398 of the Act on July 20, 1983. The petitioners filed a reply affidavit to the additional counter filed by the second respondent. They denied the allegations as baseless and unsustainable and devoid of any merits. According to them, there are no facts to justify the making of a winding up order and the requirement of section 397 of the Act is also not satisfied. There are absolutely no grounds for invoking section 298 of the Act. The allegations are very vague and baseless in regard to the mismanagement. It is also denied that they set up Rukmani Ammal to institute any suit. According to the respondents, after the second respondent became the managing director of the company on December 28, 1978, the meetings of the board of directors of the company were held on December 28, 1978, January 20, 1979, February 10, 1979, March 10, 1979, April 21, 1979, May 5, 1979, June 9, 1979, December 1, 1980, December 8, 1980, and January 12, 1981, and the meeting of the general body was held on January 5, 1981. At the general body meeting accounts of the company for the year ended June 30, 1978, were laid and adopted. However, because of the absolute lack of co-operation and the obstructive attitude of the second petitioner as co-director, meetings of the board of directors could not be held more frequently and further general meetings could not be held to bring the accounts up to date. It is also stated in paragraph 8 of the counter-affidavit as to what transpired at the annual general meeting of the company held on January 5, 1981. They also denied the allegations made in the company petition concerning the proceedings of the general body meeting held on January 5, 1981. The contentions now advanced against the proceedings of the said meeting are an afterthought and obviously invented only for the purpose of this company petition. The respondents have also denied the allegations in paragraphs 18-A and 18-B of the company petition. According to them, article 31 of the articles of association of the company provides that the number of directors of the company shall be not less than two and not more than four. In the circumstances the election of the third respondent at the general meeting on January 5, 1981, was well within the number of directors provided in the said article. According to the respondents, there was no necessity to amend the articles of association to increase the strength of the board of directors of the company at the general meeting on January 5, 1981. A valid general meeting was properly held on June 11, 1973, after due notice to all the shareholders including the petitioner. The petitioners had deliberately stayed away from that meeting with ulterior motives, the special resolutions were validly passed at that meeting amending the articles of association in certain respects and thereafter return in Form No. 23 under section 192 of the Act was filed with the Registrar of Companies regarding the amendments to the articles of association and other subsequent proceedings to the knowledge of the petitioners. The proceedings of the meetings of the board of directors of the company subsequent to the election at the general meeting held on January 5,1981, would show that the second respondent has always adopted an obstructive attitude in all the meetings that he attended. Therefore, from any point of view, this company petition has no merits.

The petitioners filed a reply affidavit to the additional counter-affidavit reiterating the contentions raised earlier and contended that the prayers enumerated in the company petition are absolutely tenable and justifiable and that the petitioners are entitled to the reliefs as prayed for.

I have heard the lengthy and elaborate submissions of Mr. T. Raghavan, learned senior counsel appearing on behalf of the petitioners and Mr. T.R. Rajagopalan, learned counsel appearing on behalf of the respondents.

Exhibits P-1 to P-47 were marked by consent on behalf of the petitioners and exhibits C-1 to C-6 were marked . No oral evidence was let in by either parties and arguments were advanced on the basis of the pleadings and on the basis of the documents filed in these proceedings.

In this company petition, the following reliefs are sought for :

        (a)            for superseding the board of directors of the company and appoint-ment of administrator.

(b)            to convene the general meeting for appointment of a new board of directors to take charge of the affairs of the company and to vest the management with such board. These reliefs are sought for on the basis that the meetings held on June 11, 1973, and January 5, 1981, are illegal and void and not binding on the company apart from the factum of the meetings being disputed.

For appointment of administrator the contention of the petitioners-is that (a) earlier pursuant to the order of this court in C.P. No. 88 of 1973 there would be two directors one being Mr. V.G. Sundar Raj (second petitioner) and the other Mr. V.B. Padmanabhan (second respondent) representing the two groups. Mr. V.G. Sunder Raj would be the managing director for the first three years from the date of his appointment and Mr. V.B. Padmanabhan would be the managing director for a period of two years immediately following the expiry of three years of the tenure of Mr. V.G. Sunder Raj. The total tenure contemplated is five years. The order does not contemplate the continuance of the two directors appointed by the court.

A meeting dated January 5, 1981, was purported to have been convened. Whether the said meeting is valid is a question raised. The notice dated December 12, 1980, issued in the name of the board by Mr. V.B. Padmanabhan (R-2) as managing director of the company. The agenda referred to three items of business, viz., (1) consideration of accounts, (2) appointment of auditors, and (3) appointment of directors. The petitioner challenges the meeting on two counts, (a) That the purported meeting did not take place. For that reliance is placed on the telegram dated January 5, 1981, sent by the second and third petitioners and another. A reply to the same was issued by Mr. V.B. Padmanabhan, the second respondent. The minutes dated January 5, 1981, are alleged to be the minutes produced. The transactions purported to have been taken place would show that apart from the appointment of auditors there were election of directors. It is stated in the alleged meeting that three of them are elected, viz., (1) V.B. Padmanabhan (R-2), (2) V.B. Gopalakrishnan (R-3) and (3) V.G. Sunder Raj (second petitioner). Assuming that the meeting had taken place on January 5, 1981, the election of the three directors is not in accordance with the articles of association of the company as there could be only two directors under the articles. So there is no place for the third director. The respondent relies on an alleged amendment to the articles purported to have been made at an extraordinary general meeting said to have been held on June 11, 1973. The petitioners challenge the holding of such meeting. The petitioner has detailed in paragraphs 18(c), 18(d) of the petition as to how there would never have been a meeting on June 11,1973, and the resolutions purported to have been passed on June 11, 1973, are illegal and void. The purported proceedings held on January 5, 1981, depend upon the factum and validity of the alleged meeting of June 11, 1973.

The following are the circumstances that would be relevant to be noticed to show that no meeting would have been held on June 11, 1973. These circumstances have been relied on by the petitioners.

(a)            The suit, O.S. No. 1246 of 1972, filed by V.G. Balasundaram on the file of the District Munisiff Court, Coimbatore, for declaration and for permanent injunction for delivery of the books and papers of the plaintiff company in the hands of the plaintiff was dismissed by the said court on May 11, 1973.

(b)            A requisition meeting was convened by petitioners Nos. 2 and 3 for removal of the second respondent. A reference to the letter dated May 30, 1973, will show that petitioners Nos. 2 and 3 have requested respondents Nos. 2 and 3 and the company to convene an extraordinary general meeting of the company for the purpose of passing a special resolution as required under section 284 of the Act. The resolutions were for the removal of the second respondent from the post of director of the company and to appoint the second petitioner to be the director of the company in the place of the second respondent.

(c)            The letter dated June 6,1973, sent by the company to petitioners Nos. 2 and 3 from the second respondent herein expressing their inability to convene the general body meeting for the removal of the second respondent in view of the pendency of the proceedings in O.S. No. 870 of 1972 on the file of the District Munsiff Court, Coimbatore, and O.S. No. 463 of 1972 on the file of the Sub-court, Coimbatore.

(d)            Notice dated June 7, 1973, sent by registered post with acknowledgment due from the first petitioner to the second respondent and also to the Registrar of Companies and to the chartered accountants. It is stated therein that the business of the company could not be transacted in view of the extraordinary circumstances mentioned in the said letter. The said communication was sent to place on record that no business was trans acted in the board meeting of the company on June 7, 1973.

(e)            Notice of the board meeting for June 16, 1973, was sent on June 8, 1973. Item No. 3 of the agenda is to consider the requisition dated May 30,1973, received by the company on June 4, 1973, from petitioners Nos. 2 and 3.

(f)         Another letter dated June 8,1973, was sent to the first petitioner herein in connection with the board meeting held on June 7, 1973, enclos ing the agenda for the meeting held on June 16, 1973, and requesting the first petitioner to attend the said meeting.

(g)        O.S. No. 416 of 1973 is the suit filed by the company by its managing director, the second respondent herein against the second, third and first petitioners respectively on the file of the Sub-Court, Coimbatore, to declare that the resolutions proposed and contained in the requisition for general meeting dated May 30,1973, and the notice of the extraordinary general meeting of the first respondent company issued by petitioners Nos. 2 and 3 on July 5, 1973, are illegal and opposed to the articles of association and invalid and without any legal effect and for a consequential injunction restraining the petitioners herein from making any claim or asserting any rights on the basis of the said resolution or seeking to enforce the same in any manner and for costs. This suit was filed on July 9, 1973.

(h)        The written statement filed by the petitioners in O.S. No. 416 of 1973 is another document marked as exhibit P-13 in the present proceedings to show that no meeting would have been held on June 11, 1973. It is mentioned in paragraph 11 of the written statement that no special resolution is required under the article for removal of a director. Article 27 has been misinterpreted by the respondents herein and V.B. Padmanabhan was not appointed as director for any specific term and is removable at the will of the general body. Only article 31, section 284 of the Act would apply and in either event, only an ordinary resolution is required. The allegation that the proposed resolution was also opposed to articles 31, 32, 35 and 36 are meaningless and none of these articles apply to the proposed resolution. It is also stated in paragraph 12 of the written statement that no special resolution is required for appointment of a director unless the strength of directors is thereby increased.

(i)         The written statement filed by V.G. Balasundaram, the first petitioner herein and the third defendant in O.S. No. 416 of 1973, and marked as exhibit P-14 in these proceedings is also relevant to be noticed in this context. It is also stated that no resolution is required under the articles for removal of a director.

(j)         Company Petition No. 88 of 1973 was filed on October 16, 1973, on the file of this court by petitioners Nos. 1 to 3 impleading the first respondent company and V.B. Padmanabhan as respondents Nos. 1 and 2. The said petition was filed under sections 397 and 398 of the Companies Act. Several acts of misconduct have been alleged against the respondents therein. It is stated in paragraph 22 of Company Petition No. 88 of 1973 that the petitioners and the other members of the company are entitled to have the affairs of the company managed properly by a duly appointed board of directors in accordance with the provisions of the Companies Act. The articles of the company which were drawn up in the year 1935 are totally inadequate to ensure proper management of the company. The articles, particularly the provisions relating to the appointment of directors, their powers and duties require a revision so as to bring them in line with the provisions of the Companies Act. It is also essential in the interests of the company and the shareholders that the board of directors of the company should be superseded and the affairs of the company administered by one or more administrators to be appointed by this court for such period as may be decided by this court. As the action of the second respondent has resulted in serious loss to the company, it is also necessary that this court may be pleased to give directions for appropriate action being instituted against the second respondent, V.B. Padmanabhan.

(k)       In the said company petition, a memorandum of compromise was entered into and signed by the petitioners and the respondents and their respective counsel. This memorandum of compromise dated October 14, 1974, is marked as exhibit P-4 in the present proceedings. Under the said memorandum of compromise, parties have agreed to withdraw the following legal proceedings, which were then pending and allow them to be dismissed as settled out of court :

                1.         C.P. No. 35 of 1974, High Court, Madras.

                2.         O.S. Nos. 416 of 1973 and 265 of 1974, Sub-Court, Coimbatore.

(l)            It is mentioned in paragraph 22 of the compromise that the respective contentions of parties in the suit in O.S. No. 416 of 1973, Sub-court, Coimbatore, are left open and the parties shall be at liberty to proceed with the said suit. It is also a matter of record that the two appeals in A. S. Nos. 57 and 112 of 1977 preferred on the file of the District Court, Coimbatore, and the two second appeals in S. A. Nos. 1994 of 1978 and 2163 of 1979, respectively, preferred against the said judgments of the District Court on the file of this court were dismissed.

The respondents claim that the amended articles of association were filed in O.S. No. 416 of 1973. According to the petitioners, the said amended articles were never marked as exhibit and that the suit was not tried at all. There is no occasion for the petitioners to know that the articles of association were filed by the respondents in O.S. No. 416 of 1973 were different from the articles filed in C.P. No. 88 of 1973.

In Company Petition No. 88 of 1973, in Company Petition No. 1(A) of 1981 and Company Petition No. 10 of 1981 (the present proceedings), the petitioners filed the original articles of association, which are marked as exhibit P-1. In this connection it is useful to refer to rule 22 in the Ramaiya's Companies Act, Eleventh edition, Appendix V, page 1786. Rule 22 provides that every petition and application mentioned in Appendix II shall be accompanied by the documents set opposite thereto in column (4) of the said Appendix. The petitioners' case is that it is only in the course of the hearing in C.P. No. 1(A) of 1981 that the purported meeting said to have been held on June 11, 1973, came to be known. The written statement filed by the petitioners in O.S. No. 416 of 1973 would clearly show that the pleadings were on the basis of the existing articles of association without reference to the purported amendment. The minutes book of the proceedings is also not produced.

There were at all times only two directors of the company. In para 22 of Company Petition No. 88 of 1973, specific reference is made that the articles were drawn up in 1935 and that the articles relating to the appointment of directors require revision so as to bring them in line with the provisions of the Companies Act, 1956. In the counter-affidavit filed by the second respondent, there is no reference to the amendment of the articles at the meeting purported to be held on June 11, 1973.

That no meeting was held on June 11, 1973, was further made clear in the counter filed by Mr. V.B. Padmanabhan, the second respondent herein in Company Application No. 715 of 1978 in C.P. No. 88 of. 1973 (available at pages 209 and 210 of typed set No. 3). It is alleged by Mr. V.B. Padmanabhan that the articles of the first respondent company provided and provides only for two directors. This would clearly show that the respondents wanted to keep in dark the manipulation of the minutes to be utilised at an appropriate time which came to them at the meeting held on January 5, 1981. The contention of the respondents that no meeting was held would be evident from their additional counter-affidavit. A reference to paragraph 6 of the additional counter-affidavit will amply prove this. It shows there from that according to them it was a requisitioned general meeting and notice was sent to all shareholders under certificate of posting.

Section 169 is the relevant provision with regard to the requisition meeting. Section 169 provides that an extraordinary general meeting may be called on requisition of members holding at least one tenth of the paid-up capital carrying voting rights in respect of that matter. A notice should be sent by the requisitionists to the company. The company should forthwith convene a board meeting and the board will convene a requisition meeting within 21 days of the receipt of the notice. If the board does not convene the meeting, then the requisitionists would convene the meeting. There is no reference as to when the requisition notice was received by the company, when the board meeting of the company was convened for consideration and how the company should have issued a notice.

From a perusal of the notice, it is seen that the notice is said to have been issued by the said company. But from the dates given earlier, it would show that there was no board meeting which considered any requisition for holding the meeting and decided to convene a meeting. No presumption of the minutes would arise with reference to the minutes of the requisitioned meeting. Sections 193 and 195 of the Companies Act will not be applicable to the minutes of the requisitioned meeting and the minutes have to be proved as a matter of fact. As rightly contended by Mr. T. Ragavari the minutes book is not produced before this court.

According to the petitioners, no meeting was ever held on January 5, 1981, and even assuming that such a meeting was held, and the articles duly amended the proceedings of the said meeting were challenged with reference to the election of directors on two grounds :

        (a)            Appointment of a third director should be done by a special resolution ;

        (b)            Even in the so called amended articles the appointment of directors is contemplated by a special resolution.

Section 189 of the Companies Act stipulates that the notice must specify the resolution as special resolution and to be passed. Article 27 of the articles of association of the company contemplates increase in the number of directors by special resolution in general meeting. If such an increase is contemplated with reference to the meeting held on January 5, 1981, a special resolution should have been passed for appointment of directors. The purported amended article 32 contemplates the appointment of directors in general meeting by special resolution. In my view, section 189 of the Companies Act is mandatory and has not been complied with in this case. Section 189(2) of the Act says as follows :

"A resolution shall be a special resolution when —

(a)    the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution :

        (b)    the notice required under this Act has been duly given of the general meeting".

In two decisions of our High Court and the Patna High Court respectively Self Help Private Industrial Estate Private Ltd., In re [1972] 42 Comp Cas 605 (Mad) and Parikh Engineering and Body Building Co. Ltd., In re [1975] 45 Comp Cas 157, it has been held by two learned judges that for want of proper or sufficient notice or other defect in procedure a special resolution is not effective.

Section 173 of the Companies Act is equally mandatory. The said section applies to the company as the articles of association has not expressly excluded the application of section 173. Section 173(1) of the Act contemplates the appointment of directors in the place of directors retiring as ordinary directors. There are only two directors appointed by virtue of compromise. The appointment of a third director is not a director appointed in the place of directors retiring. The explanatory statement is mandatory, as could be seen from the following two decisions in :

        1. Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Ltd. [1964] 34 Comp Cas 777 (Guj) ;

        2. Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377 (Bom).

The notice dated December 12, 1980, for the meeting to be held on January 5, 1991, is in my view thus defective. The notice dated December 12, 1980, has been marked as exhibit P-5 in these proceedings. Subject No. 3 in the agenda relates to the appointment of directors. In my view, the appointment of directors can only be by a resolution with required majority. I am also of the view that every single requirement of section 189 of the Act is absent in the instant case. If these appointments are bad since they are not by a special resolution, then it can be construed that there is no valid board at all. Every single requirement of the Act prescribed for the protection of the shareholders is violated. Section 166 of the Act speaks about the condition of the annual general meeting. It is contended that no general body meetings were held in regard to the company in question. Section 210 of the Act provides that : "At every annual general meeting of a company held in pursuance of section 166, the board of directors of the company shall lay before the company —

        (a)            a balance-sheet as at the end of the period specified in sub section (3), and

        (b)            a profit and loss account for that period".

It is contended that the material provisions mentioned above have not been complied with by the respondents. Section 285 of the Act relates to the meetings of the board of directors, which contemplates that a meeting of the board of directors of the company shall be held at least once in every three months and at least four such meetings shall be held in every year. It is also seen that the petitioners sent a telegram on January 5, 1981, itself. There is also a dispute as to what happened on January 5, 1981, in the said meeting. It is seen from the proceedings of the first respondent company under subject No. 3 that according to the members as soon as this subject was taken up Shri V.G. Sundar Raj moved a resolution that subject No. 1 of the agenda to be deferred to another date and that the same may be considered by the general body at the adjourned meeting. The abovesaid resolution was seconded by Sri V.G. Muniraj. The chairman of the meeting Sri V.B. Padmanabhan, the second respondent herein stated that the accounts have already been passed by the board of directors, that this meeting has been called pursuant to an undertaking given in the High Court and the proceedings before the High Court and that it is not proper to defer the subject and that, therefore, the chairman has stated that he was putting the resolution for adjournment to vote. It is also stated in the minutes that the resolution for adjournment was lost by only two members voting for the resolution and four members voting against the resolution and accordingly, the chairman declared the resolution as lost. At this stage, Sri V.G. Sundar Raj, Sri V.G. Muniraj and Sri V.G. Krishnaswamy Naidu (proxy for Sri V.G. Balasundaram) staged a walk out from the meeting and thereupon it was resolved that the profit and loss account for the year ended June 30, 1979, and the balance-sheet as on that date and the reports of the board of directors and the auditors be and they are thereby received, adopted and approved. Shri V.B. Jagadeesan seconded the above resolution and the resolution was then put to vote and declared carried by the chairman on show of hands unanimously. Likewise, subject No. 3 which relates to appointment of directors resolved that Shri V.B. Padmanabhan, the second respondent, was appointed as director of the company. The said resolution was proposed by Mr. V.B. Jagadeesan and seconded by V.B. Devarajan. It is stated in the minutes that at that stage Sri V.B. Padmanabhan intervened and stated that it would not be proper for him to be the chairman while considering the resolution concerning his appointment as director and, therefore, he stepped down from the chair. Again, Shri V.B. Padmanabhan proposed and Shri V.B. Jagadeesan seconded that V.B. Gopala-krishnan be voted to the chair unanimously. After Sri V.B. Gopalakrishnan assumed the chair, the resolution relating to the appointment of Sri V.B. Padmanabhan as director was put to vote and declared carried by the chairman on show of hands unanimously. At this stage, Sri V.B. Gopalakrishnan stepped down from the chair and Sri V.B. Padmanabhan assumed the chair, having already been elected to the chair and he moved the following resolution :

        (a)            That Shri V.G. Sundara Raj be appointed as director of the company.

(b)            The said resolution was seconded by Sri V.B. Jagadeesan and the resolution was then put to vote and declared and carried by the chairman on show of hands by three members voting for the resolution and Sri V.B. Gopalakrishnan voting against the resolution.

(c)            Sri V.B. Jagadeesan proposed another resolution, proposing to appoint Sri V.B. Gopalakrishnan as director of the company.

(d)            The said resolution was seconded by Shri V.B. Devarajan and then the said resolution was put to vote and declared and carried by show of hands unanimously.

(e)            The meeting terminated with a vote of thanks to the chair. The minutes of the meeting was signed by the chairman of the meeting.

In my opinion, the notice itself is not in consonance with section 189(2)(a) of the Act for the reasons mentioned above. Exhibit P-1 is the memorandum and articles of association of the first respondent company. Paragraph 27 deals with the appointment of directors by a special resolution. Paragraphs 29 and 30(a) have to be noticed in this connection. Paragraph 29 of exhibit P-l deals with show of hands only. It further deals with decision at the meeting on the question submitted and the procedure to be followed. It says that every question submitted to a meeting shall be decided in the first instance by show of hands by the members present in person and by the duly constituted representative of any company or corporation and the chairman shall have in case of equality of votes a casting vote and unless a poll is demanded by any member, a declaration by the chairman that a resolution has been carried or lost and an entry to that effect in the minutes book shall be conclusive evidence without proof of the number or proportion of votes recorded in favour of or against, such resolution. Article 30(a) provides that if a poll is demanded by any member, every member present shall have a vote for each share and the result of the poll shall be deemed to be resolution of the meeting. A reference to the minutes of the meeting which is marked as exhibit P-39 of the proceedings will show that Sri V.B. Padmanabhan, the chairman elected by show of hands proposed that Sri V.B. Gopalakrishnan be elected to the chairman and that a poll was taken on the said resolution with 25 votes being cast in favour and 25 votes being cast against the said motion and that at that stage Sri V.B. Padmanabhan as chairman gave his casting vote in favour of the election of Sri V.B. Gopalakrishnan and Sri V.B. Gopalakrishnan was elected to the chair and after the election he conducted the further proceedings.

As stated above, article 30(a) does not provide a casting vote, which apart from oppression in my view is a good ground for winding up. As far as poll is concerned, there is no casting vote. If that is so, V.B. Gopalakrishnan cannot conduct the proceedings, if he is not properly elected. It is seen from the minutes that Mr. V.B. Gopalakrishnan conducted the further proceedings. As seen from the proceedings mentioned earlier it will be seen that the meeting held on January 5,1981, is not a valid meeting and that the meeting was objected to by telegrams sent by the petitioners. Therefore, there is a serious dispute as to the validity of the meeting. That apart it is also seen that the notice sent is also defective in regard to the appointment of directors.

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.

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 the nullification of the action taken. In the instant case, there is no article excluding section 170(2) of the Act. In the case of private companies, these provisions will apply. Therefore, in my opinion, under section 173 of the Act with regard to appointment of directors, there should have been an explanatory statement which is mandatory. In the instant case, no explanatory statement has been appended to the notice which is mandatory. Hence failure to append an explanatory statement is not only defective but also fatal and an incurable defect. Hence, on this point also I hold that the entire meeting held on January 5, 1981, and the resolution stated to have been adopted after the petitioners withdrew from the meeting are bad in law. This point has been specifically raised by the petitioners in their pleadings. I have already held that section 173 is mandatory and not directory. Hence, respondents Nos. 2 and 3 cannot consider themselves as duly elected directors since, in my view, the notice is defective and once the notice is held to be defective, no business can be transacted. It was virtually an ex parte meeting. In this context, support can be derived from the decision in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Ltd. [1964] 34 Comp Cas 777, of the Gujarat High Court. It was held that section 173 of the Act enacts a provision which is mandatory and not directory and that 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.

Section 195 of the Act also does not save the situation. In my view, the statutory presumption is something which is rebuttable.

Let me now deal with the validity of the meeting said to have been held on June 11, 1973.

Section 169 of the Act provides that an extraordinary general meeting may be called on the requisition of members holding at least one-tenth of the paid-up share capital of the company as at that date carrying the right of voting in regard to that matter. The requisition is not placed before this court. The board is expected to call for a meeting if there is a valid requisition. If there was no, requisition, it is the duty of the parties to place that requisition before the meeting. According to the petitioners, no notice was served on them for the meeting held on June 11, 1973, That none of the petitioners attended the meeting is a common ground. The minutes are stated to be recorded for June 11, 1973, meeting. The minutes are stated to be recorded in some book which is not at all the minutes book. That is also not placed before this court. Hence, in my view, the statutory presumption under section 195 of the Act does not arise. The minutes of the general meeting should contain a fair summary of the proceedings of such meeting and in particular of all material questions asked or comments made. Section 193 of the Act provides that every company shall cause minutes of all proceedings of every general meeting of its board of directors or of every committee of the board to be kept by making within thirty days of the conclusion of every such meeting concerned, entries thereof in books kept for that purpose with their pages consecutively numbered. If the presumption is not under section 193, presumption under section 195 is not at all available. The factum with regard to the June 11, 1973, meeting is not placed before this court. This court is also not in a position to know what was the requisition, who could lead it, was it a valid requisition and if so, why the company has not acted on that. I may say that there is practically no material on these aspects. The judgment of the apex court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC), is also a judgment under section 397 of the Act. The Supreme Court said that the circumstances must be such as to warrant the inference that there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy. The Supreme Court said that the conduct must be continuous act on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence, springs for oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.

The observations made by the Supreme Court are directly applicable to the facts of this case. In this case, the loss of confidence against the respondents is justifiable. Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC) has been followed in (sic) which relates to a case of small companies. The relevant passage in Rajahmundry Electric Supply Corporation v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC) is extracted hereunder (at page 97) :

"Loch v. John Blachwood Ltd. [1924] AC 783 (PC) was itself a case in which the order for winding up was asked for on the ground of mismanagement by the directors, and the law was thus stated at page 788 :

'It is undoubtedly true that at the foundation of applications for winding up, on the just and equitable rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, whenever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up'."

In Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd, [1981] 51 Comp Cas 743 at 779, the Supreme Court had extracted a passage from Lindley on Partnership (14th Edition, pages 194-95) which cites Blisset v. Daniel [1853] 10 Hare 493 ; 68 ER 1022 as an authority for the proposition that :

"The utmost good faith is due from every member of a partnership towards every other member; and if any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour".

Mr. T.R. Rajagopalan, learned counsel appearing for the respondents, argued that a single act does not constitute oppression. Needle Industries (India) Ltd,'s case [1981] 51 Comp Cas 743 was referred to by learned counsel. The said case was considered by the Delhi High Court after Needle Industries (India) Ltd.'s case [1981] 51 Comp Cas 743 (sic). I have also been taken through the pleadings and also the relevant documents filed in this case. According to learned counsel, the documents filed in this case show that the petitioners had knowledge about the management. According to Mr. Rajagopalan, learned counsel for the respondents, there was a change in the management and that from 1975 the petitioners' group were in management for a period of three years and then for two years, the respondents' side were in management and in view of the compromise reached between the parties, the June 11, 1973, meeting cannot be relied upon for oppression. Learned counsel has also relied on certain passages in some judgments in support of his contention. However, I am of the view that the very fact that the respondents suppressed the alleged meeting stated to have been held on June 11, 1973, and used the alleged amendment of the articles at the meeting held on January 5, i981, for the purpose of electing a majority of board is not a single act. What is dormant till 1981, by suppression and given up at the time C.P. No. 88 of 1973 was sought to be reactivated at the meeting convened for January 5, 1981. In my view, the contention of the respondents is baseless. I am also of the view that in view of the decisions in :

        1. Ramashanhar Prosad v. Sindri Iron Foundry, AIR 1966 Cal 512.

        2. AIR 1982 (2) LLJ 216 (Delhi) (sic).

The contention that a single act does not constitute oppression is not at all acceptable. But the said single act again has a long standing effect. While reiterating his arguments, Mr. T.R. Rajagopalan contended that isolated instances cannot be a ground for a petition under section 397 and that in the nature of the case, it cannot be said that there is oppression. He cited the decision in Maharani Lalita Rajya Lahshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 ; AIR 1962 Cal 127, which in turn refers to a case of single and solitary instances and a case under section 397.

Mr. T. Raghavan, learned counsel for the petitioners has also cited the following decision : Seethiah v. Venhatasubbiah [1949] 19 Comp Cas 107 ; AIR 1949 Mad 675, and submitted that subsequent events after the filing of the petition can also be taken into account and that no pleading is necessary for the said purpose. It is a fact that no meeting was held after 1982 and no accounts have also been submitted and the company's position is not disclosed by the respondents and no particulars as to the position obtained in the company were made available to the court. No accounts whether audited or not were filed in this court. While arguing on this point, Mr. T. Raghavan, learned senior counsel for the petitioners drew my attention to the decision in Gopal Krishnaji Kethar v. Mohd. Haji Latif, AIR 1968 SC 1413 at page 1416. In the instant case, as mentioned above, the respondents have not placed before this court any documents and if they fail to do so, this court is always entitled to draw an adverse inference.

Before I conclude I must also advert to the impact of the judgment of the Hon'ble Supreme Court dated November 28, 1991, in V.B. Rangaraj v. V.B. Gopaahishnan [1992] 73 Comp Cas 201 (SC).

Company Petition No. 1A of 1981 proceeded on the basis that the judgment of Ramanujam J. in the second appeal is binding on the parties, subject to final decision of the Supreme Court. Parties proceeded on the basis that each group holds 25 shares. There would be a deadlock. The judgment of the Supreme Court resolved the said deadlock. If one group holds majority, then there will be no deadlock and it is now possible for the company to run. The court under section 402 of the Act has power to require the other members also to sell their shares. It is to be noticed that the powers of this court under section 402 are very wide.

For the foregoing reasons, I have no hesitation to hold that the several acts on the part of the respondents mentioned above are harsh, oppressive, burdensome and prejudicial to the interest of the petitioners herein. The second respondent also did not take any steps to convene the meeting of the board of directors and also finalise accounts and place them before the board and also convene a general body meeting for passing the accounts. In view of this obstructive attitude on the part of the respondents, the second petitioner who is the only other director in the company during the relevant time was kept completely in the dark in regard to the administration of the company. The petitioners who are holding 25 shares and are entitled to participate in the affairs of the company are prevented from participating in the affairs of the company because of the prejudicial and oppressive conduct of the respondents. Because of the prejudicial conduct of the members of the respondent group, the company has incurred heavy loss. The licence of the company also was not renewed in time and the second respondent was responsible for such oppressive management. The theatre was closed for want of a licence. I also hold that the meeting purported to have been held on June 11, 1973, was not really held and that the resolution purported to have been passed in the said meeting is illegal and void. Therefore, I hold that the articles of association of the first respondent company will be as they stood prior to the alleged meeting dated June 11, 1973, and hence the petitioners are entitled to a declaration that the extraordinary general meeting of the first respondent company held on June 11, 1973, is illegal and void and that the resolutions passed thereat are not binding on the first respondent company. Likewise the third respondent, who is purported to have been appointed at the meeting held on January 5, 1981, cannot function as such director of the first respondent company. The appointment of the third respondent was not considered as a special business under the provisions of section 173 of the Act. The notice issued for holding the meeting for January 5, 1981, has not disclosed the intention to move the election of the third respondent as a director as and by way of special resolution. There is also no explanatory statement attached to the notice as required under section 173 of the Act, which is mandatory and in the absence of compliance with the said provisions, I hold that the purported resolutions are illegal and void.

For the aforesaid reasons :

(a)            the petition filed by the petitioners has to be allowed in toto and in the interest of the company and its shareholders, the board of directors of the company is superseded ;

        (b)            the affairs of the company are directed to be administered by petitioners Nos. 1 to 3 ;

(c)            since it is proved that the action of the second respondent has resulted in serious loss to the company and its shareholders, the petitioners, as administrators are directed to take appropriate proceedings being instituted against the second respondent pursuant to section 406 read with sections 539 to 544 of the Act, so that the second respondent may be surcharged and the company compensated for the loss sustained by the acts and omissions of the second respondent ;

(d)            the petitioners will engage a chartered accountant to go into the accounts and affairs of the company, during the management of the respondents to assess the damages sustained by the company, by reason of the wrongful acts of the second respondent and the petitioners are permitted to take appropriate proceedings against the second respondent by way of surcharge proceedings as mentioned above ; and also move this court for any directions ;

(e)            the petitioners as administrators shall convene one or more general meetings of the company, after complying with the above directions for appointment of a new board of directors to take charge of the affairs of the company and to vest with the management of such board,

        (f) this company petition is allowed with costs of the petitioners.

[1972] 42 COMP. CAS. 442 (CH.D)

CHANCERY DIVISION

Bailey Hay & Co Ltd., In re

BRIGTMAN, J.

MARCH 2,3,4,5,8,9,10, 1971

 Allan Heyman Q.C and M.K.I Kennedy for the liquidator

P.J. Millet for Bailey Fertilizers Ltd.

JUDGMENT

Brithtman, J.— This is an application by Mr. Walter Thomas Wells Tickler, a member of the firm of Messrs W.H Cork, Gully & Co., the well known accountants. Mr Tikcler has acted as liquidator of Bailey, Hay & Co Ltd. since December, 1965. He seeks a declaration that payment totalling some ₤7000, made between July and September, 1965 to Bailey Fertilizers Ltd. constitute a fraudulent preference. The defence is the bold one - I think, in the experience of the counsel before me that the company, despite all outward appearances, is not really in liquidation at all.

Bailey, Hay & Co, Ltd. (“the company”), was incorporated on July 24 1963, with a capital of ₤1,000 divide; in ₤1shares - Its purpose was to act as agents for Bailcey Fertilizers Ltd. (“ the fertizer company”). The share-holders of the company at all relevant times were Mr, and Mrs. Hay, 250 shares each, Mr. Kinslow with 250 shares, Mr. Bailey with 50 shares and the fertilzer company with 200 shares. The board of the company consisted originally of the four individual shareholders—Mr. and Mr. Kinslow and Mr Bailey, Mr. Kinslow being the chairman. Mr., Bailley was the chairman of the board of the fertilizer company and Mr. Kinslow was the managing director Accordingly, Mr, Kinslow and Mr.Bailey and the fertilizer company in which they held high office could exercise 50 per cent. of the voting power of the company at general  meetings.

The company’s year ended on June 30. During its first broken year it traded at a loss of about₤11,000, and during its second year, ending on June 30,1965, it traded at a loss of ₤5000. On September 16,1965, Mr. Kinslow and Mr. Bailey resigned from the board of the company. On November 24,1965, notices were sent to the shareholders convening an extraordinary general meeting of the company. The notice was for the purpose of considering and if thought fit, passing the following resolutions as extraordinary resolutions:

(a) That it has been proved to the satisfaction of this meeting that the company cannot by reason of its liabilities continue its business, and that the company be wound up voluntarily. (b) That Walter Thomas Wells Tickler of the firm of W.H. Cork, Gully & Co…. be and is hereby appointed as liquidator of the company for the purpose of the voluntary winding up.”

The notice is dated November 20, but as I have mentioned, it was not actually given until November 24, being received on November 25, Mr. Kinslow and Mr. Bailey stated that they were much shocked by the proposed liquidation: they did not like to feel that their names would be associated with a bankrupt concern.

On December 8, the day before the meeting was due to be held, Mr. Kinslow and Mr. Bailey, acting on behalf of the fertilizer company sought advice form one Mr. McGonigal, a solicitor who had qualified the previous June and was employed by Messers. Coward, Chance & Co. He advised, I think, that there was not really sufficient information to enable Mr. Kinslow and Mr. Bailey to judge whether the company ought or ought not to be put into liquidation. He told me that the point that all three of them had in mind was that there would be criticism if the company continued in existence but was in fact hopelessly insolvent. He said that the only logical course for Mr. Kinslow and Mr. Bailey to take in those circumstances was to abstain from voting. He was well aware that they controlled through their won personal holdings and the holding of the fertilizer company sufficient votes to defeat the winding up resolution. He told me in advance that he was quite certain that he so informed Mr. Kinslow and Mr. Bailey. I see no reason to doubt his evidence on this point.

Mr. Kinslow and Mr. Bailey caused Mr. McGonigal to be appointed as representative of the fertilizer company. They instructed him to attend the meeting on behalf of the fertilizer company and to abstain form meeting as indeed they intended to do themselves: in other words, Mr. Kinslow and Mr. Bailey and the fertilizer company decided they would deliberately leave to Mr. and Mrs. Hay, the persons who prima facie were passed of full information about the company, the responsibility of attending whether or not the time had come to liquidate the company.

They were all aware that, by abstaining, the resolution to liquidate would in all probability, if not for a certainty, be passed. On December 9 the of shareholders was held. Those present consisted of Mr. Hay, a proxy for Mrs. Hay, Mr. Kinslow, Mr. Bailey and Mr. McGonigal, as the representative of the fertilizer company. The resolution to wind up was put; it was passed by the votes of Mr. and Mrs. Hay without any voice, as Mr. Kinslow and Mr, Bailey and Mr. McGonigal musjtiiave would be the case.

The shareholders’ meeting was followed by the statutory meeting of creditors. At the latter meeting Mr, Tickler was appointed liquidator The statement of affairs showed an estimated deficiency as unsecured creditors, subject to costs of realisation, in excess of £25,000. I quote, for reasons which will appear later, from the liquidator’s report dated December 30, of the statutory meeting of creditors. Messrs. W.H Cork, Gully & Co, say this:

“Confusion also exists concerning the motor vehicles of the motor vehicles of the company and the correct title of these assets. Certain vehicles have been transferred out of the company into other names, and Mr. Hay has also been paying out the hire-purchase on two of the vehicles concerned. An independent valuation of six vehicles has been undertaken, but for the purpose of statement of affairs we have included three vehicles only at a value of £145O, Two of these vehicles, however, are subject to the hire –purchase in the sum of £1,067. Here, again, the position concerning motor vehicles will also have to be examined by the liquidator.”

Then, a litter letter:

“Creditors present were extremely dissatisfied with the affairs company, and an investigation will take place by the liquidator in due course.”

Thereafter the resolution to wind up was duly filed; the usual advertisements were inserted in the, London Gazette on December 24, 1965 and in the local newspapers on December 30 and 31,

Shortly before December 22, 1965. Mr. Kinslow, who throughout the matter displayed a remarkably detailed and accurate knowledge of the company law, discovered that the notice convening the meeting of December9 had been one day short. The meeting had been convened by an 14 days’ notice and not as specifically required by the articles, 14 days’ notice. He so informed Mr. McGonigal, and on wrote, as the managing director of the fertilizer company, to Mr McGonigal in these terms:

“Enclosed with the letter”—that is, a letter which had been associated company to Mr. McGonigal—”are bank statements and cheques in connection with Messrs. Bailey, Hay & Co. Ltd. These make very interesting reading, as they relate to the period just before the board of Bailey, Hay & Co. Ltd. decided to propose to the shareholders to go into liquidation, and just afterwards. I have made Photostat copies of these statements and cheques for any future reference. I should be much obliged if you would send these statements and cheques to Messrs. D.H Ormans & Co…, who were, or are the auditors of Messrs. Bailey Hay & Co I prefer this way instead of to Mr. Tickler, of Messers. W.H. Cork Gully & Co., as you know we reserve the right to dispute Mr. Tickler’s appointment as liquidator, in that the notice given for the shareholder’s meeting was inadequate. Naturally, we are not suggesting at this stage, or necessarily at any stage, that we challenge his authority; but if the statements and cheques are sent to Ortmans it would not mean we have acknowledged his position as liquidator”

Mr. McGonigal did not at this moment of time express any view as to Mr. Kinslow’s proposition that the resolution to liquidate was invalid. Later he considered the matter, and in January or February, 1966, he reported back to Mr. Kinslow, that Mr. Kinslow was probably technically correct, so that the meeting was not validly convened. He did not communicate this view to Mr. view to Mr. Tickler at that time.

In the meantime a point arose in connection with a lorry which was subject matter of a hire-purchase agreement made by the company but which the fertilizer company had agreed to buy from the company. Mr. Kinslow/writing again in his capacity as managing director of the fertilizer company  addressed the following query to Mr. McGonigal in a letter of January 27, 1966

“… this lorry now is a burden to us. It must have been misused in Midhurst. It is costing to us too much to run, and we propose to get of it. However, in view of Bailey, Hay being in process of liquidation had also there is a hire-purchase agreement concerned, we wish to know the legal position before actually selling the vehicle.”

There followed a correspondence between Messrs Coward, Chance & Co. and Messers. W.H Cork, Gully & Co. It began with a letter of Macrh 8,1966, the second paragraph of which I quote:

“Our clients intend to pay off the remaining instalments, exercise their option to purchase, and then sell the vehicle. In view of the uncertainty of the legal position as regards the assignment we would be grateful if you will confirm that no claim will be made on behalf of Bailey, Hay & Co. by the liquidator to the ownership of the vehicle or to any of the proceeds of sale.”

The liquidator replied on March 21, in effect reserving his rights; and the following letters were exchanged. There was a letter dated 22,1966, addressed by Messers Coward, Chance & Co. to Mr. Tickler.

“We wish to make it quite clear that our clients reserve their rights in this matter against you, as liquidator of the above company.” A letter of May 10 from Messers Coward, chance & Co. to Mr. Tickler:

“Re Bailey, Hay & Co. Ltd. (In Liquidation) Bedford truck…We thank you for your letter of May 6 and aplogise previous letter. Our intention was, of course to reserve our clients. rights against the company in liquidation. We regret that we cannot agree that the company in liquidation is. entitled to lorry. We thought that we had made the position clear to you ,but evidently some misunderstanding has arisen lorry to our clients. As the lorry was the subject of a hire-purchase agreement prohibiting such transfer, the sale does not bind Lombark the owners of the lorry. But it is binding on Bailey &, Hay & Co, Ltd. and also on Bailey’s Fertilizer Ltd., unless and until Bailey’s Fertilizers repudiate the sale. This they propose to do in the interests of the credit of Bailey, Hay & Co. Ltd., but we must make it clear that this repudiation is made on terms that our clients reserve their rights against Bailey, & Co. Ltd. We should be grateful if you would confirm that the accepted back on these terms so that no further misunderstanding arise.”

Then a letter written by the liquidator to Messrs. Coward chance & Co., and dated May 11,1966 reads:

“Re Bailey, Hay & Co. Ltd. (In Liquidation) Bedford truck… I am greatful to you for your letter of the 10th instant. I assume that in the second paragraph  of your letter you are reserving your rights against the second paragraph of your letter you are reserving your rights against the company in so far as you wish it to be agreed that any claim in respect of loss sustained will be the basis of a claim in the liquidation upon which a dividend will be payable if admitted. This I am prepared to agree provided that the claim does not include a figure for damages other then expenses incurred and moneys paid away, for which no benefit has been received.”

Finally, on May 16, form Messrs. Coward, Chance & Co. to Mr. Tickle, a letter in these terms:

“Bailey, Hay & Co, Ltd. (In liquidation). Bedford truck...Thank for your letter of May11. We agree that any claim to be mad clients will be a claim in liquidation upon which a dividend will able if admitted. We do not feel that at this stage we can agree to limit our clients’ claim to expenses incurred and moneys paid out benefit has been received. We have not investigated the quantum of any claims which our clients might have as at this stage they do not propose to raise any. We hope you will be satisfied with this position”

And I believe that in the end, no proof was lodged in the liquidation by the fertilizer company.

The committee of inspection had instructed Mr. Tickler to engage accountants to make a preliminary investigation into the affairs of the company. On February 1, 1966, Mr. Tickler engaged Messrs. Donald Bruce & Co., chartered accountants, to undertake that investigation. By letters dated March 4, Mr. Bruce of the latter company; requested Mr. Kinslow and Mr. Bailey for an interview because he thought that they could assist him in his inquiries. This interview was arranged for:3 March 22. The meeting took place and was also attended by Mr. McGonigal. Mr. .Bruce made rough notes during the meeting, and he also wrote a letter dated March 24 to Megsrs. W.H. Cork, Gully & Co. recording what occurred. Paragraph 3 of the letter reads—and 1 must quote almost the whole of it:

“At the conclusion,, of the meeting, however, he “—that is to say, Mr. Kinslow—”specifically requested that we should acquaint him with is following points which, apparently, he regarded as of some importance: I he stated that he had received inadequate notice of the meeting at which he company was liquidated; (b) referring to September 16, 1965, the date his resignation.  Mr. Kinslow said that Mr. Hay had given him the specific undertaking that the debts of the company would be met;….(c)he complained that your private and confidential communication of December 30,1965…. Contained an inaccuracy in sub-paragraph (a) of the third paragraph on page 2. According to Mr. Kinslow, Cork, Gully did not say that one of the reasons why the company failed was inadequate capital; was inadequate capital; (d) Mr. Kinslow did not understand why, in the letter referred previous sub-paragraph, you have omitted to state that the company.’s trading was conducted from Midhurst and that Mr. Hay was the managing director, the names of the auditors were D.H. Ortmrut & Co., the last date on which the auditors prepared accounts was 1965; (e) finally, Mr. Kinslow complained that the letter referred estate that the accounts to June 30, 1965, had not been audited on date 30, 1965. We do not feel that the above five points produced at Mr. Kinslow’s formal request, have any patter of our investigation, and we so informed offer the observation that so far as we letter of December 30, 1965—that was the liquidator’s it of the state of affairs as you found “

In regard to point (a) Mr. Bruce is adamant that Mr. Kinslow confined ‘saying- merely that the meeting of December 9 was convened by notice. Mr. Kinslow, Mr. Bailey and Mr. McGonigal go further, and say that Mr. Kinslow positively asserted that Mr. Tickler’s appointment liquidator was therefore invalid. The meeting of March 22, 1966, was the first occasion on which the short notice of the meeting was openly raised It was also the first occasion on which the possible invalidity of Mr. status as liquidator was openly raised, if in fact it was also, raised at all.. It was also the last occasion on which either point was openly, Raised until Mr. Kinslow and Mr. Bailey swore their affidavits in these/prncecdiugs ia December, 1969.

Neither Mr. McGonigal, Mr. Kinslow nor Mr. BaKey possess any note of what transpired at the meeting of March 22, although Mr McGcnigal recalled in the witness-box that he thought he/had, at one time possessed such notes. None of them even wrote to Mr; Bruce or Mr. Tickler to put on record that objection was taken to the validity of Mr. Tickler’s appointment. Mr. McGonigal said that he/did not feel that he was. under duty at all to write formally to Mr. Tickler warning him that he had ; status as a liquidator, notwithstanding that his continued assumption an office which he did not truly hold might involve him in some per liability. On July 2, 1966 Messrs. Donald Bruce & Co. presented a preliminary report of the investigation into the company affairs.

The end of the first year of the liquidation was now approaching, and/ therefore, the need to convene a general meeting of creditors in accordance with the statute. The following inter-change letters took place between McGonigal the fertilizer company. A letter dated October 5,1966, from Mr. Kinslow:

“…We understand from the Companies Act that if the company has not been wound up 12 months after the liquidation proceedings start, then it would be necessary to call a company meeting to inform the shareholders as to what is going on. In actual fact, it is of very little interest to us as to whether this meeting is held or not, but we presume that Cork, Gully will go through the formalities of calling it. If this is so, it is not our intention to send along any company representative, but we should like you to attend by proxy just to ensure that our interests our observed.”

The next letter was dated December 30, 1966, from Mr. McGonigal to Mr. Kinslow.

“I enclose a copy of a notice I have received from the liquidator of the above company in case you have not yourself received one. that Mr. Tickler is investigating a possible fraudulent preference I presume that you have heard nothing about this although I seem to there was some talk at the creditors’ meeting about a possible of Baileys Fertilizers.”

On January 2, 1967, from Mr. Kinslow replied to Mr. McGonigal:

“Thank you for your letter of December 30, 1966. You will be arranging for us, as a company, to be represented at the company meeting. As far as I am personally concerned I do not wish to be represented as you know I reserve the right to upset the proceedings at a later date if I think it necessary, on the grounds that I was given inadequate notice of the meeting at which the liquidation was agreed.”

On January 17, 1967, the creditors’ meeting was held. The fertilizer company could not attend that meeting because they were not creditors. It so happened that Messrs. Coward, Chance & Co. were creditors for £5 or £10. Mr. McGonigal attended that meeting, ostensibly as Messrs Coward, Ehance’s representative, but actually on behalf of the fertilizer company, which paid him for that purpose: There is no evidence as to who attended shareholders’ meeting if there were one. On September 1, 1967, Messrs the. Donald Bruce & Co presented their second report on the affairs of the company. On March 26, 1968, Messrs. Cork, Gully & Co. submitted long questionnaire to Mr. Kinslow. The questionnaire was answered through Messrs. Coward, Chance & Co. on Jane 28, 1968, no objection being taken to the status of Mr. Tickler. There was some further correspondence, finally on August 25, 1969, the present summons was issued claiming that certain payments made between July and September, 1965, by the company were a fraudulent preference of the fertilizer company. As I have already the preliminary answer of the fertilizer company is that the company is not, and never has been, in liquidation.

This highly equivocal attitude of the fertilizer company, of Mr. Kinslow Mr. Bailey as its responsible officers, can be illustrated, if not explained, by certain extracts from the correspondence and evidence. On March 7, 1966, Mr. Kinslow wrote on behalf the fertilizer company to Messrs Coward, Chance & Co. in these terms:

“I am prepared to co-operate in any investigation of the affairs of Bailey, Hay including any interview. However, it must be established and for all, whether the company is liquidation. As you know I maintain that I received inadequate notice of ‘so-called’ company meeting on December 9, 1965, at which it was ‘resolved’ to place the company in voluntary liquidation. Thus whomsoever carries out any investigation must be validly appointed to carry out the type of investigation proposed.”

On March 15, Mr. McGonigal replied to that letter:

“Thank you for your letter of March 7 upon which we have spoken the telephone. I confirm that I will arrange a meeting between yourself, Mr. K.J. Baliley and Mr. Bruce at 12 noon on Tuesday, March 22 at which I shall be present.”

“I think that you are right to cu-operate with Mr. Bruce notwithstanding that he has been appointed by a liquidator the validity of whose appointment you dispute. I understand that you wish to reserve the possibility of upsetting appointment of Mr. Tickler liquidator if at some point you consider that he has not adequately investigated the affairs of the company so that a new investigation can take place. However, I think that it is best to co-operate to the full in Mr Tickler’s Investigation in the interest, both of yourself and the creditors even if this co-operation involves some recognition of Mr. Fielder’s appointment.”

In evidence Mr. Kinslow said under cross-examination: “I did not see that any harm could come to the fertilizer company if the company went into liquidation.” Mr. Bailey said: “I was content to let matters rest. I did not object and do not object to Mr Tickler carrying on. I was happy to let things drift along until these proceeding;; started.” Mr. McGomgial told me in a carefully considered/answer in reference to the attitude of mind of his clients and himself in advance of the meeting of March 22 “we would tell Mr. Bruce/mat we did not recognise Mr. Tickler’s appointment. We would co-operate in the investigation. If we did not like the way things were going, then we would upset the liquidation.”

One might ask why Mr. Kinslow and Mr. Bailey were seeking to preserve the position in this curious way. I think that the situation was this and I so find. Mr. Kinslow and Mr. Bailor as officers of the fertilizer company had no objection whatever the company being liquidated although they personally regretted that their names were associated  with a,-bankruptcy. They were, however, very dissatisfied with the State of the company’s affairs as indeed were the creditor’s as appears from Mr. Tickler’s report of December 30, 1965. Mr. Kinslow and Mr. Bailey had misgivings in the first instance as to whether Mr. Tickler would really cause a full and through investigation to be made into the company affairs, misgivings which Mr. McGonical told me, and I think his clients, he did not really share. Mr. Kinslow and Mr. Bailey reserved mentally the right to object to his appointment in case they wanted to challenge the way in which he was conducting the investigations and get somebody to replace him. I say “mentally” because the only time that the reservation, as it were, surfaced into public view was at the meeting of March 22,1966.

In the end it seems to me Mr. Kinslow arid Mr. Bailey were content with Mr. Tickler as liquidator, but now the point has been resucitated for a wholly different purpose, namely, as a defence to a fraudulent preference. Mr. Millett quite frankly admits that the defence is a technical one and is being raised on. his own advice and instigation of his clients. The matter comes before me by way of preliminary point directed to be tried separately from the main issue of fraudulent preference. The question defined in the order of [Mr. Registrar Berkeley] of February 27, 1970, is simply whether the company is or is not in voluntary liquidation. There is no halfway house. Either the company must be treated as having gone into voluntary liquidation on December 9, 1965, or the company must be treated as not yet in liquidation and all the transactions which have taken place over the last five and a quarter years are liable to be re-examined by somebody on that basis.

It is not, in my view, possible, as I think Mr. Millett at one time tended to suggest, for me to dismiss the present summons on the footing that the company is not in liquidation, but for all other purposes to proceed on the basis that the company is in liquidation. This would, in my view, be a quite inconsistent pair of positions for any court to take up. Put briefly, and at the risk of not doing full justice to Mr. Millert’s able submissions, his argument is that (1) the company did not validly resolve is not precluded by its conduct or by laches from maintaining that defence. He submits that the mere attendance of Mr. Kinslow and Mr. Bailey and Mr. McGonigal at the meeting of December 9, 1965, did not validate the proceedings purported to be transacted thereat. Nor, he submits, did their abstention from voting against the resolution amount to its acceptance. He says that the fertilizer company did not waive the defect inherent in the notice of the meeting of December 9, 1965. Mr. Kinslow and Mr. Bailey were at that period unaware of their right to object to the length of notice. Therefore, Mr. Millett submits, there could be no waiver. They acquiesced, he says, in nothing. There has been no laches because, to adopt either one attitude or another. The allegation that the company is not in liquidation is merely a defence and no one is under any duty to defend himself until he is attacked.

I appreciate the force of what Mr. Millett submits, but I think it is important to bear in mind the broad picture of this case. In 1965 the fertilizer company is a shareholder in the company. The company is insolvent. The shareholder receives a 14-day notice of a meeting at which voluntary liquidation is proposed. The shareholder is advised by a qualified solicitor and is represented by him at the meeting. One realizes at the meeting that it has been convened at short notice. The shareholder suffers the resolution to be passed and sees the company ostensibly placed in liquidation. Within the next fortnight the shareholder that the notice was short by one but does not openly disclose a fact until a further three months have elapsed. The shareholder a with the liquidator as liquidator in a dispute over a lorry and reserves the right to prove in the liquidation. The shareholder even attends the statutory creditors’ meeting under borrowed colours. The shareholder raises no effective objection to the liquidation until three-and-a-half years after it began. The shareholder qua former creditor is then called upon to discharge an obligation, or alleged obligation, arising as a result of the liquidation of the company. Then for the first time it seeks in this court a declaration that the company has never been in liquidation such circumstances unless I were compelled to do so by authority.

It is eatablished law that a company is bound in a matter, intra vires the company, by the unanimous agreements of all its corporators. I refer to In re Express Engineering works Ltd. [1920] 1 Ch. 466 and Parker and Cooper Ltd. v. Reading [1926] Ch. 975. I quote two brief passages from the latter case. At p. 982 Astbury J. says : “………where a transaction is intra vires the company and honest the sanction of all the members of the company, however expressed, is sufficient to validate it,……” At p. 983; “…….the company was bound in a matter intra vires by the unanimous agreement of its members.”

I consider that on the particular facts of this case all the corporators ought to be treated as having assented on December 9, 1965, to the company being wound up on that day. In my judgment, the case falls within the principle of the decisions in the two cases I have mentioned. Admittedly three of the five corporators did not vote in favour of the resolution, but they undoubtedly suffered it to be passed with knowledge of their power to stop it.) The true quality of the acts of such corporators on December 9 is not to be judged exclusively by reference to what they did or did not do on that day, but is also to be judged in the light of what they did and did not to thereafter.

What these corporators did and did not to after December 9, 1965, down to December 10, 1969, when they swore their affidavits disclosing this defence, points, in my view, to one conclusion only. The conclusion is that they outwardly accepted the resolution to wind up as decisively meeting without protest, stand by without protest while their fellow members purport to pass a resolution, permit all persons concerned to act for years on the basis that the resolution was duly passed and rule their own conduct on the basis that the resolution in an estanblished fact. I think it is idle for them to contend that they did not assent to the purported resolution.

In the circumstances I have set out I see no injustice in treating them as having agreed to the liquidation. I observe that in a paragraph from a letter written by Mr. Kinslow on January 2, 1967, which I have already read, Mr. Kinslow himself apparently saw nothing strange in the remark that “I was given inadequate notice of the meeting at which the liquidation was agreed.” It seems to me that that was a very appropriate observation.

Secondly, the fertilizer company is in my view, barred by laches from now disputing that the company is in liquidation. The fertilizer company is setting up a positive case against the liquidation, a case which inevitably wrongly in possession of the company’s assests. In my judgment, the equitable doctrine of laches is applicable to that situation just as if the fertilizer company were seeking a remedy against the liquidator.

It will be sufficient for present purposes to cite a passage from the speech of Lord Blackburn in Erlanger v. New Sombrero Phosphate Co. [1878] 3 App. Cas. 1218, 1279;

“In Lindsay Petroleum Co. v. Hurd [1874] L.R. 5 P.C. 221, 239, it is said: ‘The doctrine of laches in courts of equity is not an arbitrary or a technical doctrine. Where it would be practically unjust to give a remedy, either because the party has, by his conduct it or where by his conduct and reglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases lapse of time and delay are most material. But in every case if an argument against relief, course not amounting to bar by any stature of limitations, the validity of that defence must be tried upon principle substantially equitable. Two circumstances always important in such cases are the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other so far as relates to the remedy.’ I have looked in main for any authority which gives a more distinct and definite rule than question of more or less, depending on the degree of change which has occurred, remedy or withholding it. The determination of such a question must therefore be subject to uncertainty; but that, I think, is inherent in the future of the inquiry.”

There is no period of limitation which applies to proceedings to declare valid a purported resolution to wind up. Mr. Millett concedes, and in my view rightly concedes, that there must be some limit of time which would bar those proceedings; in other words, that the doctrine of laches is relvant in such a case, It does seem to me that after this period of time it would be “pratically unjust” to the creditors of the company and to Mr. Tickler to accede to the sort of relief which is sought here, assuming that I am wrong inn the conclusion which I earlier expressed that the three corpororators have in truth assented to the resolution. Additionally, therefore t the first ground of my decision, I find also that the declaration sought by the fertilizer company is in any event barred by their laches.

I have purposely left to the conclusion of my judgment one dispute of fact which I think is really the only disputed fact in the case: that is to say, whether at the meeting of March 22,1966, Mr. Kinslow asserted that the appointment of MR. Tickler as liquidator was invalid so that he had no status. I do not think that the point is very material because nothing was ever done about it by Mr. Kinslow or Mr. Bailey, or the fertilizer company, and as Mr. Heyman observed, there is no such thing as a “ without prejudice” liquidation. But in case the matter goes further, I think I ought to record my own view that it is unproven that any such assertion was made by Mr. Kinslow.

I reach this finding for these reasons. I have seen in the witness-box all persons who attended that meeting. I have heard what they have said and I am certain that all did their best to recall the truth. However Mr. Bruce took a most careful note of the five points made by Mr. Kinslow that the points were produced by Mr. Kinslow deliberately and in a manner which enabled them to be recorded. Indeed it is very noticeable from the rough notes made by Mr. Bruce how the nature of his notes changed when he comes to the five points. The five points are recorded carefully and farily fully with no attempt at the sort of verbal shorthand which appears earler in these notes. I do not believe that Mr. Bruce would have failed to record the express challenge to the status of the liquidator had it, in fact, been made. Nor is there any trace of that challenge among the contemporaneous writings which refer to this meeting. Without in any way casting imputations on the honesty and truthfulness of Mr. Kinslow, Mr. Bailey and Mr. McGonigal I prefer the evidence on this point of Mr. Bruce to the evidence of those speaking to the contrary effect because it seems to me more likely. In the result, I shall declare that the company is in voluntary liquidation.

[1962] 32 COMP. CAS. 937 (PUNJ)

Mohan Lal Chandumall

v.

Punjab Company Ltd., Bhatinda

TEK CHAND, J.

MARCH 21, 1961

 

This is a petition under sections 397, 398, 402 and 403 of the Companies Act, 1956, on the behalf of twenty-nine petitioners, against the Pubjab Company Limited, Bhatinda.

Besides the company, eleven other respondents have also been impleaded. The Punjab Company Limited, Bhatinda, which will hereinafter be referred to as “the company” was incorporated in the year 1941, under the Patiala Companies Act, 1996 Kk., as a public company limited by shares and it is, therefore, a company within the meaning of section 3 of the Companies Act, 1956, with its registered office at Bhatinda.

The nominal capital of the company is rupees five lakhs divided into five thousand shares of Rs. 100 each. Its subscribed capital consists of 963 shares of Rs 100 each fully paid up: 659 shares on which Rs. 50 per shares have been paid. The amount of the paid-up capital ,therefore, comes to Rs. 1,29,250. The company when floated had a large number of businesses but it has been in the main engaged in doing forward contract business in grains, in particular in rape seeds and mustard seeds.

The petitioners feel aggrieved with the manner in which the affairs of the company have been conducted which, according to them, is oppressive in relation to the non-trading members. They feel that the directors of the company are behaving in a manner prejudicial to the interest of the company.

At the meeting of thee board of directors held on the 14th of December, 1957, it was resolved that the following notice and resolution be circulated along with the following explanatory statement as required by section 173 of the Companies Act, 1956:

“Notice is hereby given that an extraordinary general meeting of the shareholders of the company will be held on Thursday, the 9th January, 1958, at 2 p.m. at the registered office of the company to pass the following resolution with or without modification:

SPECIAL RESOLUTION:

Resolved that instead of the existing articles of association of the company and the articles as amended vide Resolution No. 2 of April 19,1957, the following articles of association be substituted.

EXPLANATORY STATEMENT under section 173 of the Companies Act, 1956.

In order to bring the articles of association in conformity with the amended memorandum of association of the company and Forward Contracts (Regulation) Act, 1952, and suggestions of the Forward Markets Commission and to make the articles more comprehensive for the benefit of the trade and to run the company’s business more efficiently and on firm ad sound footing. it has become essential to alter, add and amend the articles of association of the company.

On the 9th of January , 1958, a resolution was passed by the shareholders of the company in an extraordinary general meeting at which 28 shareholders out of the total of 237 were present. This resolution runs as under:

“Resolved unanimously that the articles of association of the company circulated among the shareholders for substitution instead of the existing articles and the articles as amended vide Resolution No. 2 of April 19, 1957, with modifications and amendments moved by the chairman, and passed in this meeting are hereby approved and adopted and be substituted listed of the existing articles of associations of the company and the articles as amended vide Resolution No.2 of April 19, 1957.”

It was also resolved to send a copy of the resolution to the Forward Markets Commission, Bombay, for their approval and to the Register of Companies, Jullunder, for registration.

The petitioners consists of non-trading ad also trading members of the company. The contention on behalf of the on-trading members is that the substituted articles of association have deprived them of their elementary right as shareholder of the company under the Act. May now consider the amendments brought by some of the impugned articles.

In articles 2 which give the definitions, “member” means “a shareholder and a trading member” and “a shareholder” means a person who is registered with the company as a shareholder”. The effect of this charge is that a shareholder who is not a trading member is excluded from the definition of “member” and the result is that a number of non-trading shareholders are excluded from the definition of “member” According to article II new shares of the company shall be allotted only to the trading members of the company.

The qualification of a trading member under article 47 are the holding of shares of the company of the face value of at least Rs. 2,000 besides payment of security deposit of Rs. 1,000 building deposit of Rs.1,000 admission fee of Rs. 500, annual subscription of Rs. 151 etc.

Under article 59, the right of entering into contracts with other person, whether trading member or not , commodities for which the company is recognised by the Central Government shall belong to trading members of the company. Under articles 62, the boar is required to keep separate registers of shareholders and of trading members.

Articles 85 to 106 deal with the holding of meetings. Statutory annual general ordinary and extraordinary general meetings etc. The other matters dealt with relate to giving of notices of the meetings, quorum, adjournment of meetings, the manner of taking votes and of demanding of poll, etc. One of the grievances is that in sequence of the change in the definition of “member”, the non-trading shareholders cannot participate in the meetings.

Articles 107 provide that voting rights shall be restricted to the trading members only.

Articles 115 provide that every member shall be classified within two month in. panel of members approved by the board in consultations with the Forward Markets Commissions. It is then said that the non-trading shareholder is deprived from being put in one of the panels. Articles 121 provide the constitution of directors, the total number of which shall not exceed nineteen. There shall be elected by the members not more than thirteen directors. Broker’s Association shall elect one director. There is also a provision for co-opting one director from the surrounding moffusil areas.

Lastly four directors are to e nominated by the Government of India in accordance with section 6(2) (b) of the Forward Contracts (regulation) Act, 1952. Thus the non-trading shareholder has no representation any all on the board ad they have no right to participate in the election of a director. Articles 159 which is very extraordinary provides for declaration of a dividend to be paid to the members of the accompany. As the word “member” does not include non-trading shareholder he is excluded from participation in the dividend. It has already been noticed that the non-trading members have contributed more than fifty per cent. of the paid-up capital of the company. To sum up the oppression complaint consists of the non-trading shareholder having no. right if vote, calling of a meeting of passing or objecting to the passing of the balance sheet of electing directors or controlling their activities or becoming directors themselves electing auditors or even declaring or receiving divided.

Before dealing with the question whether the impugned amendments in the articles of association call for the exercise of posers of the this court under sections 397 and 398 of the Companies Act, the position taken up by the respondents may be examined. On their behalf,, it is inter alia contended that the petition does not disclose any mismanagement of the affairs of the company or oppression on any member or member of the company or such conduct which may e prejudicial to the interest of the company. It is conceded that prior to 9th January, 1958, the particles of association of the company gave the right of vote to every shareholder and now that right has been restricted to trading members only. The amendments in the articles of association h have been necessitated in pursuance of the provisions of the Forward Contracts (Regulation) Act of 1952 as amended by Act II of 1957. It is said that the Government of India by its notification dated 25th January, 1955, to rape-seeds and mustard seeds in the whole of Indian except Greater Bombay with the result that the contracts in these two commodities could be contracted only through a recognised association. The government of India by another notification of the same date applied section 17 of the Forward Contracts (Regulation) Act, 1952 to rape-seeds and mustard sees oils in the hole of India, the effect of which was to continue the ban on transferable specific delivery contracts to the purchase or sale of these oils.

One of the recommendations made by the Forward Markets Commissions was that the grant of recognition to the association dealing in these commodities be conditional “on their previously carrying out such modifications in their articles of association, trading bye-laws and working procedure as may be suggested to them by the Commission”. The commission also recommended that futures markets should also be established when representative association come to be established Futures trading n rape seeds and mustered seeds oils should continue to be banned as at present in the whole of India. These recommendations had been accepted by the Government of India. It is allege that the amendments in the articles of association were accepted with a view to comply with the wishes f the Government of India.

An affidavits sworn by Shri E K Vasudevan, Deputy Director,. Forward Markets Commissions, Bombay has been placed on record. This affidavit is discursive and gives the background resulting in there amendment of the articles of association. It is stated that on the suggestion of the Forward Markets Commission, the trading members were given exclusive representation on the governing body of the association and the respondent company was, therefore required to carry out several modifications by the articles of associations with a view to achieve the objects laid down by the Commission. He stated that every amendment had been suggested by the commission. including and amendments to article 107 and after the amended article had been adopted, that article along with other articles were approved by the commission. It was submitted in the affidavit that the impugned articles of association of the company, though apparently in conflict with the provisions of the companies Act, 1956 are expressly saved ad declared legal under the provisions of section 9A was incorporated in the Act by the amending Act 32 of 1957 with he object of making it legal for companies granted recognition under section 6 of the Act to restrict the voting right to persons interested in the trade and keeping out persons interest only in profits or dividends. This portion of the affidavit is argumentative and is indicative of the policy and does not contain matters which are factual. It has also been urged that in February, 1957, the respondent company made an application under section 5 of the forward Contracts (Regulation) Act, 1952, for recognition and after the articles of association had been amended, the recognition was granted by the Central Government under section 6 of the Act on 28th April, 1958. He said that the resolution of the 9th January, 1958, was passed unanimously by twenty-eight shareholder present, out of whom twenty were non trading. The petitioners, however are not among those twenty non trading shareholders It was also said that n objection was raised by any non trains members that the notice of the meeting was not sufficient or the modification or the proposed amendments were not understood. It was also said that the first elections according to the amended articles of association were held in August, 1958, and non trading shareholder never protested that they were not allowed to vote and this right of their had been rainless taken away. It was urged that the working capital of the company runs into poper eight lakhs and contributed in the main by the trading members as against Rs. 67,100 contributed by the on trading shareholders. The undeniable fact, however is that out of the paid-up capital of Rs. 1,29,250, the non trading shareholder have contributed Rs. 67,000 and trading shareholder have contributed Rs. 62,150. The sum of rupees eight lakhs referred to above consists of cover money deposits, margin money deposits and security deposits of trading members.

The questions which now calls for decision is whether on the admitted facts and circumstances of this case, a case has been made out for interference under sections 397 and 398 of the Companies Act, 1956. My attention has been drawn to section 9A if the Forward Contracts (Regulations) Act as amended by Act 32 of 1957. It empowers and association to which the central government has granted recognition under section 6 to make uses or amend any rules made by it , to provide favor all or any of the matters mentioned therein namely to grouping of the member s of the association according to functional or local interests to reserve seats on its governing body for members belonging to each group, etc. This provisions does not extend immunity to the articles which have given umbrage. These articles do not become inviolate by virtue of provisions of section 9A.

In this case, the non trading shareholder have been deprived of their right to vote, to call meetings , to elect directors and auditors. They cannot exercise the right to declare or receive dividend. It is argued on behalf of the respondents that after due naughts had been given to all shareholder of the company a meeting was called on 9th January, 1958, when the impugned articles had been adopted unanimously. The first elections were held in August, 1958, within anybody raising objection to the elections in accordance with the new articles which prohibited the non-trading shareholders from voting. From this conduct, I am desired by the respondents to hold that the petitioners are estoppel from raising the plea under sections 397 and 398. On behalf of the petitioner, it is argued that the meeting of 9th January, 1958, was no adequately represented because out of 237 shareholders only 28 were present. This arguments of Mr. B R Tuli, learned counsel for the petitioners does not carry much weight. If the shareholder concerned who had received proper notice and to whom the proposed amendments were sent did not choose to study the modifications or even to attend the meeting they cannot be helped to say that there was n sanctity attached to the resolutions unanimously passed because the meeting was not adequately represented. No weight can be attached to such a contention.

The only arguments which merits consideration is that omission to object is immaterial in respect of matters which deprive a shareholder of certain fundamental statutory rights guaranteed by the Act. There are certain rights which no shareholder of a company can be permitted to barter away. In respect of such rights, failure to object is no fatal. Reference in this connection may be made to the following provisions of the Companies Act.

Section 9(b) of the Companies Act reads, “any provision contained in the memorandum articles agreement or resolutions aforesaid shall t the extent to which it is repugnant to h provisions of this Act, become or be void as the case may be”. The intention of the above provision is to make the stature law supreme so as to override the memorandum. articles, etc.

Section 87 confers upon every meter of ac company limited by shares and holding any equity share capital therein the right to vote in respect of such capita on every resolution placed before the company.

Section 181 visualizes certain restrictions on exercise of voting right of members. Under this section, notwithstanding anything contained in the act, the articles of a company may provide that no members shall exercise an voting right in respect o f any shares registered in his name on which any call or other sums presently payable by him had not been paid. Section 182 provides that a public company shall not prohibit any members from exercising his voting right on any ground not being a ground set out in section 181, This is a basic recognition of a fundamental rights that no restriction not specifically saved by the by the act can be placed upon the voting rights of a members.

The right to case one’s vote is a proprietary right and the holder of share may exercise is right in any manner he pleases. The voting rights have been effectively entrenched by the statute and cannot be taken away by any alteration in the memorandum of association or by passing of any resolution in that behalf. Sanctity is attached to the voting rights because it is in this manner that a holder f such a right expresses his will, preference or choice regarding decision on a proposed measure or proceedings or on the selection of an officer, Giving of vote is a vehicle for commenting to other the choice of the voter The exercise of voting rights is amens for giving expression to one’s will mind or choice. It is recognize as a formal mode for authoritatively expressing a person’s opinion. The possession of shares which is a valuable property will as a right become nugatory by taking away the voting power. Weightly and important matters affecting the affairs of the company are decided at meetings by votes of members. A resolution or a motion than against it. When this right is taken away, the the enjoyment of property is gravely hampered, if not altogether denied. I cannot conceive of a worse oppression than the denial of voting right to a shareholder especially in a case like the present where the trading members whose contributions to the paid up capital is less than half exclusively enjoy th right voting; and no trading shareholder who in this case have contributed more to the paid up capital cannot exercise this right. I would not be understood to mean that the voting right. I should not be understood to mean that the voting right of a minority can be taken away> I refer to its fact , in order time phasise to extent of oppression s in this case , the on trading shareholder who far outnumber the trading shareholder have no voice in the affairs of the concern. This right which is bestowed by the stature could not be battered away by the members present at the meeting of 9th January, 1958, either for themselves or for other non-trading shareholders.

Mr. Sikri argues that if a right is voluntarily given up with the open eyes, howsoever valuable that right may e it cannot be styled as oppression. According to in oppression is an act proceeding from one against the other to the latter’s detriment and against his consent. This arguments has failed to impress me. An oppression may be an act of cruelty. severity, unlawful exaction domination of will or excessive use of authority. The sixth chapter of the companies Act deals with the preservation of oppression and mismanagement.

Section 297 provides relief, inter alia where the court is of the opinion that the company affairs are being conducted in a manner oppressive to any member or members , In this case the nonvoting members are being subjected to hardship or burden which may truly be called oppressive. They are subjected to an oppressive conduct in so far as they are being dominated and have to submits to excessive use of authority. Such a conduct amounts to unjust hardship. To oppress,ordinary, means to crush smother or trample. In this case, their valuable rights are being tramped upon by unjust exercise of authority or powers. To take away the rights of partaking in dividends earned by their contribution is not merely oppressive but even confiscator.

In my view, therefore this case calls for an interference by this court under section 397 of the companies Act.

In this connection my attention has been drawn to section 6(3) of the Forward Contracts (Regulation) Act, 1952, according to which “No rules of a recognised association shall be amended except with the approval of the Central Government.” The argument is that this court cannot in the exercise of its powers under section 397 and the following section pass an order which may have an effect of causing amendments in the rules of a recognised association without obtaining approval of the Central Government. The powers of this court for prevention of corruption and mismanagement under Chapter VI of part Vi subject to te imitations imposed by the provision therein are of plenary character and are not abridged by anything contained in section 6(3) of the Forward Contracts (Regulations) Act, 1952, It is open to the court to struck out such rule o a recognised association which may result in oppression. Section 6(3) restricts acts of the association and cannot be read to mean that it subjects this count to obtain the approval of the Central Government before passing an order which may have the result of amending rules of an association which offend against the provisions of the Companies Act.

Where the shareholders are denied a most valuable right by amending rules of an association and in utter disregard of the statutory protection the making of a winding up order on the ground that it is just and equitable, would be justified. But in this case to wind up the company would be otherwise unfair. To a case like the present the provision of section 397 are eminently suitable.

It is in accord with the principles of the Forward Contracts (Regulation) Act, that the association which have received recognition from the central Government should consist of member engaged in the trade. The non trading members in this case excepting those who desire to quality themselves ad trading members, would be anxious to sever their connection and walk out of the company with such capital as the had contributed. In these circumstances the relief contemplated by section 402(b) and(c) is proper.

I direct that within three months of the date of this order, the company should purchase the share or the interests off non trading members with the consequently reduction of the company’s share capital.

I allow the petition, but i the circumstances of the case, I leave the parties to bear own costs.

My previous orders in this case restraining the Punjab Company from holding meetings stand vacated.

[1970] 40 COMP. CAS. 819 (GUJ)

HIGH COURT OF GUJARAT

Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re

D.A. DESAI, J.

Company Application No. 23 of 1968 with Company Petition No. 8 of 1969

DECEMBER: 10, 1969

 

JUDGMENT

Messrs. Indequip Limited (hereinafter referred to as the petitioner) has filed this petition under section 391(2) of the Companies Act, 1956, for sanctioning, a scheme of compromise and arrangement between the creditors and members of Maneckchowk & Ahmedabad Manufacturing Company Limited (hereinafter referred to as the company) and the compromise proposed by the company in Company Application No. 23 of 1968 and approved by the creditors and members of the company. The company was incorporated in the year 1892 and it was manufacturing cotton yarn and cotton textiles. For that purpose the company had set up textile mills divided into two units described as Unit No. I and Unit No. II. Since 1913 one Hiralal Trikamlal was its managing agent. Hiralal Trikamlal has three sons, Manubhai, Chandulal and Linubhai, and two daughters, Shardaben and Shantaben, all of whom are very much concerned in this petition. In 1957 the firm of Hiralal Trikamlal & Sons was appointed as managing agents of the company. One Gopaldas P. Parikh was appointed as a director of the company in the year 1959. Up to 1st January, 1966, Manubhai Hiralal and Chandulal Hiralal as partners of Hiralal Trikamlal & Sons were in active management of the affairs of the company and since that date Linubhai Hiralal along with Gopaldas P Parikh took over the active management of the company. It appears that since 1962 the company was in financial doldrums and its losses were mounting up from year to year. The workers of the company went on strike on 2nd April, 1968, as their wages for nearly two months were in arrears with the result that the company was obliged to close the mills. The first petition praying for winding up the company was filed in April, 1968. The immovable properties of the company were attached by the Collector at the instance of the Regional Provident Fund Commissioner and Employees' State Insurance Corporation. The company filed Company Application No. 23 of 1968 on 27th June, 1968, under section 391(1) seeking directions for convening the meeting of its creditors and members for considering and if thought fit for approving with or without modifications a scheme of compromise and arrangement proposed by it. Before the court gave directions on the aforementioned application, one Chandulal Hiralal as power of attorney holder of Shardaben and Shantaben and others filed Company Petition No.24 of 1968 on 4th July, 1968, praying for an order for winding up the company. Two other petitions for the same reliefs were fried on 12th July, 1968, being Company Petition No. 28 of 1968 by Ambica Dyes and Chemicals and Company Petition No. 29 of 1968 by Popular Dyestuffs and Chemical Company. On the application filed by the company under section 391(1), the court gave direction on 4th July, 1968, for convening meetings. The petitioners in Company Petition No. 24 of 1968 filed Company Petition No. 35 of 1968 on 29th July, 1968, for appointment of a provisional liquidator which petition was granted by the court and the official liquidator attached to this court was appointed as provisional liquidator of the company and since then the provisional liquidator is in possession of the assets of the company. The meetings of the unsecured creditors and members of the company were held on 5th and 6th October, 1968, and final meeting of the secured creditors was held on 9th December, 1968. The chairman appointed by the court to preside over these meetings submitted his report on 16th December, 1968. Thereafter the petitioner applied for and obtained leave in Company Application No. 1 of 1969 on 13th January, 1969, to file substantive petition under section 391(2) of the Companies Act for sanctioning the scheme of compromise and arrangement as approved by the creditors and members as provided by rule 79 of the Companies (Court) Rules, 1959, because the company as represented by the provisional liquidator was not willing to file the substantive petition. The court granted leave to file this substantive petition, whereupon the petitioner filed substantive petition on 1st February, 1969. The petition was admitted on 3rd February, 1969. The court gave directions for advertising the petition in various newspapers and a notice was also directed to be issued to the Central Government as envisaged by section 394-A of the Companies Act. In the advertisement issued in the newspapers it was stated that the court would take up this petition for hearing on 8th March, 1969, and anyone interested in the company may come and appear either to oppose or support the petition. The hearing of the petition had to be adjourned from time to time as the petitioner had not submitted the latest financial position of the company as required by the proviso to section 391(2) of the Companies Act. The petitioner experienced difficulty in disclosing the latest financial position of the company because the provisional liquidator was in charge of the company and it appears that the books of accounts of the company were not written, as also the petitioner being creditor had no access to the books of accounts of the company. On a judge's summons taken out by the petitioner, the court gave certain directions and appointed auditors to prepare the statement showing the latest financial position of the company. After the auditors submitted detailed reports disclosing the latest financial position of the company the petition was set down for hearing.

At the hearing of the petition Mr. R.N. Oza appeared for the Union Bank of India, a secured creditor of the company, Mr. B. R. Shah appeared for the Employees' State Insurance Corporation, Mr. S. N. Shelat appeared for two creditors, namely, M/s. Atul Cotton Traders and M/s. Amarshi Damodar, Mr. C. C. Gandhi appeared for Indian Electro Chemical Limited, Mr. R.M. Gandhi and Mr. R.P. Bhatt appeared for the Regional Provident Fund Commissioner and Mr. S. B. Majumdar appeared for the Textile Labour Association and they all supported the scheme. Mr. S. B. Vakil appeared for the creditors who had filed Company Petition No. 24 of 1968 for winding up the company and for Messrs. East India Company instructed by Messrs. Ambubhai Divanji and for Asia Electric India Private Limited and opposed the scheme. Mr. B.J. Shelat appeared for Ambica Chemicals and Dyes, petitioner in Petition No. 28 of 1968 and Popular Dyestuffs and Chemicals, petitioner in Company Petition No. 29 of 1968—both of whom are the creditors of the company—and opposed the scheme. Mr. L.T. Shah appeared for the provisional liquidator who submitted to the orders of the court.

The scheme as finally submitted to the court for its sanction envisages reorganization of the share capital of the company which includes reduction of the share capital by reducing the face value of the ordinary share of Rs. 1000 fully paid to Rs. 250 fully paid, and preference share of Rs. 100 fully paid to Rs. 25 fully paid. The scheme also envisages increase of share capital by issue of shares to the unsecured creditors of the company excluding the workers to the tune of 50% of the verified claim of each unsecured creditor. The scheme envisages dismantling and scrapping of Unit No. II of the mills of the company and the sale proceeds to be utilised towards the payment to the secured creditors, namely, Union Bank of India and the Regional Provident Fund Commissioner. After Unit No. II is scrapped, the open land is to be let out to the intending lessee which will fetch a steady income. It is proposed to restart Unit No. I of the mills of the company. The secured creditors are to be paid in full in the manner set out in the scheme. The balance of 50 per cent, of the claim of the unsecured creditors are to be frozen for a period of two years and thereafter the said claims are to be satisfied as provided in the scheme. The dues of the workers are to be paid by certain stages. Some of the detailed features of the scheme will be examined while considering the objections raised by those contesting the scheme.

Before the court accords its sanction to any scheme of compromise and arrangement, it would normally expect to be satisfied about three important matters, namely, (i) whether the statutory provisions have been complied with or not; (ii) whether the class or classes have been fairly represented; and (iii) whether the arrangement is such as a man of business would reasonably approve. As the scheme was very vehemently contested and a number of contentions have been raised by Mr. Vakil, these three aspects have been vigorously debated and they will be considered while considering those objections.

Mr. S. B. Vakil, who was the principal contender at the hearing of this petition, contested the scheme on the following grounds:

(1)            The petitioner has not satisfied the requirement contained in the proviso to section 391(2) by not making necessary disclosures at the proper time and it being a condition precedent to the court's exercise of jurisdiction under section 391(2), the present petition must fail.

(2)            The proposed scheme is not a proper alternative to an order for winding up the company in view of the fact that the company is guilty of giving a number of fraudulent preferences in favour of the Union Bank of India, the Regional Provident Fund Commissioner and five other creditors which can only be investigated and avoided in winding up proceedings.

(3)            The proposed scheme envisages scrapping of Unit No. II and part of Unit No, I of the mills of the company and, in the absence of a permission for scrapping a textile mill, it would be illegal to sanction the scheme.

(4)            The proposed scheme envisages reorganisation of the share capital of the company, including reduction and increase of share capital, which cannot be done without going through the whole gamut of the procedure prescribed for the same and as it is an inseverable part of the scheme, it would be futile to sanction the remainder of the scheme in its mutilated form.

(5)            In the absence of proper directions for convening separate meetings of different classes of creditors and members of the company, appropriate meetings of distinct classes of members and creditors were not held and therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members.

(6)            A proper statement as required by section 893(1) and as directed by the court's order, dated 26th June, 1968, in Company Application No. 23 of 1968 was not sent along with the notice convening the meetings of members and creditors of the company.

(7)            The meetings of creditors and members were conducted in an irregular manner and, therefore, the votes recorded at such meetings cannot be relied upon to show that the scheme has been approved by the requisite majority of creditors and members.

(8)            Even if it be held that the meetings were properly conducted, in fact the scheme is not approved by a statutory majority of creditors and members; but assuming that the other view is possible, the court on the analysis of votes recorded at the meeting should not exercise its discretion in favour of the scheme so as to impose it on the dissenting members and creditors.

(9)            The scheme is not commercially and economically viable or feasible and is in fact unfair and unreasonable; the court should not exercise its discretion in favour of such a scheme. These grounds will be dealt with in the order in which they are set out.

Re. Ground No. 1. Section 391(1) and (2) reads as under:

"391. Power to compromise or make arrangements with creditors and members.—(1) Where a compromise or arrangement is proposed—

        (a)    between a company and its creditors or any class of them; or

        (b)    between a company and its members or any class of them;

the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the court directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company.

Provided that no order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under sub-section (1), has disclosed to the court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like."

The contention is that before the court can proceed to consider whether the scheme of compromise and arrangement should be sanctioned or not, the party sponsoring the scheme must disclose to the court by an affidavit or otherwise all material facts relating to the company, such as, the latest financial position of the company, latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like. It is undoubtedly true that before the court can accord sanction to a proposed scheme of compromise and arrangement, between the company and its creditors or any class of them; or between the company and its members or any class of them, approved by a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present and voting either in person or, where the proxies are allowed, by proxy, the court must be satisfied amongst other things that company or the sponsor of the scheme has disclosed all material facts relating to the company. The contention is that this disclosure should be made at the time when the petition is filed under section 391(1) and as that has not been done, the court should ignore whatever is disclosed after the petition for sanctioning the scheme is filed under section 392(2). Sections 391(1) and 391(2) refer to two distinct stages. Whenever a compromise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members or any class of them, the court on the application of the company or any creditor or member of the company or in the case of the company which is being wound up, of the liquidator, order a meeting of the creditors or members or any class of them as the case may be. Such an application shall be moved by judge's summons supported by affidavit to which the proposed scheme of compromise and arrangement should be annexed. The judge's summons can be moved ex pate unless the petition is by some one other than the company in which case, a notice to the company has to be served. The court may give various directions at the hearing of this summons set out in rule 69. Once these directions are given, application under section 391(1) would be disposed of. Nothing further is required to be done until after the meetings directed to be convened are held and the chairman submits his report, whereafter a substantive petition for sanctioning the scheme can be filed as envisaged by section 391(2) and rule 79. Before the court can accord sanction to the scheme, the petitioner or the company must disclose latest financial position of the company and the latest auditor's report as required by the proviso to sub-section (2). Proviso is annexed to sub-section (2) which envisages a distinct stage from sub-section (1). The submission is that disclosures as required to be made by the proviso should be made at the stage of seeking directions under sub-section (1) of section 391. The submission would stand negatived apart from anything else by the very language in which the proviso is cast and its' location in the scheme of section 391. Firstly, the proviso is engrafted to sub-section (2) which envisages a distinct stage from sub-section (1); secondly, the opening words of the proviso: "provided no order sanctioning any compromise or arrangement shall be made by the court unless .........." would manifestly indicate the intention of the legislature that the disclosure is to be made at the stage when the court is called upon to sanction the scheme. If the submission had any merit in it, it was perfectly open to the legislature to engraft the proviso to subsection (1) and in that event, the language would be "provided no direction shall be given for convening meeting unless". Undoubtedly that has not been done. If sub-sections (1) and (2) of section 391 envisage two distinct stages, namely, (i) giving direction for convening the meeting for considering the proposed scheme and (ii) the independent stage when the court would be called upon to consider whether the scheme should or should not be sanctioned and if the disclosure is to be made before the court at the time when the court is called upon to sanction the scheme, it is not possible to accept the submission that the disclosure ought to be made at the initial stage when an application is made under section 391(1).

Mr. Vakil however urged that disclosure as envisaged by the proviso has to be made either by the company or by any other person by whom application has been made under sub-section (1) which gives strong indication that the disclosure ought to be made at the initial stage when an application is filed under section 391(1). But as the summons under subsection (1) is to be moved ex parte, objection can be taken about the non-disclosure at the initial stage only at the time when the court proceeds to accord sanction to the scheme and, therefore, the proviso is engrafted to sub-section (2). It was urged that an application under section 391(1) can be made by a creditor or member who may not be in possession of the latest financial position of the company a notice to the company is made obligatory under rule 68. This notice to the company is made obligatory because only the company would be able to disclose the latest financial position. It is no doubt true that a compromise or arrangement can be proposed by either a creditor or a member of the company but it is essentially a compromise or arrangement between the company and its creditors or between the company and its members and if the application is made by some one other than the company it was considered desirable that a notice should be given to the company before direction for convening the meetings are given. Merely because a notice is to be given to the company under rule 68 before directions are given and because the advocate of the company has to file the form of advertisement and statement accompanying the notice as required by Form No. 35 in which order convening the meetings has to be made, it cannot be said that the disclosures ought to be made at that stage. Mr. Vakil however urged that in this application under section 391(1), judge's summons for seeking directions for convening the meeting to consider the proposed scheme of compromise and arrangement would be moved ex parte and the court would not be able to give proper directions in the absence of material disclosures as envisaged by the proviso and, therefore, even though the language of the proviso and its location may apparently indicate that the disclosure has to be made at the stage when the court is called upon to consider the scheme, for very good reasons, the court should interpret the proviso to mean that the disclosure should and ought to be made at the initial stage. It was urged that when an ex parte judge's summons is moved under sub-section (1) and the court is required to give direction for convening the meeting, the court has to determine, amongst other things, class or classes of creditors and class or classes of members whose meetings have to be convened and has to determine the value of the creditors and/or members or creditors or members of any class as the case may be, and the court would not be able to do it unless the latest financial position including the auditor's report is disclosed to the court. It was also urged that in order to enable the court to give proper statement under section 393(1)(a) which must accompany the notice convening the meeting so as to give those who are to attend the meeting, the necessary information to enable them to cast their votes intelligently, it is absolutely necessary that the aforementioned disclosures should be made at that stage. It was very vehemently urged that the sanction of the court to the scheme is of secondary importance, its approval by the creditors and members whose vital interest in the company are really at stake is of primary importance; and unless the scheme is properly considered by different classes of creditors and members, it cannot be taken up for consideration by the court. Therefore, the distinct and homogeneous class of creditors and members should be properly drawn up while giving directions for convening meetings, and it would be impossible to do so in the absence of disclosure about the latest financial position of the company, at that stage. It was further urged that material facts which ought to be disclosed as required by the proviso would include all the relevant facts which would go to show that the company is liable to be wound up and that the compromise and arrangement is fair and reasonable and is not mala fide and that it would be a proper alternative to the winding up of the company the material facts required to be disclosed would also include the information which would help the court in determining the class of creditors or members whose separate meetings should be convened and their values to be properly determined.

Affidavit in support of the judge's summons moved under section 391(1) has to be drawn up in Form No. 34 —a perusal of which shows that in the affidavit the party seeking the directions of the court which would of necessity be either the company or its creditor or member, must set out the circumstances that have necessitated the proposed compromise and arrangement, the object sought to be achieved by it, the terms of the compromise and arrangement, the effect if any of the compromise and arrangement on the material interests of the directors managing director, managing agent, secretaries and treasurers or manager of the company and when the compromise and arrangement affects the interest of the debenture-holders its effect on the material interests of the trustees of the debenture trust deed. It must further be disclosed in affidavit that classes of creditors or members with whom the compromise or arrangement is to be made and if the compromise and arrangement is between the company and its members it should further be stated whether any creditor or class of creditors are likely to be affected by it. The affidavit must show that different kinds of meetings of different classes of persons are required to be convened. It is obligatory upon the applicant under section 391(1) to set out the aforementioned facts in the affidavit in support of the judge's summons. The aforementioned facts, if properly disclosed, would enable the court to give proper directions as envisaged by rule 69 and the absence of the latest financial position of the company or the latest auditor's reports would not be handicap in the court giving proper directions. In my opinion, the details required to be mentioned in the affidavit have been so prescribed to enable the court to give proper directions and no disclosures are required to be made as required by the proviso at that stage. The form in which the affidavit is required to be made further strengthens the conclusion that the proviso does not come into play when the court deals with the petition under section 391(1) but it comes into play only at the later stage.

It was however urged that if the court is going to rely on the affidavit in support of the judge's summons in Company Application No. 23 of 1968, for reaching a conclusion that relevant information was disclosed in the affidavit, it would be necessary to consider in detail the affidavit of Mr. B. I. Patel, the constituted attorney of the company who filed his affidavit in support of the judge's summons. It was urged that the affidavit of Mr. Patel did not disclose the fact that the company had suffered consent decrees and charges were created on the properties of the company indicating that the company was guilty of giving fraudulent preferences in favour of the creditors in whom the then directors were vitally interested. It was urged that this affidavit does not disclose the fact that various petitions praying for winding up the company were presented and were pending; nor the fact that the company had executed two mortgages, one in favour of the Union Bank of India in January 1968 and the other in favour of the Regional Provident Fund Commissioner in May 1968; and that the company had incurred losses in the last year to the tune of Rs. 45 lakhs and odd. The affidavit of Mr. Patel is in the prescribed form and it sets out various details necessary for giving proper directions. It may be mentioned that Mr. Patel had annexed the latest balance-sheet of the company upto 31st March, 1967, to the affidavit. He had also stated the dues of the managing agents, Indequip group of companies and dues of the managing director as well as the members of his family and the effect of the scheme on their claims. Therefore, whatever was necessary at that stage was disclosed in the affidavit and nothing further was required to be done at that stage.

Mr. Vakil further urged that the proposed scheme is to be considered by the members and creditors of the company and when they are considering the scheme, they should ordinarily have all the relevant information about the financial position of the company so that they can bring to bear upon the subject their independent (intelligent) commercial judgment as to whether the scheme should or should not be approved. If the matter is viewed from this angle, urged Mr. Vakil, it would indicate that disclosure should be made at the stage when the application is filed under section 391(1) because that information would be available to the creditors and members in their meeting. It was contended that if the creditors and members are called upon to vote upon the scheme without supplying them necesssary information which would help them in judging the scheme in its proper perspective, their approval of the scheme in sheer ignorance of the relevant facts would be of no avail. The approval of the scheme by the creditors and members must be after bringing to bear upon the subject their intelligent judgment based upon full disclosure as to the existing stage of affairs of the company and its future which is sought to be assured by the proposed scheme of compromise and arrangement. Mr. Vakil referred to In re Travancore National & Quilon Bank Ltd. An objection was raised before the court considerig the scheme that as the scheme was not based upon correct information as to the affarirs of the company and has not had the intelligent support of the body of creditors who are supposed to have given assent to the scheme and there is no guarantee that the realizations therein promised would be realised. Referring to two English cases it has been observed that any scheme which is approved must prima facie appear to be based on correct information and data. However, having thus observed the court further proceeded to observe that this does not mean that the application for sanctioning the scheme should be rejected on the ground that sufficient information was not supplied at the meeting of the creditors when they approved the scheme. This would not bear out the submission that the disclosure must be made at the initial stage. Reference was also made to In re Calcutta Industrial Bank Ltd. wherein an objection was taken that the books of accounts of the company were not available at the meeting of the creditors and that the creditors were prevented from putting questions. Even though these grounds were considered, it may be stated that on the facts found in the Chariman's report no weight was attached to the aforementioned objections. Reference was also made to In re Bharati Central Bank Ltd. The question raised before the court was whether the creditors and members who had unanimously approved the scheme had full information of all the aspects and were acting honestly and in good faith at the meeting. After considering the evidence in the case it was observed that it was impossible to say that the creditors had full and fair knowledge of all the relevant facts on which they could come to an intelligent decision or that they had applied their independent mind to the scheme. In my opinion, no proposition of law can be deduced from the aforementioned case as suggested by Mr. Vakil that the disclosure ought to be made at the initial stage. It is always a question of fact whether the creditors and members did consider the scheme in the various meetings after getting the relevant information which would help in judging the scheme on its merits. But it cannot be said that as discloures were not made at the initial stage when the directions were given by the court the requirements of the proviso were not complied with.

Looking to the language of the proviso especially its opening words:

"Provided that no order sanctioning any compromise or arrangement shall be made..." and the location of the proviso in the scheme of section 391 and especially the fact that section 391(1) and section 391(2) envisage two distinct and independent stages when the court is called upon to apply its mind to the proposed scheme of compromise and arrangement and the contents of the affidavit required to be drawn up in prescribed form in support of the judge's summons under section 391(1) it is not possible to accept the submission of Mr. Vakil that disclosures as required by the proviso shonld be made at the intial stage when the application is made under section 391(1). In my judgment, these disclosures are required to be made when a petition is filed under section 391(2) for sanctioning the scheme and must be available when the court proceeds to examine the scheme to find out whether sanction should be accorded to it or not.

As a second limb of the argument, it was contended that even if it be held that disclosures as required by the proviso are to be made at the stage when the court is considering the petition for sanctioning the scheme, in fact, no disclosures have been made in this case and therefore, the court should not accord sanction to the scheme. It was argued that the proviso being couched in the negative form is of a mandatory character and disclosures being a condition precedent to the court's exercise of jurisdiction for sanctioning the scheme, unless condition precedent is fully satisfied, the court will have no jurisdiction to sanction the scheme. It is true that the proviso is cast in the negative form. It is equally true that the court is precluded from according sanction to the scheme unless the disclosure as required by the proviso are made. As the proviso is prohibitory in character, it is not possible to treat it as merely permissive (vide High Commissioner for India and the High Commissioner for Pakistan v. I.M. Lall ) The proviso was introduced in the year 1965 and as it is prohibitory in character and provides condition precedent to the court's exercise of jurisdiction for sanctioning the scheme it definitely appears to be mandatory in character and must be strictly complied with. The question is whether in fact it has been complied with or not. When the present petition was filed, the company was in charge of the provisional liquidator. The petitioner being a creditor could not produce documents showing latest financial position of the company. In order to make available latest financial position of the company and latest auditor's report, the petitioners took out a judge's summons in Company Application No. 11 of 1969 for a direction that the provisional liquidator who is in charge of the company should supply the latest financial position and all material facts pertaining to the said company. The court gave certain directions as a result of which Mahendra M. Patel & Company, Chartered Accountants, were appointed as auditors to prepare the latest financial position of the company and to submit the auditor's report. It transpired that the books of accounts for certain period were not written and under the supervision of the provisional liquidator, the ex-directors of the company were permitted to complete the books of accounts. Thereafter the chartered accountants prepared the latest balance-sheet upto 29th July, 1968. Company Application No. 23 of 1968, was filed under section 391(1) on 27th June, 1968. The mills of the company are closed from 2nd April, 1968. Therefore, when the books of accounts till 29th July, 1968, are prepared and auditors have audited the books, it cannot be gainsaid that the latest financial position and latest auditor's reports have been disclosed by the petitioner. The requirement of the proviso has certainly been complied with. But Mr. Vakil urged that the auditors did not get clarification on a number of points set out in the report under the heading "Notes forming part of the accounts for the period 1st April, 1968, to 29th July, 1968." It was urged that, unless these points have been clarified, it cannot be said that the latest financial position of the company is made available to the court. It was also contended that looking to what the auditors have stated in the report, the latest financial position of the company is not capable of being ascertained at the present stage. It was also contended that the dues of certain creditors have not been properly verified and there is difference in the trial balance prepared by the auditors to the tune of Rs. 18,214 which the auditors have debited to the suspense account. It is undoubtedly true that the auditors have set out various queries in the report, but these queries did not in any manner come in the way of proper appreciation of the latest financial position of the company as disclosed in their reports. There may be some difference here or there but that is not material because the court is not examining the accounts of the company or any allegation of embezzlement or defalcation. The court at this stage is concerned with the financial position of the company in its broad outlines. In fact, the court would primarily be concerned with the assets and liabilities of the company and a few minor details here or there would not be of any consequence while considering the scheme of compromise and arrangement. These details may. be of importance when the claim of each creditor qua the company is being considered; but while considering the scheme of compromise and arrangement, the court, more particularly, is concerned with the assets and liabilities of the company and they are admittedly set out in the reports submitted by the auditors. It may be mentioned that the petitioner has filed the affidavit of Gopaldas P. Parikh at page 506 of the record to which is annexed the clarifications submitted by the directors to the queries raised by the auditors. However, it is not necessary to go into them at this stage. Suffice it to say that proper disclosures in their broad outlines have been made so as to comply with the proviso to section 391(2). In my judgment, therefore, the first ground of attack is without merits and must be negatived.

Reg. Ground No. 2.—Second ground of attack was that the proposed scheme is not a proper alternative to an order for winding up the company in view of the fact that the company is guilty of giving a number of fraudulent preferences in favour of the Union Bank of India, the Regional Provident Fund Commissioner and five other creditors, namely, (1) Indian Electro Chemicals Ltd., (2) Dyestuffs and Chemicals Private Ltd., (3) Indequip Ltd., (4) Amarshi Damodar, and (5) Messrs. Atul Cotton Traders, which can only be investigated and avoided in winding up proceedings. The contention is that the proposed scheme was put forth by the directors of the company in order to shield themselves and to prevent investigation of their misdeeds, misfeasance and non-feasance during their management of the affairs of the company. It was very vehemently contended that if the petition for sanctioning the scheme is rejected, the only alternative open to the court would be to wind up the company. If the company is wound up the official liquidator would be able to investigate the management carried on by the directors of the company. The official liquidator would also be able to avoid fraudulent preference alleged to have been granted by the directors of the company in favour of their chosen creditors as also in favour of the Union Bank of India and the Regional Provident Fund Commissioner and that neither this investigation could be made nor fraudulent preferences could be avoided if the scheme is sanctioned. In other words, it was urged that sanctioning of the scheme would provide a shield to the ex-directors of the company to cover up their misdeeds which brought the company to a state of complete ruination. The charge is rather very serious and if prima facie it could have been shown that the ex-directors were guilty of giving fraudulent preferences to their chosen creditors and further if these fraudulent preferences could not have been avoided except on the pain of winding up the company, I would have experienced considerable hesitation in further considering the scheme.

The company was indebted to the tune of Rs. 2,63,129.92 to Indian Electro Chemicals Ltd., Rs. 5,79,650 to Dyestuffs and Chemicals Private Ltd., Rs. 33,14,783 to Indequip Ltd., Rs. 3,38,267.96 to Messrs. Amarshi Damodar and Rs. l,86,225.50 to Messrs. Atul Cotton Traders. Gopaldas P. Parikh is vitally interested in the first mentioned three creditors and one Manubhai Amarshi, who carries on business under the name and style of Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders is a close friend of Gopaldas P. Parikh. Manubhai Amarshi has supplied cotton to the company, Indian Electro Chemicals Ltd., and Dyestuffs and Chemicals Private Ltd. had supplied goods and stores to the company; Indequip Ltd. had not only supplied goods and stores but also extended cash loans from its sharafi accounts to the company. Gopaldas P. Parikh holds large blocks of shares in the Indequip Ltd. and is virtually the owner of the Indian Electro Chemicals Ltd. and Dyestuffs and Chemicals Private Ltd. Thus there is no room for doubt that Gopaldas Parikh was vitally interested in the aforementioned five creditors. The first petition for an order for winding up the company was filed in the year 1967 being Company Petition No. 27 of 1967. That was withdrawn on 24th April, 1968. By that time, another petition filed for winding up the company was pending. During the pendency of this petition, it appears that the aforementioned five creditors filed suits against the company which was then being managed by Anil Parikh, son of Gopaldas P. Parikh, Surotam Hathising and Linubhai Banker. Undoubtedly, Gopaldas P. Parikh was the boss of the whole show. Indian Electro Chemicals Ltd. filed Summary Suit No. 789 of 1968. Dyestuffs and Chemicals Private Ltd. filed Summary Suit No. 790 of 1968. Indequip Ltd. filed Summary Suit No. 791 of 1968, Messrs. Amarshi Damodar filed Summary Suit No. 768 of 1968 and Messrs. Atul Cotton Traders filed Summary Suit No. 977. 1968 against the company for recovering their respective claims as set out above. All these suits were filed on 15th April, 1968. On the next day, the board of directors of the company resolved to suffer consent decrees in all these suits. The company suffered consent decrees for the full amounts claimed by each creditor. So far no serious objection could have been taken; but the company over and above suffering consent decrees without investigating the exact amount payable to each of the creditors, the directors went further and created charges in favour of each of the creditors for its respective claims over the movable and immovable properties of the company. The suits were filed by Mr. B. A. Kayastha, who, it was urged, is an associate of Messrs I. M. Nanavati & Company Associates and Mr. I. M. Nanavati has been throughout appearing for the company. In the suits Mr. Nanavati had not appeared for the company. Not only the suits were not contested, but even the plaints drawn up show very sketchy averments as to how the amounts were due. Apart from that, the company suffered decrees and created charges in favour of each of the aforementioned creditors. These decrees were suffered as stated earlier on 17th April, 1968, when winding up petition was pending against it and the mills of the company had already closed down. The creation of a charge on immovable property would be a transfer of property which, in certain circumstances, either in winding up proceedings or insolvency proceedings, can be attacked as fraudulent preference and if so proved, the transfer can be declared to be void. The attempt of the then directors of the company, which included one Anil Gopaldas Parikh, son of Gopaldas P. Parikh, who was vitally interested in the creditors, was to give benefit or preference to the aforementioned creditors to the detriment of the other unsecured creditors of the company. On the face of it, the creation of the charge was fraudulent preference and having given when the petition for winding up was pending or having been given within a period of 6 months prior to the presentation of these petitions for winding up the company, it would certainly be fraudulent preference. The zeal evinced by the directors in these circumstances in suffering decrees smacks of giving an unfair advantage to the creditors in whom they were vitally interested and detrimental to the financial interest of the company. This conduct is unbecoming of a responsible director of a company. As between a company and director, it is fair to presume that there is a fiduciary relationship and if that presumption is proper, the directors in suffering decrees conducted themselves in a manner unbecoming a custodian of the interest of the company. Their action in giving charges would very adversely hit the other unsecured creditors. The directors preferred between creditors and creditors and especially preferred those in whom they were vitally interested and could certainly be stigmatized as guilty of giving fraudulent preferences. Mr. Gandhi who appeared for the petitioner made no attempt to defend this action of the directors in suffering decrees. One may not take a very serious objection to the suffering of the decrees but for the manner in which they were suffered; but the most undesirable part is of giving charges in favour of select and chosen creditors. If these charges could not have been avoided except in winding up proceedings as fraudulent preferences, no alternative would have been left but to reject the scheme and wind up the company. However, I would presently point out that charges created in favour of the aforementioned creditors no more subsist.

After the charges were created in favour of the aforementioned live creditors, an application was made to the Registrar of Companies in each case for registering the charges as required by section 125 in Part V of the Companies Act. However, Gopaldas P. Parikh filed an affidavit at page 590 of the record in which he has stated that, even though the applications were made to the Registrar of Companies in respect of the charges created in favour of the aforementioned five creditors, the said charges are not registered. The Registrar of Companies was summoned to the court to find out whether the charges were registered by him or not. The Registrar informed the court in the presence of the parties at the hearing of this petition that certain corrections had to be made in the form in which the applications were made and he had informed the directors of the company to make necessary corrections. But before these corrections could be made by the directors, a provisional liquidator was appointed with the result that the corrections were not made and charges were not registered; and unless the provisional liquidator makes the necessary corrections, the charges cannot be registered and the provisional liquidator informed the court that he does not wish to make corrections. If the scheme is sanctioned and the company gets going, the directors will be precluded from making corrections. If the corrections as suggested by the Registrar are not made, the charges cannot be registered and if the charges are not registered, they are void as provided in section 125 of the Companies Act.

It must further be noticed that the aforementioned five creditors have specifically given up their charges. Gopaldas P. Parikh as director of Indequip Ltd. has filed an affidavit at page 499 of the record. He has annexed the resolution of the Indequip Ltd. This resolution would show that Indequip Ltd. has accepted the scheme and has agreed to accept 50 per cent, of its dues in the form of shares and other 50 per cent, as provided by the scheme, which I would point out at a later stage. Indequip Ltd. has agreed not to claim and discharge the company from the liability of paying the amount if the scheme is to be sanctioned. The resolution further shows that the charge created in favour of Indequip Ltd. is relinquished and will not be enforced. In the affidavit of Gopaldas P. Parikh at page 590, he has stated that Indequip Ltd. would not pursue the application for registering the said charge and the application should be deemed to have been withdrawn. There is also the affidavit of Prabhakar L. Khale, Director of Dyestuffs and Chemicals Private Ltd., at page 495 to which is annexed the resolution at page 497, which is to the same effect. There is also an offer on behalf of Dyestuffs and Chemicals Private Ltd. not to claim the remainder of its 50 per cent, dues if the scheme is sanctioned. The charge in favour of Dyestuffs and Chemicals Private Ltd. is relinquished. Further affidavit is filed by Mr. Khale in which he has stated that the application for registration will not be pursued and he undertook to intimate to the Registrar that the application for registration of the charge is cancelled. Mr. S. N. Shelat, learned advocate who appeared for Messrs. Atul Cotton Traders and Messrs. Amarshi Damodar, filed two statements of appearance at pages 694 and 695 signed on behalf of the aforementioned two creditors accepting the scheme and the charges in their favour stand cancelled. It may also be mentioned that the aforementioned two creditors by their two letters dated 15th October, 1969, at pages 533 and 534 of the record have informed the court that they accept the scheme, which in terms means that the charge in their favour would be ineffective and of no consequence. Then remains the case of Indian Electro Chemicals Ltd. Mr. C. C. Gandhi, learned advocate appearing for the Indian Electro Chemicals Ltd., at the earlier stage of hearing stated that he would oppose the scheme on behalf of his clients. Subsequently, during the course of hearing a statement signed by Mr. C. C. Gandhi, advocate for the Indian Electro Chemicals Ltd., has been filed at page 702 of the record to which is annexed a letter from the clients of Mr. Gandhi whereby they informed the court that they do not oppose the scheme. Now, the scheme provides that 50 per cent, of the dues of the unsecured creditors of the Indian Electro Chemicals Ltd. will be converted into share capital by issue of shares and 50 percent, will be paid in a certain manner after some period. Indian Electro Chemicals Ltd. does not oppose the scheme, meaning thereby that it is prepared to accept its dues in the manner provided in the scheme for payment to the unsecured creditors. The scheme does not provide for payment to Indian Electro Chemicals Ltd. as secured creditors. The scheme in fact treats Indian Electro Chemicals Limited as a secured creditor. If Indian Electro Chemicals Limited does not oppose the scheme it would only mean that it would accept the position that it is not a secured creditor and that payment would be made to it in accordance with the provisions for the payment to other unsecured creditors. It would thus appear that all the five charges created by the decrees, which could have been avoided as fraudulent preferences in the event of the winding of the company, have been withdrawn, relinquished or cancelled and, at any rate, are void for want of registration and of no consequence in law. The result which Mr. Vakil seeks to achieve in winding up proceedings is achieved while sanctioning the scheme.

Turning next to the mortgage in favour of the Union Bank and Regional Provident Fund Commissioner, it may be mentioned that Mr. Vakil, after perusing the documents produced by the bank with the affidavit of Mansukhlal Hiralal Trivedi at page 601, did not suggest that the mortgage in favour of the bank for Rs. 13,00,000 dated January 19, 1968, would be a fraudulent preference. Suffice it to say that the bank had advanced cash loan of Rs. 13 lakhs on the security of the State Government to the company and the mortgage security was given towards this cash loan of Rs. 13 lakhs. By no stretch of imagination such a mortgage could be styled as a fraudulent preference.

It was next contended that the deed of mortgage executed by the company in favour of the Central Board of Trustees for the Provident Fund on May 21, 1968, would be a fraudulent preference given to the said trustees. It appears that Rs. 15,05,418.37 were due and payable by the company in respect of the provident fund contribution and Rs. 47,693.80 for administration charges to the Regional Provident Fund Commissioner. It appears that the company had committed default in payment of this amount and the properties of the company were attached. Subsequently, on May 21, 1968, the company executed a mortgage deed in favour of the Central Board of Trustees. It was urged that a petition for winding up the company was pending when this mortgage deed was executed by the company and that, in the absence of the mortgage, the Central Board of Trustees for the Provident Fund would be unsecured creditors and they are given fraudulent preference by executing the mortgage deed in their favour and that would be a fraudulent preference. It is undoubtedly true that the mortgage deed in favour of the Central Board of Trustees was executed on May 21, 1968, when the petition for winding up the company was pending in the court. It is, at any rate, executed within six months prior to the institution of the petition which is now pending and in which prayer for winding up the company is made. If that petition succeeds, investigation will have to be made whether the mortgage in favour of the Central Board of Trustees would amount to a fraudulent preference within the meaning of section 531 of the Companies Act. Mr. R. M. Gandhi, learned advocate who appeared for the Regional Provident Fund Commissioner, urged that the properties of the company were already attached by the revenue authorities at the instance of the Central Board of Trustees right from the year 1961-62 and the Central Board of Trustees gave further time to pay up the amount on the company executing the mortgage deed in favour of the Central Board of Trustees. Accordingly, the company executed the mortgage deed. Mr. Gandhi, however, urged that, even apart from this, the circumstances in which the mortgage deed came to be executed would themselves indicate that it could not be avoided as a fraudulent preference. Mr. R. M. Gandhi referred to the arguments of Mr. D. C. Gandhi in which he has stated that the directors of the company were threatened with prosecution and under the threat of prosecution they executed the mortgage deed. Mr. R. M. Gandhi, however, urged that, assuming that this submission is factually correct, yet, execution of the mortgage in favour of the Central Board of Trustees would not be. a fraudulent preference. Mr. Gandhi urged that, in order to avoid a transfer of property by a debtor in favour of the creditor on the ground of its being a fraudulent preference, it must be shown that the debtor with intent to prefer the creditor has transferred the property, and it must be a free and volitional act of the party. It refers to the state of mind of the debtor and it must be shown that the debtor intended to prefer the creditor or acted in a manner solely with a view to prefer the creditor to the exclusion of others. If, therefore, it could be shown that the debtor acted under an apprehension that he would be prosecuted or under a threat of prosecu tion, the transfer of property by him could not be said to be a free volitional act of the debtor disclosing an intention to prefer the creditor but it would appear that he has acted under the compulsion of the circumstances, may be of his own creation. Reference in this connection may be made to Sharp (Official Receiver) v. Jackson. In that case it was found that the trustee had committed breaches of trust and was insolvent, and, on the eve of his bankruptcy, he conveyed an estate to make good the breaches of trust, this transfer was sought to be avoided as fraudulent preference in a bankruptcy proceeding against a trustee. It was held that the transfer cannot be avoided as fraudulent preference because it was found that the trustee made the conveyance not with the intention or view or object whatever it may be called preferring any person in whose favour the transfer was made but for the sole purpose of shielding himself. In order to find out whether a transfer of property would amount to fraudulent preference, the question should be addressed whether it was done to prefer one of the creditors to the exclusion of others. If it was done not with a view to prefer one of the creditors but to save one's own skin, say a threat of prosecution looming large or to avoid prosecution, certainly the transfer could not in such circumstances be fraudulent preference. This decision has been followed in In re M. I. G. Trust Ltd. Reference may also be made to In re F. L. E. Holdings Ltd.  In that case a passage from Buckley on the Companies Acts, 13th Edition (1957), is quoted which shows that as preference implies selection and selection implies freedom of choice, a payment must in order to constitute a preference be voluntarily made, and that a payment made under pressure, e.g., in the shape of proceedings actual or threatened by the creditor concerned, or fear of such proceedings, is not for this purpose a voluntary payment. Viewed from this angle, the transfer by way of mortgage by directors in favour of the Central Board of Trustees would not prima facie appear to be fraudulent preference as it appears that it was done under the threat of imminent prosecution.

Recalling now the submission of Mr. Vakil that the company has been guilty of giving a number of fraudulent preferences they could not be investigated except in a winding up proceedings and, therefore, the scheme is not a proper alternative to winding up, does not carry conviction. The charges created by the decrees in favour of the five aforementioned creditors, which certainly call for investigation, have been set aside without having taken recourse to the proceeding in winding up and two mortgages one in favour of the Union Bank of India and the other in favour of the Central Board of Trustees of Provident Fund have prima facie no tinge of fraudulent preference. Therefore, it is not possible to accept the submission of Mr. Vakil that the fraudulent preferences given by the company would go unchallenged and uninvestigated, if the scheme is sanctioned.

Mr. Vakil further urged that apart from this fraudulent preference given by the directors there are several acts of mismanagement pointed out by the auditors in their report which cannot be investigated and brought to light except in winding up proceedings. The accounts of the company were not written from December, 1967, and they were completed during the course of the proceedings in the court. They have been audited by Messrs. Mahendra Patel & Company, Chartered Accountants, and their detailed report is placed on record. It is true that the auditors have stated that in view of the state of accounts they are not in a position to express opinion whether the accounts give a fair view in respect of the balance-sheet as on 31st March, 1968, and 29th July, 1968, and profit and loss accounts. They have also stated that they were not able to obtain all the information and the explanation which was necessary. They have also stated that the books of accounts have not been kept as required by law. They have also set out certain queries in their report. Those queries will have to be complied with by the Board of Directors that may come into existence if the scheme is sanctioned. But Mr. Vakil could not point out to me any specific case of either embezzlement or of fraud. A very general statement was made that there are several acts of mismanagement which must be investigated in winding up proceedings. Such an allegation is rather vague and devoid of details. On such a vague allegation, the scheme cannot be rejected. But it was urged that even the debt which the company owes to the aforementioned five creditors requires to be verified and checked up; and that also cannot be done, unless the official liquidator in winding up proceedings proceeds to verify the claims lodged with him by the creditor. In order to ascertain and verify the debts owed by the company to the aforementioned five creditors, one need not resort to the extreme provision of the winding up of the company. Those debts can be verified by an order of this court by the official liquidator as court officer, and such a direction can be given while sanctioning the scheme. As for the vehemence with which a grievance was made that there are several acts of mismanagement and misfeasance committed by the directors of the company that for the commercial morality and purity of administration of such a public company it is best to pass an order for winding up the company and investigate its affairs, it must be said that the last board of directors against whom Mr. Vakil with a very facile tongue and vituperative language made serious allegation came into the management of the affairs on 1st January, 1966, and prior thereto Mr. Chandulal Hiralal Banker, the constituted attorney of Mr. Vakil's client, was in active management of the company and even during that period the losses had mounted up to a considerable extent and a land deal in favour of one Bansidhar Private Limited prima facie appeared to be shady. The attitude adopted on behalf of Mr. Chandulal Banker totally fails to carry conviction in the matter and investigation, if need be made, should be made for a period much prior to 1st January, 1966, when Chandulal and Manubhai were in active management of the company. But these are hardly considerations on which it can be said that the scheme approved by a statutory majority is not a proper alternative to winding up. It is not possible, therefore, to accept the submission of Mr. Vakil that this scheme is a cloak put forth to cover the misdeeds of the directors because the cloak, if any, extends to the period when Chandulal and Manubhai were in active management of the company. It is true that if the court comes to the conclusion that the scheme is a cloak to cover the misdeeds of the company or is put forth with a view to shield the directors against the investigation into their mismanagement of the affairs of the company, the scheme cannot be accepted, only on the ground that it has been approved by the creditors and members. Reference in this connection may be made to In re Calcutta Industrial Bank Ltd., wherein it is observed that the creditors, left to themselves, do not appreciate the importance of many things unless it is brought to their notice. The object of having the affairs of the company investigated by an independent auditor was to bring all material facts relating to the management as well as the present financial position of the company to the notice of the creditors so as to enable them to make up their minds whether they should at all enter into any arrangement with such a company. Reference was also made to Pioneer Dyeing House Ltd. v. Dr. Shankar Vishnu Marathe.One of the grounds for opposing the scheme in that case was that the object of the scheme was to cover the deeds of the delinquent directors. It was observed that if the scheme is sanctioned, the winding up order will stand set aside, the liquidators will be discharged, there will be none to prosecute the misfeasance summons against the erring directors and the assets of the company will once again fall into the hands of persons whose rectitude is under a cloud; and that cannot be permitted under the cloak of a scheme of reconstruction. It would undoubtedly be so if the scheme is put forth as a cloak to cover the misdeeds of the directors. (But it will be a question of fact in each case as to whether it is so). In the aforementioned case the first scheme proposed was rejected and after a lapse of a period of ten years after the order for winding up was made another scheme was proposed which when examined disclosed a number of defects. In the facts and circumstances of this case, it does not appear that the scheme is put forth with a view to shield the directors of the company. When it comes to choosing between a scheme for reconstruction and an order for winding up after keeping all the circumstances of the case as also the question of commercial morality in view and if the scheme appears to be feasible and workable, it should be preferred to compulsory liquidation. The second contention of Mr. Vakil, therefore, cannot be accepted.

Re. Ground No. 3.—The third ground of attack was that the scheme proposes scrapping of Unit No. II and part of Unit No. I of the mill of the company and in the absence of a permission for scrapping a textile mills, it would be illegal to sanction the scheme. The scheme envisages scrapping of Unit No. II of the mills of the company. The mills of the company are divided into two units described as Unit No. I and Unit No. II. There are 501 looms and 13,488 spindles in Unit No. I and there are 308 looms and 23,160 spindles in Unit No. II. The scheme proposes that Unit No. I with 400 looms and 15,000 spindles should be restored and Unit No. II comprising the rest of looms & spindles and machinery should be scrapped. Scrapping of Unit No. II is an integral and inseverable part of the scheme because by scrapping the company hopes to realise Rs. 14 lakhs which would go towards the discharge of debts of the bank and the central board of trustees of the provident fund. Mr. Vakil urged that a textile mill cannot be scrapped without the permission of the Central Government. No provision or statute was pointed out to the court which would show that textile mills cannot be scrapped without the permission of the Central Government. But it was common ground that such a permission is essential before a textile mill can be scrapped. Mr. D. C. Gandhi for the petitioner urged that the company has obtained such a permission while Mr. Vakil strongly urged that there is no such permission. The company applied for such a permission and the letter of the Government of India, Ministry of Commerce, dated l/4th October, 1966, at page 175 of the record shows that such a permission was granted. It is stated in the letter that the Government of India have no objection to M/s. Maneckchowk & Ahmedabad Manufacturing Company Mills, Ahmedabad, being scrapped. If the matter were to rest with this letter, it would indisputably appear that the permission to scrap the whole mill which would enable the company to scrap a part of the mill was granted. Mr. Vakil however urged that this permission was cancelled and even the company has admitted that it was withdrawn and is no more effective and no fresh permission is applied for or obtained. In this connection Mr. Vakil first referred to the report of the court of inquiry constituted by the Government of Gujarat under section 100(1) of the Bombay Industrial Relations Act presided over by Mr. D. M. Vin which has inquired into some aspects concerning the company. The report of the court of inquiry is published in the Gujarat Government Gazette, Part I-L, dated 10th October, 1968. The company appeared in this inquiry and filed its statement, part of which is reproduced in the report. In para. 5 of the report it is stated that the Government of India, Ministry of Commerce, permitted scrapping of the mill but that permission was subsequently withdrawn at the instance of the Textile Labour Association. Relying on this statement of the company before the court of inquiry, it was urged that even according to the company the permission was withdrawn and no fresh permission is granted. Mr. D. C. Gandhi for the company urged that what is sought to be culled out from the report as an admission of the company is not accurate. Mr. Gandhi urged that the permission was at best kept in abeyance till April, 1967, and as no further order is made by the Government of India, the original permission became effective and is still effective. The letter of the Government of India at page 175 of the record shows that the permission to scrap the whole mill was granted. At that stage, the Textile Labour Association, which is a representative Union of the workers of this company, opposed the grant of such permission with the result that the Government of India, Ministry of Commerce, by its letter dated 15th December, 1966, informed the company that the question of scrapping of the mills of the company would be further examined and the decision conveyed by the letter of the Government of India dated l/4th October, 1966, by which permission was granted was to be held in abeyance till April, 1967. This letter of the Government of India is at page 389 of the record. If the decision of the Government of India granting permission was held in abeyance for a certain period and if no further order was made, cancelling or revoking the permission, obviously after the period having expired, the permission would be good and valid. It was, however, urged that a later query with the Government of India disclosed that no such permission as alleged by the company is granted. During the pendency of this petition Mr. Vakil for the contesting creditors addressed a letter to the Textile Commissioner on 29th November, 1968, inquiring whether the company has been granted permission to scrap the mill or any unit thereof or any prohibitory order has been issued against the company against scrapping the unit under the Cotton Textile Control Order, 1948. This letter of Mr. Vakil was forwarded by the Assistant Director to the Textile Commissioner,I.L. Section. Finally, by the letter from the office of the Textile Commissioner dated 23 rd December, 1968, Mr. Vakil was informed that the Government of India had not permitted the management of the Maneckchowk & Ahmedabad Manufacturing Company Limited to scrap their unit. These last three letters are at pages 318 to 320 of the record. Relying on these letters it was strenuously urged that no permission is granted or at any rate no valid permission is in force and if the permission is not in force or effective, Unit No. II cannot be scrapped and the very foundation of the scheme is knocked out. The contention appears to be entirely without merits. It cannot even be disputed that the Government of India by its letter dated 1/4th October, 1966, did grant permission to scrap the whole mills. This permission was to be held in abeyance as per the letter of the Government of India dated 15-12-1966 till April, 1967. The query of Mr. Vakil may have been directed to the Textile Commissioner and the reply of that office that no such permission is granted cannot be accepted in the face of the letter dated l/4th October, 1966. The period during which the permission was held in abeyance having expired and no order having been made either cancelling or revoking the permission, the permission would be good and valid and the company was justified in proceeding on the basis that it has got a valid permission to scrap Unit No. II. It may incidentally be mentioned that the permission was held in abeyance on an objection raised by the Textile Labour Association representing the workers of the company. The Textile Labour Association has entered into an agreement with the company and has accepted the scheme; when the Textile Labour Association accepted the scheme it is implicit that it agrees to scrapping of Unit No. II which would result in discharge of some of the workmen, yet, the textile Labour Association does not raise any objection to the scrapping of Unit No. II. Therefore, also, it appears crystal clear that the permission for scrapping Unit No. II is good and valid and would be effective. Further, it may be mentioned that Mr. B. R. Shah, learned Assistant Govt. Pleader, appearing for the State of Gujarat, relying on the relevant files of the industries department, made a statement to the court that there is nothing on the record of the Government that permission granted by the Government of India is cancelled or set aside or withdrawn.

It is, therefore, not possible to accept the submission of Mr. Vakil that there is no valid permission for scrapping Unit No. II and scrapping of Unit No. II being an integral part of the scheme, the scheme cannot be sanctioned.

Re. Ground No. 4.—The next ground of attack of Mr. Vakil is that the proposed scheme envisages reorganization of the share capital of the company including reduction and increase of share capital, which cannot be done without going through the whole gamut of the procedure prescribed for the same and, as it is an inseverable part of the scheme, it would be futile to sanction the remainder of the scheme in its mutilated form. It is undoubtedly true that the scheme envisages reorganization of the share capital of the company. The share capital of the company is at present divided into 788 ordinary shares of each of Rs. 1,000 and 1,050 preference shares each of Rs. 100 fully paid. The scheme envisages reduction of share capital by REDUCING the face value of the ordinary shares of Rs. 1,000 to Rs. 250 and preference shares of Rs. 100 to Rs. 25. The scheme also envisages fresh issue of share capital by converting 50 per cent, of the claim of the creditors by issue of fresh shares. As a necessary corollary the authorised, issued and subscribed share capital of the company would be increased. Thus the scheme envisages reorganization of the share capital of the company. There are certain specific provisions in the Companies Act which prescribe the procedure for the reduction of the share capital and for increase of the share capital. The issue of fresh share capital is governed by the Capital Issues (Control) Act, 1947. The contention of Mr. Vakil is that, as part of the scheme it is not open to the court to sanction reorganization of the share capital which includes reduction, increase and issue of fresh capital. It was urged that if the scheme of compromise and arrangement envisages reorganization of share capital, it cannot be sanctioned as part of the scheme and the provision of the Companies Act which prescribe the procedure for reduction of share capital and increase of share capital and issue of fresh capital must be specifically and strictly complied with. On the other hand, it was urged by Mr. Gandhi that section 391 provides a complete code for the reconstruction of the company which may include reorganization of its capital as part of the scheme of compromise and arrangement. In other words, it was urged that if the scheme of compromise and arrangement includes in its ambit reorganization of the share capital then it can be carried out as part of the scheme of compromise and arrangement and it is not at all necessary to go through the whole gamut of the procedure prescribed for the reduction of share capital and for issue of fresh capital. There seems to be considerable force in the contention of Mr. Gandhi that section 391 is a complete code. It provides for a scheme of reconstruction and amalgamation of companies. The scheme of reconstruction of a company may also include a compromise and arrangement between the company and its creditors or any class of them or between the company and its members or any class of them. Section 390(b) provides that the expression "arrangement" as used in sections 391 and 393 includes a reorganization of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods. It is an inclusive definition. It was attempted to be urged that the arrangement herein defined does not include increase of share capital, so also it does not include reduction of share capital even though a specific provision is made as to what procedure would be gone through when the scheme of compromise and arrangement provides for reduction of share capital. Rule 85 of the Companies (Court) Rules, 1959, provides that where a proposed compromise or arrangement involves a reduction of capital of the company, the procedure prescribed by the Act and the Rules relating to the reduction of capital and the requirements of the Act and these Rules in relation thereto shall be complied with, before the compromise or arrangement, so far as it relates to reduction of capital, is sanctioned. If section 391 were not to be treated as complete code and if it is intended that various things that can be done by way of a scheme of compromise and arrangement, if they were to fall under different provisions of the Companies Act which prescribe certain procedure for doing the same and that procedure has to be gone through, it was not necessary to provide specifically that if the scheme of compromise and arrangement includes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in rule 85. A scheme of compromise and arrangement may be between company and creditors or between the company and members. If the proposed scheme offers compromise or arrangement between the company and its members only and it envisages reducti6n of share capital which can be carried out as part of the scheme under section 391 without going through the procedure prescribed under section 100 onwards, it may be that reduction of share capital in a given case may adversely affect the creditors and the creditors would have no chance to object to the same. It is manifestly clear that reduction of share capital in certain circumstances may adversely affect the creditors but if reduction of share capital is brought about as part of the scheme of compromise and arrangement between the company and its members yet as this prescribed procedure for affecting reduction of share capital has to be gone through even though it forms part of a scheme of compromise and arrangement, the creditors will have a chance to object to the same if it adversely affects them. Such would not be the case where the capital is increased or the rights of various classes of shareholders are altered or changed. The reorganization of capital as envisaged in section 390 would certainly include increase and reduction of share capital, but reduction of share capital can be brought about by arrangement between the company and members yet it will have direct impact on the creditors and therefore a specific provision is made in rule 85 that even if reduction of share capital is to be effected as part of the scheme of compromise and arrangement, the procedure prescribed for reduction of share capital in the Companies Act and the Rules must be gone through before the scheme is sanctioned. This specific provision would indicate that other things such as increase of share capital simpliciter when sought to be carried must be done according to procedure prescribed for the same. It can also be done as part of a scheme of compromise and arrangement and the result can be achieved by following the procedure prescribed in section 391. Section 391 provides a complete code of putting through a scheme of compromise and arrangement which may even include reorganisation of share capital subject to the well recognized exception that if reorganization of share capital included reduction of share capital, the prescribed procedure for effecting the same must be gone through in view of rule 85 before the scheme could be sanctioned. If rule 85 were not enacted, obviously, reduction of share capital could have been effected as part of the scheme of compromise and arrangement without going through the procedure prescribed in section 100 onwards. The very fact that a specific rule had to be enacted for this purpose indicates that section 391 is a complete code providing for all those things which can be included in a scheme of compromise and arrangement and all those things can be brought about by the procedure prescribed in section 391 onwards. The nature of compromise that can be entered into under section 391 is not defined. The definition of reorganization of capital is an inclusive definition which would not exclude reduction of share capital or increase of share capital which would also be a kind of reorganization of the share capital of a company. If section 391 was subject to other provisions of the Act every time the scheme of compromise and arrangement is put forth for the sanction of the court, if it includes things for which specific provisions are made and that will have to be gone through before the scheme is sanctioned, it would result in unnecessary duplication of procedure and would be cumbersome. On the contrary, it appears that if the creditors and members of the company arrive at a certain compromise which the court considers fair, it can be sanctioned under section 391 despite the fact that for some of those things included in the compromise another procedure is prescribed in the Companies Act and which has not been carried out. It, therefore, appears that section 391 is a complete code which provides for sanctioning of the scheme of compromise and arrangement. If such a scheme of compromise and arrangement includes increase of share capital, it can be done as a part of the reorganization of the share capital, which would be part of the arrangement that would be brought about between the company and its members. In case of reduction of share capital, in view of rule 85, the procedure prescribed under section 100 and onwards will have to be gone through. Looking at the matter from a slightly different angle, it appears that section 391 is a special provision for sanction of a scheme of reconstruction of companies, of amalgamation of companies and for a scheme of compromise and arrangement. The scheme of compromise and arrangement, or for that matter even the scheme of amalgamation of two companies, may envisage reorganisation of share capital of one or the other company. The Companies Act no doubt makes provision for reduction of share capital simpliciter, increase of share capital simpliciter, or fresh issue of capital simpliciter without its being part of any scheme of compromise and arrangement. The scheme of compromise and arrangement can be brought about only between the company which is liable to be wound up under the Companies Act and its members or creditors. The special provision contained in section 391. namely, sanction of the scheme of compromise and arrangement would in my opinion exclude general provisions for reduction of share capital or for issue of fresh capital. It is well settled that a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where the special provision does not apply: vide South India Corporation (P.) Ltd. v. Secretary Board of Revenue and C. Rajagopalachari v. Corporation of Madras, Therefore, it appears that the provisions contained in section 391 is a complete code. As a necessary corollary, if the scheme of compromise and arrangement includes reorganization of share capital except reduction of share capital, it can be sanctioned as a part of the scheme of compromise and arrangement. In the case of reduction of share capital as part of the scheme of compromise and arrangement, rule 85 will have to be given full effect. The scheme has been approved by a statutory majority as will be presently pointed out and if the scheme is to be sanctioned as part of such a scheme, reorganization of the share capital except the reduction of share capita] can be sanctioned. It will, of course, be necessary to find out whether the procedure prescribed for effecting reduction of share capital has been gone through or not.

The reorganization of the share capital sought to be effected by the scheme involves reduction of share capital, issue of fresh share capital and increase of share capital. It will be proper to dispose of first the question with regard to increase and issue of fresh capital. The memorandum of association of the company shows that the issued and subscribed capital of the company consisted of 788 ordinary shares each of Rs. 1,000 and 1,050 redeemable cumulative preference shares of Rs. 100 each. Thus the total issued and subscribed capital was Rs. 8,93,000. The preference shares were redeemable cumulative preference shares. Article 10 of the company's articles of association provides that the company may by ordinary resolution in general meeting alter the conditions of its memorandum by increase of its share capital, by such amount as it thinks expedient by issuing new shares as may be necessary. The company can also divide and consolidate its shares. Thus the company has reserved powers to itself to increase the share capital by ordinary resolution in a general meeting. Now, when share capital is increased and fresh shares are issued, such issue would be governed by section 81. Section 81 provides that such fresh issues should be offered to persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date. The procedure for making the offer is also set out in section 81(1). It was urged that even if it be assumed that the company has power to increase the share capital, fresh share capital can be issued only to the existing shareholders in proportion to the capital paid up on those shares on that date. The scheme envisages increase of share capital by converting 50 per cent, of the claim of the unsecured creditors into paid up share capital at the reduced value of shares. It is no doubt a fresh issue of capital to persons other than existing shareholders and it would also result in increase of capital; the company having power to increase its capital can further issue capital but it is urged that it can be done in the manner provided in section 81(1) and, if the scheme is sanctioned, it would result in contravention of section 81(1). Sub-section (i A) of section 81 provides as under:

"81. (1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons (whether or not those persons include the persons referred to in clause (a) of sub-section (1)) in any manner, whatsoever—

(a)    if a special resolution to that effect is passed by the company in general meeting, or

(b)    where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies arc allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the board of directors in this behalf, that the proposal is most beneficial to the company."

There is a similar provision in article 15 of the articles of association of the company. It would appear that sub-section (1A) permits issue of further shares to persons other than the existing ordinary shareholders of the company. It cannot, therefore, be said that issue of further shares to the persons other than the existing shareholders of the company is wholly barred. It would only require special resolution to that effect passed by the company in the general meeting. If, therefore, a special resolution for issue of further shares after increasing the capital to persons other than the existing shareholders of the company is passed in a general meeting of the company, section 81 would not be contravened. In the present case, the scheme provides for issue of further shares and these further shares are to be issued to the persons other than the existing shareholders of the company. The further shares are to be issued to the creditors of the company in satisfaction of the 50 per cent, of their claims. Mr. Vakil urged that before sub-section (1A) of section 81 can come into play, it must be shown that the special resolution has been passed in the general meeting of the company. Mr. Vakil urged that the meeting of the company to be a general meeting must be of all the members of the company entitled to attend and vote and the resolution to be a special resolution must satisfy all the requirements of section 189 of the Companies Act. It was urged that if the members of the company did not meet together at one place to consider the resolution but divided themselves and met in two separate meetings, it cannot be said that the proposal for further issue of shares was considered in the general meeting of the company. There are two classes of members of the company. They are: (1) holders of ordinary shares; and (2) holders of redeemable cumulative preference shares. Article 5(b) of the articles of association of the company provides that the cumulative preference shares shall not entitle the holders thereof to be present at or to vote either in person or by proxy at any general meeting of the company unless a resolution is to be passed affecting their rights or privileges. Further issue of ordinary shares would not affect the rights or privileges of the holders of the preference shares. Therefore, if article 5(b) were to apply, the holders of the cumulative preference shares had no right to attend and vote at any general meeting. The general meeting of the company would be a meeting of ordinary shareholders of the company. Indisputably, such a meeting has been held and therein the scheme has been voted upon which includes issue of further shares. But it was urged that as the interest for more than two years payable on redeemable cumulative preference shares is in arrears, section 87(2)(b)(i) and article 119(b)(i) of the articles of association of the company would come into play and they would have a right to attend and vote at every general meeting. That of course is true. The question then is if the holders of the preference shares met in a meeting separate from the meeting of the ordinary shareholders and in each meeting the proposal for further issue of shares was considered and voted upon by a majority of 75 per cent, of members present and voting, could it be said that special resolution has been adopted? It was very vehemently urged that the concept of a general meeting connotes consensus or meeting of minds and joint deliberation and that would be lacking in group or class meetings. It was urged that to interpret the concept of general meeting otherwise would permit the company to consult each individual shareholder to consider the proposal denying the benefit of joint deliberations and even if all shareholders agree to the proposal it cannot be said that there was a meeting of the minds which is of the essence of a general meeting. It was, therefore, urged that the meeting of a class of members and general meeting of all members are two distinct things. In my opinion, what is of the essence of the matter is that the persons affected must have an opportunity to consider the proposal and deliberate together. If the deliberations are carried on by two distinct classes having distinct interests separately it cannot be said that the proposal has not been considered in a general meeting. A too narrow and strict view may necessitate first convening the meeting of two classes together and then for the purpose of the scheme separate meetings of each class. It, in my opinion, would be an idle formality. It would be more so on the facts of this case because preference shareholders were not ordinarily entitled to attend and vote at the meeting but for the eventuality that the interest payable on preference shares is in arrears. Therefore, in my opinion, it cannot be said that the resolution adopted was not adopted at a general meeting. Even if it be said that joint deliberation of all those who are entitled to participate in the meeting is of the essence of a general meeting, it cannot be said that two classes of persons one of whom in ordinary circumstances was not entitled to attend the meeting deliberated in a different meeting and both adopted the same resolution, there was no joint deliberation. In fact when one class of members are likely to overwhelm the other class, to safeguard the interest of the other class, deliberations are held in separate meetings, but a common resolution is adopted by both the meetings and in each meeting it was passed with statutory majority. It can never be said that the resolution was not adopted at a general meeting. Reference was made to Sharp v. Dawes. In that case a meeting was called by the secretary and only one shareholder attended, where a resolution was adopted making a call on the share and pursuant to this resolution a call was made which was challenged. It was held that one shareholder cannot constitute a meeting. I fail to see how this observation is of any use in the present case.

The question then is whether the requirements of a special resolution are satisfied. Section 189 of the Companies Act provides as to which resolution could be said to be a special resolution and in what manner it should be passed. Sub-section (2) thereof provides that the special resolution could be said to have been passed when the votes cast in favour of the resolution are three times the number of votes, if any, cast against the resolution— meaning thereby that it must be passed by 75 per cent, majority of the members present and voting. The notice convening the meeting at which the resolution is passed should be given 21 clear days before the date of the meeting as required by section 171. In the notice convening the meeting, intention to move the resolution as a special resolution should be specifically set out and explanatory note should be annexed thereto. In order to be a special resolution, the aforementioned conditions have to be complied with. The notice convening the meeting was issued on 3rd September, 1968, and the meeting was to be held on 5th and 6th October, 1968. The proposed scheme of compromise and arrangement in respect of the company was annexed to the notice and it was specifically set out in the scheme that the face value of the ordinary shares will be reduced from Rs. 1,000 to Rs. 250 and of the preference shares from Rs. 100 to Rs. 25 and thereafter 50 per cent, of the claim of the unsecured creditors will be coveted into share capital by issue of further shares to unsecured creditors. In the notice convening the meeting it was stated that the meeting is specifically convened to consider the proposed scheme and to approve the same with or without modification. The production programme after the mill is restarted along with the production estimate and cash flow statements were also annexed to the notice convening the meeting. Thus the notice convening the meeting gave information to the members that the meeting is being convened for considering the proposed scheme which included both reduction and increase of share capital. The votes cast in favour of the resolution approving the scheme were more than three times the votes cast against it. Therefore, sub-clauses (b) and (c) of sub-section (2) of section 189 are strictly complied with. It was, however, urged that clause (a) is not properly complied with inasmuch as in the notice convening the meeting, intention to move the resolution as a special resolution was not set out. Taking a very strict view of sub-section (2)(a) of section 189, it might appear that the requirement therein contained is not properly complied with. The question then is whether clause (a) is mandatory in terms or it is merely directory. If it is mandatory, different considerations might arise. If it is held to be directory, the doctrine of substantial compliance would come into play. It is not inconceivable that part of the section may be directory and part of the section may be mandatory. It cannot be gainsaid that clauses (b) and (c) of sub-section (2) are certainly mandatory. The notice of certain duration must be given and resolution must be adopted by a statutory majority. This requirement could, by no stretch of imagination, be said to be directory; otherwise sub-section (2) may lose all its significance. Even giving of notice may be said to be mandatory. But the question is whether failure to set out in the notice convening the meeting to move a particular resolution as a special resolution could be said to be mandatory. There is no general rule for determining whether particular provision in a statute is a mandatory or directory. The court must look at the purpose for which the provision is made, its nature and intention of the legislature in making the provision, to find out whether it is directory or mandatory. The use of the word 'shall' is not decisive of the matter. In Raja Buland Sugar Co. Ltd. v. Municipal Board, Rampur, the Supreme Court has in this connection observed as under:

"The question whether a particular provision of a statute which on the face of it appears mandatory—inasmuch as it uses the word 'shall' as in the present case—or is merely directory cannot be resolved by laying down any general rule and depends upon the facts of each case and for that purpose the object of the statute in making the provision is the determining factor. The purpose for which the provision has been made and its nature, the intention of the legislature in making the provision, the serious general inconvenience or injustice to persons resulting from whether the provision is read one way or the other, the relation of the particular provision to other provisions dealing with the same subject and other considerations which may arise on the facts of a particular case including the language of the provision, have all to be taken into account in arriving at the conclusion whether a particular provision is mandatory or directory."

In that case section 131(3) of the U. P. Municipalities Act came up for consideration. Section 131(3) is divided into two parts. The first part lays down that the Board shall publish proposals and draft rules along with a notice inviting objections to the proposals or the draft rules so published within a fortnight from the publication of the notice. The second part provides for the manner of publication and that manner is according to section 94(3). The condition of prior publication is always held to be mandatory. Yet, while considering the question of non-compliance with the manner of publication as provided in section 94(3), the Supreme Court observed that the requirement of publication is mandatory but the manner of publication appears to be directory and, so long it is substantially complied with, that would be enough for the purpose of providing the taxpayers a reasonable opportunity of making their objections. It would thus appear that part of section 131(3) was held to be mandatory while part of it was held to be directory. Approaching the subject from this angle, it would appear that clause (a) of sub-section (2) appears to be directory and not mandatory. The purpose behind making this provision appears to be to convey definite information about matters to be considered at the ensuing meeting. The explanatory note to be annexed will enable members to understand and appreciate the object behind the proposed resolution. The intention being a state of mind in this case the state of mind of a corporate body is required to be set out for the benefit of the members of the corporate body. The question then is whether the requirement of setting out this intention in the notice could be said to be such mandatory requirement, the failure to comply with it would invalidate the resolution. The purpose behind enacting this provision and its nature and the intention of the legislature and the general inconvenience that the failure to observe it is likely to cause to members all go to show that the requirement to set out the intention to move a resolution as special resolution could not be mandatory. The resolution ought to be adopted as special resolution and that requirement is mandatory. But the setting out of the requisite intention in the notice convening the meeting could not be mandatory but only directory. The absence of requisite intention in the notice was not likely to cause serious inconvenience to the members. Considering the provision in juxtaposition with clauses (b) and (c), it appears that the provision contained in clause (a) is directory and it is sufficient if it is substantially complied with.

The notice convening the meeting to which the proposed scheme was annexed and various statements including the statement under section 393 (1)(a) annexed to it would give sufficient information to the members that they have to consider both increase and reduction in share capital. That, in my opinion, would be substantial compliance with the provisions contained in sub-section (2)(a) and provisions contained in sub-sections (2)(b) and (2)(c) are strictly complied with. Therefore, the resolution adopted will have all the trimmings of a special resolution and it can be said with reasonable certainty that a special resolution at a general meeting as envisaged by clause (1A) of section 81 has been adopted. If such a resolution is adopted further issue of shares to persons other than the members of the company would be legal and valid even though it's done in contravention of the provisions contained in section 81(1).

Incidentally it was contended that even if the special resolution was adopted at a general meeting as provided by section 81(1A), yet notice of that meeting was not given to the auditors as required by section 172(2)(iii) and the explanatory note as provided under section 173(2) was not annexed to the notice and, therefore, the resolution could not be said to have been adopted as a special resolution. Sub-section (3) of section 172 provides that the accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it should be given shall not invalidate the proceedings at the meeting. Non-issue of the notice to the auditors, in my opinion, would be covered by sub-section (3) of section 172. As for the explanatory note as envisaged by section 173(2) it must be stated that the whole scheme annexed to the notice and production and cash flow statement and statement under section 393(1) would provide sufficient material as to be an adequate substitute for explanatory statement as envisaged by section 173(2) and, therefore, also, the proceedings of the meeting would not be invalid or proceedings would not be vitiated.

The above discussion would establish that the resolution for increasing the share capital of the company has been adopted in a general meeting of the members of the company and the resolution satisfies all the requisites of a special resolution. It would appear that the requirements of section 81(1A) of the Companies Act are fully satisfied and it would be lawful for the company to issue further ordinary shares as part of the scheme to both holders of ordinary shares and persons other than present holders of ordinary shares of the company but all of whom should be unsecured creditors of the company and further shares should be issued only in satisfaction of 50 per cent, of the claim of each unsecured creditor.

It was next contended that the issued and subscribed capital of the company would be raised by roughly Rs. 39 lakhs by converting 50 per cent, of the claims of the unsecured creditors into share capital and that would be in contravention of section 3 of the Capital Issues (Control) Act, 1947. It is indeed true that fresh capital cannot be issued without the permission of the Controller of Capital Issues as provided by section 3 of the said Act. The scheme envisages increase of capital by roughly Rs. 39 lakhs. Permission for issue of fresh capital is not obtained from the Controller of Capital Issues. However, that should not come in the way of the court considering the scheme because that part of the scheme can come into operation after obtaining the permission of the Controller of Capital Issues. That was the view taken by me in a similar situation in In re New Commercial Mills Co. Ltd. and I am informed that necessary permission by the Controller of Capital Issues was obtained soon after the scheme was sanctioned by the court.

The second ground of attack of Mr. Vakil under the head of reorganization of share capital is that the company would be issuing fresh shares at a discount in contravention of section 79 and the court should not, therefore, sanction the scheme. The contention is entirely without merits. Section 79 provides that a company shall not issue shares at a discount except as provided in sub-section (2) thereof. Sub-section (2) provides that a company may issue shares at a discount if the issue is authorised by a resolution passed by the company in general meeting and sanctioned by the court and the resolution specifies the maximum rate of discount (not exceeding 10%, or such higher percentage as the Central Government may permit in any special case) at which the shares are to be issued and not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business and the shares should be issued within two months after the date on which the issue is sanctioned by the court. Mr. Vakil urged that 50 per cent, of the claims of the unsecured creditors are to be converted into shares; in other words, 50 per cent, of the claims of the unsecured creditors will be paid in the form of shares. Mr. Vakil had twofold objection to the issue of shares in this manner. The first limb of the argument was that, even according to the company, if the company is wound up, the unsecured creditors are likely to get nothing and their claims are merely chose-in-action which are entirely worthless in respect of which shares of Rs. 250 fully paid up will be issued in proportion to the claims and the shares would thus be issued at a discount. The other limb of the argument was that the shares are issued otherwise than for cash because they would be in payment of claims which cannot be realized. Reliance was placed on a statement in the affidavit of the petitioner that in the event of the winding up the unsecured creditors are not likely to get anything looking to the assets and liabilities of the company and the claim of the secured creditors and preferential creditors. Undoubtedly there is a statement to that effect in the affidavit of the petitioner. Does it necessarily imply that if the shares are issued against the claim of the unsecured creditors, the issue is either at a discount or for no consideration? It will be presently pointed out that in order to write off the loss of capital the share capital is being reduced by reducing the face value of ordinary shares of Rs. 1,000 fully paid up to Rs. 250 fully paid up and cumulative redeemable preference shares of Rs. 100 fully paid up to Rs. 25 fully paid up. After the reduction of the face value, the shares will be allotted and issued to the unsecured creditors in satisfaction of 50 per cent, of their claims. For every ordinary share of Rs. 250 issued, the claim of the unsecured creditors exactly to that extent will be wiped out. Unless an idle formality of the company paying Rs. 250 cash towards discharge of the liability of the unsecured creditor and then every unsecured creditor buying the shares of the company is to be insisted upon, it can never be said that the issue is either at a discount or for no consideration or for consideration otherwise than cash. In fact for every ordinary share of Rs. 250 issued, the liability of the company to the unsecured creditor would be proportionately decreased and wiped out. In other words, the company will get Rs. 250 for a share of Rs. 250. But it was urged that even a share of Rs. 250 of this company would not fetch anything in the market and when it is issued for a consideration of Rs. 250 to unsecured creditors the issue is based on misrepresentation. There again, I see no substance. A majority of unsecured creditors of the company, except very few represented by Mr. Vakil, have approved the scheme and thereby agreed to accept the ordinary share of this company of Rs. 250 as against his claim of Rs. 250. There is no misrepresentation involved in such a transaction. The statement of the petitioner that in the event of the company being wound up the unsecured creditor is not likely to realise anything cannot be the foundation for a submission that as the claim is merely a chose-in-action and entirely worthless it cannot provide consideration for issuance of the shares of the company nor could it be the foundation for a submission that the shares are issued for a consideration otherwise than cash or for no consideration. In this connection, it was lastly urged that, even though new ordinary shares issued at Rs. 250 would be fully paid up share, yet, in the event of the company being wound up, the liquidator would certainly inquire if anything was paid by the holder towards the share of Rs. 250 and in that event if his finding that the claim that was set off against the issue of shares was entirely worthless or of no value it would be open to the liquidator to treat such shareholder as contributory and to insist upon his contributing Rs. 250 into the assets of the company. Reliance in this connection was placed on In re Anglo-Moravian Hungarian Junction Railway Company In that case one Dent, a subscriber to the memorandum of association of a limited company, subscribed for 100 shares. The articles of association recited that Even, who assigned the concession to the company, had agreed to cause fully paid up shares to be allotted to all the persons subscribing the memorandum. Subsequently £ 4,000 fully paid up shares were issued to Even for work done by him for the company and Even requested the company to allot 100 shares out of the same to Dent. Subsequently the company was ordered to be wound up and the official liquidator placed Dent on the list of contributories for 100 shares and made calls upon him to pay the amount. The contention of Dent was that the shares allotted to him were fully paid up shares and, therefore, he was not liable to pay anything as contributory. His further contention was that even though he had subscribed for 100 shares, as the shares were allotted to him at the instance of Even and that the shares were fully paid up shares, he was not liable to pay as a contributory. Negativing this contention it was held as under:

"........ where a man, by subscribing to the memorandum of association

contracts a liability to pay to the company the full amount of his shares, and by another contract agrees to receive a certain number of paid-up shares, so that he is to have two sets of shares, one on which he is to be liable, and one on which he is not to be liable, he cannot extinguish his liability on the shares for which he has subscribed by setting off against it that which, although it might be valuable to him, would not increase the capital of the company and cannot therefore be assumed to be an equivalent, in money's worth, to the payment of his shares."

In fact the present case is simpler in which the company proposes to issue shares to unsecured creditors in satisfaction of its liability. Issue of one share of Rs. 250 fully paid-up to an unsecured creditor would go to discharge an equivalent amount of debt owed by the company to the unsecured creditors. Such an arrangement brought about between the company and its creditors and members cannot be contested on hypothetical submission that the share has no value in the market nor the claim could ever be realised in the event of winding up. In fact the arrangement as proposed here is quite legal and valid and that also becomes evident from the further observations from the judgment quoted above. The relevant observation is as under:

"The previous agreements between Even and the company are all before the court, and I find that in the particular agreement referred to, which is dated the 19th September, 1865, certain persons who are subscribers to the memorandum of association, being creditors of the contractor for work and labour done, or money advanced for preliminary expenses in respect of which he had a claim upon the company, are to be paid what is due from him to them in paid-up shares of the company; and I do not say that the court would not give effect to such an arrangement. I must not be understood as deciding, to the prejudice of any of those persons, that if they were really creditors of the contractor for matters for which he was entitled to be paid by the company, they might not receive under those documents their payment in paid-up shares, and have those shares attributed to their subscription to the memorandum of association; the effect being, to discharge" the company from an equivalent amount of debt, due from the company to the contractor."

This is exactly the position in the case before me. For each share issued to the unsecured creditor the liability of the company for the amount equivalent to the face value of the share would stand discharged or the company would be discharged from equivalent amount of debt due from the company to the unsecured creditor. Such arrangement, in my opinion, is quite legitimate and can be the subject-matter of compromise and arrangement between the company and its members and creditors and, if it is otherwise reasonable and fair, must be given effect to At any rate, it cannot be thrown out on the ground that on the one hand the share would fetch no price if it is sold in the market and the claim of the creditor being a chose-in-action has a debatable value or is of no value. Reference in this connection may be made to the Ooregum Gold Mining Co. of India Ltd. v. George Roper and Charles Henry Wallroth. At page 136, their Lordships have observed that a company is free to contract with an applicant for its shares; and when he pays in cash the nominal amount of the shares allotted to him, the company may at once return the money in satisfaction of its legal indebtedness for goods supplied or services rendered by him. That circuitous process is not essential. It has been decided that under the Act of 1862, share may be lawfully issued as fully paid up for consideration which the company has agreed to accept as representing in money's worth the nominal value of the shares. At another stage, it has been observed that not only may a share be allotted as fully paid up in respect of property, goods or services received by the company, but the courts will not inquire into the adequacy of the consideration, and certainly have not required it to be proved that the consideration given was equivalent in cash value to the nominal amount of the shares. Reference may also be made to Hilder v. Dexter. In that case, the company raised necessary working capital by issue of one-half of the share capital for cash, the other half being used for the purpose of payment in shares credited as fully paid up for the concessions to be purchased by the company. Of course, after referring to the sections of the English Companies Act, the court reached a conclusion that a transaction of this nature is not prohibited; but the important observation was that in such a transaction the shares so issued could not be said to have been issued either at a discount or for consideration other than cash. Reference was also made to Madanlal Fakirchand Dudhedia v. Shree Changdeo Sugar Mills Ltd. The subject-matter of dispute in that appeal before the Supreme Court was with regard to the agreement between the promoters and the company for paying them certain commission out of the net profits of the company. I fail to see how any portion of that judgment helps in deciding the controversy in the present case.

In view of the aforesaid discussion, in my opinion, the further issue of shares to unsecured creditors in satisfaction of their claims as provided in the scheme cannot be said to be issue of shares either at a discount or on misrepresentation or for no consideration or for consideration other than cash.

That takes me to the last attack under the head "reorganization of share capital", namely, that the scheme envisages reduction of share capital and that cannot be done without following the procedure as prescribed in section 100 onwards of the Companies Act, even if it be done as part of the scheme. I have already pointed out above that reorganization of the share capital can be carried out as a part of a scheme of compromise and arrangement under section 391 without following the whole gamut of the procedure prescribed for the same in other parts of the Companies Act. However, rule 85 makes a special departure in case of reduction of share capital when it is to be carried out as part of the scheme of compromise and arrangement. Rule 85 which I have already referred to earlier, provides that when reduction of share capital is to be effected as part of a scheme of compromise and arrangement, procedure prescribed for the same in the Companies Act and Rules should be carried out as stated earlier. This provision is made for very good reasons. It unmistakably indicates that reorganization of share capital can be brought about as part of the scheme of compromise and arrangement. But even if it is to be done as part of the scheme of compromise and arrangement this special provision in rule 85 enjoins a duty to carry out the procedure contained in section 100 onwards of the Companies Act. Ordinarily, reduction of share capital affects members of the company and it can be brought about by a compromise or arrangement between the company and its members ignoring the creditors. Now, if reduction of share capital involves repayment of a part of paid up capital or extinguish or reduce the liability on any of the shares in respect of unpaid share capital it would adversely affect the creditors. Yet the creditors would have no voice in the matter. If the procedure as provided in section 100 onwards has got to be carried out the court could not sanction reduction of share capital unless the creditors are heard and provision is made for the creditors who object to the reduction. However, if the reduction of share capital does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up capital, the court can sanction the same without reference to the creditors. The creditors in such a case would not even be entitled to object to the proposed reduction as provided in section 102. In the instant case, admittedly, the reduction of share capital is by way of cancellation of share capital which is lost or is unrepresented by available assets. In such a case, creditors, even in a reduction simpliciter, are not entitled to object and it makes no difference if reduction is brought about by following the procedure prescribed in section 100 onwards or by way of a scheme of compromise and arrangement. Thus, if it can be done in a given set of circumstances as part of a scheme of compromise and arrangement, it has been properly done in this case and while sanctioning the scheme ipso facto the reduction of share capital ought to be confirmed.

I am however prepared to proceed on the assumption that even if the proposed scheme of compromise and arrangement envisages reduction of share capital which is lost or is unrepresented by available assets the same cannot be done except by following the procedure specifically prescribed in section 100 onwards of the Companies Act. It is, therefore, necessary to find out whether the procedure therein prescribed has been carried out by the company or not. There is nothing objectionable in the company proposing a scheme of compromise and arrangement simultaneously proposing reduction of share capital and both can be considered and approved simultaneously. This is borne out by the observations in In re Tata Iron and Steel Co. Ltd. In that case it was contended that the scheme which effects alteration in the memorandum or articles of association without proceedings having been taken under the Act in the manner laid down by the Act for the purpose of effecting such an alteration cannot be sanctioned unless separate proceedings are taken for alteration in the memorandum and articles of association. Negativing this contention, it was held that where the Act lays down express procedure for altering the memorandum it is doubtful whether it is not necessary to follow that procedure before applying for sanction under section 120, but where that is not so, the court can under section 120 sanction the scheme which alters the memorandum. In In re Katni Cement and Industrial Co. Ltd. a scheme of amalgamation was proposed between the said company and merger of all the cement companies to be named as Associated Cement Companies Ltd. Before this merger could be made it became necessary to reorganize the share capital and alter the rights conferred by the memorandum of association upon different classes of shareholders in the capital of the said company. This was proposed as a part of the scheme of amalgamation under section 153 of the Companies Act, 1913, which is pari materia with section 191 of the Companies Act, 1956. It is observed that the court under section 153 can sanction a scheme, even though it involves acts which, apart from such provisions, would be ultra vires the company; but this rule is subject to the limitation that if the Companies Act contains express provision enabling the doing of any act in a particular way, the provisions of the enabling section, and not those of section 153, must be followed. Relying on this observation, it was urged that if there is provision for effecting' reduction of share capital, it must be followed to the exclusion of section 391. Reference was also made to Bengal Bank Ltd. v. Suresh Chakvavarthy, wherein it has been observed that a scheme involving reduction of capital must be carried out in accordance with the statutory provisions relating to reduction. Reference was also made to In re Bharati Central Bank Ltd. wherein it has been observed as under:

"....where the Act expressly prescribes a special procedure for reduction of capital, e.g., by section 55 and the several sections following it, a scheme involving a reduction of capital, such as the one now before me does, cannot be sanctioned unless the procedure for reduction of capital has also been followed. Form No. 774 in Palmer's Company Precedents, 15th edition, Part I, page 1264, shows that the reduction of capital and scheme may be considered by the shareholders at one and the same meeting and separate meetings are not necessary and that the court may, by one and the same order, sanction a scheme in conjunction with reduction of capital, that is to say, under section 55 confirm the special resolution for reduction of capital, and, under section 153, sanction the scheme. If, however, the requirements of section 55 and other sections have not been complied with, the court may direct the application for sanction to stand over in order to enable the company to advertise the petition and otherwise comply with the requirements of the Act for reduction of capital, as was done in In re Cooper ."

It does appear well settled that where the scheme of compromise and arrangement comprises within its ambit reduction of share capital, the procedure for reduction must be gone through but if it is shown that the procedure prescribed under section 100 onwards has been carried out simultaneously while submitting the scheme for approval of the creditors and members, the court can, while sanctioning the scheme, sanction reduction of share capital. The important thing to find out would be whether the procedure for reduction of share capital wherever it is mandatory has been strictly carried out and wherever it is directory has been substantially complied with.

Before one can find out as to what exact procedure should be followed for effecting reduction in share capital in a given case, it must be found out how the company proposes to reduce the share capital. The share capital of a company can be reduced in three distinct ways as set out in section 100. The. company for effecting reduction of share capital may extinguish or reduce the liability of any of its shares in respect of share capital not paid up; either with or without extinguishing or reducing liability on any of its shares cancel any paid up share capital which is lost, or is unrepresented by available assets; or with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company. The reduction of the share capital can be effected by a special resolution at a general meeting which must be sanctioned by the court. Section 101 provides that, if the proposed reduction of share capital involves either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital, the provisions therein prescribed shall have effect, subject to the powers of the court having regard to the special circumstances in the case to direct that the provisions of sub-section (2) shall not apply as regards any class or classes of creditors.

In the present case the share capital is not reduced by extinguishing or reducing the liability of any of the shares of the company, in respect of the capital not paid up or by paying off any paid up share capital which is in excess of the wants of the company. The reduction is effected by cancelling the paid up capital which is lost or is unrepresented by available assets. When the capital is reduced by cancelling any paid up share capital which is lost or is otherwise unrepresented by available assets, it is not mandatory to follow the procedure prescribed in sub-section (2) of section 101 unless the court so directs. The procedure prescribed under sub-section (2) of section 101 requires service of the notice of the petition filed for confirming the reduction of capital on every creditor of the company affected by reduction and who is entitled to object to the reduction. The procedure goes so far as to make provision by order of the court for payment to the dissenting creditors. That procedure is mandatory, where the proposed reduction involves diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital. That is not the case here. It is common ground that reduction is by way of cancellation of the paid up share capital which is lost or is unrepresented by available assets. Unless, therefore, the court otherwise directs, the procedure prescribed under sub-section (2) of section 101 is not mandatory in this case. Therefore, in order to effect reduction of share capital by way of cancellation of paid up share capital which is lost or is unrepresented by the available assets, the company will have to adopt a special resolution to be styled as resolution for reducing the share capital in a general meeting and then apply for confirmation of the reduction of share capital. For the reasons hereinbefore mentioned, I will hold that the company has given notice of 21 days' duration and the notice convening the meeting served upon the members disclosed the resolution that, while approving the scheme, the members should approve the reduction of share capital. Resolution approving the scheme has been passed with statutory majority. The only question would be whether the intention to move the resolution as special resolution in a general meeting to be attended by the ordinary shareholders and preference shareholders is set out in the notice convening the meeting or meetings. The reasons set out above while considering the case of issue and allotment of further share and the provision contained in section 81(1) and 81(1A) would mutatis mutandis apply here. I would, therefore, hold that the members of the company in a general meeting approved reduction of share capital by a special resolution which has been passed by statutory majority and while approving the scheme the members simultaneously approved reduction of share capital by a special resolution. Therefore, the procedure prescribed in sections 100 and 101 has been carried out by the company and section' 102 would not be attracted and therefore while sanctioning the scheme the court can sanction the reduction of share capital. I would, therefore, hold that the mandatory procedure prescribed for reduction of the share capital has been strictly complied with. Therefore, the company has carried out the procedure prescribed for reduction of share capital and the same can be simultaneously confirmed while sanctioning the scheme which I hereby propose to do.

I may notice the last submission of Mr. Vakil under the head of "reorganization of share capital". A very feeble attempt was made to urge that the company cannot reduce preference share capital. Mr. Vakil approached the problem from a number of angles such as that by reduction of preference share capital without wholly extinguishing the ordinary share capital, the holders of preference shares who are entitled to preferential payment from the assets of the company in winding up are relegated to the extent of cancellation of part of preference share capital behind the ordinary shareholders which can never be done. It was also urged that an ordinary shareholder would be paid Rs. 250 from the assets of the company in winding up without paying full amount of Rs. 100 to the preference shareholders which holder of the preference shares would be entitled to receive in the distribution of the assets of the company. In my opinion, there is no substance in this contention. The provision in the Companies Act at the relevant time showed that the company could have two kinds of share capital— ordinary share capital and preference share capital. Section 100 provides that subject to the confirmation by the court, a company limited by shares, may if so authorised, by its articles by a special resolution reduce its share capital in any way. Section 100, therefore, enables the company to reduce its share capital. The word "share capital" is a genus of which "equity and preference share capital" are species. If the company has power to reduce its share capital as provided in its articles of association, it is implicit therein that it can reduce both ordinary share capital as well as preference share capital unless specific provision to the contrary is made. Article 10 permits the company to increase its share capital and article 7 authorises the company to reduce its share capital by special resolution subject to confirmation by court and subject to the provisions of sections 100 to 104 of the Companies Act. Therefore, this company has retained to itself powers to reduce its share capital—meaning thereby that it can reduce both its ordinary and preference share capital—and there is no express provision to the contrary which says that the preference share capital cannot be reduced till the whole of the ordinary share capital is extinguished. Therefore, there is no substance in the contention that preference share capital can never be reduced.

Considering the matter from all the aspects, there is no substance in the contention that the reorganization of share capital as contained in the proposed scheme of compromise and arrangement cannot be given effect to. In my opinion, the company has complied with the provisions of law and reorganization of share capital can be confirmed as part of the scheme.

Re. Ground No. 5—The next ground of attack of Mr. Vakil was that in the absence of proper directions for convening separate meetings of different classes of creditors and members of the company, appropriate meetings of distinct classes of members and creditors were not held and, therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members. When a scheme of compromise and arrangement is proposed between the company and its creditors or any class of them; or between the company and its members or any class of them, the party sponsoring the. scheme must move the court for proper directions by the judge's summons under section 391 for convening the meetings of different classes of creditors and members. It is at this stage that proper classification of members and creditors must be made. There is little difficulty in defining different classes of members. A formidable difficulty arises in deciding and defining different classes of creditors.

When the judge's summons is taken out for seeking directions for convening meetings a duty is cast on the company to put proper materials before the court so that the court may give proper directions for separate meetings of different classes of creditors and members. If the creditors and members are not properly classified and if the meeting of the proper class of creditors and members is not separately held, the scheme approved at such meeting cannot be sanctioned, vide Court Practice Note in (1934) Weekly Notes 142. The responsibility for determining what creditors are to be summoned to any meeting as constituting a class is of the applicant company and if meetings are incorrectly convened or constituted or an objection is taken to the presence of any particular creditor as having interests competing with the others such objection if successfully taken at the hearing of the petition for sanctioning the scheme the company must take the risk of having it dismissed.

It is always a moot question what constitutes a class. Buckley on the Companies Ads, 13th edition, page 406, has observed that it is a formidable difficulty to say what constitutes a "class" of creditors. The creditors composing the different classes must have different interests. When one finds a different state of fact existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes. "Class" must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest (vide Sovereign Life Assurance Co. v. Dodd). Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with commonality of interest. If people with heterogeneous interests are combined in a class, naturally the majority having common interest may ride rough shod over the minority representing a distinct interest. One test that can be applied with reasonable certainty is as to the nature of compromise offered to different groups or classes. The company will ordinarily be expected to offer an identical compromise to persons belonging to one class, otherwise it may be discriminatory. At any rate, those who are offered substantially different compromises each will form a different class. Even if there are different groups within a class the interests of which are different from the rest of the class or who are to be treated differently in the scheme, such groups must be treated as separate classes for the purpose of the scheme. Broadly speaking, a group of persons would constitute one class when it is shown that they have conveyed all interest and their claims are capable of being ascertained by any common system of valuation. The group styled as a class should ordinarily be homogeneous and must have commonality of interest and the compromise offered to them must be identical. This will provide rational indicia for determining the peripheral boundaries of classification. The test as stated earlier would be that a class must be confined to those persons whose rights are not so similar as to make it impossible for them to consult together with a view to their common interest.

In this case, the court gave directions on the judge's summons taken out under section 391(1). The directions were to the effect that separate meetings of ordinary shareholders, preference shareholders, secured creditors and unsecured creditors of the company should be called on the dates mentioned in the notice. The court, thus at the instance of the company, directed four separate meetings to be held. The ordinary shareholders themselves will form one class; so also the preference shareholders will form one class. In the case of each of them the compromise offered to each member belonging to the class is identical. Similarly, the meeting of the secured creditors is also properly directed to be held. The real difficulty arose with regard to the meeting of the unsecured creditors. Of course, Mr. Vakil has attempted to urge that even in respect of the meeting of preference shareholders, directions are not proper. But I do not see much substance in it for the reasons to be presently mentioned. So also, I do not see much substance with regard to the directions given for holding the meeting of secured creditors. It was very vehemently urged that there was a conglomeration of persons with heterogeneous interest who were grouped together in the class of unsecured creditors. Generally speaking the creditors of the company should be divided into three different classes, viz., secured creditors, preferential creditors and unsecured creditors. The workers of the company each to the extent of the first Rs. 1,000 of his claim in winding up, would be a preferential creditor and indisputably they would form a separate and distinct class. They were grouped together with other unsecured creditors. I shall separately deal with the objection in respect of each meeting raised by Mr. Vakil.

As per the directions given by the court, a separate meeting of ordinary shareholders of the company was convened. In my opinion, equity or ordinary shareholders each holding fully paid shares of the company will form a separate class by themselves. They will also form a separate class in view of the identical compromise offered to them. It was however urged that there might be some creditors who may also be shareholders and their interest will conflict with the interest of shareholders who are not creditors and they should form a separate class. It was also urged that the managing director, Linubhai Banker, and ex-director, Gopaldas P. Parikh, should, form a separate class as also Indequip group of companies should also form a separate class. At page 244 of the affidavit in reply, the shareholding of Linubhai and his relation, Gopaldas P. Parikh, and the company in which Gopaldas P. Parikh is interested has been set out and it is stated that out of the total of 788 ordinary shares, 424 are held by these persons and they form a separate group. It is difficult to understand how the interest of these shareholders is different from the other shareholders. But it was urged that Indequip group of companies are very big creditors of the company and they will be supporting the proposal for converting half of their claim in the share capital so as to clamp down their octopus hold on the company and therefore they would be vitally interested in supporting the scheme and should form a separate class. Again, I see no substance in this contention. The compromise offered to the ordinary shareholders, whether creditor or not, is the same as any other shareholder. Therefore, in my opinion, the ordinary shareholder will form a separate class and proper directions in this behalf are given.

For the reasons which are mentioned above, in my opinion, there is no substance in the contention that all the preference shareholders will not form a class by themselves. In fact all the preference shareholders of the company would form a separate and independent class and their meeting is properly convened.

The Union Bank of India and the Regional Provident Fund Commissioner as representing the Central Board of Trustees are secured creditors of the company. They will certainly form a class. But it was urged that Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders became secured creditors by virtue of charges created in their favour by the decrees obtained by them against the company and, therefore, they would be secured creditors and should have been grouped with the Union Bank of India and the Regional Provident Fund Commissioner. When the meeting of the secured creditors was held on October 6, 1968, seven creditors were present including the Union Bank of India, the Regional Provident Fund Commissioner and the aforementioned 5 creditors. The chairman has reported that at the commencement of the meeting the bank took objection to any other creditor attending the meeting on the ground that there was no other secured creditor of the company holding pari passu charge on the assets of the company with the bank and this objection was submitted in writing to the chairman. As on that date the charges created by the decrees in favour of the aforementioned 5 creditors were subsisting, obviously those five creditors would be secured creditors. Before the chairman could decide the objection raised, it appears that all the secured creditors who were present requested the chairman to direct that in view of the objection raised, and in view of the statement made by the representatives of the Indequip group of companies, which would include Indequip Limited, Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Pvt. Ltd., that they would attend the meetings of secured and unsecured creditors but their votes in number and in value should be taken into consideration at the meeting of the unsecured creditors subject to the approval of the court. A direction to that effect has been given by the court. As a matter of fact, the votes of the aforementioned creditors, who at one stage claimed to be secured creditors, have not been taken into consideration at the meeting of secured creditors in view of the directions issued by the court. It should be so in view of certain later developments. The aforementioned five creditors have relinquished the charges created in their favour by the decree as also the charges are not registered as required by section 126 of the Companies Act, and are not now likely to be registered and they have become void. Obviously, therefore, the aforementioned 5 creditors would be unsecured creditors and would certainly not be entitled to attend the meeting of the secured creditors. The report of the chairman also shows that they did not vote at the meeting of the secured creditors and, in my opinion, they have been rightly grouped with the unsecured creditors. The Union Bank of India and the Central Board of Trustees represented by the Regional Provident Fund Commissioner are undoubtedly secured creditors of the company and they would form a single class and their meeting is properly convened.

That takes me to the meeting of unsecured creditors convened under the directions of the court. Mr. Vakil took serious exception to grouping together all the workmen of the company and other unsecured creditors some of whom may be suppliers of goods and some of whom may be depositors or persons who had advanced cash loan to the company, in one class. There is considerable force in this contention of Mr. Vakil. In the affidavit filed by Chandulal Hiralal Banker, at page 208 he has stated that in the context of a scheme of compromise or arrangement between the company and its creditors, the creditors of a company can be divided into at least three broad classes—secured creditors, unsecured creditors and preferential creditors. In Palmer's Company Law, 21st edition, at page 700, it is observed that creditors can be divided into three categories (which may themselves overlap) of preferential creditors, secured creditors and unsecured creditors. It is further observed that unsecured creditors will normally form a single class except where some of them are to be treated in a manner different from the rest and have different interests which might conflict. It is unfortunate that the company did not take proper directions with regard to the convening of the meeting of unsecured creditors. In the class of the unsecured creditors, the workers of the company who, as stated earlier, would be preferential creditors, have been grouped together with other unsecured creditors. The only defect appears to be in grouping together the workers who are preferential creditors of the company with other unsecured creditors. In respect of the workers different compromise is offered while to the remaining unsecured creditors a distinct compromise is offered. That will also make them two distinct and separate classes. If the meeting is not properly convened, the scheme approved at such meeting cannot be sanctioned. If two distinct classes of creditors are grouped together in one class and if there is no material for finding out who belonged to one class and what was the result of their voting and who belonged to the different and distinct class and what was their voting, the only course open to the court would be to direct separate meetings of those two classes. But if the report of the chairman provides ample material for finding out the number of preferential creditors who attended the meeting of unsecured creditors and what was the number and value of their votes then it can be separated from the number and value of the votes of the remaining unsecured creditors and the court may proceed to examine the result of the voting as if two separate meetings are called. A view was taken by me in the case of Anant Mills Ltd. If any creditor present at the said meeting would have said that the presence of the distinct class of creditors was either oppressive or not conducive to their deliberations all such objections could have been examined on merits. No such objection is raised. The defect as far as the meeting of unsecured creditors is concerned, appears to be that the preferential and other unsecured creditors have been grouped together. The workers are preferential creditors in winding up but not otherwise who would form a separate class. Instead of remitting the scheme to separate meetings of unsecured and preferential creditors in my opinion, there is ample material in the report of the Chairman from which the votes in number and value representing the preferential creditors can be separated from the votes and value of the votes representing the other unsecured creditors. As this is quite possible and which would be worked out while considering the ground of attack that the scheme is not approved by a statutory majority in each class, it is not necessary to direct a separate meeting of preferential creditors and other unsecured creditors.

Mr. Vakil, however, urged that in fact there should have been seven separate meetings of persons who were grouped together in the meeting of unsecured creditors, viz, (a) workers of the company who would be preferential creditors; (b) Linubhai Banker & members of his family; (c) Indequip group of companies; (d) Manubhai Banker & members of his family; (e) depositors and persons who have advanced cash loan and supplied stores and cotton to the company; (f) Asia Electric Company and (g) shareholders who are also creditors and those who are not. It is undoubtedly true that the workers of the company as preferential creditors would form a distinct and separate class. But the depositors who had supplied goods and cotton to the company on credit would not form a separate and distinct class. This is so because identical compromise is offered to them. Similarly, Linubhai Banker who was the managing director and members of his family and Manubhai and members of his family who was in active management prior to January 1, 1966, who are creditors of the company, would not form a separate and distinct class. The compromise offered to them is identical with the other unsecured creditors. Asia Electric Company need not form a class because no compromise is offered to it. The Union Bank of India has agreed to pay Asia Electric Company out of the sale proceeds of the blading system supplied by the said creditor. The shareholders who are creditors are in no way in a distinct class from the shareholders who are not the creditors of the company. In my opinion, therefore, the classification suggested by Mr. Vakil is neither logical nor is based on any intelligible differentia, and has no rational nexus to the objects sought to be achieved while approving the scheme of compromise and arrangement. The broad division as stated by me earlier, and keeping in view what constitutes a class, would provide better and distinct classification. The court has ample material to find out from the report of the chairman the number and value of votes in respect of the two distinct classes of creditors grouped together and it would certainly be open to the court to do so. Therefore, there is no substance in the contention of Mr. Vakil that appropriate meetings of distinct classes of members and creditors were not held; and, therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members. The contention must be negatived.

Re. Ground No. 6.—The next ground of attack is that a proper statement as required by section 393(1) and as directed by the court's order dated 26th June, 1968, in Company Application No. 23 of 1968 was not sent along with the notice convening the meetings of members and creditors of the company.

Section 393 reads as under:

"393. Information as to compromises or arrangements with creditors and members.—

(1)    Where a meeting of creditors or any class of creditors, or of members or any class of members is called under section 391,—

(a)        with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any material interests of the directors, managing director, managing agent, secretaries and treasurers or manager of the company, whether in their capacity as such or as members or creditors of the company or other wise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and

(b)        in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.

(2)    Where the compromise or arrangement affects the rights of debenture-holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company's directors.

(3)    Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall on making an application in the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement.

(4)    Where default is made in complying with any of the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees; and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company:

Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person, being a director, managing director, managing agent, secretaries and treasurers, manager or trustee for debenture-holders, to supply the necessary particulars as to his material interests.

(5)    Every director, managing director, managing agent, secretaries and treasurers or manager of the company, and every trustee for debenture-holders of the company, shall give notice to the company of such matters relating to himself as may be necessary for the purposes of this section; and if he fails to do so, he shall be punishable with fine which may extend to five hundred rupees."

One of the directions which the court gave while giving directions for convening meetings in Company Application No. 23 of 1968, was that the advocate for the company should file in the court within five days a form of advertisement, notice and the statement required by section 393 to accompany the notice to be addressed to members and creditors of the company. The first question is what should be the contents of the statements required by section 393. The statement under section 393 must contain the terms of the compromise and arrangement simultaneously explaining its effect on certain interests. It must particularly contain any material interests of the directors, managing director, managing agent, secretaries and treasurers or manager of the company whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests of the compromise or arrangement if, and in so far as, it is different from the effect on the like interests of other persons. The whole of the scheme of compromise and arrangement was annexed to the notice convening the meeting. The statement as required by section 393 annexed to the notice, does explain its effect on the interest of the creditors and members. At the relevant time, there were no managing agent, secretary, treasurer or manager of the company. Therefore, the company was obliged to disclose material interests of the directors and managing director in their capacity both as director and managing director and also as member or creditor of the company and the effect of the scheme on their interests only in so far as that effect is different from the effect on the like interests of other persons. The scheme directly did not have any effect on the interests of the directors either as director or as a member or creditor in a manner different from the manner in which the scheme would have effect on the interest of other creditors and members. The interest of the managing director as creditor of the company is set out in paragraph 7 of the statement and it may be stated that the effect of the scheme on his interests is identical as the effect on the interest of other creditors and members of the company, if the scheme is sanctioned. Therefore, a mere perusal of the statement annexed to the notice would show that it conforms with the requirement set out in section 393(1)(a). The essential requirement is that the creditors and members who are to assemble in the meeting should have advance information of the proposed scheme of compromise and arrangement and its effect on their interest as members and creditors. As the whole of the proposed scheme was annexed to the notice, anyone having a bare perusal of the scheme would be able to find out what was intended to be done by the scheme of compromise and arrangement and what would be its effect on his interest as creditor or member of the company. Therefore, the first part of clause (a) of section 393(1) is fully complied with. In respect of the latter part of clause (a), it must be stated that the material interest of director and managing director in their capacity as such or as a creditor or a member of the company will have to be stated in the statement; but the effect of the scheme on their interest will have to be disclosed to the extent that effect differs from the effect on the like interest of other creditor and member that would be made by the scheme. If there is no difference, it is not essential that the effect of the scheme on the interest of director and managing director and others need be set out in the statement. In order that the statement accompanying the notice may conform to the requirement of section 393, what should be its content has been considered by Miabhoy J. (as he then was) in In re Sidhpur Mills Co. Ltd. It has been observed in this connection as under:

"In my judgment, the true legal position is that it is the duty of every officer of the company and the company to acquaint himself or itself with the material interests of every other concerned person, such as the director, managing partner or manager of the company, and to mention that interest and to explain its effect in the statement. That is the primary duty which has been cast upon the concerned persons....... In my judgment, therefore, the true construction of clause (a) to section 393 of the Indian Companies Act is that it requires the material interests which every person concerned possesses, not only in the company, but also in the scheme, to be stated by all the other persons concerned and if the latter part of clause (a) applies, then, the effect thereof must also be mentioned."

After referring to the aforementioned observations Mr. Vakil raised four-fold objection to the statement which was annexed to the notice. Before I refer to these objections, the recitals made in the statement may be briefly referred to. In paragraph (1) it is mentioned that the copy of the scheme of compromise and arrangement is annexed to the notice. In paragraph (2) it is stated that the company is in serious financial difficulties and as against the total assets of Rs. 1,26,54,147 its present liabilities are to the tune of Rs. 1,30,89,493. In paragraph (3) it is stated that several winding up petitions are filed in the High Court and as the company is unable to meet with its liabilities, the court in all probability may direct the winding up of the company. In paragraph 4 it is stated that if the company is ordered to be wound up and is sold as a running concern, it may not fetch more than 17 to 20 lakhs of rupees, as disclosed by the experience of selling Anant Mills of Ahmedabad and Rajratna Mills. It is further stated that prior to the present management, the company was being managed by the managing agency firm of Hiralal Trikamlal & Sons and when the board of directors took over the management of the company, there were accumulated losses of Rs. 62.43 lakhs. It is also stated that the machinery of the company is old and worn out and requires renovation and looking to the heavy losses, it is not possible to carry out renovation. In paragraph (5) it is stated that, in the circumstances, the board of directors have proposed a scheme of compromise and arrangement. In paragraph 6 it is stated that the share capital of the company is to be reduced and portion of dues of the creditors is to be converted into share capital and balance is to be frozen for a period of two years, whereafter it would be paid by instalments and, by this process, the company would be able to pay up its dues by 1970. In paragraph 7 it is stated that the managing director is a creditor of the company to the extent of Rs. 3,00,000 and he has agreed to convert 50 per cent, of his dues into share capital and has agreed to the payment of the balance by yearly instalment of Rs. 38,000 after 1972. In the last paragraph it is stated that the company proposes to scrap Unit No. II and the price realised on the sale of the scrap would provide some working capital and also enable the company to pay partly some of the dues of the creditors as detailed in the scheme. This statement is signed by Mr. R.L. Dave, in his capacity as Chairman appointed for the meeting, and Additional Registrar, High Court of Gujarat, Ahmedabad.

The first objection of Mr. Vakil to this statement is that the statement is not settled by the Registrar as required by the order of this court dated 28th June, 1968. The order on the judge's summons seeking directions for convening meetings under section 393(1) is to be drawn up in Form No. 35. The order in fact is drawn up in Form No. 35 and one of the directions thereby given is that the advocate for the company should file in the court within the prescribed time, the draft form of advertisement, notice and statement to accompany the notice and the same should be settled by the Registrar of the court. It was urged that the statement may have been submitted by the company but it is not settled by the Registrar. It was urged that specific contention has been raised in the affidavit in reply that the statement is not settled by the Registrar and there is no denial thereof and that the perusal of the statement would show that, at any rate, it is not settled by the Registrar. There is no substance in this contention. Rule 2(11) of the Companies (Court) Rules, 1959, defines "Registrar" to mean, in the the High Court, the Registrar of the High Court, and includes among others such other officer as may be authorised by the Chief Justice to perform all or any of the duties assigned to the Registrar under the Rules. The Honourable Chief Justice has authorised the Additional Registrar of this High Court to perform all or any of the duties assigned to the Registrar under the Rules. Therefore, the Additional Registrar will have all powers conferred on the Registrar under the Rules. In this case Mr. R.L. Dave who was appointed Chairman of the meeting is Additional Registrar of the High Court and to whom the work under the Companies Act is assigned by the Honourable Chief Justice and, therefore, the Additional Registrar would have to perform the functions of the Registrar and, therefore, he would have to settle the statement. When the statement is signed by the Additional Registrar in his said capacity, it can be said that he has settled the same. Mr. Vakil, however, urged that the statement appears to have been prepared by the company and the Additional Registrar has not applied his mind to the contents of the statement with the result that false and misleading statements have crept into the statement and it is a case of non-application of mind. In fact direction given by the court shows that the statement in the first instance has to be furnished by the advocate of the company and there is nothing on the record to show that it was not furnished by the advocate of the company. The Additional Registrar having signed it would mean that he has settled the same. Therefore, the direction has been properly complied with.

The next objection of Mr. Vakil was that this statement under section 393 ought not to have been signed by the Additional Registrar as Chairman of the meeting, because the Additional Registrar is an officer of the court and the statement issued under his signature was likely to convey a wrong impression to the members and creditors that the factual averments made in the statement had the sanction of the court. It is true that the Additional Registrar was not well advised in signing this statement. When a statement containing factual averments is signed by an officer of the court judgment of the recipient of the statement was likely to be influenced by the fact that the factual averments made in the statement have been sanctioned by the court. Therefore, such a statement ought not to have been signed by the Additional Registrar. But the mischief which was likely to be perpetrated by this statement having been signed by the Additional Registrar has been nullified by the direction given by the court in Company Application No. 55 of 1968 filed by Chandulal Hiralal Banker on behalf of his principals praying for a direction that the Additional Registrar and Chairman appointed to preside over the meetings should withdraw the statement issued under his signature and to send a fresh statement as required by section 393. A further prayer was made that till the said company application is disposed of the Chairman may be restrained from holding meetings. While rejecting this application Mehta J. on 30th September, 1968, gave an oral direction that the Chairman at the inception of each meeting should inform the creditors and members as the case may be present and attending the meeting that even though the statement sent to them is signed by him he does not vouchsafe the truth of the factual averments made therein and no inference should be drawn from the fact that the statement is signed by the officer of the court. He was further directed to explain that contents of the statement were not either true to his own knowledge or were not the view of the court; but they were factual averments made and view expressed by the sponsors of the scheme. Under the directions of Mehta J. the Chairman made this clarification at the inception of each meeting. He has so stated in his report submitted to the court. Therefore, no damage is done by the error committed by the court officer in signing the statement annexed to the notice convening the meeting.

It was next contended that this statement contained various false and misleading statements and further contained some averments and recitals for carrying on propaganda in favour of the scheme. It was urged that while complying with the statutory requirements, the company utilised the opportunity and the forum for carrying on propaganda in favour of the scheme so as to prejudicially influence the judgment and decision of the creditors and members who were to attend the meetings. It was urged that material facts were suppressed with ulterior end in view of obtaining approval of the scheme by the members and creditors. Mr. Vakil took serious exception to the averments in the statement that Anant Mills and Rajratna Mills of Petlad have been sold for an amount varying from 12.50 lakhs to Rs. 20 lakhs. I fail to see how exception can be taken to these averments because it is not suggested that these facts are untrue. It was further contended that the averments in the statement that the previous management was responsible for the loss suffered by the company to the tune of Rs. 62.43 lakhs (sic). Even Mr. Vakil could not urge that the statement as a fact is not true. In fact there is good evidence to show that the company had suffered loss to that extent till January 1, 1966, when the management changed. But it was urged that further loss suffered by the new management when they came to power from January 1, 1966, ought to have been set out. The omission to make certain statement, not required by law to be made, could not vitiate the statement nor the maker of the statement could be charged with making false or misleading statement on that account. It was then urged that the interest of family members of the managing director in the company as well as the effect on such interest of the scheme have not been set out in the statement. Section 393 only requires that the statement should contain material interest of the managing director and others set out in the section and not of the friends and relations of the managing directors and the other concerned persons: vide In re Sidhpur Mills Co. Ltd. But Mr. Vakil took a very serious exception to the averment contained in the last para. of the statement that the price realised on the sale of the scrap of Unit II of the mills would provide some working capital. It was very vehemently urged that the cash-flow statement annexed to the scheme shows that the company expects to realise Rs. 14 lakhs by sale of the scrap of Unit No. II of the company's mills and it further shows that Rs. 14 lakhs are to be forthwith paid to the secured creditors of the company, namely, Union Bank of India and Central Board of Trustees of the Provident Fund. It is true that the amount realised by the company by sale of scrapping of Unit No. II is to be appropriated towards the discharge of the liability of the company to its secured creditors, namely, Union Bank and the provident fund authorities. It is true therefore that no part of it would be available for running the mills. But the cryptic statement made in the last para. of the statement annexed to the notice would go to show that if the liability of the company to its secured creditors is discharged the company would be able to arrange for cash in view of the reduced liability of the company from other sources for running the mills. The statement made in paragraph 8 has to be read in this background. There is no suppression of the fact that the amount realised by sale of the scrap is to be utilised towards discharging the liability because it is so stated in the cash-flow statement annexed to the scheme. In my opinion, therefore, there is no substance in the contention that the statement contained false and misleading statements of facts with a view to obtain the approval of the scheme of compromise and arrangement or it prejudicially influenced the judgment of creditors and members.

The last objection of Mr. Vakil under this head of attack is that the effect of the scheme on the material interests of directors and managing director has not been clearly set out in the statement. It was strenuously urged that annexing of the statement as required under section 293 of the notice convening meeting is obligatory and absence of it would vitiate the proceedings of the meeting. It was further urged that the statement must contain in clear and unambiguous terms the effect of the provisions of the scheme on the interest of the directors and managing director so that the members and creditors may have full information about the change that would be brought about by approving the scheme, and which change may influence their judgment in the matter. It is undoubtedly true that the company is under an obligation to set out the interest of the directors and managing director in the company and the effect on their interest by the scheme—more particularly when the effect is likely to be different from the effect on the interest of like nature on other creditors and shareholders. The question then is whether the interest of the directors and managing director in the company and the effect of the scheme on such interest has been set out in the statement or not. It may at once be stated that the interest of the directors and managing director in the company has been set out in the statement. The latter part of clause (h) of section 393(1) is required to be complied with only if the effect of the scheme on the interest of the directors and managing director is likely to be different from the effect of the scheme on the like interest of members and creditors in the company. If the effect is to be the same in respect of both categories of persons, in my opinion, it is not obligatory on the company to set out the effect in the statement. But it was urged that, in this case, the effect of the scheme on the interest of the directors and managing director; is going to be of such a revolutionary character that it should have been set out in the statement. To illustrate this point, it was urged that Gopaldas P. Parikh is virtually the owner of the companies, namely, Indequip Ltd., Indian Electro Chemicals Private Ltd., Dyestuffs and Chemicals Private Ltd. and these three companies are creditors of the mills company to the tune of more than Rs. 42 lakhs. It was then pointed out that under the scheme 50 per cent, of their claim would be converted into share capital. Therefore, the effect of the scheme in the words of Mr. Vakil would be that Gopaldas P. Parikh as virtual owner of the three aforesaid companies would have shareholding in the mills company to the tune of Rs. 20 lakhs and, therefore, thereby Gopaldas P. Parikh would establish his octopus hold on the mills company to the detriment of other creditors and shareholders. It was urged that the interest of Gopaldas P. Parikh should have been set out in the statement. But I am afraid, the argument has its genesis in the obsession of the contesting creditors with Gopaldas P. Parikh which never remained concealed throughout the hearing of this petition. At the relevant time when the scheme was sponsored, Gopaldas P. Parikh was not the director of the company. He had long ceased to be director of the mills company. ' If he was neither the director nor managing director, his interest was not required to be disclosed in the statement. But it was urged that Anil Gopaldas Parikh, son of Gopaldas P. Parikh, was a director of the company at the relevant time. That, of course, is true. But Anil Gopaldas is merely a director and he had no other interest in the mills company and, therefore, there was nothing to be disclosed in respect of his interest and the effect of the scheme on his interest. The interest of the managing director, Linubhai Banker, is disclosed and the effect of the scheme on his interest is also disclosed and it can be said with reasonable certainty that the effect on his interest is in no way different from the effect of the scheme on the interest of other creditors and members. Therefore, there is no substance in the allegation that necessary disclosure as required by section 393(1)(a), later part, has not been made.

As a second limb of the argument, it was urged that the production programme, annexed with the estimated production statement, and cash flow statement, annexed to the scheme, contained misleading and incorrect information. I need not dilate upon it because I would have to advert to this submission when I consider the feasibility of the scheme.

The statement under section 393 should be drawn up as to convey to the members and creditors sufficient information so that they may be able to bring to bear upon the scheme their intelligent judgment. They must have information which would help in considering the scheme on its own merits. In my opinion, in this case, the scheme as a whole as was annexed to the notice along with various statements and statement under section 393 gave the necessary information to the creditors and members so that they may be able to intelligently deliberate upon the scheme keeping in view the commercial feasibility of the scheme and on the material supplied they were in a position to decide intelligently whether the scheme should or should not be approved. It is of course true that some further information was sought at the meeting and Mr. Surottam Hatheesing, the Chairman of the company, till the date of the appointment of the provisional liquidator, was unable to furnish that information. But the information sought was not of such a vital character that non-availability of it would have come in the way of the creditors and members deliberating upon the scheme. Therefore, considering the matter from all the aspects, in my opinion, the statement as required by section 393 was annexed to the notice convening the meetings and the provisions of section 393 have been duly complied with.

Re. Ground No. 7. —The next ground of attack was that the meetings of creditors and members were conducted in an irregular manner and, therefore, the votes recorded at such meetings cannot be relied upon to show that the scheme has been approved by the requisite majority of creditors and members. In Company Application No. 23 of 1968, the court gave directions for convening separate meetings of ordinary and preference shareholders and secured and unsecured creditors. The court also gave a direction that the notice of the meeting should be advertised and a notice convening meeting showing time, place of meeting, together with the copy of the proposed scheme of compromise and arrangement and statement required under section 303 and form of proxy, should be served by a pre-paid letter under certificate of posting to each ordinary and preference shareholder and individual notice to the creditors whose debts exceeded Rs. 1,000. Individual notices to the creditors having a claim of less than Rs. 1,000 was dispensed with. These directions have been complied with and an affidavit to that effect has been filed by the chairman who presided over the meetings. Requirements for convening proper meetings are contained in rules 69, 70, 73, 74, 75 and 76. The requirements of these rules appear to have been properly complied with. Mr. Vakil had a four-fold objection to the procedure adopted by the chairman at various meetings. The first objection is that the management failed to furnish relevant information to the creditors and members at the meeting with the result that the creditors and members had not enough information to intelligently deliberate upon the proposed scheme. It was urged that the chairman did not insist upon the management to furnish relevant information sought for by the members and creditors and, in the absence of the information, it cannot be said that the creditors and members were fully apprised of the various ramifications of the scheme and brought to bear upon the subject their intelligent judgment. At the meeting of the ordinary shareholders of the company the question was put to Mr. Surottam Hatheesing as to who were the directors of the company who had sponsored the scheme to which reply was given that the scheme was sponsored by the board of directors consisting of L.H. Banker, S.P. Hatheesing, P.H. Raval and Shri N.M. Soparkar, the last two being Government-nominated directors. Thereafter, further questions were put by the members relating to the working of the company and particularly as to the assets and liabilities of the company. Mr. Hatheesing gave replies generally dealing with the topic but he further stated that detailed figures could not be given as the provisional liquidator is in charge of the company. Thereafter some questions were put in writing and the chairman then requested Mr. Hatheesing to give replies to these questions. Mr. Hatheesing disclosed his inability to reply to the questions for want of detailed information. Unfortunately questions given in writing are not annexed to the report of the chairman. It is, therefore, difficult to find out what were the questions put and what would be the effect of the failure of the chairman of the company to give replies to the same. However, no objection appears to have been taken by the ordinary shareholders that, in the absence of information sought for, they would not be able to consider the scheme in its various aspects. Exactly similar thing happened at the meeting of the unsecured creditors. The question is whether the information sought for both by the ordinary shareholders and unsecured creditors was of such a vital nature as to affect the deliberations of the ordinary shareholders and creditors on the merits of the scheme. The first information sought was as to the assets and liabilities of the company and the exact figures have been set out in the statement annexed to the notice. Therefore, the information in this respect is certainly given both to the members and creditors. In respect of the other information sought, it is unfortunate that the exact nature of the information sought is not available and, therefore, it is not possible to come to the conclusion that in the absence of such information the creditors and members were unable to deliberate upon the scheme. The creditors and members attending did not consider the information vital enough in the absence of which they could not consider the scheme on merits. If that was the situation, they would have declined to approve the scheme. The scheme is approved except by very few creditors whose opposition is grounded on factors entirely irrelevant to the merits of the scheme and to which I would refer at a later stage. It is undoubtedly true that the creditors and members called upon to deliberate upon the scheme of compromise and arrangement should have full and fair knowledge of all the relevant facts on which they can come to an intelligent decision (vide In re Bharati Central Bank Ltd.). But, in my opinion, in the facts and circumstances of this case, it is not possible to accept that the members and creditors could not bring to bear upon the scheme an intelligent judgment for want of relevant information. The second limb of the argument was that the amendments which had been proposed to the original scheme by the secured creditors, namely, Union Bank of India and Central Board of Trustees of the Provident Fund, have not been adopted according to the correct legal procedure. The scheme as originally proposed offered a compromise to the Union Bank of India— secured creditor of the company—undertaking to pay arrears of provident fund dues to the Central Board of Trustees—the other secured creditor—by monthly instalments of s. 40,000. At the meeting of the secured creditors, the compromise offered to both of them have undergone a change. The bank agreed to accept the scheme on its own terms as suggested in the annexure to its letter dated 8th October, 1968. It must be confessed that there is a radical change with regard to the mode of payment to the bank. The amendments proposed by the bank are at page 154 of the record and the amendments proposed by the Central Board of Trustees are at page 160 of the record. The adjourned meeting of the secured creditors was held on 8th December, 1968. At this meeting, the amendments proposed by the bank were considered by the sponsors and they were accepted. The amendments proposed by the Central Board of Trustees for Provident Fund have been accepted both by the bank as well as the sponsors and they have been incorporated in the final scheme submitted to the court for its sanction. The contention of Mr. Vakil is that unsecured creditors and members approved the scheme as originally proposed and the amendments made in the scheme in respect of the compromise offered to the secured creditors have not been considered by the unsecured creditors as well as by the members of the company. According to Mr. Vakil if a comprehensive scheme of compromise and arrangement is offered to various classes of members and creditors and if some class of members and creditors approved the comprehensive scheme and if subsequently in respect of one other class the scheme is modified at the suggestion of the other class, the modified scheme should again be submitted to the remaining class of creditors and shareholders. This approach to the problem ignores the very structure of section 391 of the Companies Act. Section 391 permits the company or anyone proposing the scheme to offer compromise between the company and its members or any class of them, and between the company and its creditors or any class of them. In other words, there can be a compromise between a company and one class of its creditors or members and that compromise can be arrived at as between the company and that class of members or creditors only and it need not be approved or ratified by other class of members or creditors not affected by the same. The compromise has to be considered by the class which is to be affected by the compromise and to which the compromise is offered. Requirements of section 391 do not imply that every compromise between a company and one of its class of creditors or members should be approved and ratified by all other class before it can be sanctioned by the court. It is implicit in section 391 that the company may offer compromise to one of its class of members or creditors and approval by statutory majority of that class alone is necessary before it can be submitted for sanction of the court. The court while according its sanction to such a scheme may consider whether this compromise affects any one other than the class to which it is offered. If it does not, it is not at all necessary that such a compromise should be ratified and approved by a statutory majority by other class of creditors and members. If this is the correct interpretation of section 391, in my opinion, it furnishes a complete reply to the contention of Mr. Vakil. The company in this case has two classes of members and three classes of creditors. They are: ordinary and preference shareholders and secured creditors, preferential creditors and unsecured creditors. The company has offered compromise to each class and, in my opinion, even though the compromise is incorporated in a comprehensive scheme, in fact, each class will have particularly to consider and if thought fit to approve that part of the compromise which is offered to it. In the process that class may deliberate upon the entire comprehensive scheme of compromise and arrangement, then it would be open to that particular class to reject the compromise offered to it, if it felt that in comparison to other class of creditors and members it has not been given a fair deal or in view of the compromise offered to other class of creditors and members it may consider the compromise offered to it as unfair and disapprove the same. But even if the comprehensive scheme of compromise and arrangement is offered for consideration to various classes of creditors and members each class will have to consider and deliberate upon the compromise offered to it though in the process it may consider the feasibility of the whole scheme. But the requirements of law will be satisfied if each class deliberated upon and approved that part of the compromise of offered to it. In the present case, ordinary shareholders were offered a compromise by which the nominal value of the ordinary share was to be reduced and the same was the case with regard to the preference shareholders. Excluding the preferential creditors, namely, workers of the company, other unsecured creditors were offered a compromise that 50 per cent of their claim will be converted into share capital with the reduced nominal value of the share and the balance of 50 per cent, would be paid by instalments after a period of 2 years. Therefore, this would show that each class is offered a distinct separate compromise. The secured creditors were offered a compromise that they would be paid in full but the mode of payment would be by instalments. This aspect was before the mind of the unsecured creditors and members. If the mode of payment with regard to secured creditors as suggested in the proposed scheme is altered at the instance of the secured creditors, in my opinion, it is not necessary that before the scheme can be submitted to the court for its sanction, the amended compromise offered to the secured creditors should be ratified and approved by the unsecured creditors, preferential creditors and members of the company. Even though an all-pervasive scheme of compromise and arrangement comprising within its folds various different compromises offered to different class of creditors and members is offered for approval, in effect every class will have to consider the compromise offered to it and its judgment disclosed by its voting will have to be considered in respect of that part of the compromise affecting it. Viewed from this angle, there is no force in the contention of Mr. Vakil that the amendments which had been passed at the meeting of the secured creditors have not been passed according to the correct legal procedure. In this connection, Mr. Vakil had also contended that the amendment proposed at the meeting of the unsecured creditors were also not properly adopted. Three amendments were proposed at the meeting of unsecured creditors and members of the company relating to the payment to the Employees' State Insurance Corporation; payment to Indequip group of companies to be deferred till cotton merchants and suppliers of stores referred to in clauses 2(e) and 2(f) are paid their dues and deletion of clause 2(g) from the scheme. Clause 2(g) provides that the payment of arrears of wages and retrenchment compensation to the workers be deferred for a period of two years. These amendments were undoubtedly proposed at the meeting but it was urged that they were not properly proposed and seconded. There is no substance in this contention because the resolution passed at the meeting shows that the scheme was approved after incorporating the aforementioned amendments. Therefore, the contention of Mr. Vakil under this sub-head must be negatived.

The third limb of the argument was that Indequip group of companies and two other creditors participated in the meetings of both secured creditors and unsecured creditors and this by no canon of construction of section 391 would be permissible. This aspect has already been considered while disposing of ground No. 5. Suffice it to say that Indequip group of companies and two other creditors were not allowed to vote at the meeting of the secured creditors. In fact, except the bank and provident fund authorities the other five secured creditors having now given up their charge and charges created in their favour having now been relinquished or were void from their very inception for want of registration under section 125 they would be unsecured creditors and, therefore, the value of their vote should not be taken into consideration while considering whether the scheme has been approved by a statutory majority of the secured creditors. It may be mentioned that after the aforementioned five creditors are excluded from the category of secured creditors, only two secured creditors remain, namely, the bank and the provident fund authorities and both of them have approved the scheme and, therefore, no illegality attaches to the proceedings of the meeting of the secured creditors where the aforementioned five creditors initially attended the meeting. It must be distinctly made clear that Indequip group of companies and two other creditors were not permitted to vote at the meeting of the secured creditors and in final analysis the votes of the remaining creditors, namely, M/s. Amarshi Damodar and Atul Cotton Traders, have been excluded while computing the voting at the meeting of the secured creditors.

The last limb of the argument under this sub-head is that those creditors who are companies within the meaning of the Companies Act should have lodged their resolution and proxy as required by section 187 before they could attend and vote at the meeting. Section 187 of the Companies Act reads as under:

"187. Representation of corporations at meetings of companies and of creditors.—(1) A body corporate (whether a company within the meaning of this Act or not) may—

(a)    if it is a member of a company within the meaning of this Act, by resolution of its board of directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the company, or at any meeting of any class of members of the company;

(b)    if it is a creditor (including a holder of debentures) of a company within the meaning of this Act, by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of any creditors of the company held in pursuance of this Act or of any rules made thereunder, or in pursuance of the provisions contained in any debenture or trust deed, as the case may be.

(2) A person authorised by resolution as aforesaid shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the body corporate which he represents as that body could exercise if it were an individual member, creditor or holder of debentures of the company."

It would appear from the language of section 187 that if a company is a creditor of another company within the meaning of the Companies Act, it may authorise by resolution of its board of directors any person as it thinks fit to act as its representative at any meeting of the creditors or at any meeting of members of the company held in pursuance of the provisions of the Companies Act and such a person authorised by the resolution would be entitled to attend in person and by his presence, the company as creditor would be attending the meeting in person. Such a person authorised by the resolution to represent the company would also be entitled to vote by proxy. A proxy by such a person properly lodged would be a proxy on behalf of the company. It would thus appear that where a person authorised by the resolution of a board of directors of a company attends in person it is not necessary that he should also hold a proxy properly lodged for and on behalf of the company. On a true interpretation of section 187 it appears that where a company is a creditor of another company, the first company by resolution of the board of directors may authorise any person to attend the meeting of the creditors of the other company of which it is a creditor. In such circumstances, the authority conferred by the resolution would enable the person so authorised to attend the meeting on behalf of the creditor company. Such appearance of the person so authorised would indicate the presence of the company as creditor in person looking to the language of section 187. Such a person need not hold proxy on behalf of the company. In fact he himself can nominate a representative to vote by proxy and his vote by proxy would bind the company by whose resolution he is authorised to attend the meetings. Mr. Vakil, however, urged that even if there is a resolution authorising the person to attend a meeting of the creditors of the debtor company on behalf of the creditor company, he should not only be authorised by a resolution but he should also lodge proxy on behalf of the creditor company. In my opinion, this is not borne out by the language of section 187. Mr. Vakil, however, referred to Arun prasad v. Shantilal Shankarlal Shah. The question that arose for consideration of the Supreme Court was as to the manner in which the creditor company can validly cast its vote at the meeting of the creditors held under the provisions of section 153 of the Companies Act of 1913. It would appear that the case is decided under the provisions of the Companies Act of 1913, Undoubtedly, in that case it is held that, though the person who was authorised by the directors of the creditor company to represent the said company at the meeting was present in person at the meeting, the company could not be regarded as having been present at the meeting in person, within the meaning of section 153, and, as that person was also not a proxy, the vote cast by him at the meeting was void. But in this very case the effect of the provisions contained in section 187(2) is left open. It is observed that in the Companies Act of 1956 a provision has been introduced under which a company which is a creditor of another company may by resolution of its directors authorise such person as it thinks fit to act as its representative at any meeting of the creditors of the company held in pursuance of the Act and a person authorised in this manner shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the company. Such a provision was not to be found in the Companies Act of 1913 and, therefore, this decision is not an authority for the proposition that a person authorised by a resolution of the board, before he can represent the company should also hold a proxy, especially after the introduction of section 187, and particularly subsection (2) of section 187 of the Companies Act. In my opinion, the provision contained in sub-section (2) is a complete answer to the contention of Mr. Vakil and it must stand negatived. Thus, there is no force in the contention that the meetings of the creditors and members were conducted in an irregular manner.

Re. Ground No. 8.—The next ground of attack is that even if it be held that the meetings were properly conducted, in fact, the scheme is not approved by a statutory majority. There was also an alternative submission that, assuming that the other view is possible, the court on an analysis of votes recorded at the meeting should not exercise its discretion in favour of the scheme so as to impose it on the dissenting creditors and members. I will first examine the first part of the submission that the scheme is not approved by the statutory majority of the creditors and members. Before the court can accord sanction to the scheme of compromise and arrangement, it must be approved by a majority in number representing 3/4ths in value of the creditors or class of creditors or members or a class of members, as the case may be, present and voting, either in person or where proxies are allowed by proxy. The submission is that neither the creditor nor the members have approved the scheme of compromise and arrangement by majority in number representing 3/4ths in value. Ordinary and plain meaning of section 391(2) is that the scheme of compromise and arrangement must be approved by a majority in number of each class of creditors and each class of members and the affirmative votes must represent 3/4ths in value of the shares or debt represented by the person attending the meeting either in person or by proxy.

The issued and subscribed capital of the company consists of 788 ordinary shares each of Rs. 1,000 fully paid and 1,050 redeemable cumulative preference shares each of Rs. 100. In all 117 ordinary shareholders holding 597 ordinary shares attended the meeting of the ordinary shareholders by person or proxy. Eighty-one shareholders holding 522 equity shares voted in favour of the scheme and 34 ordinary shareholders holding 72 ordinary shares voted against the scheme. The validity of votes of the two ordinary shareholders holding three shares was considered doubtful. Excluding the doubtful votes the analysis would show that 80 ordinary shareholders holding 5/8 ordinary shares cast valid votes in favour of the scheme and 32 ordinary shareholders holding ordinary shares cast valid votes against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares represented at the meeting by the members attending the meeting by person or proxy. Obviously, therefore, the scheme is approved by a statutory majority in the meeting of ordinary shareholders.

The meeting of the preference shareholders was attended by 71 preference shareholders either in person or by proxy holding 544 preference shares. Out of the aforementioned 71 preference shareholders present in person or by proxy 55 shareholders holding 456 preference shares voted in favour of the scheme while 16 shareholders holding 88 shares voted against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares represented at the meeting by the members attending the meeting by person or proxy. Doubtful votes were not taken into consideration. Obviously, therefore, the scheme is approved by a statutory majority in the meeting of preference shareholders.

The meeting of the secured creditors of the company was convened first on October 6, 1968, and was adjourned to various other days. The Union Bank of India and the Central Board of Trustees of the Provident Fund were the only secured creditors of the company and both of them have voted in favour of the scheme subject to the modifications suggested by them in respect of the compromise offered to each of them and the same has been accepted by the sponsors of the scheme and, therefore, the final scheme submitted to the court is approved by both the secured creditors which would indicate that the same has been approved by a statutory majority. It may be mentioned here that Asia Electrical India Pvt. Ltd. Company holds a charge for the price of the blading system supplied by it to the company. The said creditor claims to be the creditor of the company to the tune of Rs. 1,48,471.20 and has filed a suit to recover the said amount in the High Court of Maharashtra against the company. A representative of the said creditor attended the first meeting of the secured creditors but did not attend the subsequent meetings when the secured creditors finally voted upon the scheme. It may however, be mentioned that under the scheme Unit II of the mills of the company is to be scrapped and sold and the realization therefrom is to be shared by the Union Bank of India and the Central Board of Trustees of the Provident Fund. The scrapping of Unit No. II includes scrapping of the blading system which is part of the power plant of the company. Therefore, blading system will also be sold. Out of the price realised by the sale of the blading system the Union Bank has agreed to pay the amount payable to Asia Electric India Pvt. Ltd. Company. At any rate, it cannot be said that Asia Electric Company claiming to be secured creditor of the company has voted against the scheme. Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders had at one stage claimed to be the secured creditors. They were not recognised as such and they were not permitted to vote at the meeting of the secured creditors. In fact the charge created by the bank in their favour having not been registered by the Registrar of Companies on the date of the meeting or subsequent thereto and they having specifically relinquished the charges in their favour could by no stretch of imagination be said to be secured creditors and, therefore, they were rightly not permitted to vote at the meeting of the secured creditors. Even if they are considered to be secured creditors, they having approved and consented to the scheme, there is no negative vote at the meeting of secured creditors. It can, therefore, be said with reasonable certainty that the scheme has been approved by the secured creditors of the company by more than the statutory majority.

That takes me to the meeting of unsecured creditors. As stated earlier, the meeting of unsecured creditors was attended by the creditors who were suppliers of stores and cotton, workmen of the company and the depositors. The depositors are relations and members of the family and a few friends of the managing director, Linubhai Hiralal Banker. The total value of the debt represented by the creditors attending the meeting was to the tune of Rs. 1,11,05,004. The creditors representing the claim in the value of Rs. 94,94,502 voted in favour of the scheme. If the meeting of the unsecured creditors as a class is held to be valid, it would appear that as against the creditors representing the debts of the company to the tune of Rs. 94,94,502 who voted in favour of the scheme, only creditors representing debts to the tune of Rs. 9,52,185 voted against the scheme. Therefore, it would prima facie appear that majority of the unsecured creditors representing 3/4ths in value approved the scheme.

It was very vehemently contended that preferential creditors and unsecured creditors were grouped together in one class and, therefore, the votes cast at such an illegal meeting approving the scheme cannot be taken into consideration by the court. As stated earlier, the workers of the company would be preferential creditors; so also, the Employees' State Insurance Corporation would be a preferential creditor of the company and they should not have been grouped together with the other unsecured creditors. For the reasons stated hereinabove, the creditors of the company would fall broadly into three distinct classes, namely, secured creditors, preferential creditor of the company and they should not have been grouped together with the other unsecured creditors. For the reasons stated hereinabove, the creditors of the company would fall broadly into three distinct classes, namely, secured creditors, preferential creditors and other unsecured creditors. Separate meeting of secured creditors has been convened and they have approved the scheme. The error appears to have been committed in convening the joint meeting of preferential and unsecured creditors. But the report of the Chairman would help in finding out the debts represented by the preferential creditors and the debts represented by other unsecured creditors in the meeting of unsecured creditors. The report of the Chairman would show that out of 1955 creditors including both preferential and unsecured creditors, who attended the meeting, 1055 creditors inclusive of both the classes representing Rs. 94,91,502 voted in favour of the scheme. It would further appear from the report that the workmen of the company forming a class of preferential creditors who attended the meeting represented their claim to the tune of Rs. 36.33,400. The claim of the Employees' State Insurance Corporation against the company on that date was to the tune of Rs. 6,27,346. The workmen and Employees' State Insurance Corporation, being the preferential creditors, would form one class. It may be that as the compromise offered to the Employees' State Insurance Corporation is slightly different from the compromise offered to the workmen of the company, the workmen and the Employees' State Insurance Corporation may each form a distinct class. The remaining unsecured creditors would comprise suppliers of cotton and stores and depositors. An entirely identical compromise is offered to the suppliers of cotton, stores and depositors and, therefore, they can be conveniently grouped together in one class. Their rights are not so dissimilar as to make it impossible for them to consult each other for their own interest. Thus, the workers being preferential creditors would form one distinct class. Employees' State Insurance Corporation would form another class. The remaining unsecured creditors would form a class by themselves. The next thing is to find out the votes and value of votes cast in each class to ascertain whether in each class the scheme is approved by statutory majority. It is very easy from the report of the Chairman to find out the total number of workers present and the value of their votes. It is equally easy to find out the value of the vote of Employees' State Insurance Corporation. The composite value of the affirmative votes cast in favour of the scheme at the meeting according to the report was Rs. 94,94,502. This is inclusive of the claim of workers as preferential creditors which was to the tune of Rs. 36,33,400. If the votes of the workmen representing in value the claim to the tune of Rs. 38,33,400 is deducted from the votes representing the debt of other unsecured creditors to the tune of Rs. 94,94,502 the balance would be Rs. 58,61,202 out of which vote representing the value of the claim of the Employees' State Insurance Corporation to the tune of Rs. 6,27,346 should be deducted which would leave a balance of Rs. 52,33,756. The unsecured creditors being suppliers of stores and cotton and depositors and excluding preferential creditors who attended the meeting and voted in favour of the scheme represented the debt in the value of Rs. 52,33,756. The value of the claim of the creditors who voted against the scheme was Rs. 9,82,185. It would immediately appear that the unsecured creditors excluding the preferential creditors, namely, the workmen and Employees' State Insurance Corporation have approved the scheme by more than the statutory majority.

The workmen of the company who attended the meeting unanimously voted in favour of the scheme, and the value of their claim was Rs. 36,33,400. Similarly, Employees' State Insurance Corporation whose claim was in the amount of Rs. 6,27,346 has accepted the scheme. Thus the workmen of the company who would be preferential creditors forming a distinct class of creditors of the company have approved the scheme by more than a statutory majority. So also, the Employees' State Insurance Corporation who would be a distinct class of creditor of the company has accepted the scheme. It thus becomes crystal clear that the preferential creditors of the company have approved the scheme by more than the statutory majority.

At this stage one submission of Mr. Vakil may be noticed. It was very vehemently urged that if the preferential creditors and unsecured creditors each form a distinct class, separate meetings of each class ought to have been convened and it is not open to the court to analyze the votes at a meeting attended by such heterogeneous creditors as unsecured creditors, preferential creditors and Employees' State Insurance Corporation and arrive at a positive finding. It was further urged that it would not be possible to find out how the judgment of each class of creditors must have been affected or influenced by deliberation in such a meeting of heterogeneous creditors and it was further contended that the workers who are vitally interested in the restarting of the mills of the company must have caused an over-powering influence on the deliberations at the meeting and the judgment of other creditors would be adversely affected. The submission was that if once an error is committed in convening the meetings, nothing further can be done and either the court should ignore the decision arrived at such a meeting or at best fresh meeting with proper clarification should be convened and consideration of the scheme should be postponed till such meeting is convened and result is notified to the court. It is undoubtedly true that at the stage of giving directions under section 391 it is the bounden duty of the sponsors of the scheme to place proper materials before the court so that the court can give accurate directions for convening separate meetings of distinct class of creditors and members. It must be confessed that such a case was not taken by the company when direction for convening the meeting of unsecured creditors was given and which included within its fold grouping together of such heterogeneous creditors as preferential creditors, Employees' State Insurance Corporation and other unsecured creditors. It would have been well and good if such distinct and separate meetings were convened in respect of each class of distinct creditors. But if error was committed yet the voting at the meeting can be properly analysed to find out which was the distinct class whose separate meeting could have been called and votes of each class can be ascertained, in my opinion, such an error would not be fatal. There is absolutely no allegation that one class of creditors imposed themselves on the other class or that the majority coerced the minority into acceptance of the scheme. In the absence of slightest allegation to that effect and in the absence of any allegation that there were no free, frank and fair deliberations, in my opinion, it is not necessary to order a fresh meeting of the distinct class of creditors. If there was the slightest doubt in my mind that one class of creditors, namely, preferential creditors, by their sheer majority imposed themselves on the minority or the minority were coerced into approving the scheme, I would have certainly ordered separate meetings of preferential creditors and unsecured creditors. But the analysis of the votes would show that except the principals of Chandulal Hiralal Banker who is practically the only contesting creditor and whose stubborn opposition to the scheme is attributable not to inherent demerits of the scheme but to the personal feuds and vengeance and no other unsecured creditor representing any substantial interest opposed the scheme in the meetings of unsecured creditors, framing or the hearing of their petition, it is not necessary to order. In these circumstances, in my opinion, the analysis of the vote at the unsecured creditors' meeting after separating the preferential creditors from other unsecured creditors should be taken into consideration to find out whether the preferential creditors as a class have approved the scheme and whether other unsecured creditors as a class have approved the scheme. As stated above, the workers as being preferential creditors, the Employees' State Insurance Corporation and other unsecured creditors each as a class has approved the scheme by statutory majority and, therefore, there is no substance in the contention that the scheme is not approved by statutory majority.

The alternative submission of Mr. Vakil may now be considered. It was urged that even if it be held that the scheme has been approved by different classes of creditors and members in their respective meetings by statutory majority, the court on an appropriate analysis of voting would not impose such a scheme on the dissentient members and creditors. The submission was that the scheme is so designed as to help Gopaldas Parikh and his protege, Linubhai Banker, to cover their misdeeds and to give them unfair advantage by which they would have an octopus hold on the company. It was urged that if the scheme is approved, three companies in which Gopaldas Parikh has a controlling interest, namely, Indian Electro Chemicals Limited, Dyestuffs & Chemicals Private Limited and Indequip Limited, would be able to obtain ordinary shares of the company worth Rs. 20 lakhs and thereby they would have such a controlling voice in the affairs of the company that their misdeeds could not be brought to light and they would be able to ride rough shod over the other shareholders. It was also urged that Shardaben, Shantaben and Chandulal Banker who are contestants would be left to the tender mercy of Gopaldas Parikh and Linubhai Banker. In fact, even at the present stage, Indequip group of companies along with Linubhai Banker, and the members of his family hold 422 shares out of the total number of 738 ordinary shares of the company. If the scheme is sanctioned Indequip group of companies would be able to get allotment of shares worth Rs. 20 lakhs by conversion of their 50 per cent, claim against the company. It is not likely to tilt the balance in a different way. It cannot be said, therefore, that the scheme is designed for obtaining a controlling voice in the affairs of the company. On the contrary, if the scheme is sanctioned, number of other creditors would become holders of shares and would be able to influence the management in the affairs of the company. Therefore, on this account, the scheme cannot be rejected. Even at the cost of repetition, it must be mentioned that the scheme is opposed by a very few creditors and an infinitesimally small number of shareholders. The fact that the scheme has been approved by a requisite majority of shareholders is undoubtedly a strong argument in its favour, unless it is shown that their approval was not obtained fairly and the terms of the scheme are not such as a reasonable man may accept. The approval of a scheme by statutory majority of creditors and members is not decisive of the matter. But it is equally true that due weight should be attached to the choice indicated by the creditors and members who are vitally interested in the company and the scheme affecting the company. Further, on the analysis of the votes cast at the meeting, the salient feature that comes out to the surface is that the scheme was opposed especially by those who, apart from the merits of the scheme, are personally opposed to Gopaldas Parikh and Linubhai Banker. The feud appears to be more between the blood relations rather than between the creditors and members who have offered their best commercial judgment to the scheme on its merits. It is an inescapable conclusion that Chandulal Banker as a power of attorney holder of Shardaben, and Shantaben who is the principal contender, opposed the scheme tooth and nail not because he had the interest either of the company or creditors and members at heart but because he had to leave the active management when Gopaldas Parikh and Linubhai Banker stepped in and because of his personal vendetta against both of them. In this view of the matter it is not possible to accept the submission of Mr. Vakil that the scheme should not be imposed upon dissentient members.

Re. Ground No. 9.—The last ground of attack was that the scheme is not commercially and economically viable or feasible and is in fact unfair and unreasonable. Before I proceed to consider this contention on merits, the approach to the scheme of compromise and arrangement by the court should be made clear. How should the court approach a scheme of compromise and arrangement submitted for its sanction which is shown to have been approved by a statutory majority of creditors and members who are directly affected by the scheme. The burden, of course, of showing that the scheme is a fair and reasonable one initially lies on the petitioner. The petitioner must prima facie show that the scheme is pre-eminently fair and reasonable as a prudent and reasonable shareholder would approve of and not object to. In order to show prima facie that the scheme is fair and reasonable, it is open to the petitioner to submit that due weight must be accorded to the fact that the majority has recorded a decision in favour of the scheme and the court must not lightly ignore or set aside that decision. In In re Sidhpur Mills Co. Ltd. Miabhoy J. (as he then was), in this connection, observed as under:

"Therefore the scheme has not got to be scrutinised by the court with that much care with which an expert will scrutinise it, nor will it approach it in a carping spirit with a view to pick holes in it. If the majority is acting in a bona fide and honest manner and in the interests of the class that it purports to represent, then, if the scheme is such as a fair-minded person, reasonably acquainted with the facts of the case, as prevailing at the time when the scheme was sponsored and approved, can regard it as beneficial for those whom the majority seeks to represent, then, unless there are some strong and cogent grounds to show that the scheme was conceived, designed or calculated to cause injury to others, the court will ordinarily sanction it, rather than reject it."

This must be the approach of the court while examining the scheme and the court should, keeping in view all the aspects of the matter, prefer a living scheme to compulsory liquidation bringing about an end to a company. Reference may be made to Lawrence Dawson v. j. Hormasji Cunliffe J. has observed as under:

"The court is of course not a mere machine for registration. It will look into the proposed scheme much as a court of appeal will canvass, if asked to do so, the decision of a jury, to ascertain if there was reasonable evidence to support their verdict; but it will, I think, always also prefer a living scheme to a compulsory liquidation bringing about an end to a company, and usually without any hope of payment in full."

The court in exercising its discretion under section 321(2) must treat it as cardinal that its function does not extend to usurping the view of the members or creditors. It must look at the scheme to see that it is a reasonable one and while so doing, the court will be strongly influenced by a big majority vote and the reasons which actuated the contesting creditors in opposing the scheme. None the less it is essential that the scheme must be a fair and equitable one though it is none of the business of the court to judge upon the commercial merits which in fact is the function of the creditors and members.

Approaching the scheme from this angle, let me find out whether it is feasible and workable. It is not necessary to bring to bear upon the subject the expertise of textile magnates. The court must be prima facie satisfied that the scheme in its broad outlines is a reasonable and fair one and that it is feasible and workable. The first objection was that the estimate of receipts and outgoings made in the cash flow statement annexed to the scheme is factually incorrect and cannot be conceived even in the realm of possibility. The estimate of rent of godowns to be constructed on the land that will be vacated by scrapping of Unit II was considered exaggerated. Except making a statement in affidavit in reply that the estimate is exaggerated, no material is placed on record to reach the conclusion that the estimate is exaggerated. It was also urged that, in the year 1963, Rs. 3 lakhs will be received by way of deposits from the intending lessors and acceptance of deposit from the intending lessee would result in contravention of section 18 of the Bombay Rents, Hotel & Lodging House Rates Control Act, 1947 (hereinafter referred to as the "Rent Act"), which prohibits a landlord from receiving any fine, premium or other like sum or deposit or any consideration other than the standard rent or the permitted increases, in respect of the grant, renewal or continuance of a lease of any premises. It was also urged that acceptance of deposit from the intending lessee by the landlord for granting lease would be a penal offence. It is unnecessary to decide this point in this case because it does not directly arise for consideration. Prima facie, however, it may be pointed out that Explanation I to section 18 of the Rent Act would show that receipt of rent in advance for premises let out for the purpose other than residence would not come within the mischief envisaged in section 18. If the premises let out are for the purpose other than residence, advance rent can be taken by the landlord and if the lease is for a longer period, it would be open for the landlord to contract that the advance rent taken would be given credit for for the period which is just preceding the expiry of the lease. Such an agreement, if entered into between the landlord and tenant in respect of the premises leased for a purpose other than residence, would enable the landlord to take advance rent and also continue to recover the rent for the initial period of the lease. Therefore, even though what is styled as rent deposit-, it in effect appears to be advance rent to be taken from the intending lessee and prima facie it does not appear that such an action would be in contravention of section 18. It was also contended that Rs. 25,000 are expected to be received by sundry receipts, but there is no source disclosed. The amount is not very large and a textile mill can hope to get it by way of sundry receipts. It was, however, urged that there is no cash capital with the company and initially a large cash amount would be required for restarting the mill and if the realisation from the scrap of Unit No. II is to be paid straightaway to the secured creditors, there would be no cash capital with the company to start Unit No. I and unless the Unit No. I starts no income can be expected. In this connection, I would like to point out that Gopaldas Parikh has filed his affidavit at page 500 of the record in which he has stated that he is connected with about 24 companies and he would be in a position to arrange finances to the extent of Rs. 10 lakhs for restarting Unit No. I of the mills of the company. There is a similar affidavit of Surotam Hatheesing at page 498 who is connected with two mills and live other companies. He is also a managing director of Arvind Mills Ltd. It is nowhere suggested that these persons would not be able to provide finances as indicated by them in their respective affidavits. It is also proper to refer at this stage to another affidavit of Gopaldas Parikh in which he has stated that he would be able to arrange liquid finance to the tune of Rs. 10 lakhs for the working of the mills for two years from the date of sanctioning the scheme and that he is prepared to provide finance from his own resources and personal guarantees to be furnished by him subject to a condition that whatever additional funds are brought by him within the said period of 2 years from his resources or on his personal guarantees they should be secured against the block of the company and will have first preference of payment after the dues of the present secured creditors are paid off. At no stage, the ability of Gopaldas Parikh to provide additional finances was in any way seriously disputed before me. Looking to his connection with different companies and looking to the fact that various creditors have extended credit to the company to the tune of Rs. 74 lakhs on the personal guarantee of Gopaldas Parikh, it would be reasonable to believe that he would be able to procure finances as promised by him in his affidavit.

It was next contended that production programme annexure and estimate production statement annexed to the same are based on exaggerated action of the efficiency of the machinery of the mills and the management. It was urged that the textile machinery of the company is very old and completely worn out and would not work at the expected efficiency and the estimated production cannot be obtained. Reference in this connection was made to the observations made by the court of inquiry appointed to inquire into the closure of the mills in Inquiry Case (IC.I/67) wherein it is observed that the mills is very old with equally old machinery and that there is no other alternative but to scrap the mill. It is true that the machinery is very old; and it is also true that when both the units worked the company suffered loss and, therefore, apparently, it would appear that when one of the two units is to be scrapped the other unit could not be profitably worked. But it appears that uneconomic working of the two units apart from being the result of depreciation in the textile industry was to a considerable extent attributable to the division of the mills into two units in two separate sheds which raised labour ratio to an uneconomic level. Once Unit No. II is scrapped the other Unit can be profitably worked. An expert like Chandraprasad Desai, general manager of Arvind Group of Mills, was one of the opinion that Unit No. I can be profitably worked and estimated production can be obtained. Gopaldas Parikh consulted Chandraprasad Desai and a reply received from Chandraprasad Desai is at page 503. Annexed thereto are the monthly working of the mills and estimated production statement. Mr. Vakil compared these two statements with statements annexed to the scheme submitted to the creditors and members and tried to point out discrepancies between the two. There are some discrepancies but they are not of material nature. After all two experts are bound to differ in their estimates and unless the difference is of an unbridgeable character, it is not the function of the court to examine the scheme like that of an expert in the textile industry. Suffice it to say that Chandraprasad Desai, whose claim as an expert was not very seriously disputed and cannot be disputed, has expressed an opinion that Unit No. I can be profitably worked and that, in my opinion, along with the fact of approval by creditors and members, would be sufficient to come to the conclusion to say that the scheme is workable and feasible.

The next question is whether the scheme is a reasonable and a fair one. The scheme offers compromise of an equitable character to the members and unsecured creditors. But it was urged that the Union Bank and the Central Board of Trustees of the Provident Fund have been given an unfair advantage and they are net expected to make any sacrifice which other interested persons are called upon to make in the scheme. It was urged that the bank does not agree to reduce its claim and insists upon continuance of its security and no relief is sought to be given even in payment of interest. It was also urged that the amount to be realised from the scrap of Unit No. II would be wholly appropriated towards the payments of the dues of the Union Bank and the Central Board of Trustees of the Provident Fund. That of course is true. It must, however, not be forgotten that the Union Bank of India is a secured creditor and can remain outside winding up and prima facie it appears that if it does realise its security, nothing would be left for other creditors and members. The Central Board of Trustees of the Provident Fund have given concession inasmuch as they have agreed to give up damages payable by the company on its failure to pay the provident fund contribution and that is an important concession. Further, both the secured creditors agreed to accept payment by instalments spread out over a long period. It, therefore, cannot be said that the bank and the Central Board of Trustees of the Provident Fund are given unfair advantage in the scheme to the detriment of the interests of the other unsecured creditors and members. Now, if the scheme is sanctioned, the company is likely to be enormously benefited and obtain substantial benefit to which I would presently refer. It must be distinctly understood that the advantages sought to be extended and concession sought to be granted are subject to an important reservation that the proposed advantages and concessions would be extended or made if and only it the scheme is sanctioned. Considering all these aspects, in my opinion, the scheme is a reasonable and fair one and, on the present material, it can be said that it is commercially sound and economically viable. Therefore, it is not possible to accept the contention of Mr. Vakil that the scheme is neither fair nor reasonable nor workable.

I should like now to dwell upon the important aspect why the scheme should be approved. There are two alternatives before the court: (1) to sanction the scheme, or (2) to reject the scheme and as a necessary corollary to wind up the company by passing appropriate orders on three winding up petitions which are pending before the court. If the scheme is to be rejected the only alternative is to wind up the company; and it was urged with utmost vehemence that for an insolvant company, winding up is its inevitable fate and natural corollary. The company can at this stage be undoubtedly said to be commercially insolvent and in respect of such a commercially insolvent company, the creditor would be entitled to an order for winding up the company ex debito instias. But when in respect of such a company, a scheme of compromise and arrangement is offered, the court should, in my opinion, evaluate the position—firstly of creditors and secondly of members in winding up and in the scheme and should weigh the advantages that may accrue in either course to be adopted by the court and find out which way the balance tilts. If the matter is approached from this angle, in my opinion, the conclusion in this case is inescapable. If the company is ordered to be wound up, the liquidator would dispose of the assets of the company and will have to apply first the receipts for discharging the dues of the secured creditors and then preferential creditors and thereafter unsecured creditors; and if there is any balance, there would be pro rata distribution to the members. The present liabilities of the company are in the aggregate amount of Rs. 1,64,54,117. The company is indebted to the bank to the tune of Rs. 40 lakhs and roughly Rs. 22 lakhs are payable to the Central Board of Trustees of the Provident Fund. The company has to pay Rs. 8 lakhs to the Employees State Insurance Corporation and the preferential claim of the workers would come to Rs. 20 lakhs. Indequip Group of companies are creditors to the tune of Rs. 40 lakhs and there are other unsecured creditors to the tune of Rs. 15 lakhs. The remainder is the claim of the workers representing their non-preferential claim. If the assets of the company are sold, taking the best view of the matter, Rs. 28 lakhs may be realised by the sale of the machinery and the land may fetch, at the best available price, Rs. 35 lakhs. I have worked out the figure of Rs. 28 lakhs of the machinery on the basis that the company hopes to realise Rs. 14 lakhs by sale of the machinery after scrapping Unit No. II only. The company is the owner of the land admeasuring about 59,000 sq. yds. These are approximate estimates. It would immediately appear that the claim of the secured creditors and preferential creditors would not be paid in full by the sale of the assets of the company at the market price. After satisfying the claim of secured creditors and preferential creditors there will be no residue and the unsecured creditors are not likely to get a farthing, and even a part of the claim of the preferential creditors, in my opinion, would remain unsatisfied. Therefore, there is no vestige of a chance for the unsecured creditors to get anything towards their claim in the event the company is ordered to be wound up. Even Mr. Vakil could not by any logic work out the figures to show that looking to the present liabilities of the company towards the secured creditors and preferential creditors in the event of winding up, unsecured creditors were not likely to get even a fraction of one per cent, towards their dues. In the event of winding up the mills will be closed down and would be disposed of and, if they are disposed of by scrapping the machinery, there is no question of restarting the mill even by the purchaser. As a necessay consequence the workers would be unemployed and starvation would be their only lot. The company would be dissolved and would come to a dead end. This consequence would generally follow in the event of an order of winding up the company being made and taken to its logical end.

If, on the other hand, the scheme is sanctioned, the secured creditors and preferential creditors would be paid in full. The unsecured creditors would get 50 per cent. of their claim in the shape of ordinary shares of the company and the balance of 50 per cent. would be paid by instalments commencing after a period of two years after restarting of all the departments of Unit No. I. Unit No. I would be restarted under the scheme and would provide employment to roughly 1,000 workers. These aspects cannot be lost sight of even on a humanitarian ground. The company would be resuscitated. The debt liability of the company would be considerably reduced because the Indequip Ltd., which is the biggest unsecured creditor roughly to the tune of Rs. 40 lakhs, has agreed under a compelling necessity and not out of altruistic motive to forgo balance of 50 per cent. of its dues after recovering 50 per cent in the shape of ordinary shares of the company. This concession is made in the affidavit of Gopaldas Parikh. There is a similar concession made by Mr. Khale on behalf of Dyestuffs and Chemicals Private Ltd. which would reduce the liability of the company by another 3 lakhs of rupees. Thus the debt liability of the company would be roughly reduced by Rs. 23 lakhs. These concessions are made on behalf of Indequip Ltd. and Dyestuffs & Chemicals Pvt. Ltd. on the condition that the court sanctions the scheme. It the company is resuscitated, the members may also hope to earn dividend after a lapse of a few years. Now it must be confessed that the concession made by Gopaldas Parikh on behalf of the Indequip Ltd. and by Mr. Khale on behalf of the Dyestuffs and Chemicals Private Ltd. is not actuated by any altruistic motive because it is absolutely certain that in the event of the scheme being rejected and an order for winding up the company is being made, they as unsecured creditors are not likely to recover a farthing out of their total claim of nearly Rs. 46 lakhs. Their aporoach appears to be that when everything is likely to be lost part of it may be recovered by forgoing the other part of it. This concession is not by way of gift or as an inducement to the court to sanction the scheme. They are actuated by their approach as a man of business of sound commercial instinct. They may get 50 per cent. by agreeing to the scheme while they would lose everything if the scheme is rejected. It is under a compelling necessity that they have made this offer. Nonetheless it would be beneficial to the company. When thus the consequence that would follow in the event of sanctioning the scheme or in the event of winding up order being made directly affecting the creditors and members, undoubtedly, the balance in favour of the scheme considerably tilts and that should be a very important circumstance which would influence the court's decision while considering the scheme on its own merits.

It must also be pointed out that if the scheme is not sanctioned and an order for winding up is made, the secured creditors, namely, the Union Bank of India and the Central Board of Trustees of the Provident Fund, have declared their unequivocal intention to remain outside the winding up and they would insist on realising their security in full and, in that event, nothing would be left because the experience of this court, while considering the offers for purchase of a textile mill in this city for the last one year, shows that the price realised is hardly attractive. If the scheme is sanctioned the secured creditors have agreed to be bound by the scheme, while in the winding up, they have expressed in no uncertain terms that they would remain outside the winding up and realise their security in full. If they come under the scheme which they have agreed to do they could be paid by instalments and keeping in view some of the conditions which I propose to impose while sanctioning the scheme, the liability of the company to pay running interest may be reduced to some extent. The Central Board of Trustees of the Provident Fund have agreed to forgo damages to the tune of Rs. 6 lakhs in the event of the scheme being sanctioned. The only thing that was harped upon by Mr. Vakil was that, in the event of winding up, various inquiries can be made into the misdeeds of the ex-directors and fraudulent preferences can be avoided. I have already pointed out that the mortgage in favour of the bank and Central Board of Trustees of the Provident Fund cannot be avoided as fraudulent preferences. The charges created by decrees in favour of the other five creditors, namely, Indian Electro Chemicals Ltd., Dyestuffs & Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Atul Cotton Traders, have been relinquished, by way of concession in the above. The result which Mr. Vakil seeks to achieve is obtained without the order of winding up being made. Thus, giving the matter my anxious thought the advantages and benefits that are likely to accrue by sanctioning the scheme far outweigh the imaginary or productive result which Mr. Vakil thinks can be achieved in winding up. Therefore, also, the scheme deserves to be sanctioned.

Before sanctioning the scheme it is necessary to give specific directions subject to which I would accord sanction to the scheme. The court has power at the time of making an order sanctioning the scheme under section 392(1)(b) to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. This power can be exercised not for substituting the scheme as approved by the creditors and members but for making the scheme of compromise and arrangement effective and workable. The only pre-condition in the exercise of the power under section 392(1)(b) is that the court can make modifications for the proper working of the compromise and arrangement. In other words, the court can modify the scheme of compromise and arrangement so as to make it effective and workable. It has become necessary to exercise this power because the scheme was considered by the creditors and members prior to December, 1968, and it was hoped that it would go through in the early part of the year 1969. For various reasons, the hope has not materialised with the result that certain consequential modifications will have to be made in the scheme to make it effective and workable. Some modifications have also become necessary in order to restrict the powers of the bank and Central Board of Trustees of the Provident Fund to throw overboard the scheme at their sweet will and pleasure. The scheme gives discretion to the bank in the event of the bank in its absolute discretion feeling that its rights as secured creditors are in jeopardy or its guarantee is impaired, to take any action as a secured creditor. The scheme also gives an option to the bank and Central Board of Trustees of the Provident Fund to recover the whole amount at once if the default in payment of instalment is committed. While sanctioning the scheme if these provisions are retained, it would give veto to the bank and the Central Board of Trustees of the Provident Fund to play ducks and drakes with the scheme at their sweet will. Such a power to take unilateral action to the detriment of other interested persons bound by the scheme with a view to destory the scheme given to the bank and Central Board of Trustees of the Provident Fund, would always keep the scheme at the tender mercy of those two creditors and it would not be conducive to the healthy working of the scheme of compromise and arrangement. Therefore, I consider it just and proper for the proper working of the scheme of compromise and arrangement to direct the following modifications to be made in the scheme and, subject to these modifications, the scheme would be sanctioned.

Under the scheme, the dues of the bankers are to be paid by monthly instalments commencing from the specified date. The date has become almost unmeaning when the scheme is being sanctioned. Some instalments holiday is absolutely necessary to give a breathing time to the company. In my opinion, the first instalment payable by the company to the Union Bank of India should commence six months after restarting of all the departments of Unit No. 1 under the scheme, and thereafter every succeeding instalment shall be paid from month to month. The company would be liable to pay interest at the agreed rate but not with quarterly rests. The interest should be simple interest payable from year to year at the agreed rate of interest. The default clause in the scheme by which, in the event of the company committing default in payment of any instalment, the whole of the amount payable to the bank would become due and payable at once, would stand deleted. Whenever the bank wants to sell any property of the company under the rights conferred on the bank in the scheme of compromise and arrangement the same shall not be exercised without prior permission of the court. It is not open to the Union Bank of India to go out of the scheme and proceed to realise the security without obtaining the prior permission of the court.

Similarly, the monthly instalments payable to the Central Board of Trustees under the scheme would commence six month safter the restarting of all the departments of Unit No. I. The company should pay simple interest on the outstanding amount at the rate agreed upon between the company and the Central Board of Trustees of the Provident Fund. The clause in the scheme giving option to the Central Board of Trustees of the Provident Fund to recover the whole of the amount due to it in the event of the company committing default in payment of monthly instalments would stand deleted. The Central Board of Trustees of the Provident Fund would not be entitled to recover damages as conceded in letter No. BPF-1969/ 44878-M Education and Labour Department, Government of Gujarat, dated 18th June, 1969. Whenever the Central Board of Trustees of the Provident Fund want to sell any property of the company under the rights conferred on the board in the scheme of compromise and arrangement the same shall not be exercised without prior permission of the court. It is not open to the board to go out of the scheme and proceed to realise the security without obtaining the prior permission of the court.

The claim of Indequip Ltd., Indian Electro Chemicals Ltd., Dyestuffs Chemicals Private Ltd., M/S. Amarshi Damodar and M/s. Atul Cotton Traders shall be verified by the official liquidator as court officer. After ascertaining the amount, half the verified claim will be converted into share capital of the company. The balance of 50 per cent. of the verified claim payable to Indequip Ltd. and Indian Electro Chemicals Ltd. shall not be payable by the company on their own concession in the event the scheme is finally sanctioned and is worked.

The directors to whom the management of the company would be restored by the provisional liquidator on the scheme being sanctioned are restrained from registering taking any steps hereafter pursuant to the applications already made in respect of charges created in favour of Indequip Ltd., Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders by the decrees of the City Civil Court, Ahmedabad.

In the event of the scheme being finally sanctioned the Union Bank of India should pay to Asia Electric India Private Ltd. from the amount realised from the sale of scrap of Unit No. II of the mills of the company whole or a portion of its claim proportionate to the amount realised from sale of blading system, being part of the power plant of the company, sold by the said creditors to the company and having a charge on it for the unpaid price.

Sanction is hereby accorded to the scheme of compromise and arrangement, copy of which is annexed to this judgment subject to the aforementioned modifications and directions. The court hereby accords sanction to the reduction of share capital as envisaged in the scheme.

All the parties who appeared at the hearing should bear their respective costs, except the official liquidator whose costs should come out of the company. The costs payable to the official liquidator is quantified at Rs. 1,000.

The provisional liquidator is in charge of the company. The directions for return of possession of the company will be given hereafter on judge's summons being taken out by the petitioner or the company. The operation of the order sanctioning the scheme is stayed till 10th January, 1970, as two directors, namely, East India Company, and one other creditor, namely, Pratapsinh Vasantlal, intend to prefer an appeal against this order. The company to pay the expenses incurred by the provisional liquidator on the bills submitted by him.

[1934] 4 COMP. CAS. 73 (LAHORE)

HIGH COURT OF LAHORE

Gujranwala Trading Co. Ltd., In re

TEK CHAND, J.

APPLICATION NO. 20 OF 1933

JANUARY 19, 1934

 Iqbal Singh, for the petitioners.

JUDGMENT

Tek Chand, J.—This is an application under section 55(2)(c) of the Indian Companies Act for orders of this Court confirming certain resolutions passed by the company for the refund of Rs. 150 per share out of the paid-up share-capital, which is stated to be in excess of the wants of the company. According to paragraph 4 of the petition the special resolution sanctioning the refund was passed at a meeting held on the 31st May, 1933, and this was confirmed at another meeting held on the 7th June 1933. But it is laid down in section 81 (2)(b) that the subsequent meeting at which the resolution is confirmed must be held after an interval of not less than fourteen days, and not more than one month, from the date of the first meeting. It appears that this mandatory provision of the law was overlooked by the company. The resolution is, therefore, invalid and cannot be confirmed by this Court. I, therefore, dismiss the petition.

[1959] 29 COMP CAS 418 (P&H)

HIGH COURT OF PUNJAB

Hind Iran Bank Ltd.

V.

Raizada Jagan Nath Bali

TEK CHAND, J.

CIVIL ORIGINAL NO. 104 OF 1957

MARCH 19, 1959

 

TEK CHAND, J. - This is a petition under section 45-E of the Banking Companies Act read with section 187 of the Indian Companies Act of 1913, praying for the passing of payment orders against all the contributories mentioned in list A who are 96 in number. Out of the above contributories, three contributories Nos. 89 (Shri Tara Chand Anand), 93 (Bhai Mohan Singh) and 94 (Shri Sita Ram Sawhney) had made application to this court under section 19 of the Displaced Persons (Debts Adjustment) Act No. 70 of 1951, read with section 45-B of the Banking Companies Act. These three petitions were opposed by the official liquidator. By my order dated 23rd of May, 1958, these petitions were dismissed. The three contributories mentioned above have preferred appeals against my order which are now pending before the Letters Patent Bench. Recovery of the amounts due from each of these three contributories has been stayed by the Letters Patent Bench and therefore the order passed in this case shall not relate to the above named contributories Nos. 89,93 and 94.

Payment orders on the basis of compromises sanctioned by me have already been passed in case of contributories Nos. 17, 29, 69, 70, 72, 76 and 84 and these cases will not be affected by this order.

Out of the remaining contributories, the petition of the bank has been contested on behalf of contributories Nos. 1 (Raizada Jagan Nath Bali), 16 (S. Balwant Singh), 82 (Shrimati Ram Khetri and her son S. Taranjit Singh), 85 (Shrimati Sant Kaur) and 88 (S. Taranjit Singh and Shrimati Ram Khetri). The above contributories are represented by Bakhshi Gurcharan Singh, advocate in this court. Contributories No. 82 and 88 are same persons but as contributory No. 82 they owe a sum of Rs. 10,000 on account of 200 shares and as contributory No. 88, the official liquidator has claimed Rs. 2,75,000 on account of 5,500 shares. The petition is also contested by contributories Nos. 43 (Messrs. Harnam Singh-Bishan Singh), 45 (S. Budh Singh), 74 (S. Kartar Singh son of S. Kishan Singh), who are represented by Shri H. S. Gujral, advocate, and contributory No. 92 (Shri Prem Chand Bhasin) on whose behalf Shri K. S. Thapar, advocate, appeared.

Shri H. S. Gujral on behalf of his clients, contributories Nos. 43, 45 and 74 did not advance separate arguments but has adopted the arguments advanced by Bakhshi Gurcharan Singh on issued Nos. 2, 3 and 4 which are common to the clients of Shri H. S. Gujral and Bakhshi Gurcharan Singh, advocates. The first issue relates exclusively to contributory No. 88 and fifth issue to contributory No. 92. Issues Nos. 2, 3 and 4 are common to all the contesting respondents.

In his petition the official liquidator has prayed that payment orders against all the contributories mentioned in list A attached to the petition for the amounts shown against the contributories with interest at the rate of 6 per cent. per annum from 21st of October, 1957, to date of payment, be passed. In the petition it is stated that the Hind Iran Bank Limited was ordered to be wound up by this court on 9th of April, 1954. On 26th of August, 1957, the official liquidator had asked this court to endorse the list of contributories as settled and filed by the official liquidator and for making a call to the extent of the entire unpaid amount on the shares against all the contributories.

The petition was opposed by the contesting respondents on several grounds. The pleadings have given rise to the following issues :

1.         Whether the debt of contributory No. 88 had been discharged in 1948 and if so, what is its effect ?

2.         Whether the contributories in this case are entitled to the benefit of section 19 of Act No. 70 of 1951 ?

3.         Whether the contributories are not liable to pay the amount claimed against each ?

4.         Whether valid notice was issued to the contributories and if not, what is its effect ?

5.         Whether contributory No. 92 (Shri Prem Chand Bhasin) can claim set-off and if so, to what extent ?

Issue No. 1. - This issue is confined to the case of contributory No. 88, Shri Taranjit Singh and his mother Shrimati Ram Khetri. These two respondents are holders of 5,500 shares of Rs. 100 each, on which Rs. 2,75,000 is the unpaid amount of the calls. It is stated that notice was given to all the contributories in the form marked 'B' attached with the petition, on 19th of September, 1957, by registered post calling upon them to pay the amount due from them on or before 20th of October, 1957, and that in default the official liquidator would move the court for a payment order being passed against them with interest.

Before dealing with the case of these two respondents in support of the first issue, some important facts may be mentioned. The registered office of the bank was at Rawalpindi and on 18th of June, 1947, the board of directors decided to shift the registered office from Rawalpindi to Amritsar. On 20th of July, 1948, a meeting of the creditors of the bank was held at the registered office at Amritsar and it was resolved that the bank be voluntarily wound up under section 209 of the Indian Companies Act, 1913. It was also resolved that Shri Tara Chand Anand be appointed the voluntary liquidator of the bank. A meeting of the shareholders was also called for on 2nd of September, 1948, but no meeting could be held for want of quorum and the meeting was then adjourned to 9th of September, 1948, which was attended by two shareholders and a resolution passed for the voluntary winding up of the bank and for the appointment of Shri Tara Chand Anand as the voluntary liquidator. On 27th of December, 1950, HARNAM SINGH J. found that the two shareholders who attended the meetings of shareholders on the 2nd and 9th of September, 1948, were in arrears in respect of the call money and therefore the meeting at which the special resolution was passed was unauthorised, and that the two shareholders who passed that resolution were not entitled to vote at that meeting and no other shareholder was present at that meeting. It was, therefore, held in Civil Original No. 27 of 1950 that the bank had not been sent into voluntary liquidation according to law, that the appointment of Shri Tara Chand Anand as liquidator was not valid, and that he was not competent to maintain petitions in this court. On Letters Patent Appeal being preferred by the bank, the order of the learned Single Judge was upheld, vide L.P.A. No. 6 of 1951 dated 26th of August, 1953. On 1st of October, 1953, certain petitioners who were the creditors of the Hind Iran Bank Limited, presented a petition under section 162 of the Indian Companies Act, 1913, for the winding up of the bank. By order dated 9th of April, 1954, this petition was accepted and it was ordered that the Hind Iran Bank Limited be wound up.

Late S. Sahib Singh who was the father of respondent Taranjit Singh and husband of respondent Shrimati Ram Khetri, was one of the founders of this bank and on 4th of May, 1945, he died leaving two sons and his widow. It is stated that the elder son, Jai Singh, died in March, 1948. The members of his family held six fixed deposit receipts of this bank of the value of Rs. 2,46,433-5-4. The amounts payable to the holders of the above fixed deposit receipts had become due along with interest when the call was made. The fixed deposit receipts have been produced in this court by the bank from its custody and they are exhibits C. 2, C. 3, C. 4, C. 5, C. 6, and C. 18. On 23rd of July, 1947, the bank sent a notice addressed to S. Jai Singh, major (now deceased), S. Taranjit Singh, minor, and S. Sardarni Ram Khetri asking them to pay a sum of Rs. 2,75,000 on account of the third call on their 5,500 shares "to the manager of the said bank at its office in Rawalpindi City on or before 7th of August, 1947, during the working hours ...". Copy of the resolution dated 21st of July, 1947, resolving to make a further call of Rs. 50 per share was enclosed. A communication was sent on 26th January, 1948, from Dehra Dun to which place Sardarni Ram Khetri and other members of her family had shifted, to the manager of the Hind Iran Bank Limited, Kucha Sher Singh, Rawalpindi. It was stated in the letter that the fixed deposit receipts, details of which were given, had matured for payment and were enclosed as duly discharged and the amount due towards the call be adjusted. The six fixed deposit receipts were got attested by Shri Narindar Singh, Magistrate First Class, Lucknow, on 16th of December, 1947.

Exhibit C. 21 is a communication dated 13th of February, 1948, sent by the Manager, Hind Iran Bank Limited, Rawalpindi, to the manager of the bank at Amritsar, which reads as under :

"We beg to advise having credited you Rs. 2,57,26-10-0 (rupees two hundred and fifty-seven thousand two hundred and sixty seven and annas ten only) o/a payment by Shrimati Ram Khetri for 50 per cent. Call on her shares."

Exhibit C. 31 is letter dated 17th of February, 1948, from Shri Tara Chand, managing director, from Delhi, addressed to Hadi Hussain shah, Manager, Hind Iran Bank Limited, Rawalpindi, and is reproduced below : 

 

                        "Confidential.

My dear Shah Ji,

Re : Your advice for Rs. 2,57,267-10-0 on a/c of payment by Sh. Ram

     Khetri on her unpaid call of 50% per share.

I am afraid it is not possible for me to entertain the transaction in absence of board's resolution and proper legal authority on the subject. You are, therefore, requested not to accept the proceeds of deposit receipts towards payment of unpaid calls on her shares for simple reason that the rest of the depositors are not being paid their deposits and if in this case the F.D. Receipts are adjusted towards capital account, you pay the depositor namely, Shrimati Ram Khetri, in full, hence a preferential treatment, which I do not allow. This requires board's resolution and legal authority. I have already made a reference on February 11, 1948, on the subject to the legal adviser for guidance and shall place before the directors his opinion for their decision.

Meanwhile to avoid legal complications on a/c of our inability to meet our liabilities please see that this transaction is not entertained and no similar transaction is accepted by you until your getting our permission on the subject.

I hope I am quite clear. 

 

                                      Yours sincerly,

                                 (Sd.) Tara Chand Anand,

                                     MANAGING DIRECTOR."

It was contended that the above letter, exhibit C. 31, was only a private letter and could not have the effect of legally countermanding what had been already done by the bank. Bakhshi Gurcharan Singh, advocate for the respondents, argued that his clients had complied with the requirements of the call notice, exhibit C. 30, in so far as they had sent the payment represented by the fixed deposit receipts which had become matured to the manager of the bank at its office in Rawalpindi City. These fixed deposit receipts have been produced from the custody of the bank and they were never returned to the respondents. The fixed deposit receipts were valuable property and if the amount represented by them had not been accepted by the bank towards payment of the call money, they should have been returned to the shareholders, which was never done.

Mr. Tuli, learned counsel for the bank, has argued that out of these fixed deposit receipts, two of them had not matured on 26th of January, 1948, when the letter-exhibit C. 1 was addressed to the manager of the bank at Rawalpindi requesting him to adjust the amount of the receipts towards the call due. The date of maturity of the fixed deposit receipt, exhibit C. 6, which for Rs. 10,000 was 2nd of February, 1948, and of exhibit C. 18, which was for Rs. 9,500 was 29th of February, 1948. It was also argued that the tender of the amount of the call money by means of the six fixed deposit receipts was not valid as it was not in the current coin of the realm and in any case that tender of part payment could not be considered as tender at all. The call amount on 5,500 shares was Rs. 2,75,000, besides interest which was payable at 7 per cent. per annum. The amount that was tendered on behalf of Shrimati Ram Khetri and her sons by means of fixed deposit receipts, came to Rs. 2,57,267, leaving a balance of Rs. 17,733 besides interest that had accrued. It was contended that under section 38 of the Indian Contract Act in order that the offer of performance should be valid it must be an offer of the whole payment or performance that is due. Reliance was placed upon Beharilal Biswas v. Nasimannessa Bibi, where it was held that a creditor was not bound to accept less than his whole debt and there can be no valid tender of part of an entire and indivisible debt.

It was also argued that the tender had not been accepted by the manager of the Rawalpindi branch and in any case he had no power to do so. I am afraid the above arguments are fallacious and do not commend themselves to me. The above objections to the validity of the tender had never been previously made on behalf of the bank and the validity of the tender on any of the above grounds was never questioned. There is nothing on the record to show that the bank did not adjust the amount represented by the fixed deposit receipts against the call money on any of the above grounds. The call money was in respect of 5,500 shares of the bank and the total claim of Rs. 2,75,000 in this respect could not be treated "an entire and indivisible debt" as was the case in Beharilal Biswas v. Nasimannessa Bibi. The items of the claim being 5,500 distinct shares were separable and a tender can be made in respect of separate items. Moreover, the bank not having made any objection on the ground that the entire debt was not being tendered, will be considered to have waived the objection as to the nature and form of the tender. The above objection, therefore, whether they deal with payment not having been tendered in the current coin of the realm or as to there being no performance in entirety or as to the two fixed deposit receipts maturing a few days later, are not entertainable as they were never taken by the bank when payment of Rs. 2,57,267 was offered in 1948 by way of adjustment against the six fixed deposit receipts which were accepted and retained by the bank and never returned to the contributories. It is true that a creditor is not bound to accept payment by means of a cheque or fixed deposit receipt but if such a cheque or receipt, when tendered, is received and no objection is raised, the creditor is precluded afterwards from objecting to the nature of the tender or to its form. The conduct of the creditor in such a case would be construed as implied waiver of the objection : vide Hira Lal v. Khizar Hayat Khan, Jagat Tarini Dasi v. Naba Gopal Chaki, Venkatarama Iyer v. Gopalakrishna Pillay, Harnath Rai Binjraj v. Hirdyanarain Kumar, Krishnaswamy Ayyar v. Mohanlal Binjani, Keshav Mills Co., Ltd. v. Commissioner of Income-tax, and Halsbury's Laws of England, Third Edition, Eighth Volume, paragraph 290, page 170.

The next question is whether the tender of the call money by Shrimati Ram Khetri and her sons as per exhibit C. 1, dated 26th of January, 1948, enclosing six fixed deposit receipts duly discharged had been accepted by the bank. It has already been pointed out that the acceptance of the tender should be construed from the fact that no objection was raised and the fixed deposit receipts, which were valuable property were never returned by the bank. Besides that, there is a letter, exhibit C. 21, dated 13th of February, 1948, produced by the bank which was addressed by the manager of the Rawalpindi City branch to the manager at Amritsar, which has already been reproduced above.

According to the notice, exhibit C. 30, dated 23rd of July, 1947, these respondents were required to pay the sum of Rs. 2,75,000 to the manager of the bank at its office in Rawalpindi City, and this had been done and the manager of Rawalpindi City branch advised to Amritsar branch that he had credited to Amritsar branch the amount due on account of call on the shares in question. I do not think it is open to the bank to object that the sum of Rs. 2,57,267-10-0 had not been credited on account of payment of the call money due on these shares. On behalf of the official liquidator of the bank, reliance had been placed upon two documents, exhibits C. 31 and C. 22. Exhibit C. 31 is a confidential personal letter dated 17th of February, 1948, addressed from Delhi by Tara Chand Anand, styling himself as managing director, and has been reproduced in an earlier part of the judgment.

The other document is exhibit C. 22; it is undated and is written on a letter form of the bank but addressed to no one. It is in the nature of a note stating : "These entries were passed in terms of Sardarni Sahib's instructions but cancelled in view of M.D.'s letter."

On behalf of Shrimati Ram Khetri it is contended that in view of the provisions of section 86-1(1)(d) of the Indian Companies Act, 1913, Tara Chand Anand, erstwhile managing director of the bank, should be deemed to have vacated his office as he had failed to pay the call made on him in respect of shares held by him within six months from the date of such call having been made. On the day of writing the letter, exhibit C. 31, dated 17th of February, 1948, more than six months had elapsed from the date of the call and he had incurred the disability under section 86-1 of the Indian Companies Act, 1913. Moreover, this letter is in the nature of a private communication addressed to the manager of the Rawalpindi branch and not an official document emanating from the managing director and addressed to the manager. In my view this letter emanating from Shri Tara Chand Anand at a time when he had ceased to be the managing director is of no effect. Moreover, in this case the fixed deposit receipts in question throughout remained in the bank's custody and no communication was ever made to the contributory that her liability to the extent of the amount represented by the fixed deposit receipts had not been discharged. In the circumstances no unilateral act on the part of any official of the bank could have the effect of reversing the appropriation already made of the amount of the fixed deposit receipts towards the call money.

The endorsement and the delivery of the fixed deposit receipts to the bank at its Rawalpindi office in accordance with the terms of the notice issued to the shareholders was a good payment to the bank even if the fixed deposit receipts may not be transferable, vide Paget's Law of Banking, Fifth Edition, pages 94 and 95. In Spargo's case : In re Harmony and Montague Tin and Copper Mining company, James L.J. stated the principle in the following words :

"But if a transaction resulted in this, that there was on the one side a bona fide debt payable in money at once for the purchase of property, and on the other side a bona fide liability to pay money at once on shares, so that if bank notes had been handed from one side of the table to the other in payment of calls, they might legitimately have been handed back in payment for the property, it did appear to me in Fothergill's case, and does appear to me now, that this Act of parliament did not make it necessary that the formality should be gone through of the money being handed over and taken back again; but that if the two demands are set off against each other the shares have been paid for in cash. If it came to this, that there was a debt in money payable immediately by the company to the shareholders, and an equal debt payable immediately by the shareholders to the company, and that each was accepted in full payment of the other, the company could have pleaded payment in an action brought against them, and the shareholder could have pleaded payment in cash in a corresponding action brought by the company against him for calls. Supposing the transaction to be an honest transaction, it would in a court of law be sufficient evidence in support of a plea of payment in cash, and it appears to me that it is sufficient for this court sitting in a winding up matter."

The above dictum was cited with approval in In re Jones, Lloyd & Co. Ltd. Similar view was expressed in Adamson's case : In re Paraguassu Steam Tramway Co.

A debt and due owing by the bank to a shareholder can be set off against a sum due from him upon calls so long as the bank is a going concern, vide Habershon's case : In re Masons' Hall Tavern Co. and Ramwell's case : In re Exchange Banking Co. Ltd. A call can be effectually paid in money's worth otherwise than by cash and such a payment is effectual where the consideration given is regarded by the parties as fairly representing the sum purporting to be discharged, vide Buckley, 13th Edition, page 802, In re White Star Line.

In this case the manager at Rawalpindi was, as admitted by Tara Chand Anand himself as C.W.I, competent to receive any amount paid as call money and he had the same power of attorney on behalf of the bank as was held by Tara Chand Anand himself. The official liquidator of the bank has not chosen to produce the power of attorney in favour of Tara Chand or Mr. Shah, the manager at Rawalpindi. Tara Chand has stated that the manager at Rawalpindi was authorised to receive and set off the loan account and also authorised to receive cash to liquidate debts. Money paid to the bank against fixed deposit receipts was in the nature of a loan to the bank and this debt could be utilised by the depositor for liquidating other liability of the depositor to the bank, vide Paget's Law of Banking, Fifth Edition, page 95.

It is not denied that the payment could not be made at Rawalpindi which was the place of payment under article 36 of the articles of association of the bank and it was also the place mentioned in the call notice.

It was lastly argued by Shri Tuli that according to the statement of Shri Balwant Singh, son in law of Shrimati Ram Khetri, a reply was received to her letter, exhibit C. 1, in which adjustment was refused with reference to the managing director. That letter or its copy has not been produced and it is not known if it is available. I cannot, from this, conclude that there had been no adjustment at all.

In this case it cannot be urged on behalf of the bank that adjustment of the amount of the fixed deposit receipts towards the call money amounted to a fraudulent preference by the bank of the respondents, on 13th of February, 1948, the date of exhibit C. 21, over the other creditors of the bank within the contemplation of section 54 of the Provincial Insolvency Act read with section 231 of the Indian Companies Act, 1913. The resolution of the shareholders for sending the bank into voluntary liquidation is dated 9th of September, 1948. The adjustment had been done seven months previously in pursuance of the respondent's letter exhibit C. 1, dated 26th of January, 1948. Moreover, as found by HARNAM SINGH J. in his order dated 27th December, 1950 in C.O. No. 27 of 1950, the special resolution passed at a meeting of two shareholders, both of whom were in arrears in respect of the call money, was of no legal effect as they were not entitled to vote at the meeting. It was held in Chennakesava Iyengar v. Coimbatore Mahalakshmi Bank Ltd., that there where a voluntary winding up by a company is followed by a petition for its winding up by the court or subject to its supervision, the crucial date for determining whether a transfer by the company was within three months of the act of insolvency is the date of the petition for compulsory winding up and not the date of the resolution for voluntary winding up.

In order to show that there has been fraudulent preference in a particular case on the part of a debtor, of some creditor over another, it is not sufficient merely to show that the creditor had in fact been preferred but that the transfer or payment had been made "with a view" to giving a preference to that creditor over the other creditors. In all cases of alleged fraudulent preference it has to be proved that the view to prefer was the dominant or the substantial view.

"The fact that a debtor pays a particular creditor does not amount to a fraudulent preference, though he may at the time of payment have been in insolvent circumstances, not even if the consequence of his act has been to prefer that creditor over his other creditors. It must be shown not only that he has preferred the creditor, but that he has done so with the dominant view of giving him preference over the other creditors". - See The Law of Insolvency in India by D. F. Mulla, Second Edition, page 629.

The onus of proving that there had been a fraudulent preference lies on the official liquidator. On the facts of this case it cannot be urged with any seriousness that on the date of the acceptance of the call money by means of fixed deposit receipts, the manager of the Rawalpindi branch of the bank had the dominant intention to prefer the respondents over some other creditors of the bank.

In view of what has been stated above, I hold that the debt of contributories shown at No. 88 in respect of the call on shares in discharged to the extent of the amount due from the bank in respect of the six fixed deposit receipts of the bank of the value of Rs. 2,57,267-10-0 as admitted in exhibit C. 21.

Issue No. 2 - This issue is common to all the contesting contributories and the question is whether they are entitled to the benefit of section 19 of Act No. 70 of 1951 (the Displaced Persons (Debts Adjustment) Act). In their respective written statements, the contributories Shri Jagan Nath Bali, Shrimati Ram Khetri, Shrimati Sant Kaur, S. Balwant Singh and Shri Tara Chand Anand claimed the benefits of section 19 of the Displaced Persons (Debts Adjustment) Act. It was claimed on their behalf that they were displaced persons from West Punjab. The resolution for the voluntary winding up of the bank was passed on 20th of July, 1948. By order of HARNAM SINGH J. dated 27th of December, 1950, passed in C.O. 27 of 1950, it was held that the bank had not been sent into voluntary liquidation in accordance with law, and that the appointment of Shri Tara Chand Anand as liquidator was not valid. On 20th of August, 1953, the Letters Patent Bench confirmed the order of the Single Judge. The petition for compulsory winding up was made on 1st of October, 1953. The Displaced Persons (Debts Adjustment) Act was extended to the Punjab on 10th of December, 1951. Section 19 enables a displaced person to apply to a company for conversion of partly paid up shares held by him into a smaller number of fully paid up shares in respect of which calls have been made. If such a request is refused by the company, the Tribunal - in this case, this court, in view of the provisions of the Banking Companies Act - may, on application, direct the company to convert the partly paid up shares into smaller number of fully paid up shares. The provisions of section 19 have effect for a period of ten years from the 15th day of August, 1947, and thereafter they ceased to have effect except as respects things done or omitted to be done (vide sub-section (6)).

In this case admittedly no application under section 19 has been made either to the company or to the court, during the period of ten years from 15th day of August, 1947, till 15th day of August, 1957. What has been submitted by the learned counsel for the contributories is an argumentum ad misericordium. It is stated that till the order of the single Judge passed on 27th of December, 1950, which was later confirmed by the Letters Patent Bench on 26th of August, 1953, the shareholders were in the dark about the exact situation of the bank as to whether it was a living company or in liquidation. It is also stated that they were unaware of the fact as to when application for its winding up was made and when the winding up order was passed. It was on these grounds, prayed that the benefit of section 19(4) of the Act should be extended to them. No application by any shareholder was made prior to 15th of August, 1957, i.e., during the period of ten years when relief under section 19 could have been granted. This bank is in liquidation since 1st October, 1953, when the petition for its compulsory winding up was made. The order sending the bank into compulsory winding up was passed on 9th of April, 1954.

I have held in the case of Bhai Mohan Singh v. Hind Iran Bank Ltd. that a displaced person who holds partly paid up shares in a company has no right after the company has gone into liquidation to apply under section 19 of the Act to have his partly paid up shares converted into a smaller number of fully paid up shares. In this case the bank cannot be said to be in liquidation since the passing of the resolution for voluntary winding up, as the voluntary liquidation of the company was held to be illegal by HARNAM SINGH J. In Bhai Mohan Singh's case, I expressed the view that section 19 referred exclusively to the benefits conferred upon a displaced person or a displaced bank holding shares in a company or a co-operative society which was a going concern and not to a company or society in liquidation. Section 20 of the Act refers to a case of a company or co-operative society in liquidation and sections 19 and 20 are mutually exclusive. After hearing the arguments of the learned counsel, I have not been able to persuade myself to change my view that I had formed in Bhai Mohan Singh's case.

It was next argued that even after the lapse of ten years from the 15th day of August, 1947, section 19(6) kept the operation of section 19 alive "as respects things done or omitted to be done". In this case it was argued that if the shareholders had omitted to make an application under section 19 within the period of ten years, this period could be extended by virtue of sub-section (6). This argument is devoid of any sound principle. Sub-section (6) contemplates the taking of some steps during the statutory period. If after the machinery provided by law had been set in motion, there were left certain things unfinished they could be completed. The words of sub-section (6) cannot be stretched so as to defeat the very purpose of providing a fixed period of ten years during which the benefit of section 19 could be availed of. Any other interpretation would have the effect of defeating the clear intention of the provision. Section 19 was designed to give relief to displaced persons who asked for it within ten years from 15th day of August, 1947, and not beyond that period. This issue is, therefore, decided against the contributories.

Issue No. 3. Under this issue, the contesting contributories claim that they are not liable to pay the amount as it is barred by limitation in view of the provisions of article 112 of the Indian Limitation Act, which runs as under : 

 

"For a call by a company      Three years.         When the call is payable."

registered under any                               statute or Act.

Bakhshi Gurcharan Singh, learned counsel for the contributories, argued that the call was made payable on or before 7th of August, 1947, and the petition for compulsory winding up of the company was filed on 1st October, 1953, more than six years later, and under article 112 the limitation of three years had long expired. Shri B. R. Tuli, learned counsel for the bank, argued that article 112 applied to a call made by a company. He said that the liability of the contributories arose in this case under section 156(1)(iv) read with section 187 of the Indian Companies Act, 1913. In this case, besides the call made by the company this court by order dated 30th August, 1957, in the exercise of its powers under section 187 had ordered the making of the call and its payment by the official liquidator. Such a call is recoverable within six years from the date of default under article 120. Article 112 of the Limitation Act does not apply.

It was held in Parell Spinning and Weaving Co. Ltd. v. Manek Haji, that to a suit which is brought not by the company but by the liquidator, article 120 of the Limitation Act applied. JARDINE J. after discussing English authorities, said that :

"The result of the decisions and dicta seems to be, that although the liquidator is submitted for, and enforces the rights of, the creditors in right of the company yet that the winding up order calls into existence new rights and new liabilities which did not exist before; and that equities which might have been set up against the company cannot prevail against the liquidator as representing the creditors."

Reliance was also placed on the observations of JESSER M.R. in In re Whitehouse and CO. :

"That is a new liability; he is to contribute; it is a new contribution .... it is a liability to contribute to the assets of the company; and when we look further into the Act it will be seen that it is a liability to contribution to be enforced by the liquidator. It is quite true that a call made before the winding-up - ..... is a debt due to the company, but that does not affect this new liability to contribution."

The above view had been followed in a large number of decisions. In Pokhar Mal v. Flour and Oil Mills CO. Ltd., TEK CHAND J. said :

"The question of limitation is concluded by authority. It is settled in a long course of decisions that a member of a company in liquidation is liable in respect of unpaid calls even though the calls were made by the company before it went into liquidation and the suit of the company for their realization had become barred by time under article 112 of the Indian Limitation Act : Sorabji v. Isher Das, Vaidiswara Ayyar v. Siva Subramania Mudaliar, Jagannath Prasad v. U.P. Flour and Oil Mills CO. Ltd., Dehra Dun Mussourie Electric Tramway Co., In re, Prayan Prasad v. Gaya Bank Ltd., Delhi Woollen Mills Co. Ltd. v. Durga Das The principle of these decision is that when a company goes into liquidation, section 156 creates a new liability on the shareholders in respect of such calls, which is distinct from and independent of the rights which the company had against them before the winding up : Hansraj Gupta v. Asthana, Whitehouse & Co., In re.

In Jagraon Trading Syndicate Ltd. v. Nanak Chand Roshan Lal it was said :

"It is well settled now that section 156 imposes new rights and liabilities upon shareholders as soon as the liquidation proceedings start. As laid down in several authorities on the subject as soon as a company goes into liquidation, this section saddles the shareholders with a new liability in respect of unpaid calls and such unpaid calls are recoverable at the instance of the liquidators though barred by time and though the company could not recover them."

Reference may also be made to Mahomed Akbar Abdulla Fazalbhoy v. Associated Banking Corporation of India Ltd., and Jagannath Prasad v. U.P. Flour and Oil Mills Co. Ltd.

Bakhshi Gurchan Singh relied upon Hansraj Gupta v. Dehra Dun Mussoorie Electric Tramway Co. Ltd., and Sri Narain v. Union Bank Of India, for the proposition that the words "money due" occurring in section 186 were to be confined to money due and recoverable in a suit by the company and did not include money which at the date of the application under section 186 could not have been so recovered. But both these cases were judgments under section 186, which is inapplicable and not under section 187, which governs the facts of this case. The Judicial Committee of the Privy Council did not overrule the decision in Jagannath Prasad v. U.P. Flour and Oil Mills Co. Ltd. but distinguished it as it was a decision relating to section 187. The long string of authorities beginning with Parell Spinning and Weaving CO. Ltd. v. Manek Haji, fully support the contention raised on behalf of the official liquidator.

Bakhshi Gurcharan Singh has next argues that the provisions of section 156(1)(iv) do not govern the case of a time-barred debt. The relevant words of that provision are :

"in the case of a company limited by shares, no contribution shall be required from any member exceeding the amount (if any) unpaid on the shares in respect to which he is liable as a present or past member".

The argument in brief is that the liability contemplated above is in respect of claims which are enforceable in praesenti, i.e., which are not time-barred. He maintains that the words "he is liable" means at the present time when the provisions of section 156 are being invoked and the order is being passed under section 187. He wants to give to the word "liable" the restricted meaning of being legally responsible or bound in law and in praesenti. The word "liable" has a large and comprehensive significance and when so construed it means "obliged in law or equity, subject", vide Webster's New International Dictionary. The word "liable" has also a second definition and that is "exposed or subject to a given contingency, risk or casualty which is more or less probable" vide Black's Law Dictionary. The word is used in the sense of actually or potentially subject to an obligation. The word is not used in an absolute sense and does not exclude the idea of contingency. It refers to a possible or probable happening which may not actually occur. Under section 187, the court may make calls for payment of any money which it considers necessary to satisfy the debts and liabilities of the company, etc. Thus a person is liable "if he is actually or potentially subject to an obligation". The provisions of section 156(1)(iv) emphasised the outside limit of liability of a present or past member. What is required is that the contribution should not be in excess of the unpaid amount on the shares in respect of which as a present or past member he is liable.

The liability of a member to contribute under section 156 is ex lge and arises by reason of the fact that his name appears on the register of members. It is not ex contractu. This section imposes a new liability on the shareholders after the company goes into liquidation, in respect of unpaid calls made before or after the winding up. Such calls can be recovered even if barred by limitation, when the winding up order was made, vide Mahomed Akbar Abdulla Fazalbhoy v. Official Liquidator, Vaidiswara Ayyar v. Siva Subramania Mudaliar, In re East Bengal Sugar Mills Ltd., and Webb v. Whiffin.

On issue No. 3, I hold that the contributories are liable to pay the amount claimed against each.

Issue No. 4. - This issue relates to validity of notice issued to the contributories. This issue has not been pressed by either party and therefore it is assumed that the notice issued to the contributories did not suffer from any infirmity.

Issue No. 5 - This issue relates exclusively to contributory No. 92 (Shri Prem Chand Bhasin) and the question is whether he can claim set-off and if so, to what extent. The case of Shri Prem Chand Bhasin is that he was a director of the bank and that a call was made on the shareholders in July, 1947, and he evacuated from Pakistan in September, 1947. He says that he had Rs. 75,000 in the bank out of which Rs. 10,000 were debited to his account against his fixed deposit; Rs. 50,000 were withdrawn by him from time to time, and Rs. 15,000 were left in the bank in this account for adjustment against the call. The amount claimed from him by the official liquidator is Rs. 10,000 in respect of his 200 shares. He stated in cross-examination that he could not say if he addressed any letter to the registered office of the bank for adjustment of the fixed deposit amount against the call that had been made. He stated that he had not written any letter to Shri Tara Chand as he had spoken to him verbally and in view of his cordial relations with him, he believed that Tara Chand would do the needful. He also admitted that Tara Chand never told him that the adjustment asked for by him had been done, Tara Chand, who appeared as C.W. 1, stated that he could not remember if any request on behalf of Mr. Prem Chand Bhasin for adjustment of the call money against his deposits was ever made to him. From this evidence, no case is made out in favour of Mr. Prem Chand Bhasin entitling him to claim set-off against the bank. Issue No. 5 is, therefore, decided against him.

In the result I hold that contributory No. 88, namely, S. Taranjit Singh and Shirmati Ram Khetri owe to the bank a sum of Rs. 17,732-6-0 that is to say, Rs. 2,75,000 claimed by the official liquidator, less Rs. 2,57,267-10-0 allowed by me as set-off. I, therefore, pass payment order against contributory No. 88, S. Taranjit Singh and Shrimati Ram Khetri for Rs. 17,732-6-0.

So far as contributories Nos. 17, 29, 69, 70, 72/76 and 84 are concerned, orders in respect of their cases have already been passed and this order does not affect them.

Similarly this order does not affect contributories Nos. 89, 93 and 94 whose appeals under the Letters Patent have not been disposed of so far.

As against all other contributories, I pass payment order for the amounts shown against each as per list attached.

Order accordingly.

[1946] 16 COMP. CAS. 8 (BOM.)

HIGH COURT. OF BOMBAY

T.H. Vakil

v.

Bombay Presidency Radio Club Ltd.

BLAGDEN, J.

O.C.J. SUIT NO. 922 OF 1944

AUGUST 11, 1944

V.F. Taraporcwala and B J. Desai, for the Plaintiff.

Sir Jamshedji Kanga and R.J. Joshi, for the Defendants.

JUDGMENT

This is a suit and motion brought by a member of the Bombay Presidency Radio Club, Ltd., against the club asking for a declaration that a ruling given by the chairman of the club at its last annual general meeting was invalid and for consequential relief. The material facts are not in dispute and it has been agreed that the hearing of the motion may be treated as the trial of the suit. What happened was this. The general meeting was held on 19th of last month at 6 p.m. pursuant to a notice dated 14th June. One item on the agenda contained in the notice was "to receive the report of the Managing Committee and the audited balance sheet as at 31st December 1943, and the Income and Expenditure Account for the year ended 31st December 1943, and to approve and adopt the same."

At the meeting, the chairman moved, himself, "that the report of the Managing Committee and the audited balance sheet as at 31st December 1943, and the Income and Expenditure Account for the year ended 3lst December 1943, be received and adopted."

That proposition was duly seconded, and thereupon a Mr. P.D. Shamdasani moved an amendment in terms which were identical with the motion of the proposition moved by the chairman up to and including the words "be received." Mr. Shamdasani's amendment, however, then proceeded:

"but not adopted and that a committee consisting of the following namely" (then follows a list of the names of five gentlemen, first and foremost of whom was that of Mr. P.D. Shamdasani himself) "be and is hereby appointed to look into them and the accounts and to report thereon within one month from this date."

The seconder of the chairman's resolution then raised a point of order and after some discussion the chairman ruled the amendment out of order. Now the question before me is whether his ruling was right or not, and (if it was wrong), what ought to be done about it. The subsequent proceedings of the meeting took, as far as I can see, a perfectly logical course because the chairman's resolution was eventually put to the meeting and lost. This would seem to indicate that the majority of the members present were dissatisfied with the accounts and presumably would have voted in favour of Mr. Shamdasani's amendment had it been allowed to be put to the meeting. Curiously enough there is no decided authority directly bearing on the present question. But one very often finds that the more simple a question, the more difficult it is to find an authority about it. I understand the general rule on the point to be this: first, that amendments must be germane to the subject-matter of the proposition and, secondly, that they must not be, in substance, a direct negative of it. If, for example, a resolution were that a particular piece of business be now considered, it would be in substance a direct negative to move that it be considered 999 years hence. One thing that has been suggested about this amendment is that it is a direct negative. I do not think this is correct. Instead of saying "be not received" it expressly proposed that the accounts shall be received, but that instead of adopting the same the company should appoint a committee to go into them and to report thereon. I do not think that it can be said to be a direct negative of the proposition originally made. The report of the proposed committee might be that the accounts were perfectly in order and that, to use a popular phrase, "everything in the garden was lovely." If that had been the report, no doubt the club would have willingly adopted the accounts. Then can it be said that the amendment is not reasonably germane to the original proposition? On that point a very interesting opinion is expressed in the last edition of Palmer's Company Precedents at p. 647. Though it is not a judicial pronouncement, it is the opinion of a father and son both of whom have had a great deal of experience in company work and the senior of whom is now a County Court Judge. It therefore has some degree of authority. This is the statement which the learned authors make: —

"No amendment can be moved which goes beyond the notice convening the meeting or, in the case of an ordinary meeting, beyond the scope of the ordinary business which by the articles may be transacted thereat without special notice. Thus, in the case of an ordinary meeting, where a motion is submitted that the report and accounts be received and adopted an amendment that the directors be removed from office, or that the articles be altered, would be irregular; but amendment to the effect that the accounts and balance sheet be received but not adopted and that a committee of shareholders be appointed to look into them and report would be competent"

That correctly lays down the law as regards germanity of the amendment and as to its coming within the scope of the business of a meeting convened for the purposes for which this meeting was convened. Where the agenda proposed the reception and adoption of accounts, I do not think the meeting is bound either to reject or accept them. I think that an amendment of this kind might be moved subject to any statutory provisions of the Companies Act. In the case of a meeting of a private association, unfettered by statute, I think that the members must expect the possibility of an amendment such as this being moved and the absent members could not complain if such an amendment were moved and carried. The ore serious matter that could be urged by the company in the endeavour to uphold the chairman's ruling is that the amendment as proposed would, if carried, result in a resolution that the meeting was incompetent to pass. The reason why it is contended that the resolution if passed would be incompetent is this, that Section 142 of our Companies Act, which deals with the appointment by the company of committees of inspection requires the appointment by special resolution. [See sub-section (1).] If, however, one reads the remaining sub-section one rinds that inspectors so appointed, that is appointed by special resolution, shall have the same powers and duties as inspectors appointed by the Central Government, and if one looks elsewhere in the Act (Section 140) one finds the latter class of inspectors have power to examine persons on oath and to enforce production of the company's books under penalty. Moreover, it is to be observed that the provision that the company may appoint an inspector by special resolution, and that if it does so, the person appointed shall have certain drastic powers, does not necessarily imply that it may not do so by ordinary resolution, subject to this, that the person appointed by ordinary resolution would not have those drastic powers. At all events, his Honour Tophain, J., seems to be of opinion that the company could pass what would in effect be a resolution for a committee of inspection by an ordinary resolution at an ordinary meeting. Other text-writers do not take such a definite view of the matter. The well-known authority, Sir Frank Gore Browne, whose last edition was edited by his Honour Haydon, J., seems to have been of opinion that to carry a resolution for a committee of inspection it would be necessary to give notice. The same opinion seems to be shared by Mr. Albert Crew in his book "Conduct of meetings." In Sarkar and Sen, the question is described as "doubtful." In the articles of this particular company the statutory form of article 101 has been adopted as article 92 and according to that article the books of the club are not to be inspected by any member of the club, not being a member of the committee except as provided by law or authorised by the committee or by a resolution of the club in general meeting. It does not say that the resolution should be a special resolution nor, in terms, that the resolution should be one pursuant to notice. On the whole, I have come to the conclusion that the chairman's view was mistaken, and that it was competent by an amendment of his proposition for the company to appoint what would in effect be an informal committee of inspection; I say "informal" because the committee, if so appointed, would not have had the powers which are conferred on a committee appointed as contemplated by Section 142 or as conferred on government inspectors of companies.

Now the question is what the effect of making the declaration which I am asked to make will be. The only authority which has any bearing on that, as far as I know, is Henderson v. Bank of Australia. There an amendment by shareholders was improperly ruled out of order and subsequently the unamended proposition was put to the meeting and carried. In that respect the facts are distinct from those of this case where the unamended resolution was put to the meeting and lost. But I think this is a distinction without a difference because the principle, as I understand it, which is stated in the judgment of Lopes, L.J., is that the refusal by the chairman to put an amendment to the meeting "invalidates the proceedings" by which are meant the subsequent proceedings as regards that particular question. Lopes,L.J. says, "It is to my mind perfectly clear that it does." The reason is, as I take it, that the members who were present at the meeting have expressed their opinion on the substantive motion without having had an opportunity to express their opinion on the amendment and as a result of that it may well be (I do not say it is) that the real sense of the meeting has not yet been ascertained. The proper course for me is to make the declaration which I am asked to make under prayer (a) of the plaint and make an order as asked under prayer (e). I direct a general meeting to be convened for the purpose of receiving and adopting the documents mentioned in prayer (e) at 14 days notice to be given by the defendant company. Re-circulation of audited accounts, balance sheet, and report may be dispensed with. I declare that the resolution refusing to accept or adopt the accounts, etc., was invalid. Costs against the defendant company to come out of the company's assets. Interim injunction dissolved.

 

[1993] 76 COMP. CAS. 469 (DELHI)

HIGH COURT OF DELHI

Amar Nath Malhotra

v.

Mcs Limited

ANIL DEV SINGH J.

I.A. NOS. 323 OF 1992 IN SUIT NO. 120 OF 1990.

MAY 29, 1992

 

S.P. Mahna for the Plaintiff.

P.N. Lekhi, P.A.S. Rao and C.L Narsimham for the Defendants.

JUDGMENT

Anil Dev Singh J.— This is the plaintiff's application under Order 39, rule 4, read with section 151, Civil Procedure Code, for "setting aside the interim injunction" dated September 7, 1991, granted by the learned Sub-Judge, Delhi, and for dismissal of the plaintiff's application under Order 39, rules 1 and 2, Civil Procedure Code. The events leading to this application are as follows :

The defendant-company, which is a public limited company, fixed its annual general meeting on September 9, 1991, and in this regard circulated a notice dated July 1, 1991, informing the members about the same. On August 21, 1991, the plaintiff, who is a shareholder of the defendant-company, in turn, informed the latter that he will be moving the following resolution under section 225(2) of the Companies Act, 1956 (for short "the Act"), at the forthcoming annual general meeting :

"Resolved that Messrs. Ram Pal Gupta and Associates, 6781, Beri Wala, Bagh Chowk, Azad Market, Delhi-6, chartered accountants be and are hereby appointed as auditors of the company in place of Messrs. Amod Agarwal Associates, Chartered Accountants".

The vice-president of the company, vide his letter dated August 24, 1991, wrote to the plaintiff that the proposed resolution, which the latter intends to move at the annual general meeting for appointing Messrs. Rampal Gupta and Associates as auditors of the company in place of Amod Agarwal and Associates, chartered accountants, was not in accordance with the provisions of the Act and therefore, no action can be taken in regard to the proposed resolution. The refusal of the company to take action in regard to the proposed resolution implied that the defendant was neither circulating the proposed resolution to the members of the company nor was including the same in the agenda for the annual general meeting. Aggrieved by this refusal of the defendant, the plaintiff instituted the present suit in the court of the Senior Sub-Judge for a declaration that the notice dated July 1, 1991, for holding the annual general meeting of the defendant-company is illegal and null and void, besides being violative of the interests of the shareholders. In the suit a perpetual injunction is also claimed for restraining the defendant-company from holding the annual general meeting on September 9, 1991. Along with the plaint, an application under Order 39, rules 1 and 2, Civil Procedure Code, being I.A. No. 323 of 1992, was also moved whereby the plaintiff prayed for an ex parte interim injunction against the defendant-company from holding the annual general meeting on the scheduled date. On September 7, 1991, the learned Sub-Judge made certain directions with regard to the publication and circulation of the proposed resolution of the plaintiff. According to the directions of the learned Subordinate Judge, the resolution was deemed to be properly filed with the company subject to the plaintiff depositing a sum of Rs. 2,500 with the company. It was also directed that the resolution shall be taken as item No. 4A in the ordinary business of the company in the agenda. Not satisfied with the order of the learned Sub-Judge, the defendant filed a petition under clause 9 of the Letters Patent and under article 227 of the Constitution before the High Court. On December 2, 1991, J.K. Mehra J. transferred the suit pending before the learned Subordinate Judge to this court on the original side. This order was passed on the agreement of the parties and the defendant was given liberty to move such application or take such action as may be open to it under law for revocation, modification or alteration of the impugned order. Pursuant to the order, the plaintiff has filed the present application. This is how the matter is before me.

Mr. P.N. Lekhi, learned counsel appearing on behalf of the defendant, submitted that the interim order dated September 7, 1991, was causing grave injustice, prejudice and hardship to the defendant. According to learned counsel, since no annual general meeting has taken place, it was not possible to declare the dividend payable to the shareholders for the year 1990-91. Learned counsel invited my attention to several letters of the shareholders demanding dividend for the year 1990-91. Mr. Lekhi further submitted that the right under section 225 of the Companies Act, 1956, cannot be exercised by an individual member and any resolution and notice in respect thereof can be effective only if the requirement of section 188 is complied with, namely, the proposed resolution must be signed by members representing l/20th of the total voting power of all the members having a right to vote or by at least 100 members having the said right and holding shares of the value of more than Rs. 1 lakh. As the said condition was not complied with by the plaintiff, the company was not obliged to circulate the proposed resolution or to include the same in the agenda of the annual general meeting.

Mr. Mahna, learned counsel for the plaintiff, contended that the order dated September 7, 1991, ought not to be varied or modified as the conditions contemplated under Order 39, rule 4 of the Code of Civil Procedure for varying or modifying the order have not been satisfied. According to learned counsel, the letters asking the defendant to pay the dividend are of no consequence as the same have been managed by the company from the shareholders. It is the contention of the learned counsel that no hardship or prejudice is being caused by the order dated September 7, 1991. On the merits of the controversy, it is submitted that a proposed resolution of which special notice is required need not comply with the provisions of section 188 of the Act. It is the contention of learned counsel that a single shareholder can invoke the provisions of section 225 of the Act and the refusal of the defendant-company to include the proposed resolution in the agenda of the annual general meeting was illegal and misconceived.

The first question for determination is whether or not a case has been made out by the defendant under Order 39, rule 4 of the Code of Civil Procedure justifying its prayer for discharge, variation and setting aside of the interim order dated September 7, 1991.

It is not disputed that so far the company has not been able to declare and pay dividend to the shareholders for the year 1990-91 as no annual general meeting was held during this period. The defendant attributes this to the interim order granted by the learned Sub-Judge which interdicts the holding of the annual general meeting in case the proposed resolution of the plaintiff is not included in the agenda for the annual general meeting. It goes without saying that if the annual general meeting does not take place it does cause hardship to the company and its shareholders. I may not dilate on this issue as in any event the order of J.K. Mehra J., dated December 2, 1991, leaves the door open for the defendant to ask for revocation, modification or alteration of the order of the learned judge dated September 7, 1991.

The next question for consideration is whether the defendant-company was bound to give notice to its members of the proposed resolution of the plaintiff for removal of the auditor and was also obliged to include the same in the agenda for the annual general meeting. In order to answer the question, it will be necessary to analyse the relevant provisions of the Act.

According to the Indian Companies Act, 1913, three types of resolutions could be passed at a general meeting, namely, ordinary resolution, special resolution and extraordinary resolution. The Company Law Committee recommended the doing away with extraordinary resolutions. It was the view of the Committee that the company meetings will be rendered much simpler by abolition of the extraordinary resolutions and their replacement by special resolutions except where ordinary resolutions were recommended by them. They also recommended that a uniform notice period of 21 days be given for all resolutions. This was another reason for recommending the abolition of extraordinary resolutions. Section 189 of the Act gives effect to these recommendations of the Company Law Committee.

Following the provisions of section 142 of the English Act of 1948 it was also suggested by the Company Law Committee that in certain cases special notices of proposed resolutions should be required to be given to the company which in turn must give it to the shareholders. Under the English Act, special notice is required in the case of a resolution to remove a director (section 184) or to dispense with a director's age limit (section 185) or to propose the appointment of an auditor other than the retiring auditor (section 160). Similar provisions have been incorporated in the present Act based on the recommendations of the Company Law Committee. These are sections 190, 225 and 284 of the Act.

Section 190 of the Act corresponds to section 142 of the said English Act. This section reads as under :

"S. 190. Resolutions requiring special notice. — (1) Where, by any provision contained in this Act or in the articles, special notice is required of any resolution, notice of the intention to move the resolution shall be given to the company not less than (fourteen days) before the meeting at which it is to be moved, exclusive of the day on which the notice is served or deemed to be served and the day of the meeting.

(2) The company shall, immediately after the notice of the intention to move any such resolution has been received by it, give its members notice of the resolution in the same manner as it gives notice of the meeting, or if that is not practicable, shall give them notice thereof, either by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the articles, not less than (seven days) before the meeting".

According to the above provision, the requirements of special notice are as follows :

(a)            Notice of intended resolution to be moved should be given to the company fourteen days before the meeting at which it is to be moved.

(b)            The company must give notice of the intended resolution in accordance with section 53 of the Companies Act or if that is not practicable, by advertisement in a newspaper having proper circulation or by any other mode allowed by the articles of association not less than seven days before the meeting.

Section 225 deals with appointment and removal of auditors while section 284 deals with removal of directors. These matters relating to appointment of auditors and directors are of great significance in the functioning of companies. Therefore, the Legislature thought of providing special notice to the shareholders, directors and auditors, as the case may be, so that they are provided with sufficient opportunity to consider the matter before the meeting. The plaintiff's counsel placed reliance on section 225 of the Act and contended that his client's resolution should have been circulated to the members and included in the agenda for the annual general meeting. According to him, it was not necessary to comply with the provisions of section 188 for moving the resolution. That is to say that it was not necessary to require the requisition to be signed by members representing l/20th of the total voting power of all the members or at least by 100 shareholders who hold shares of paid-up capital of Rs. 1 lakh. To appreciate this argument a close scrutiny of sections 188 and 225 would be necessary. Section 188 relates to circulation of members' resolution. The said section reads as under :

"188. (1) Subject to the provisions of this section, a company shall, on the requisition in writing of such number of members as is hereinafter specified and (unless the company otherwise resolves ) at the expense of the requisitionists, —

(a)    give to members of the company entitled to receive notice of the next annual general meeting, notice of any resolution which may properly be moved and is intended to be moved at that meeting ;

(b)    circulate to members entitled to have notice of any general meeting sent to them, any statement of not more than one thousand words with respect to the matter referred to in any proposed resolution, or any business to be dealt with at that meeting.

(2) The number of members necessary for a requisition under sub-section (1) shall be —

(a)    such number of members as represent not less than one twentieth of the total voting power of all the members having at the date of the requisition a right to vote on the resolution or business to which the requisition relates ; or

(b)    not less than one hundred members having the right aforesaid and holding shares in the company on which there has been paid up an aggregate sum of not less than one lakh of rupees in all.

(3) Notice of any such resolution shall be given, and any such statement shall be circulated, to members of the company entitled to have notice of the meeting sent to them, by serving a copy of the resolution or statement on each member in any manner permitted for service of notice of the meeting ; and notice of any such resolution shall be given to any other member of the company by giving notice of the general effect of the resolution in any manner permitted for giving him notice of meetings of the company :

Provided that the copy shall be served, or notice of the effect of the resolution shall be given, as the case may be, in the same manner and, so far as practicable, at the same time as notice of the meeting, and where it is not practicable for it to be served or given at that time, it shall be served or given as soon as practicable thereafter.

(4) A company shall not be bound under this section to give notice of any resolution or to circulate any statement unless —

(a)    A copy of the requisition signed by the requisitionists (or two or more copies which between them contain the signatures of all the requisitionists) is deposited at the registered office of the company—

(i)         in the case of a requisition requiring notice of a resolution, not less than six weeks before the meeting) ;

(ii)        in the case of any other requisition, not less than two weeks before the meeting ; and

(b)    there is deposited or tendered with the requisition a sum reasonably sufficient to meet the company's expenses in giving effect thereto :

Provided that if, after a copy of a requisition requiring notice of a resolution has been deposited at the registered office of the company, an annual general meeting is called for a date six weeks or less after the copy has been deposited, the copy, although not deposited within the time required by this sub-section, shall be deemed to have been properly deposited for the purposes thereof.

(5) The company shall also not be bound under this section to circulate any statement if on the application either of the company or of any other person who claims to be aggrieved, the Company Law Board is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter ; and the Company Law Board may order the company's costs on an application under this section to be paid in whole or in part by the requisitionists, notwithstanding that they are not parties to the application.

(6) A banking company shall not be bound to circulate any statement under this section, if, in the opinion of its board of directors, the circulation will injure the interests of the company.

(7) Notwithstanding anything in the company's articles, the business which may be dealt with at an annual general meeting shall include any resolution of which notice is given in accordance with this section, and for the purposes of this sub-section, notice shall be deemed to have been so given, notwithstanding the accidental omission, in giving it, to one or more members.

(8) If default is made in complying with the provisions of this section, every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees".

Except sub-section (5), this section is a replica of section 140 of the English Act of 1948. The section has its roots in the following recommendations of the Company Law Committee :"

"Section 78 of the Act of 1913 deals with the right of shareholders to requisition a general meeting. We consider that this section should be supplemented by a suitable adaptation of the provisions of section 140 of the English Companies Act, 1948, which empowers a specified number of shareholders to make use of the administrative machinery of a company to introduce resolutions on their own account at the annual general meeting and to inform other members of the purpose for which the resolutions are proposed to be introduced or the reasons for opposing any resolution submitted by the directors for consideration at the general meeting. The number of members necessary for a requisition under this section is : (a) a number representing not less than one twentieth of the total voting rights of all the members having a right to vote at the meeting to be requisitioned ; or (b) not less than 100 persons holding shares in the company on which there has been paid up an average sum per member of not less than a hundred pounds". (Report : paragraph 76).

As is evident from the aforesaid this section confers on shareholders a right to have the intended resolution along with the explanatory statement of up to 1,000 words circulated to all the members through the instrumentality of the company but before the company can be asked to circulate the resolution which the shareholders intend to move at the next annual general meeting or at any other meeting, the following procedure laid down in the section has to be followed :

        (1)            The proposed resolution must be in writing ;

(2)            It must be supported by members representing not less than l/20th of the total voting power of all the members having, on the date of the requisition, a right to vote on the resolution or the proposed resolution and should be supported by not less than 100 members having the said right and holding shares for which they had paid an aggregate sum of not less than Rs. 1 lakh.

(3)            A copy of the resolution duly signed by all the members intending to move the resolution must be deposited at the registered office six weeks before the meeting, in a case where the notice of the resolution was required and in any other case two weeks before the meeting.

(4)            The requisitionists must deposit a reasonably sufficient sum to meet expenses for giving the notice by the company.

Once the above requirements are satisfied the company under subsection (1) of section 188 is bound to circulate to the members the resolution which the requisitionists intend to move at the annual general meeting or at any other meeting. It is noteworthy that sub-section (7) of section 188 of the Act which starts with a non obstante clause specifically mandates the inclusion of a resolution of which notice has been given in accordance with the section in the agenda of the annual general meeting. Sub-section (8) ensures compliance with the provisions of this section by prescribing penal punishment for default by any officer of the company in this regard. Having analysed section 188, it is necessary to notice section 225 of the Act. This section deals with resolutions for appointment and removal of auditors. Section 225 of the Act provides as follows :

"225. (1) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be reappointed.

(2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.

(3) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so,—

(a)    in any notice of the resolution given to members of the company, state the fact of the representations having been made ; and

(b)    send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representations by the company ;

                and if a copy of the representations is not sent as aforesaid because they were received too late or because of the company's default, the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting :

Provided that copies of the representations need not be sent out and the representations need not be read out at the meeting, if on the application either of the company or of any other person who claims to be aggrieved, the Company Law Board is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter ; and the Company Law Board may order the company's costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application.

(4) Sub-sections (2) and (3) shall apply to a resolution to remove the first auditors or any of them under sub-section (5) of section 224 or to the removal of any auditor or auditors under sub-section (7) of that section, as they apply in relation to a resolution that a retiring auditor shall not be reappointed".

From the above, it is obvious that section 225 postulates the giving of a special notice under section 190 in the case of a resolution which is intended to be moved at an annual general meeting for removal or appointment of an auditor. The question for resolution is whether or not a single shareholder can ask the company to circulate its intended resolution to the shareholders for removal of an auditor.

Sections 190 and 225 of the Act do not mention the number of shareholders who can move a resolution for removal of an auditor. Section 190 merely lays down the procedure for circulating a resolution for which special notice is required. The object of giving special notice of a resolution is to invite special attention of the company and through the company of its members to the proposed resolution. The company is also required to send a copy of the resolution to the auditor. Therefore, the basic function of the special notice is to focus the special attention of the shareholders about the importance of the resolution which is intended to be moved at the annual general meeting. The auditor has also been given a right to represent in writing to the company in respect of the said resolution. The company is then to ensure that the representation, if filed by the auditor, is circulated to the members. All this has been done to ensure that the shareholders have adequate opportunity to consider the matter and at the same time the auditor has the right to represent to the shareholders against the intended resolution. The object of sub-sections (2) and (3) is that the auditors will have an opportunity of making a representation and also to be heard orally at the annual general meeting. This satisfies the requirement of natural justice as well.

It is not possible to impute to the Legislature an intention to confer on a single member the right to compel inclusion of a resolution for appointment or removal of an auditor in the agenda of the annual general meeting. It does not stand to logic that in matters which are less important section 188 of the Act is required to be complied with in so far as the requirement as to number of shareholders to make use of the administrative machinery of a company to introduce a resolution at the annual general meeting is concerned, and in matters which concerns the appointment, removal and supersession of an auditor no such requirement is necessary to be satisfied. It is significant to mention that much importance has been attached by the Act to the independence of the auditors. Section 226 of the Act is proof enough. This provides for the qualifications and disqualifications of the auditors. In fact, the auditor is to act as a watchdog for the protection of the shareholders and is required to examine the accounts with a view to give the shareholders a true and fair picture of the same.

In the case of Institute of Chartered Accountants of India v. P. K. Mukerjee [1968] 2 Comp LJ 211 ; [1968] 38 Comp. Cas. 628, the Supreme Court has commented upon the role of an auditor under the Act in the following words (at page 634 of 38 Comp. Cas.) :

"Respondent No. 1 owed a duty to all the subscribers of the provident fund who were in the position of beneficiaries. It is not correct to say that respondent No. 1 owed a duty only to the company which had appointed him to perform the auditing. The contributors to the provident fund had a beneficial interest in the fund and the primary object of auditing the fund was to apprise them of the true financial position of the accounts and investments made from time to time. Respondent No. 1, therefore, owed a duty to the contributors to the provident fund for making a true report to them of the financial position. In other words, the auditing was intended for the protection of the beneficiaries and the auditor was expected to examine the accounts maintained by the trustees with a view to inform the beneficiaries of the true financial position. The auditor is, in such a case, under a clear duty towards the beneficiaries 'to probe into the transactions' and to report on their true character. In our opinion, the legal position of the auditor in the present case is similar to that of the auditor under the Indian Companies Act, 1956. In such a case the audit is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the directors with a view to inform the shareholders of the true financial position of the company. The directors occupy a fiduciary position in relation to the shareholders and in auditing the accounts maintained by the directors the auditor acts in the interest of the shareholders who are in the position of the beneficiaries. In London Oil Storage Co. Ltd. v. Seear, Hasluck and Co., (Dicksee on Auditing, 17th edition, page 632 ), [1904] 30 Acct. LR 93, Lord Alverstone stated as follows :

'He must exercise such reasonable care as would satisfy a man that the accounts are genuine assuming that there is nothing to arouse his suspicion of honesty and if he does that he fulfils his duty ; if his suspicion is aroused, his duty is to probe the thing to the bottom and tell the directors of it and get what information he can.'

"Vide also the observations in In re London General Bank (No. 2) [1895] 2 Ch 673, In re Kingston Cotton Mills Co. (No. 2) [1896] 2 Ch 279 and In re City Equitable Fire Insurance Co. Ltd. [1925] Ch 407."

Keeping in view the importance of the matter, the provisions for moving resolutions for appointment, removal or supersession of an auditor or for that matter a director or all the directors have to be at least on par with the provisions for moving resolutions in matters which are less important, if not more stringent.

It seems to me that the provisions relating to special notice do not dispense with the aforesaid requirement of section 188. Resolutions which require special notice do not cease to be resolutions as contemplated by section 188 of the Act. Section 190 read with section 225 neither expressly nor by implication overrides the aforesaid requirement of section 188 of the Act. If the interpretation which is sought to be placed by the plaintiff is correct, a single member can also require the company to circulate a special resolution to the members for being taken up at the annual general meeting. In case a single member happens to be wielding extensive influence in commercial circles, the mere giving of a special notice for removal of. all the directors of the company by him can stultify the functioning of the company and might even inflict a death blow to it. In such a situation, the share prices of the company can fall as members, not sure about the future of the company, may indulge in panic sale of shares. It is not difficult to imagine a situation where a large company may be faced with thousands of resolutions proposed by single members. It will be well nigh impossible for a company in that situation to handle and circulate the resolutions requiring special notice and equally difficult for the directors to file representations against them, In my view, sections 188, 190, 225 and 284 must be read together and if so read the intention of the Legislature becomes manifest. In Pedley v. Inland Waterways Association Ltd. [1977] 1 All ER 209 (Ch D), a similar question came up for determination of the Law Lords of the Chancery Division. Slade J., speaking for the court, held as follows (at page 216) :

"With respect to the plaintiff, I think that this submission involves a misconception as to the true construction and effect of section 142. The question must in the end turn on the meaning to be given to the phrase in the section beginning with the words 'and the company shall give its members notice of any such resolution' on which the plaintiff's argument wholly depends. There are two possible ways of reading this phrase, namely, (a) as being merely intended to confer on the members of a company the right to receive notice, in the manner provided for by section 142, of any resolution of which special notice is required and has been duly given and which is to form part of the agenda to be dealt with at the relevant meeting ; or (b) as being intended to have two distinct consequences, namely, (i) to confer on any individual member of a company, on giving the necessary 28 days' notice to the company, the right to have any resolution of which special notice is required placed by the company on the agenda for the relevant meeting, that right being separate from and additional to the rights conferred on him by section 140 of the Act and any other similar rights conferred on him by the company's articles of association, and also (ii) to confer on all other members of such company rights of the nature referred to in (a) above.

In my judgment, the narrower construction, (a) above, is clearly the correct one. First, there appears to me no sensible reason why the Legislature should have intended by section 142 to confer on an individual member rights to compel the inclusion of a resolution in the agenda for a company meeting, being rights much more extensive than those conferred by section 140 merely because the resolution happens to be a resolution for the removal of a director falling within section 184, or for the appointment of a director over the age limit, falling within section 185 or for the supersession of an auditor falling within section 160. On the contrary, I can see powerful reasons why this would not have been the intention of the Legislature.

The plaintiff's submission, if it is correct, could apply mutatis mutandis in the case of any resolution of which special notice is required, and which is proposed by a single member of any company incorporated under the Act. Any such single member, for example, having received notice of an annual general meeting of the company concerned, would be entitled to send to the company a special notice expressed as being under section 142 of the Act, and as required by section 184 of an intention to move at the meeting a resolution that a director should be removed. Having received such a notice the company concerned would be bound and, be it noted, at its own expense to give its members notice of it in the manner provided by section 142 of the Act, if it was possible to do so not less than 21 days before the meeting as required by section 142".

I am in respectful agreement with the view expressed by Slade J., in regard to the interpretation of sections 140, 142 and 184 of the English Act of 1948, which correspond to sections 188, 190 and 284 of the present Act. It is also significant to note that section 225 does not have any provision like sub-section (7) of section 188 which starts with a non obstante clause and specifically provides for inclusion of a resolution of which notice has been given in the agenda of the annual general meeting.

Having regard to the above discussion, I am of the opinion that the plaintiff not having complied with the provisions of section 188 of the Act in so far as it relates to the number of members required to sign the requisition, the defendant was not bound to either circulate the proposed resolution to its members or to include the same in the agenda for the annual general meeting. The learned Sub-Judge misconstrued the provisions of sections 188, 190 and 225 of the Act and erred in exercise of his discretion in granting interim relief by the order dated September 7, 1991.

Having regard to the above, the application is allowed and the order of the learned Sub-Judge is vacated.

[1990] 68 COMP. CAS. 516 (CAL.)

HIGH COURT OF CALCUTTA

Gopal Vyas

v.

Sinclair Hotels and Transportation Ltd.

MRS. PADMA KHASTGIR AND MAHITOSH MAJUMDAR J J.

APPEAL NO. NIL OF 1986, SUIT NO. 934 OF 1986

MARCH 16, 1989

Dipankar Ghosh for the Applicant.

Mrs. S.B. Mukherji for the Respondent.

JUDGMENT

Mrs. Padma Khastgir J. —The only point which calls for consideration in this application arises under the following facts and circumstances.

The petitioner, Gopal Vyas, filed a suit under Order I, rule 8 of the Code of Civil Procedure. In the said suit, the petitioner moved an application before Mr. Justice R.N. Pyne (as his Lordship then was) whereupon, the learned judge directed that the annual general meeting of the company, Sinclair Hotels and Transportation Ltd., be held under the chairmanship of a member of the Bar but for adjournments of the same until further orders. The petitioner, being aggrieved thereby, preferred this appeal; apart from the usual prayers, the petitioner prayed for an order directing the company to hold the fourteenth annual general meeting and at such meeting to consider the notices and the proposal made by the petitioner under section 257 of the Companies Act.

The petitioner, Gopal Vyas, proposed the candidature of one Navin Chand Suchanti for the office of a director of respondent No. 1 at such annual general meeting. The petitioner had given a notice under section 257 of the Companies Act, 1956. The petitioner contended that the company was under an obligation to inform its members of such proposal made by the petitioner at such annual general meeting due to be held on December 29, 1986. But the company, being respondent No. 1 herein, according to the petitioner, wrongfully refused to comply with the said proposal on the alleged ground of non-compliance with the provisions of section 188 of the Companies Act.

There have been many proceedings so far as this company is concerned, for various reliefs. After protracted litigations, the matter went before the Supreme Court of India and, ultimately, the learned judges of the Supreme Court directed that all pending matters before the High Court should go on but no effect be given to any of such orders till the matter is finally decided by the learned judges of the Supreme Court.

Section 257 of the Companies Act, 1956, provides as follows:

"257. Right of persons other than retiring directors to stand for directorship. —(1) A person who is not a retiring director shall, subject to the provisions of this Act, be eligible for appointment to the office of director at any general meeting, if he or some member intending to propose him has, not less than fourteen days before the meeting, left at the office of the company a notice in writing under his hand signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office, as the case may be.

(1A) The company shall inform its members of the candidature of a person for the office of director or the intention of a member to propose such person as a candidate for that office, by serving individual notices on the members not less than seven days before the meeting:

Provided that it shall not be necessary for the company to serve individual notices upon the members as aforesaid if the company advertises such candidature or intention not less than seven days before the meeting in at least two newspapers circulating in the place where the registered office of the company is located, of which one is published in the English language and the other in the regional language of that place.

(2) Sub-section (1) shall not apply to a private company, unless it is a subsidiary of a public company".

Under this section, if a person other than a retiring director desires to be appointed as a director, a notice of his candidature may be given to the company. Such notice may be given by the candidate himself or by any member intending to propose him as a candidate. This candidate may be an outsider or a member of the company. He need not be even a shareholder but such notice has to be given fourteen clear days before the meeting. On receipt of such notice, the company shall inform the members at least seven days before the meeting either by individual notice or by an advertisement.

Section 188 of the Companies Act makes the provision for circulation of the members' resolutions in the following manner:

"188. Circulation of members' resolutions.—(1) Subject to the provisions of this section, a company shall, on the requisition in writing of such number of members as is hereinafter specified and (unless the company otherwise resolves) at the expense of the requisitionists:

(a)    give to members of the company entitled to receive notice of the next annual general meeting, notice of any resolution which may properly be moved and is intended to be moved at that meeting;

(b)    circulate to members entitled to have notice of any general meeting sent to them any statement of not more than one thousand words with respect to the matter referred to in any proposed resolution, or any business to be dealt with at that meeting.

(2) The number of members necessary for a requisition under sub section (1) shall be—

(a)    such number of members as represent not less than one- twentieth of the total voting power of all the members having at the date of the requisition a right to vote on the resolution or business to which the requisition relates; or

(b)    not less than one hundred members having the right aforesaid and holding shares in the company on which there has been paid up an aggregate sum of not less than one lakh of rupees in all.

(3) Notice of any such resolution shall be given, and any such statement shall be circulated, to members of the company entitled to have notice of the meeting sent to them, by serving a copy of the resolution or statement on each member in any manner permitted for service of notice of the meeting; and notice of any such resolution shall be given to any other member of the company by giving notice of the general effect of the resolution in any manner permitted for giving him notice of meetings of the company:

Provided that the copy shall be served, or notice of the effect of the resolution shall be given, as the case may be, in the same manner and, so far as practicable, at the same time as notice of the meeting, and where it is not practicable for it to be served or given at that time, it shall be served or given as soon as practicable thereafter.

(4) A company shall not be bound under this section to give notice of any resolution or to circulate any statement unless —

(a)    a copy of the requisition signed by the requisitionists (or two or more copies which, between them, contain the signatures of all the requisitionists) is deposited at the registered office of the company—

(i)         in the case of a requisition requiring notice of a resolution, not less than six weeks before the meeting;

(ii)        in the case of any other requisition, not less than two weeks before the meeting; and

(b)    there is deposited or tendered with the requisition a sum reasonably sufficient to meet the company's expenses in giving effect thereto:

Provided that if, after a copy of a requisition requiring notice of a resolution has been deposited at the registered office of the company, an annual general meeting is called for a date six weeks or less after the copy has been deposited, the copy, although not deposited within the time required by this sub-section, shall be deemed to have been properly deposited for the purposes thereof.

(5) The company shall also not be bound under the section to circulate any statement if, on the application either of the company or of any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; and the court may order the company's costs on an application under this section to be paid in whole or in part by the requisitionists, notwithstanding that they are not parties to the application.

(6) A banking company shall not be bound to circulate any statement under this section, if, in the opinion of its board of directors, the circulation will injure the interests of the company.

(7) Notwithstanding anything in the company's articles, the business which may be dealt with at an annual general meeting shall include any resolution of which notice is given in accordance with this section, and for the purposes of this sub-section, notice shall be deemed to have been so given, notwithstanding the accidental omission, in giving it, of one or more members.

(8) If default is made in complying with the provisions of this section, every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees".

Under this section, members' resolutions are intended to be moved at an annual general meeting or at any other meeting after the circulation to members in each case of the text of the proposed resolution with explanatory statement, if any, in respect of the resolution or other business. This section has conferred on all shareholders an important right to give through the company machinery publicity among all the members of the company the resolution which he intends to propose or for statements which he wants to make at the annual general meeting.

The question which calls for determination in this appeal is as to whether the company was justified in refusing to circulate the notice given by the petitioner under section 257 of the Companies Act on the ground that such proposal was made by one member for the candidature of directorship of Navin Chand Suchanti on the ground that it was not proposed either by 100 shareholder-members or by l/20th strength of the members. The provision of section 257 is an independent section. It is not subject to the provision of section 188. Section 257 is a specific provision giving a right to an individual member to give such notice. It is a self-contained provision and, under section 257, there is no scope for introduction of any other qualification which the Legislature, in its wisdom, did not think it necessary to incorporate. The specific right that had been given under section 257 does not provide that the implementation of such right will have to be in accordance with the procedure as laid down under section 188 of the Companies Act. In fact, the provision of sections 188 and 257 of the Companies Act cover two different fields. A comparative perusal of the provisions of the two sections indicates that, under section 257, any person can apply by giving the requisite notice whereas under section 188, some specific percentage of shareholding, that is, either l/20th or hundred members are the necessary requisite for such requisition. Not only is there a difference as to who can apply under both the sections but also there is a difference in respect of the subject-matter of such notice. Under section 257, such notice is given when a proposal is given for appointment to the office of director at any general meeting provided it has given not less than fourteen days before the meeting and the consent signifying his candidature for the office of the director has been given whereupon it shall be the duty of the company to inform its members of such candidature, whereas, under section 188, any matter can be transacted. There is also a difference in respect of time, which has to be given within fourteen days before the meeting under section 257 of the Companies Act. Whereas, under subsections (3) and (4) of section 188, different times have been provided. The conditions for such application under section 257 are different from the conditions as provided under section 188 inasmuch as, under the previous provision of section 257, the member was not required to deposit any sum whereas, under section 188, specific provision has been made for deposit and/or tender of the requisite amount reasonably sufficient to meet the company's expenses in giving effect to such members' requisition. Under section 257, it has been specifically provided that individual notice of such requisition under section 257 will have to be given by the company to its members or if the company decides to advertise such candidature in two newspapers having circulation at the place where the registered office of the company is located either in the English language or in any other regional language of that place. Such provision has not been made under section 188. The provision of section 257 shall not apply to a private company unless it is a subsidiary of a public company. There is no such corresponding restriction so far the provision of section 188 is concerned. Under section 257, as soon as the notice complying the provision of section 257 is served, the company has no discretion in the matter inasmuch as it has been provided under section 257(1A) that the company shall inform its members of the candidature of a person for the office of a director or the intention of a member to propose such a person as a candidate of the office by serving individual notice or by advertisement as provided in the said section.

The provision of section 173 of the Companies Act does not seem to be necessary in the instant case inasmuch as section 173 of the Companies Act provides as follows:

"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 business shall be deemed special.

(2) Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein, of every director, 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".

Under the circumstances, it appears that the transaction proposed by the appellant at such meeting was an ordinary business and not a special one in view of sub-clause (iii) of sub-section (1)(a). Moreover, section 173 provides that, in the case of annual general meeting, all business to be transacted at the meeting shall be deemed, specially with the exception of the business as provided under sub-clauses (i), (ii), (iii) and (iv) and under clause (b) in case of any other meeting, as special and it is only where any items of business to be transacted at the meeting are deemed to be special that there shall be annexed to the notice of the meeting a statement setting out all material facts as provided under clause (b). The appointment of a director in the place of those retiring is an item of ordinary business to be transacted at the annual general meeting of the company. The petitioner has not called for the meeting. It is at a meeting called by the company that the petitioner has given the notice for transaction of the business, which is ordinary in nature at such meeting. Under section 237, any member is entitled to take advantage of such provisions as contained in section 257.

The petitioner's name appears in the register of shares, so until his name is removed by rectification of such share register, his right remains. The very fact that there are proceedings pending before the company court challenging the petitioner's membership which matter is going on for a pretty long time will not disentitle the petitioner from giving such notice In any event, in view of the order passed by the learned judges of the Supreme Court that no effect be given to any of the orders passed in these proceedings relating to Sinclair Hotels and Transportation Ltd. whether the petitioner has the right to give notice would be determined finally by the learned judges of the Supreme Court. This proceeding before this court only relates to the construction of two particular sections of the Companies Act.

This is not an appeal from an interlocutory order passed by the learned court below but it is only pursuant to the leave granted by the learned judges of the Division Bench, the present application had been taken out. The case cited by Mrs. S.B. Mukherjee appearing on behalf of the company Pedley v. Inland Waterways Association Ltd. [1977] 1 All ER 209 (Ch D) does not seem to have any application to the facts and circumstances of this case. That was a case of removal of a director. The articles of the company in that case did not confer any power on any individual member to require such a resolution to remove the director be included in the agenda. Under the circumstances, the company could not be compelled to give such notice of resolution proposed by the member to be included in the agenda. The company also rejected the said notice on the ground that he had not complied with the provisions of section 140 of the Companies Act of 1947. There, section 142 did not confer on any individual member the right to compel the inclusion of a resolution in the agenda of a company meeting. At page 212, it was observed that the company's articles of association conferred no express right on any one individual member to have any item included in the notices of the agenda. Therefore, the plaintiff had to claim the right to compel the company to include the notices in the agenda of the annual general meeting of an intended resolution, had to come under some provisions of the Act giving him the right. Section 140 of the Act plainly gave him this right if he could find members representing him not less than 1/20th of the total voting rights complying with the conditions as to time and other matters as set out under section 140, sub-sections (4) and (5). Then, it was the company's duty under section 140(1) at the expense of the requisitionists unless the company otherwise resolved to give to its members the notice. The procedure for removal of a director has been specially provided in our Companies Act. Section 284 makes specific provision for such removal where special notice is required for any resolution of removal of a director or for appointment of somebody instead of that director so removed at the meeting at which he is removed. But, there is no corresponding provision given in the English Act as provided under section 257 of the Indian Companies Act. Under the special facts and circumstances of this case, the case in Pedley v. Inland Waterways Association Ltd. [1977] 1 All ER 209 (Ch D) has no application.

By allowing this application in favour of the petitioner, this court does not pass a mandatory order upon the company to pass such resolution. It is only a direction to enable the petitioner to express before the members of such meeting his intention as contained in the notice. In the case of Indian Cable Co. Ltd. v. Sumitra Chakraborty, AIR 1985 Cal 248, the learned judges of the Division Bench of this court, after discussing various cases, were of the view that, if a court is called upon to grant any relief on any interlocutory application which, when granted, would mean granting substantially the relief claimed in the suit, the court will be very slow and circumspect in the matter of granting any such prayer. It is indeed true that such a relief should be granted only in exceptional cases. Though exercise of such a discretion should be limited to rare and exceptional cases, still, at the same time, no court should think that, in law, there is any absolute bar to the court granting such a relief. In deserving cases, the court should not hesitate to come in aid of a litigant and uphold the cause of justice by granting such a relief.

The observation of the learned judges of the Supreme Court at paragraph 100 of the case LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548 indicates that a duty is cast on the management to disclose in the explanatory note all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolution, which they proposed to move at the meeting. It was further observed that every shareholder of a company has the right, subject to the statutory prescribed procedure and numerical requirement, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolution proposed to be moved at the meeting. Factually, the present case is different inasmuch as the petitioner, being a shareholder, has not called an extraordinary general meeting but, at a meeting called by the company, he has only proposed for the candidature of a particular person in the place of the retiring director. In our view, to hold that the provision of section 257 is subject to the provision of section 188 will render the provisions of section 257 nugatory and redundant. Under the circumstances, there will be an order directing the company to consider the notice given by the petitioner in accordance with law at its fourteenth annual general meeting.

The meeting was scheduled to be held on March 18, 1989: In any event, the meeting cannot be held on March 18, inasmuch as clear 21 days' notice is required to be given. Under these circumstances, the meeting is to be held on April 20, 1989.

Mrs. Mukherji, learned lawyer appearing on behalf of the company, prays for stay of the operation of this order. Such prayer is allowed. There will be a stay for a period of a fortnight.

Mahitosh Majumdar J.—I agree.

Sections 193 to 197

 

Minutes

[1989] 65 COMP. CAS. 246 (KER.)

HIGH COURT OF KERALA

Kumaran Potty

v.

Venad Pharmaceuticals and Chemicals Ltd.

S. PADMANABHAN, J.

C.P. No. 31 of 1984

JULY 22, 1987

V.M. Ramanatha Pillai for the petitioner.

M/s. Pathrose Mathai and Siri Jagan for the respondents.

JUDGMENT

S. Padmanabhan, J.—Venad Pharmaceuticals and Chemicals Ltd. is a company jointly promoted and formed in 1980 by the Kerala State Industrial Development Corporation along with Padmakumar and associates. Among the associates, P.G.K. Pillai, father of Padmakumar, was the vice-chairman. Padmakumar was the managing director. The chairman was a person from Bombay. P.W.2, K.L. Menon, was a director. The petitioner is an employee of the company. The petition is under section 155 of the Companies Act, 1956, for rectification of the share register of the company by inclusion of the name of the petitioner also as a shareholder The prayer was strongly opposed by the respondent company.

Due to mismanagement by the board of directors, the company was taken over by the Kerala State Industrial Development Corporation by purchasing shares and it got impleaded as additional second respondent. The second respondent also disputed the claim.

There were 41 employees in the company including the petitioner. From all of them, the vice-chairman, P.G.K. Pillai received huge amounts as if they were loans. It is the case of the petitioner that 70% of the amounts due to all other employees were paid back by the vice-chairman after obtaining vouchers for the full amounts. The petitioner claims to have advanced Rs. 36,000 as loan, His further case is that the managing director subsequently agreed to convert the same into shares as per exihibit P-1. Since it was not so done, he wants to become a shareholder by the process of rectification of the share register under section 155. The contention is that the company has no responsibility for the alleged loan advanced to the vice-chairman even if it is correct. The further contention is that if it is a loan to P.G.K. Pillai, it has to be realised from him and even if the company is liable, the remedy is only by way of a suit before the civil court for its realisation. The genuineness of the loan itself was disputed with an added contention that at any rate the shortcut method of becoming a shareholder cannot be allowed. The alleged agreement pleaded on the basis of exhibit P-1 to convert the amount into shares was challenged and the authority of the person who executed the same was also questioned.

The only point for consideration is whether the petitioner has any title to have his name entered in the share register of the company. The. petitioner examined himself as PW-1 and also one of the directors of the company as PW-2. DW-1 was examined on behalf of the additional second respondent. Certain documents were also produced and proved by either side. What is seen from the evidence is that the Vice-Chairman, P.G.K. Pillai, and his son, the managing director, Padmakumar, received various amounts from the 41 employees alleged to be by way of loans under the agreement that it will be repaid and, if not, converted into shares. The claim of the petitioner alone seems to remain. All others are said to have settled their claims with P.G.K. Pillai on receipt of 70 per cent of their amount.

In exhibit P-2 letter sent to the chairman, what the employees said was that Rs. 3,000 to Rs. 40,000 were received from each of them, by P.G.K. Pillai for the requirements of the company under the agreement that it will be treated as loan or share. But their request was only to get back the amount. As PW-1, what the petitioner said was that he at first advanced Rs. 25,000 to P.G.K. Pillai for his personal purpose and then paid Rs. 36,000 at his residence. He says that he alone was not repaid the amount and when demanded he was told that it is entered in the company's accounts. Though the petitioner claims to have paid the entire amount Rs. 36,000 to P.G.K. Pillai in lump on the same date, this amount was entered in the accounts on different dates in small amounts in the name of P.G.K. Pillai himself under five receipts. Then, corrections were made in the accounts and fresh receipts were either written or corrected to change them in the name of the petitioner. All these shady nature of the entries and receipts were referred to in the auditor's report. Anyhow they were entered only as unsecured loans. It is not necessary to refer to them in further detail, because we are concerned only with the question whether the petitioner acquired rights to become a shareholder entitling rectification of the share register. Otherwise, his claim, if any, will only be in a suit against P.G.K. Pillai or the company, as the case may be, to get back the amount. At best, what is evident is that there were some shady transactions between P.G.K. Pillai and his son, Padmakumar, with the employees including the petitioner. Whether these transactions will result in any claim against the company for getting shares is the question.

Let us proceed on the assumption that the amount was received by P.G.K. Pillai from the petitioner on the agreement that it will be either repaid or converted into shares. PW-2 admitted that collections were made by Padmakumar and P.G.K. Pillai without any resolution of the board of directors or authority to collect and there is no resolution of the board to allot shares for the amount. The undertaking made by Padmakumar in exhibit P-1 letter dated April 4, 1984, addressed to PW-2 that the amounts collected from workers will be converted into shares is also of no legal consequence since the conversion could only be by a resolution of the board of directors.

Under section 193 of the Companies Act, the company is bound to keep minutes of the proceedings of all the meetings. In the absence of any such minutes evidencing authorisation for collection or conversion, it cannot be contended that there was such authorisation. The contention that the managing director or vice-chairman is having the authority under article 128(3) of the articles of association to sign receipts will not lead us anywhere. Even taking for granted that the receipts issued by the vice-chairman under that authority for the amounts received by him is valid and binding on the company, the maximum result is that the loan will be binding on the company. Even the petitioner's case is only that the amount was advanced as loan. There is no case that the managing director or the vice chairman could individually convert it into shares without a resolution of the board of directors. Even if the accounts are taken as genuine, the amount remains in it only as unsecured loan. In such a situation, the question is whether the petitioner could be taken to have acquired the right to be a shareholder.

In this context, the decision in Kishan Rathi v. Mondal Bros. and Co., AIR 1967 Cal 75, or Federal Bank Ltd. v. Geevarghese [1974] KLT 249 relied on by counsel for the petitioner will not be of any help to him. If a director or manager, with ostensible authority under the memorandum and the articles of association of the company, practises a fraud upon his company while acting under its authority by not placing the money in the coffer of the company, that cannot defeat a bona fide creditor's claim against the company. According to the rule evolved in Royal British Bank v. Turquand [1856] 6 E & B 327, popularly known as "Turquand's rule", while persons dealing with a company are assumed to have read the public documents of the company and to have satisfied themselves that the transaction entered into is not inconsistent therewith, they are not expected or required to do anything more. These aspects may become relevant only when the petitioner attempts to assert his claim against the company for amounts alleged to be due to him. Those aspects are irrelevant while considering the claim involved in this case where we are dealing with the question whether the amounts have been converted into shares or could be so converted. So also the unreported decision of a Division Bench of this court in MFA No. 547 of 1981 relied on by counsel is not applicable here. That was a case in which the petitioner was found to be jointly entitled to share with persons who purchased the shares in their names alone.

The three categories of cases coming under section 155(1) are:

(1)            where the name of a person is entered in the register of members without sufficient cause;

        (2)            where after entry, the name is omitted without sufficient cause, and

(3)            where default or delay takes place in entering on the register the fact of any person having become or ceased to be a member.

In such cases, the person aggrieved or any member of the company or the company may apply for rectification of the share register. Subsection (2) is not relevant for our purpose because it only deals with the order to be passed by court on the application. Sub-section (3) only deals with matters to be decided in applications coming under sub-section (1) The title of the applicant to have his name entered or omitted could be decided in such a proceeding even though it is of a summary nature. At any rate, the petitioner cannot come under categories 1 and 2 in subsection (1). This is not a case of default or delay in entering the name of any person who has become or omitted the name of any person who ceased to be a shareholder. Therefore, the petitioner cannot come under category 3 also. Title mentioned in sub-section (3) is only title regarding any of the matters referred to in sub-section (1).

It cannot be said that the petitioner has become a member or shareholder. Only when a person becomes a member or shareholder, the question of default or delay in entering the fact of having become a member or shareholder will arise under section 155(1)(b) The petitioner has no case that he became a shareholder. In order to become a shareholder, there must be an agreement by him in writing under section 41(2). The words "in writing" indicate, by necessary implication, that an application for allotment of shares should be made in writing. There is no case for the petitioner that he has made such an application. On the other hand he has admitted that no application was made. The claim is not for acquisition of another person's share by transfer or inheritance, but for new shares for which an application is necessary. There must also be a resolution of the meeting of the board of directors. That is also not there. The amount paid was not for shares and it was not validly converted into shares also. If so, no question of having a title to become a shareholder will arise and, therefore, a petition under section 155 is incompetent also. Persons having monetary claims against a company by way of loan or otherwise cannot come under section 155 and claim that they may be made shareholders by converting the credit into shares and rectify the share register. Such claims for money could only be through a civil court. In this case, even if the claim against the company is genuine, the petitioner could only approach a civil court for realisation of the amount. The present petition is ill-conceived and it is intended only as a shortcut method of realisation by conversion into shares.

The petition is, therefore, dismissed. However, I do not make any order as to costs.

[1989] 66 COMP. CAS. 410 (DELHI)

HIGH COURT OF DELHI

Technical Consultancy House Private Ltd

v.

Kuldip Raj Narang

D.P. WADHWA J.

CRIMINAL ORIGINAL NO. 2 OF 1981

DECEMBER 12, 1986

V.V. Shastri, Indermeet Kaur, for the Petitioner.

Ved Vyas, Rajiv Behl and P.K. Seth for the Respondent.

JUDGMENT

D.P. Wadhwa J.—M/s Technical Consultancy House (P.) Ltd., the company, was ordered to be wound up by order dated October 20, 1978 (O.P. No. 74 of 1977). This was on a creditor's petition filed under section 439(1)(b) of the Companies Act, 1956 (for short "the Act"), on the ground that the company was unable to pay its debts (section 433(e)). The company was incorporated on November 24, 1971, and was established with the object of providing technical consultancy to companies. The company had various other objects also.

On the making of the winding-up order, the statement of affairs was to be filed as required under section 454 of the Act. This was not done within the prescribed time and the official liquidator, therefore, as a complainant, filed the present complaint under section 454(5) of the Act. This sub-section (5) is as under :—

"(5) If any person, without reasonable excuse, makes default in complying with any of the requirements of this section, he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to one hundred rupees for every day during which the default continues, or with both."

There are three accused. The case against accused No. 2 was separated and the present complaint, therefore, proceeded only against accused No. 1, Kuldip Raj Narang, and accused No. 3 Mokan Singh. In the complaint, it is mentioned that on the passing of the winding-up order, the complainant came to be in charge of the affairs of the company and that he caused the registered office of the company and the records of the company maintained in the office of the Registrar of Companies, Delhi, to be inspected. A visit to the company's registered office at 3, Cavalry Lines, Delhi, showed that those premises were used by "The Narang Group of Industries" which appeared to be the proprietary concern of Kuldip Raj Narang as the head. An inspection of the records in the office of the Registrar of Companies showed that accused Nos. 1, 2 and 3 were the directors of the company at the relevant date. The complainant called upon the accused to submit the statement of affairs as required and for this purpose he sent notices dated November 18, 1978, and January 25, 1979, addressed to all the accused. In his reply dated November 29, 1978 (exhibit OW 3/1), accused, Kuldip Raj Narang, said that he was on the board of the company but for the last about two years he had not received any notice calling the board meeting and as such he had not attended any meeting of the board held during that period. It was also mentioned that he was out of India for about 11 months and that when he came back in March, 1978, he could not find any trace of the office of the company. He further said that he was not in possession of any money, property, books of account or any other paper or document of the company. He said he understood that all the books of account and other documents were in the possession of A.P. Sehgal, a director of the company who had since expired. Narang, therefore, said that he was not in a position to submit the statement of affairs as required in the notice of the complainant. Narang was summoned to appear before the complainant and his statement under rule 130 of the Companies (Court) Rules, 1959 (for short "the Rules"), was recorded. This statement, however, did not advance matters as far as the complainant was concerned. Narang was unable to say where the records were or who were the former employees or the auditors of the company or in which bank the company had an account. It is further mentioned in the complaint that it appeared that some time in 1975, accused, T.P.S. Randhawa, A.P. Sehgal and Mokan Singh, were inducted into the board of directors of the company. A.P. Sehgal is stated to have died and the notices sent to the other two accused, Randhawa and Mokam Singh, were returned respectively with the postal remarks "left India" and "out of station". The complainant also issued a show-cause notice to the directors before filing the complaint and only Narang acknowledged the same but failed to comply with that. The complainant, therefore, says that the accused failed, without reasonable excuse, to file a statement of affairs as required and that the complainant is unable to carry on the liquidation proceeding. He says it was the duty of the former directors to file the statement of affairs and having failed to do so, they are guilty of an offence punishable under section 454(5) of the Act.

The court took cognizance of an offence and summoned the accused. On notice being issued to them on May 16, 1983, under section 251 of the Code of Criminal Procedure, 1973, the accused pleaded not guilty. Thereafter, evidence of the complainant was recorded. Meanwhile and prior to the issue of the aforesaid notice, an opportunity was granted to the accused to file a statement of affairs. In this connection, reference may be made to the order dated April 15, 1981. It appears that a statement of affairs was in fact filed by the accused Narang on or about September 6, 1982, but it was defective in many ways and did not fulfil the requirements of the section or rule 127 of the Rules. It did not give the names of the creditors or the auditors of the company. The complainant took time to send a formal requisition to the accused for further particulars. The matter rested at that.

In support of his case, the complainant examined three witnesses. The first witness is S.M. Talwar, an upper division clerk from the office of the Registrar of Companies, New Delhi. He said that the latest annual return of the company was for the period ending September 30, 1976, but this could not be registered because of certain objections raised by the office. He said that as per this return, there were four directors of the company, namely, the three accused and A.P. Sehgal. The last annual return which was taken on record was for the year ending May 25, 1974, and that showed three directors, namely, Kuldip Raj Narang, A.P. Sehgal and Vijay Lal. A form No. 32 dated May 22, 1975, filed on record by the company showed that accused, T.P.S. Randhawa, and Mokan Singh were taken as additional directors of the company. The record brought by this witness, however, did not show whether Mokam Singh was elected as director by the general body of the shareholders or whether he was co-opted. The witness was unable to say if Mokam Singh had signed any balance-sheet, profit and loss account or any other document in the record brought by him. A copy of form No. 32 which is dated December 20, 1971, was brought on record. It showed that the accused, Narang, was appointed director (organisation) and A.P. Sehgal was appointed director (finance) and they were both so appointed as per the articles of association of the company. They were directors since the inception of the company. There was no balance sheet of the company in the records of the Registrar of Companies after 1973. The annual return which was made up to May 25, 1974, was delivered for filing by A.P. Sehgal. The annual return made up to September 30, 1976, which was lying under objections was also delivered for filing by A.P. Sehgal. Another annual return made up to June 30, 1975, was delivered for filing by one J.K. Lal secretary of the company. It was also lying under objection. The profit and loss account for the year 1975-76 was lying under objection along with the balance-sheet and it was signed by the accused T.P.S. Randhawa. The name of the other person who had also signed could not be deciphered by the witness. The profit and loss account for the year 1974-75 was not filed. The witness, S.M. Talwar, denied that it was A.P. Sehgal who was responsible for the day-to-day affairs of the company. I may also note here that the winding-up petition (O.P. No. 74 of 1977) was filed on October 18, 1977, and the affidavit in answer to show cause why the petition be not admitted was filed by T.P.S. Randhawa on behalf of the company.

The second witness of the complainant is V.N. Sharma, a technical assistant in the office of the official liquidator. He referred to the issue of notices requiring the directors of the company to file the statement of affairs and for handing over the records and assets of the company. Since notices remained uncomplied with, the present complaint came to be filed. He said that during the pendency of these proceedings, a statement of affairs was filed but that was defective and it was prepared from the bank accounts of the company and not from the account books. The witness said that the account books were with the directors and they had not surrendered the same to the complaintant. He said in the statement of affairs that the names of the banks, account numbers, etc., had not been mentioned and that other details were also incomplete. He said that in one of the columns of the statement of affairs, it was mentioned that an amount of Rs. 5,55,645.68 was due to the creditors but the names and particulars of the debts due were not given. Similarly, no details of trade debtors, loans and advances were given. According to the witness, the official liquidator thus had no details of the creditors, loans and advances, etc., of the bank and it was not possible to trace them from the statement of affairs. He said a letter dated February 26, 1983, was written by the official liquidator requiring the directors to file a revised statement of affairs and to remove the defects. Though a list of creditors was attached with the statement of affairs, their addresses were not mentioned. He said that as per the record of the Registrar of Companies, accused, Narang, was a director on the date of the winding-up order, but he said he could not say as to what were the functions of the accused Narang. He also could not say what were the functions performed by A.P. Sehgal The letter dated February 26, 1983, which the official liquidator sent was exhibit R-1. This letter was not addressed to the accused, Mokam Singh, as the statement of affairs was filed only by the accused, Narang. This witness could not say whether the accused, Mokam Singh, was co-opted as alternate director of the company in 1975 or whether he did not participate in the management as well as other affairs of the company.

The third witness of the complaintant is V.P. Verma, assistant official liquidator. He stated that the accused, Narang, was summoned to the office of the official liquidator for examination under rule 130 of the Rules, but the accused Narang, however, wanted questions in writing which were given to him and he later replied to them in writing. This witness referred to notices being issued to the directors of the company requiring them to file the statement of affairs and also about the filing of a defective statement of affairs by the accused Narang. When cross-examined by accused No. 1, the witness said that the official liquidator was not in possession of the account books, bills, vouchers and minute books of the company as these were not filed with him. He said that as such there was no question of the official liquidator asking Narang to inspect those documents. The witness said that he could not say whether the accused, Narang, was not in-charge of the day-to-day affairs of the company or whether he was not in possession of the account books, vouchers, minute books, etc. He said that he did not know in whose possession the entire record of the company was kept and he also could not say if A.P. Sehgal was the finance director. He said that the accused Narang was a director of the company on the date of its winding up. This, he said, was on the basis of the records of the Registrar of Companies.

Statements of the accused Narang and Mokam Singh were recorded under section 313 of the Code of Criminal Procedure. In this statement, Narang said that he was not a director of the company on October 20, 1978, the date of its winding up. He said he remained a director from the inception of the company until he left India for Berkeley in the year 1977. He said he did not file the statement of affairs within the time prescribed because he was not in charge of the conduct of the affairs of the company at the material time and he remained out of India from 1977 to 1978 and could not have, therefore, submitted the statement of affairs. He said he did submit a statement of affairs after the institution of the present proceedings. The accused, Mokam Singh, said that he was not a director of the company on the date of its winding up and, therefore, the question of his submitting the statement of affairs did not arise.

The accused also appeared as witnesses in their defence. In his statement recorded as DW-1, the accused Narang said that he left for Berkeley, United States, in the end of March, 1977, on a teaching assignment and returned in the first week of February, 1978. He said A.P. Sehgal was the managing director of the company and he left the country while the accused Narang was abroad and that A.P. Sehgal died in Nairobi. The accused said that he was director (organization) of the company in terms of its articles. In this connection, he referred to form No. 32 filed by the company which was registered in the office of the Registrar of Companies on January 14, 1972. A "certified copy" of this form No. 32 has been brought on record. The accused Narang deposed that he did not look after the financial matters or the maintenance of books of account at any material time and these were being looked after by A.P. Sehgal who, he said, was a chartered accountant. He said he did not know to whom Sehgal handed over charge when he left for Nairobi. He also said that A.P. Sehgal and T.P.S. Randhawa were the two active directors of the company at that time and the accused Narang said that he presumed that Sehgal had handed over charge to T.P.S. Randhawa. He narrated the circumstances under which he got the statements of affairs prepared in the absence of the records. He said he got the accounts reconstructed from the bank records. He said the official liquidator did not inform him that the books of account and other records of the company were available with the official liquidator. In his cross-examination, he said that he was not ousted from the management of the company "in the sense that I was free to participate in the conduct of its affairs, if I chose to do so."

The accused, Mokan Singh, in his statement said that he was elected as an alternate director of the company some time in 1975 and that that election was, however, not confirmed in any general meeting of the company. He said he did not take any part in the conduct of the affairs of the company and that he was elected director only because his tenanted premises were being used by the company. He said that as far as he knew the relevant record of the company was in the possession of the other two directors, Sehgal and Randhawa. In his cross-examination, he denied the suggestion that his appointment as a director of the company was in fact confirmed in the board meeting of the company. He said he became aware of form No. 32 filed by the company showing him as an alternate director only during the pendency of these proceedings. He said he was never aware of any such form No. 32 having been filed earlier.

That is all the evidence in the case.

During the course of arguments, a copy of the memorandum of association and articles of association of the company were also placed on record which was admitted by both the parties. It is mentioned in the articles of association that where no specific provisions have been made, provisions of Schedule I, Table A of the Act, shall apply. This would also be, to an extent, the effect of section 28(2) of the Act. Article 21 gives the names of the first directors who are seven in number. The accused, Narang, is described as organisation director and A.P. Sehgal as director (finance). Other directors have been described as technical director, director (banking), director (marketing), director (accounts and law), and director (company law). Under article 23, the powers and responsibilities of the directors of the company are those as given in the Act and in Table A except in so far as these stood modified by the provisions of the articles of association. Under article 22, each director is to be paid out of the funds of the company by way of remuneration for services rendered to the company such amount as may be decided by the board from time to time and each director is also to be paid such fee as may be decided by the board for every meeting attended by him. Under article 26, the directors may appoint one or more of them to the office of the managing director for such period and on such terms as they think fit. Then articles 27 and 28 prescribe the remuneration to be paid to the managing director and also the powers to be conferred upon him.

Sub-section (1) of section 454 of the Act prescribes that where the court has made a winding up order, there shall be made out and submitted to the official liquidator a statement as to the affairs of the company in the form prescribed. The particulars to be given in the statement of affairs are also mentioned in the sub-section. These are :

(a)            the assets of the company, stating separately the cash balance in hand and at the bank if any, and the negotiable securities, if any, held by the company ;

        (b)            its debts and liabilities ;

(c)            the names, residences and occupations of its creditors, stating separately the amount of secured and unsecured debts ; and in the case of secured debts, particulars of the securities given, whether by the company or an officer thereof, their value and the dates on which they were given ;

(d)            the debts due to the company and the names, residences and occupations of the persons from whom they are due and the amount likely to be realised on account thereof;

(e)            such further or other information as may be prescribed, or as the official liquidator may require.

Sub-section (2) prescribes that such a statement snail be submitted and verified by one or more of the persons who are at the relevant date, the directors and by the person who is at that date the manager, secretary or other chief officer of the company. Then sub-section (3) says that the statement shall be submitted within 21 days from the relevant date or within such extended time not exceeding three months from that date as the official liquidator or the court may for special reasons appoint. The relevant date of course would be the date of the winding up order. Sub-section (5) which prescribes punishment for the default has already been set out above. I have set out sub-sections (1) and (2) above so far as these are relevant to this case. At this stage, some of the provisions of the Act which have a bearing on the case may also be referred to. Section 163 requires that register of members, copies of all annual returns, etc., are to be kept at the registered office of the company. Under section 193, minutes of the general meeting and board meetings of the company are be kept and under section 196, these are required to be kept at the registered office of the company. Then, under section 209, the requirement is that every company shall keep at its registered office proper books of account with details as mentioned therein and the persons responsible for securing compliance with the provisions of this section are liable to be punished for default. Under sub-s. (6) of s. 209, these persons would be the managing directors, or a manager, if there is one, and otherwise every director of the company. Section 291 refers to the powers of the board of directors and says that the board of directors shall be entitled to exercise all such powers and to do all such acts and things as the company is authorised to exercise and do. Thus, the board of directors is responsible for the overall conduct and management of the affairs of the company and to comply with the statutory requirements under the Act and other laws. Under section 260, the board of directors is entitled to appoint additional directors but these additional directors are to hold office only up to the date of the annual general meeting of the company. Then article 72 of Table A in Schedule I would be relevant as this article would be applicable in the present case. Under this article, the board has again power to appoint a person as additional director and that person is to hold office only up to the date of the annual general meeting but shall be eligible for appointment by the company as a director at that meeting subject to the provisions of the Act. Under section 283, the office of a director becomes vacant if he absents himself from three consecutive meetings of the board of directors or from all meetings of the board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the board [clause (g) of sub-section (1)]. Under section 285, a meeting of the board of directors is to be held at least once in every three months and at least four such meetings shall be held every year. Then under section 286, notice of every meeting of the board of directors of a company is to be given in writing to every director for the time being in India and at his usual address in India to every other director. Sections 540 to 545 contain provisions regarding liability of certain persons for fraudulent conduct of the business of the company, etc. Under section 541, where a company is being wound up and if it is shown that proper books of account were not kept by the company during a particular period, every officer of the company is liable to be punished unless he shows that he acted honestly. Under section 2(26), "managing director", means a director who, either by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him; and it would also include a director occupying the position of managing director by whatever name called. A managing director is, however, to exercise his powers subject to the superintendence, control and direction of the board of directors. Certain powers of routine nature as given in the proviso to this sub-section would not be deemed to be substantial powers of management. Under section 303, every company is to keep at its registered office a register of its directors, managing director etc. containing particulars as given in the section. Under sub-section (2) of this section, a company is to send to the Registrar of Companies a return in the form prescribed containing particulars as specified in the register of its directors mentioned above and is also to send a notification, again in the form prescribed (Form No. 32), of any change among its directors, managing directors, managers or secretaries, etc., specifying the date of the change. These returns are to be filed within the specified period as given in the sub-section.

Reference to two decisions may also be made. In a Full Bench decision of this court in O.L. of Security and Finance P. Ltd. v. B.K. Bedi [1974] 44 Comp Cas 499 (Delhi); ILR [1974] I Delhi 809 [FB], the court held that it would be for the official liquidator to prove that the default under section 454(5) of the Act was committed without reasonable excuse and as to how that was to be proved, the court observed as under (p. 506):

"It appears to us as that the official liquidator need only prove that notice was sent to the concerned director to submit a statement of affairs, that prescribed time has lapsed and that no extension has been sought for from him or from the court and that the necessary books of the company were available for inspection by the concerned director. These are facts which are conveniently available to the official liquidator and if he shows these facts prima facie he would have proved that the director has, without reasonable excuse, made the default in complying with the requirements of section 454. In such a case, it would obviously be for the concerned director to prove circumstances to justify his conduct and to show that he had a reasonable excuse in making the default."

In In re, Beejay Engineering Pvt. Ltd. [1983] 53 Comp Cas 918, the court was examining the question whether relief could be given under section 633 of the Act in respect of liability under Acts other than the Companies Act and one of the questions was whether a director could be exonerated merely on the ground of being a technical director. The court was of the view that no distinction could be drawn amongst the directors for fastening liability or granting relief from liability on the consideration that a person was on the board purely by virtue of his technical skill or because he represented certain special interests and there were other directors who were in effective control of the management and affairs of the company.

Prof. Ved Vyas, learned counsel for accused Narang, submitted that in view of the provisions of sections 283(1)(g) and 285, Narang ceased to be a director of the company and he could not be fastened with liability under section 454. It was also submitted that the whole of the working of the company was in the hands of A.P. Sehgal who was a chartered accountant by profession and was shown as director (finance) and it was he who was to maintain the account books and other statutory records of the company. It was also stated that the accused Narang was unaware of the affairs of the company and in spite of that he tried his best to submit a statement of affairs and which he did though it was not in the form prescribed and did not contain the relevant particulars. It was also submitted that the court should exercise discretion and dispense with the filing of the statement of affairs in the circumstances of the present case. It was submitted that though the petition was advertised, no creditor was forthcoming. Strong reliance was placed on the decision of this court in B.K. Bedi's case [1974] 44 Comp Cas 499 (Delhi) [FB].

Mr. B.K. Seth, learned counsel for Mokam Singh, adopted the arguments of Prof. Ved Vyas but stated that Mokam Singh was appointed as additional director and that there was nothing on the record to show that his appointment was approved in the annual general meeting of the company. He also said that it was A.P. Sehgal who was looking after the affairs of the company and that after the death of Sehgal, accused Randhwa was looking after the affairs of the company.

Mr. V.V. Shastri, learned counsel appearing for the complainant, however, stated that there was nothing in the Act to describe a director as active, dormant or nominal and that the Act imposed statutory duty on the whole body of directors to comply with the provisions of section 454 of the Act.

Books of account, statutory books or any other record or asset of the company were not found at its registered office and nor were these handed over to the official liquidator. Where is then the question of the official liquidator making available to the accused the necessary books of the company for inspection by them so as to enable them to file the statement of affairs ? The official liquidator made the accused aware of their statutory duty and under the circumstances, he could do no more. The Full Bench decision of this court in B.K. Bedi's case [1974] 44 Comp Cas 499 (Delhi) [FB] is inapplicable in the present case. As will be seen, the accused are trying to plead in their defence default committed by them in their statutory body. This cannot be permitted: The State of Bombay v. Bhandhan Ram Bhandani [1961] 31 Comp Cas 1 (SC); [1961] 1 SCR 801.

The board of directors of a company is to exercise such powers and to do all such acts and things as the company is authorised to exercise and do. The general management and conduct of the affairs of the company are vested in the board of directors. This board is collectively responsible for the management and conduct of the business of the company. Each and every act which a company is required to do under the provisions of the Act including the maintenance of books of account, minute books etc., is the collective responsibility of the board of directors as the general administration of the company vests in the board. Sometimes, it is usual to appoint one or more of the directors as whole-time working directors including the managing director of the company to look after the day-to-day administration of the company. This is so as it may not be possible for the board of directors to collectively act and conduct each and every act or thing on behalf of the company. In the case of a private limited company, mostly all the directors exercise some functions in the day-to-day working or affairs of the company. In the case of a public limited company, however, the day-to-day administration is usually left to one or two directors who are termed as managing director or a whole-time director. Again, a managing director or a whole-time director delegates various functions to the officers of the company when it is not possible for him to attend to the same. The board of directors is duty-bound in the management of the affairs of the company to ensure that statutory records and other records of the company are maintained in accordance with the provisions of law. If, however, the directors are in a position to explain that the responsibility for the maintenance of the minutes books etc. were delegated or otherwise entrusted to any particular director or officer of the company and that they bona fide believed that the said minutes books, etc., were being kept in a proper and safe manner by the said director or officer of the company, then in that case, they might not be held responsible for the loss or non-maintenance of the minutes books. It is the duty of each and every director to explain as to why he should not be held responsible for the loss, non-maintenance and non-availability of the minutes books in the facts and circumstances of each case. A director cannot escape liability merely by pleading that he was not directly responsible for the loss of the minutes books and other records. He has to show that he had in the usual circumstances reposed confidence in the directors and/or officers of the company who were entrusted with the responsibility of maintaining the minutes books and that there was no occasion for him to warrant any inquiry into the fact that the minutes books were not properly kept or were in danger of being lost and that he acted in a bona fide manner and in the interests of the company. The following paragraph from Palmer's Company Law, 23rd edition would be relevant—

"On principle, the management of the company is vested in the board of directors collectively and the directors must, as a general rule, act at board meetings, but the articles, or rules made by the directors under powers vested in them by the articles, may otherwise provide. This principle ensures that the collective wisdom of the board is available to the company on important decisions, and enables discussion to take place before a decision is taken."

(Paragraph 62-01, page 823)

All this discussion has been necessary to show the liability of the directors constituting the board in the conduct of the affairs of the company under certain provisions relevant to the case and to examine the various pleas of the accused in the background of these provisions.

In the present case, the accused have stated that the responsibility for maintaining the statutory records of the company was on A.P. Sehgal and after him on Randhawa. Accused Narang even went to the extent of saying that A.P. Sehgal was the managing director of the company. No document has been brought on record to show that the board of directors had entrusted the management of the affairs of the company to A.P. Sehgal or that he was the managing director of the company. In the absence of any records, I am unable to accept this contention. Accused Narang relied on Form No. 32 registered with the Registrar of Companies on January 14, 1972, in which he has been shown as director (organisation) and A.P. Sehgal as director (Finance). As mentioned above, other directors have also been given various designations as director (technical, banking, marketing, accounts and law, and Company Law). No advantage can be derived by the accused Narang from the fact that A.P. Sehgal had been shown as director (finance) and as such he was required to keep the minutes books and other statutory records of the company. These descriptions of the directors do not explain or define the functions of the directors. Accused Narang has been unable to show as to what were his functions when he was shown as director (organisation). Again, I would reject this argument that merely because A.P. Sehgal was described as director (finance), it was he who was solely responsible for the conduct of the affairs of the company.

The accused also said that they were not the directors on the date of the making of the winding up order. Accused Narang said that he did not attend any board meeting for about two years and that he received no notice of any such board meeting and also that he was out of India for a certain period. There is nothing on the record to show that any board meeting was held during this period or that any notice of any such meeting was at all issued or that accused Narang did not obtain any leave of absence to attend any such board meeting. For all that matter, there might have been default in holding the meetings of the board of directors. As per the records of the Registrar of Companies, the accused Narang was a director of the company. He contended that the last available record was for the period 1976 which showed him as a director and that while the winding up order was made on October 20, 1978, there was nothing on the record of the Registrar of Companies to show that accused Narang was a director on that day. This argument is again, to my mind, misconceived. It is on record that though the annual returns of the company filed for the period ending September 30, 1975 and September 30, 1976, were with the Registrar of Companies ; but these were not registered because of certain objections. Thereafter, no annual return or Form No. 32 was filed when there was any change in the board. Thus again, the accused is trying to plead in his defence his own default in not complying with the provisions of law regarding filing of annual returns and Form No. 32 and other documents with the Registrar of Companies.

It was also contended by Prof. Ved Vyas that after the winding up petition was advertised, no creditor of the company had come forward and that the court should dispense with the filing of the statement of affairs. I cannot accept this submission. To my mind, the statement of affairs is a basic document from which proceedings after the winding up order start. It is an important document. It must not be forgotten that the winding up order was made on a petition filed by a creditor. The official liquidator has not filed any application seeking dispensing with the requirement of section 454 of the Act. Rather, he is prosecuting the accused for their default. No ground exists to dispense with the filing of the statements of affairs.

The statement of affairs filed during the pendency of these proceedings by accused Narang obviously does not meet the requirements of law as it does not contain the particulars as required and as above mentioned. The default therefore continues.

The case of the accused Mokam Singh appears to be different. It has come on record that as per Form No. 32 filed with the Registrar Companies, he was shown as an additional director. His appointment as an additional director was to continue till the date of the next annual general meeting of the company. Nothing has been brought on record to show that in the annual general meeting of the company, he was appointed as a director. It, therefore, cannot be said that he was a director of the company on the date of the passing of the winding up order. He has, therefore, to be acquitted.

As far as accused Narang is concerned, he was aware of the winding up order and of his duty to file the statement of affairs within the prescribed period. This he failed to do. Notices were sent by the official liquidator requiring him to file the statement of affairs. This again was not done by him. Statutory books and other books of the company were not handed over to the official liquidator, and in fact I would say he was prevented from taking these into possession as these were not found at the registered office of the company for which default the directors could also be liable under the Act. It is correct that in the present case, it is not enough for the complainant to prove merely the prohibited act and then must the defendant bring himself within the statutory defence (sic). The prosecution must bring home to the accused either by direct or circumstantial evidence showing liability of a guilty mind based in the form of actual knowledge or connivance because of the use of the words "without reasonable excuse" in section 454(5) of the Act. To my mind, in the present case, the prosecution has clearly proved what the accused had to do and that he deliberately refrained from complying with the provisions of section 454 containing obligations to be performed by him as a director in spite of notices from the official liquidator on a pretext which, as noted above, cannot bear scrutiny. The suggestion that the accused was merely a figurehead not taking any active part in the control of the company is, in my opinion, not worth any serious consideration. He was a director throughout the relevant period and was responsible, along with other directors, for the management of the company. He was not there merely for a chromatic effect. There is nothing on the record to show whether A.P. Sehgal was the managing director of the company. Further, in the absence of any other evidence to corroborate the version of accused Narang, I am not prepared to accept his statement that he was unconnected or unconcerned with the affairs of the company. He has no defence. As noted above, the provisions of section 209 which relate to keeping of proper books of account of the company at its registered office are quite explicit. Non-compliance with these provisions would make every director of the company liable to penal action (sub-section (6)(d) of section 209). Accused Narang cannot escape his liability by contending that the books of account were not made available to him by the official liquidator, the complainant.

The prosecution has brought home the charge to the accused. Narang has to be held guilty of an offence punishable under section 454(5) of the Act, and I convict him accordingly. Accused Mokam Singh is acquitted.

The question that now remains is as to what punishment is to be awarded to accused Narang. Before I pass any order in that respect, I would grant the accused Narang an opportunity of being heard on the question of sentence.

I have heard arguments on the question of sentence.

An offence under section 454(5) of the Act is a serious offence and a deterrent punishment has been provided. The offence for not filing the statement of affairs under section 454(1) of the Act is a continuing one and terminates only on the filing of the statement of affairs. The offence is punishable not only with imprisonment for a term extending to two years but is also punishable with fine extending to Rs. 100 for every day during which the default continues. I do not, therefore, think that in such a case the provisions of section 360 of the Code of Criminal Procedure, 1973 should be invoked which provide for release on probation of good conduct or after admonition, as was contended before me. As to why sub-section (5) of section 454 of the Act was substituted in the Act as it now stands can be best found from the recommendations of the Companies Act Amendment Committee. The relevant portion of the recommendations of the Committee is as under ;—

"It has been the complaint of official liquidators that the statement of affairs is not filed in spite of repeated reminders and warnings, and if filed at all, is filed only after considerable delay. The penal provision is hardly ever enforced apparently because a complaint has to be made by the official liquidator to the criminal court, and this involves delay. Much of the delay in winding up is caused by the statement of affairs of the company not being filed in time to enable the Official Liquidator to take the necessary action. It would facilitate his work and speed up the winding-up of companies, if the power to punish the officers of the company who default in filing the statement of affairs, is vested in the winding-up court instead of in the ordinary criminal courts. The winding-up court, which in most cases will be the High Court, will be in a better position to judge the degree and nature of the default of the officers concerned and mete out appropriate punishment where necessary. The fear that the winding-up court would take immediate cognisance of any delay and deal adequately with those in default would by itself do much to ensure prompt filing of the statement of affairs. Section 454 of the Act should, therefore, be amended, vesting the power of punishment under the section in the winding-up court (Report: para. 166)."

(At p. 942, Guide to the Companies Act

by A. Ramaiya, 10th Edn. 1984)

As noted in the judgment above, the books of account and other statutory records of the company were not handed over to the official liquidator. The directors contravened the provision of law regarding tiling of the statement of affairs which is an important document to enable the official liquidator to start the process of winding up of the company. It now appears to me that the official liquidator is extremely handicapped in the present case and perhaps he has no choice except to seek an order under section 481 of the Act for dissolution of the company without knowing who the debtors are and who the creditors are and what functions the company performed. That appears to be the unfortunate result. It was again asserted that no creditor had come forward even after the petition for the winding up order was advertised. It is not the case of the accused that there were no creditors, and if that be so, the argument now advanced does not help the accused at all. I have already mentioned that the company was in fact ordered to be wound up on a creditor's petition. The official liquidator has not invited any claims so far ; and it will not be possible to send individual notices to the creditors as provided and I do not know what he is going to do in the circumstances of the present case. The gravity of the offence cannot be minimised. That the offence under section 454(5) of the Act is a continuing one cannot now be disputed in view of the decision of the Supreme Court in Maya Rani Punj v. Commissioner of Income-tax [1986] 157 ITR 330. By this decision, an earlier decision of the Supreme Court in Commissioner oj Wealth-tax v. Suresh Seth [1981] 129 ITR 328 was overruled. A question, however, arose as to whether sentence of fine which is for each day during which the default continues is to be limited up to the date of filing of the complaint or up to the date of conviction. The first impression was that perhaps it would be up to the date of conviction in the present case inasmuch as the court did take notice of the fact that during the pendency of this complaint, the statement of affairs was not tiled and that which was filed was altogether not in accordance with the provisions of section 454(1) of the Act and could not be termed as a statement of affairs in the eye of law. However, in my opinion, a sentence of fine cannot be imposed for the period after filing of the complaint. Sub-section (5A) of section 454 of the Act is as follows :

"The court by which the winding up order is made or the provisional liquidator is appointed, may take cognizance of an offence under sub-section (5) upon receiving a complaint of facts constituting such an offence and trying the offence itself in accordance with the procedure laid down in the Code of Criminal Procedure, 1898, for the trial of summons cases by magistrates".

If reference is made to the Code of Criminal Procedure, 1973 (after repeal of the earlier Code of 1898), 'complaint' has been defined to mean any allegation made orally or in writing to a Magistrate, with a view to his taking action under the Code, that some person, whether known or unknown, has committed an offence (section 2(d)). The court takes cognizance of the offence under section 190 of the Code upon receiving a complaint of facts constituting the offence. Process is issued to the accused under section 204 of the Code and when he appears, the substance of the accusation is to be stated to him (section 251). The provisions contained in Chapter XX of the Code relating to trial of summons cases are to be applicable inasmuch as the punishment with imprisonment is for a term up to two years Then after the trial, the court is to record its finding, convicting or acquitting the accused. Thus, it will be seen that the accused is to meet the case as set out in the complaint and the substance of the accusation is stated to him and he is asked to plead guilty or not to the same. This substance of accusation is given in the complaint only up to the date of filing of the complaint.

Considering, however, the facts and circumstances of the present case, I am of the opinion that the ends of justice will be met by imposing a fine on the accused and he need not be sent to prison. I would, therefore, sentence the accused Kuldip Raj Narang to pay a fine of Rs. 50 per day for every day during which the default continued. The fine at the rate of Rs. 50 per day will be payable from November 11, 1978, 21 days after the date of the winding up order which is October 20, 1978, till December 19, 1980, when the complaint was filed. The amount of fine comes to Rs. 38,500. In default of payment of fine, the accused will undergo rigorous imprisonment for a period of two months. The fine, when realised, will be payable to the official liquidator, the complainant.

[1987] 61 COMP. CAS. 227 (CAL)

HIGH COURT of CALCUTTA

Gluco Series (P.) Ltd., In re

DIPAK KUMAR SEN, J.

Company Petition No. 448 of 1980

JUNE 6, 7, 1984

 

JUDGMENT

Dipak Kumar Sen, J. —Debendra Nath Bhattacharya, since deceased, and Deb Kanta Roy were the promoters of Gluco Series P. Ltd. (hereafter referred to as "the company") which was incorporated on November 11, 1959. At the incorporation of the company, Debendra subscribed for 1,000 shares and Deb Kanta subscribed for 200 shares of Rs. 100 each.

The main object of the company is to manufacture and sell glucose of various types.

The articles of association of the company provide, inter alia, as follows:

"Article 7....the company shall be entitled to treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or as by statute required, be bound to recognise any benami, equitable or other claim to/or interest in such share on the part of any other person.

Article 29. —Number of directors shall not be less than two and more than seven until otherwise determined by general meeting.

Article 30. —The first directors of the company are —

        (a)    Sri D.N. Bhattacharjee

        (b)    Sri D.K. Roy.

The first directors of the company shall be permanent directors and shall not be subject to retirement by rotation. The directors shall have power at any time and from time to time, to appoint any person as an addition to the board so that the total number of directors shall not at any time exceed the maximum number fixed.

Article 42. —Sri D.N. Bhattacharjee shall be the chairman of the board of directors of the company and shall continue to act as such until he resigns voluntarily. He shall preside over all meetings of the board and all general meetings—ordinary or extraordinary. The chairman shall have the authority to exercise all the powers of the managing director as mentioned in clause 44. The remuneration of the chairman shall be fixed by the board.

Article 43. —The business of the company shall be carried on by the managing director subject to the supervision and direction of the board. Sri D.K. Roy shall be the managing director of the company, and shall continue to act as such managing director of the company until he voluntarily resigns the same."

By a special resolution dated October 12, 1965, a new article, being article No. 48A, was incorporated as follows:

"Article 48A. —Notwithstanding anything contained in these articles of association or in the regulations contained in Table "A" in Schedule I to the Companies Act, 1956, which may be applicable to the company, so long as any money remains due by the company to West Bengal Financial Corporation, its successor or successors and/or assigns (hereinafter called "the said Corporation") under or by virtue of any deed or deeds of mortgage and/or hypothecation executed by the company in favour of the said Corporation the following provisions shall have effect;

        (a)    No change shall be made in the memorandum and articles of association of the company or in the capital structure of the company save with the previous consent in writing of the said Corporation."

At its incorporation, the authorised share capital of the company was Rs. 5,00,000. By a special resolution also dated October 12, 1965, the authorised share capital of the company was increased from Rs. 5,00,000 to Rs. 10,00,000.

It is not in dispute that on March 31, 1979, the issued share capital of the company was Rs. 6,45,000 divided into 6,450 equity shares of Rs. 100 each, fully paid up, which were held as follows:

(a)            2,150 shares stood registered in the name of Debendra then deceases;

(b)            300 shares stood registered in the name of one Benoy Kumar Das, deceased;

(c)            200 shares were registered in the name of Lokenath Bhattacharjee, a son of Debendra;

(d)            200 shares were registered in the name of Timirari Bhattacharjee, another son of Debendra;

(e)            200 shares were registered in the name of Batuk Nath Bhattacharjee, another son of Debendra;

(f)             200shares were registered in the name of Smt. Chhanda Bhattacharjee, the daughter-in-law of Debendra;

(g)            450 shares were registered in the name of Sovana Bhattacharjee, the widow of Debendra;

        (h)            300 shares were registered in the name of one R. Mukherjee;

        (i)             250 shares were registered in the name of one I.B. Gautam;

(j)             2,200 shares were registered in the name of British Electrical & Pumps Private Ltd.;

        (k)            1,150 shares were registered in the name of Deb Kanta ;

        (l)             200 shares were registered in the name of one Darshanlal Jaggi;

(m)           150 shares were registered in the name of Mohini Mohan Choudhury;

(n)            50 shares each were registered respectively in the names of Mrs. Arati Mukherjee, Mrs. Anjali Mukherjee, Bikash Mukherjee, Hrishi-kesh Mukherjee and Chinta Haran Banerjee.

Lokenath Bhattacharjee, Timirari Bhattacharjee, Batuk Nath Bhattacharjee, Chhanda Bhattacharjee and Sovana Bhattacharjee filed this petition under sections 397 and 398 of the Companies Act, 1956, on October 13, 1980, against the company, Deb Kanta Roy and Darshanlal Jaggi, respondents Nos. 1, 2 and 3 respectively.

By an interim order passed in the proceedings on November 12, 1980, a special officer was appointed who was directed to make an inventory and initial the books of the company.

By another order made on February 13, 1981, the petition in the main application was directed to be amended. Bibhuti Kanta Roy, Mrs. Pratima Roy, Ranjit Roy, Mrs. Sudha Roy, Avijit Roy, Mrs. Suguna Dutta Gupta, Mrs. Sarbani Neogi, Shris Kumar Gupta, Sujit Kanta Roy, Bani Kanta Roy, Mrs. Tapati Roy, Chitta Prasanna Sen, Charu Prosad Sengupta, Bhupendra Chandra Sen, Shivaji Sen, Kanak Kanti Das Gupta and Chittaranjan Choudhury were added as parties and impleaded as respondents Nos. 4 to 20 respectively.

The petitioners seek, inter alia, the following orders:

(a)            Appointment of special officer or officers to take charge of the business and affairs of the company and to arrange for running the same.

        (b)            The board of directors of the company be superseded;

(c)            A declaration that the purported issue of 900 shares of Rs. 100 each in the purported board meeting held on October 3, 1980, is illegal, wrongful, void and not binding on the company and its shareholders including the petitioners;

(d)            Respondents Nos. 4 to 20 be restrained from exercising any right whatsoever relating to the impugned shares issued on October 3, 1980, and further the company be restrained from allowing the said respondents Nos. 4 to 20 to exercise any right whatsoever in respect of the said shares or receiving any dividend or any benefit relating thereto;

(e)            A scheme be framed by this court for administration of the company with proportionate representation of the petitioners in the board; in the alternative, the special officer be directed to convene, hold and con duct an extraordinary general meeting of the company for the purpose of election of directors and to make over charge of the company to the directors to be appointed in such meeting;

(f)             An investigation into the affairs of the company be made in the matter of dealing with the assets of the company by respondents Nos. 2 and 3 particularly since the death of Debendra and the said respondents be directed to restore or make compensation to the company of such sums as may be found due and payable on such inquiry or investigation including the amounts drawn by respondent No. 2 from the company in the form of managing director's remuneration.

The case of the petitioners is as follows:

(a)            From the quantum of shares subscribed by the promoters at the incorporation of the company, it was evident that Debendra intended to control and manage the company.

(b)            The promoters were named as the first directors of the company. Debendra, appointed as the chairman of the board of directors of the company, continued to act as such till he resigned from his office voluntarily. As the chaiman of the company, Debendra had the authority to exercise all powers of the managing director.

(c)            The company was in the nature of a partnership and has been run on the basis of personal relationship of the promoters, the members of their respective families and their friends on mutual trust and confidence. It was agreed or understood that the families of the promoters or their friends would be suitably represented in the board of directors of the company and would participate in the management of its affairs.

(d)            Out of the 6,450 shares issued, the petitioners and the members of their group, namely, the said I.G. Gautam and British Electricals and Pumps P. Ltd., hold 2,200 shares. The respondent along with their friends and supporters hold about 1,800 shares. The petitioners have not been able to obtain mutation of the shares standing in the name of Debendra as clearance under the Estate Duty Act in respect of the estate of Debendra has not been obtained.

(e)            Even without 2,150 shares standing in the name of Debendra, the petitioners and their group hold an absolute majority in the company having more than 66% of the total voting rights.

(f)             Although the company was incorporated in 1955 and acquired assets in the shape of land, factory and modern machinery, it did not commence production. If such production is commenced, it is possible for the company to make substantial profit.

(g)            After the death of Debendra in December, 1978, the petitioners have been kept completely in the dark as to the management and the affairs of the company and have been excluded from such management though they became entitled to participate therein as the majority group and after the death of Debendra also by reason of the agreement or understanding as aforesaid. The petitioners have not been served with any notice of any annual general meeting nor have they received the annual accounts of the company. The respondents are not holding any annual general meeting of the company in violation of law for which the company is liable to be prosecuted.

(h)            Respondent No. 3, holding 200 shares, has been appointed a director of the company after the death of Debendra in breach or violation of the said agreement or understanding and without the knowledge or consent of the petitioners.

(i)             From the balance-sheet of the company as on March 31, 1979, obtained from the Registrar of Companies, West Bengal, the petitioners have come to know that the factory, land, building, plant and machinery were mortgaged or hypothecated to the West Bengal State Financial Corporation (hereafter referred to as "the Corporation") and that the liability of the company to the Corporation as on March 31, 1979, was Rs. 4,38,000.

(j)             The Corporation initiated proceedings in this court for realisation of its dues under the West Bengal State Financial Corporation Act, 1951, claiming Rs. 6,82,854.09. By an order dated August 7, 1972, made in the said proceedings, joint receivers were appointed for selling the mortgaged assets of the company. The joint receivers have, however, been directed not to oust the company from its land and premises till the completion of the sale. The respondents and, in particular, respondent No. 2, have been attempting to sell the assets of the company at a gross under-value for the ostensible purpose of liquidating the liabilities of the Corporation. Their object is to make wrongful and illegal gain at the cost of the company and its shareholders. In the usual course, it would not have been possible to sell such assets without the approval of the members of the company under section 293 of the Companies Act, 1956.

(k)            Respondent No. 2 has been receiving Rs. 18,000 per year by way of remuneration as managing director without rendering any service to the company. Such remuneration has been received up to the year ending on March 31, 1979.

(l)            By reason of the aforesaid, it has become impossible to carry on the business of the company and on the facts it is possible to have the company wound up on just and equitable grounds. But such winding up would be prejudicial to the interests of the petitioners.

The further case of the petitioners introduced by the amendment of the petition is, inter alia, as follows:

(a)            At the time of the making of an inventory by the special officer, it transpired from the register of members, share ledgers and the directors' minute books of the company that at an alleged meeting of the board of directors held on October 3, 1980, 900 shares of the company of the face value of Rs. 100 each were issued to respondents Nos. 4 to 20.

(b)            The said shares were issued wrongfully and illegally, in violation of the Companies Act and the articles of the company and in breach of the fiduciary duties of the persons in charge of the company. Such issue is void and not binding on the company and its shareholders. By issuing the said shares, the respondents who are in a minority sought to convert themselves to a majority to perpetuate their illegal and wrongful control of the management and the affairs of the company and to prevent the petitioners from participating in such management which the petitioners as the majority were entitled to.

(c)            The said issue has caused prejudice to the petitioners and amounts to oppression. The said shares were issued not in the interest or for the benefit of the company, but was solely for the benefit of the respondents.

(d)            No information about the said issue was given to the petitioners either before or after the board meeting and the same was recorded probably with a back date. The respondents were not entitled to issue the said shares or invite outsiders to subscribe. The issue of the said shares was not necessary as the company did not even commence its business nor was it in need of any finance. The petitioners were ready and willing to subscribe for new shares in the company on a pro-rata basis if invited. The petitioners are not aware whether the said shares were issued for consideration other than cash or, whether they were fully paid up or not nor how the money realised, if any, from the issue has been utilised.

Two affidavits of Deb Kanta Roy, respondent No. 2, affirmed respectively on December 8, 1980, and February 16, 1981, have been filed on behalf of respondents Nos. 1, 2 and 3 in opposition to the petition. The case of the said respondents is as follows:

(a)            It was agreed or understood between respondent No. 2 and Debendra that respondent No. 2 as the managing director would be solely responsible for all administrative, executive and other functions of the company and also for acquisition of assets for setting up of its factory.

(b)            The financial affairs of the company were to be the sole responsibility of Debendra who promised and assured that necessary finance would be provided or arranged by him.

(c)            Relying on the aforesaid, respondent No. 2 proceeded with acquisition of land and import of plant and machinery for the company. He also entered into a collaboration agreement with an East German firm for operation of the plant.

(d)            By 1964-65, the company was ready to start production with its plant within one or one and half years provided finance was available.

(e)            During 1966-67, Debendra became involved in a series of litigations, both civil and criminal, his health deteriorated and he failed to pro vide or arrange for finance for the company.

(f)             Later, in 1974-75, Debendra, to solve his financial difficulties, attempted to withdraw his capital invested in the company. He pressed respondent No. 2 to buy his shares in the company or to find out buyers for the same. No one was ready to buy such shares at that stage but respondent No. 2 out of gratitude bought 1,150 out of the 2,150 shares held by Debendra in or about 1976 and promised to buy the balance 1,000 shares. Debendra executed a blank transfer deed in respect of the said 1,150 share and made over the same to respondent No. 2 but by mistake share scrips of the balance 1,000 shares were also made over along with the said transfer deed and as such the said transfer could not be registered as Debendra fell ill in 1977.

(g)            Apart from subscribing for shares in the names of himself, his wife, sons and daughters-in-law between 1962 and 1964, Debendra did not take any interest in the company or the management thereof.

(h)            Respondent No. 2 on his personal guarantee arranged loans to the company from the Corporation and the United India Credit and Development Co. Ltd., and presently he is personally liable as a guarantor to the extent of over Rs. 10 lakhs. There has been litigation between the company and the Corporation and a settlement has been arrived at ultimately. A general project report of the viability of the company has been made and it is expected that with a further investment of Rs. 59.68 lakhs, the company will be able to function.

(i)             The petitioners never participated nor showed any interest in the affairs of the company at any time. They knew that Debendra had failed to provide finance for the company as promised and that as a result the company had suffered prejudice and hardship. The petitioners had abandoned the company as lost.

(j)             The company is presently viable and expected to start production within 2 to 3 years. Realising this, the petitioners are suddenly taking interest in the company. This application has been made to sabotage the efforts of respondent No. 2 to revive the company.

(k)            Debendra stopped attending the meetings of the company altogether after 1968 and in his absence the meetings of the board could not be held. In 1969, respondent No. 2, on the advice of Debendra, co-opted Darshanlal Jaggi, respondent No. 3, as a director. Respondent No. 3, an unsecured creditor of the company, was known to Debendra and at the suggestion of Debendra, a part of the unsecured loan of respondent No. 3 was converted into shares and allotted to the latter.

(l)             The appointment of respondent No. 3 as a director was duly recorded in the returns filed with the Registrar of Companies. Debendra had full knowledge of the aforesaid as he had signed such returns as also the share scrips issued to respondent No. 3.

(m)           In or about 1976, Indu Gautam offered to sell 250 shares of the company held by her to respondent No. 2 and executed and made over an application for transfer to the latter. She, however, did not hand over the share scrips or certificates. It is contended that Indu Gautam and M/s. British Electrical and Pumps Ltd. are not supporting the petitioners nor have they any right to do so.

(n)            The petitioners and their group hold, at the maximum, 1,650 shares of the company and are not in a majority. Respondent No. 2 and the other members not in the petitioners' group hold 3,800 shares.

(o)            Notices of the annual general meetings of the company used to be sent to all members by post. At no time there had been any complaint of non-receipt of such notices. The petitioners never attended any of the annual general meetings of the company from 1963. Debendra did not want the petitioners or any of them to participate in the affairs of the company and had no faith, trust or confidence in them.

(p)            Benoy Kumar Das, deceased, in whose name 300 shares of the company stand registered had executed a transfer form in respect of the said shares.

(q)            Respondent No. 2 was also responsible in alleging other unsecured loans to the company which, as on March 31, 1980, were as follows:

 

Rs.

        (i) B.C. Sen

9,718

        (ii)            K.P. Das Gupta

2,500

        (iii)           B.K. Roy

61,695

        (iv)           M/s. D.K. Roy & Co.

9,650

        (iv)           M/s. Alloy Comp. Development Pvt. Ltd.

80,000

(r)            The remuneration of respondent No. 2 as the managing director of the company was fixed initially at Rs. 1,000 per month. Under a resolution dated October 12, 1965, the said remuneration was increased to Rs. 1,500 per month with annual increments. Respondent No. 2 was also allowed the following:

(i)     reimbursement of expenses incurred for maintenance, repair and running of a car and the salary of a driver;

(ii)    office allowance of Rs. 200 per month for permitting the company to use the personal office of respondent No. 2.

(s)            By a subsequent resolution passed on September 28, 1974, the remuneration of respondent No. 2 was further enhanced to Rs. 2,500 per month which respondent No. 2 has never charged in view of the financial position of the company.

(t)             Since the incorporation in 1959, respondent No. 2 has drawn from the company only Rs. 29,700 and over Rs. 2 lakhs remained due to him as arrears of his remuneration on November 30, 1980.

(u)            Respondent No. 2 was and remains the permanent managing director of the company for his life.

The case of the said respondents Nos. 1, 2 and 3 as to the allotment of new shares on October 3, 1980, is as follows:

(a)            In the affidavit affirmed by respondent No. 2 on December 8, 1980, the shareholding as on March 31, 1980, had been stated and the new issue on October 3, 1980, was not mentioned.

(b)            The unsecured loans to the company, referred to earlier, were obtained by respondent No. 2 from his friends and relatives including his brother, Bibhuti Kanta Roy. All the said loans were without interest and were secured by the personal guarantee of respondent No. 2.

(c)            The said creditors had been pressing respondent No. 2 for repay ment of their loans for a long time.

(d)            After March 1980, when it became apparent that the company would rehabilitate itself and commence production within two years, the said creditors refused to wait further and threatened that unless their loans were paid or settled, they would apply for winding up of the company.

(e)            Respondent No. 2, thereafter, pursuaded the said creditors to accept shares of the company, at par, in satisfaction of their respective claims though at the material time the shares had no saleable value.

(f)             Pursuant thereto, the board of directors of the company at its meeting held on October 3, 1980, allotted shares of the face value of Rs. 90,000 to the said creditors or their nominees in pro tanto satisfaction of their respective claims.

(g)            The said shares were issued bona fide and in exercise of the fiduciary powers and duties of the directors of the company for saving the company from being wound up.

(h)            The petitioners have no right to interfere with lawful and bona fide exercise of power by the directors.

The petitioners have alleged in reply as follows :

(a)            Respondent No. 2 was and is not the sole guarantor of the loan agreement between the company and the West Bengal State Financial Corporation.

(b)            By their letter dated July 29, 1974, the Industrial Reconstruction Corporation (India) Ltd. called upon the company to make arrangements for transfer to the former or their nominees shares of at least 76 per cent, of the total paid up value of all shares issued by the company. It was recorded further in the said letter that such shares would remain transferred till the repayment of the proposed loan of the Reconstruction Corporation in full.

(c)            Pursuant thereto, Debendra and the two other shareholders, viz., Indu Gautam, Benoy Kumar Das, Mohini Mohan Chowdhury and R. Mukherjee, had executed blank transfer deeds in respect of the shares held by them. Between September and November, 1976, the said transfer deeds and the share scrips had been handed over to respondent No. 2 so that the shares could be transferred to the Industrial Reconstruction Corporation (India) Ltd. or their nominees if and when the latter would sanction the proposed loan in favour of the company. None of the said shareholders sold their shares to respondent No. 2 and there is no record whatsoever of any such sale. The transfer deeds executed by the said shareholders have since lost their validity.

At the hearing, learned counsel for the petitioners submitted that the petitioners and their group constituted the majority of the shareholders. The shares standing in the names of Debendra and Benoy Kumar Das who were no longer alive stood neutralised. The Mukherjee group of shareholders holding 300 shares as also the said Mohini Mohan Chowdhury and R. Mukherjee were neutral and in any event were not supporting the respondents. Indu Gautam and M/s. British Electrical and Pumps P. Ltd. were actively supporting the petitioners.

Respondents Nos. 2 and 3 as on record did not have the support of any other shareholder including the new allottees to whom 900 shares were purportedly issued on October 3, 1980.

Learned counsel submitted further that it was not established that Debendra and Binoy Kumar Das had sold their shares to respondent No. 2. It was the case of respondents Nos. 2 and 3 that Debendra had executed a blank transfer deed in respect of 1,150 shares but as he did not make over the share scrips, the transfer could not be completed. The transfer deed has since lost its validity by efflux of time and the shares stood registered in the names of the original holder. Similar was the case of Benoy Kumar Das, Indu Gautam, Mohini Chowdhury and R. Mukherjee.

On the other hand, such facts supported the case of the petitioners that the transfer deeds were executed to fulfil the conditions of the loan offered by the Industrial Rehabilitation Corporation (India) Ltd. to the company.

On the allotment of the said 900 shares, learned counsel submitted that the object of the said allotment was to convert the petitioners who were in the majority to a minority. There was no evidence that the allottees of the said shares were creditors of the company and their names were not disclosed in the balance-sheet of the company. There was no need to issue new shares and the consideration for the issue was fictitious. The alleged creditors were only four in number but allotments were made to a number of persons.

Learned counsel for respondents Nos. 2 and 3 contended in answer that under the articles of the company, respondent No. 2 was the permanent managing director. Debendra, the chairman of the company, had left the entire affairs of the company in charge of respondent No. 2, who had shouldered the entire burden during the difficult years of the company. There was no complaint of oppression or mismanagement during the lifetime of Debendra though the petitioners were registered shareholders. It was only after the death of Debendra and when the company was expected to tide over its difficulties that the petitioners are seeking to assert their majority to interfere with the affairs of the company.

Learned counsel submitted that the said 900 shares were issued lawfully, validly and bona fide to settle the demands of the genuine creditors of the company. The accounts of the company were regularly audited and the same would show that the said creditors were genuine and that their respective loans were being carried over from year to year.

Learned counsel next submitted that no case of oppression nor one of mismanagement having been made out, the petition was not maintainable. The main complaint on the allotment of the said 900 shares had been sufficiently explained.

In support of the respective contentions of the parties, a number of decisions were cited at the Bar and are considered as follows:

(a)            Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp Cas 179; AIR 1950 SC 172. This decision was cited for the following observation from the judgment of S. R. Das J. (at pp. 203, 207 of 20 Comp Cas):

"It is well established that directors of a company are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the company. If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the court will interfere and prevent the directors from doing so. The very basis of the court's interference in such a case is the existence of the relationship of a trustee and of cestui que trust as between the directors and the company......

If the directors exercise the power for the benefit of the company and at the same time they have a subsidiary motive which in no way affects the company or its interests or the existing shareholders, then the very basis of interference of the court is absent,... the court of equity only intervenes in order to prevent a breach of trust on the part of the directors and to protect the cestui que trust, namely, the company and possibly the existing shareholders. If as between the directors and the company and the existing shareholders, there is no breach of trust or bad faith, there can be no occasion for the exercise of the equitable jurisdiction of the court."

(b)            Fildes Bros. Ltd., In re [1970] 1 All ER 923 (Ch D). The question whether the concept of quasi-partnership could be applied in the case of a company where one of the directors devoted nearly all his time to the company's business and the other did little except attending the directors' meeting and whether on a disagreement between the directors the company could be wound up on just and equitable grounds came up for consideration in this case. It was held by Megarry J. that the words "just and equitable" were wide in their scope and it could not be said that they were incapable of being applied in a case where one director was far more active in the company's affairs than the other.

(c)            Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp Cas 185; AIR 1977 SC 536. This decision was cited for the proposition that the negative words in section 108 of the Companies Act, 1956, were prohibitory and such prohibition was mandatory as the form of language was in the negative.

(d)            H. R. Harmer Ltd., In re [1958] 3 All ER 689; [1959] 29 Comp Cas 305 (CA). This decision was cited for the following observations of Lord Clyde in Baird v. Lees [1924] SC 83, 92, which were quoted with approval (at p. 325 of 29 Comp Cas):

"A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields an overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Acts would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable for the court to wind up the company."

(e)            Suresh Chandra Manvaha v. Lauls P. Ltd. [1978] 48 Comp Cas 110 (P&H). This decision was cited for the following observations (headnote):

"The legislature, while providing exception in clause (b) of section 398(1) of the Companies Act, 1956, clearly visualised that cases might occur in which financially hardpressed companies might save themselves by arranging with their creditors to become shareholders and directors in lieu of remaining creditors for the whole or part of the amount due to them and that such a change occurring in the management will not afford a cause of action to any member of a company under section 398 of the Act."

(f)             Sindhri Iron Foundry (P.) Ltd., In re [1964] 34 Comp Cas 510 (Cal); 68 CWN 118. Here, in an application under sections 397 and 398 of the Companies Act, issue and allotment of a number of shares in a company whereby an admitted majority of shareholders were reduced to a minority was struck down. On appeal, the judgment of the trial court was confirmed. See Ramshankar Prasad v. Sindhri Iron Foundry (P.) Ltd. [1966] 70 CWN 520 (Cal).

(g)            Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC). This judgment was cited for the following observations of the Privy Coun cil (at p. 837):

"...it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers. If there is added, moreover, to this immediate purpose, an ulterior purpose to enable an offer for shares to proceed which the existing majority was in a position to block the departure from the legitimate use of the fiduciary power becomes not less, but all the greater. The right to dispose of shares at a given price is essentially an individual right to be exercised on individual decision and on which a majority, in the absence of oppression or similar impropriety, is entitled to prevail. Directors are of course entitled to offer advice, and bound to supply information, relevant to the making of such a decision, but to use their fiduciary power solely for the purpose of shifting the power to decide to whom and at what price shares are to be sold cannot be related to any purpose for which the power over the share capital was conferred upon them."

Copies of the documents recording the issue and allotment of 900 shares had not been annexed to the petition. At the hearing, the relevant documents relating to the said issue and allotment were produced under the directions of the court and considered. The minutes of the meeting of the board held on October 3, 1980, revealed that at the said meeting only respondents Nos. 2 and 3 were present. The material portion of the said minutes are as follows:

"The managing directors placed before the board eleven (11) applications for shares from the creditors of the company whose money had been lying with the company for several years in adjustment of their respective loan accounts against allotments of the company's shares to them.

The applications were considered.

The applicants are the creditors of the company and have been pressing for refund of their moneys over a long time and the company was in no position to repay these loans. In the circumstances, their offer to subscribe to the shares of the company in adjustment of their respective loans was considered advantageous to the interest of the company in so far as the liability of the company would have thereby been reduced to that extent.

Sri D.K. Roy further placed before the board six (6) applications for shares...

Sri. D.K. Roy requested that the shares may be considered to be allotted to the applicants on adjustment in full of his personal and that of M/s. D. K. Roy and Co.'s loans to the company.

The matter was considered and the following resolutions were passed unanimously......"

The said minutes were typed in separate sheets and pasted on the minute book.

Section 193 of the Companies Act, 1956, provides, inter alia, as follows:

"193(1). Every company shall cause minutes of all proceedings of every general meeting and of all proceedings of every meeting of its board of directors or of every committee of the board, to be kept by making within thirty days of the conclusion of every such meeting concerned, entries thereof in books kept for that purpose with their pages consecutively numbered....

193(1B). In no case the minutes of proceedings of a meeting shall be attached to any such book as aforesaid by pasting or otherwise."

Learned counsel for respondents Nos. 2 and 3 contended that it was the practice in this company to paste the minutes of the board meetings in the book and this practice had been followed throughout.

It appears that by pasting the minutes of the said meeting in the book, section 193(1B) of the Companies Act was violated and, as such, the said minutes cannot be regarded as evidence of what transpired in the said meeting. The alleged practice followed by the company cannot cure the defect in the recording of the minutes nor override the statutory provision.

In any event, it was not recorded in the minutes as to how many applications were placed at the meeting and considered and the particulars of such applications. The minutes also do not record the alleged outstandings on account of the said loans on the date of the meeting and to what extent the same were being adjusted.

255 shares were issued at the instance of respondent No. 2 in purported adjustment of a loan from respondent No. 2 to the company and also in adjustment of loans from M/s. D.K. Roy and Co. The said shares were issued against six applications placed before the meeting. None of the applicants was respondent No. 2 or M/s. D.K. Roy and Co.

From the books of account of the company produced and considered at the hearing, it appeared that though the said 900 shares were issued and allotted by the board on October 3, 1980, there were entries in the journals of the company in September, 1980, showing some adjustment of the said loans. No final adjustment of the said loans was shown either in the journal or the ledger on October 3, 1980, or thereafter. There was no reference whatsoever in the account books of the board meeting held on October 3, 1980, or the issue or allotment of shares in adjustment of the loans.

The loans against which the shares were issued came to the company in driblets by way of petty cash from time to time. There is no record when or how the company or its board decided to obtain such loans. There is no record of any agreement by and between the company and the said creditors under which the loans were kept outstanding indefinitely without any interest.

Taking into account the shares standing in the names of Debendra and Benoy Das, both deceased, and which are presently neutralised, it is clear that the issue or allotment of the said 900 shares on October 3, 1980, has resulted in complete disequilibrium of the shareholding in the company as it stood prior to the said date.

The Law appears to be settled that it is not open to the directors of a company to issue and allot shares in a manner by which an existing majority of shareholders are reduced to a minority. The court will scrutinise with particular circumspection any such issue or allotment and unless it is satisfied beyond reasonable doubt that such issue was unavoidable and was resorted to as an extreme and emergency measure with an object of fundamental importance, e.g., saving the existence of the company, will not allow the existing balance of power in the company to be disturbed. It is also settled law that the majority shareholders cannot ultimately be kept out of control of the company as was held in Albert David Ltd., In re [1964] 68 CWN 163 and Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal); 68 CWN 118.

In the facts and circumstances, I hold that at the material time the petitioners were in the majority taking into account the effective shares held by the parties. I also hold further that as a result of the issue and allotment of the said 900 disputed shares, the existing majority of the shareholders of the company had been disturbed.

The other irregularity in the issue and the allotment of the shares have been noted above. It is also noted that none of the allottees of the said 900 shares appeared in the proceeding to support the allotments.

Accordingly, it must be held that the petitioners have made out a case of mismanagement within the meaning of section 398 of the Companies Act, 1956, and also have made out a case of oppression against the petitioners which brings respondents Nos. 2 and 3 within the mischief of section 397 thereof.

The other allegations of the petitioners can be conveniently dealt with in the domestic forum when the majority of the shareholders will take charge of the affairs of the company.

For the above reasons, the petitioners succeed in this application which is disposed of by the following order:

(a)            It is declared that the issue of the said 900 shares on October 3, 1980, is illegal and void and not binding on the company and its share holders;

(b)            Respondents Nos. 4 to 20 are restrained from exercising any rights whatsoever in respect of or under the said 900 shares;

        (c)            The present board of directors of the company is superseded;

(d)            The special officer already appointed is directed to call a meeting of the shareholders of the company on the basis of the shareholding as on March 31, 1979, as recorded in the relevant annual return for the constitution of a new board of directors;

(e)            The special officer will hand over charge of the company to the new board of directors after the same is constituted;

(f)             The special officer will file a report after handing over charge of the company to the new board. Till the new board is elected, the special officer will be in charge of the affairs and the management of the company;

(g)            The matter will appear in the list for further directions on August 20, 1984;

(h)            The petitioners will pay to the special officer further 75 gms. towards his remuneration;

        (i)             The petitioners' costs to be paid by respondents Nos. 2 and 3.

            It is made clear that I have not finally adjudicated on the claims of the unsecured creditors of the company who will be entitled to realise their dues, if any, in the manner as they may be advised.

Learned counsel for respondents Nos. 1, 2 and 3 asked for stay of the operation of this order for one week, to the extent it supersedes the present board. Such stay is allowed on condition that the special officer will forthwith take charge of all assets and records of the company and retain the same in his custody.

It is stated on behalf of respondents Nos. 1, 2 and 3 that other concerns are carrying on their business in the registered office of the company. It is made clear that the special officer will not take charge of the assets and records of the other concerns, if any. The special officer will allow access to respondent No. 2 to the registered office of the company and have inspections of documents and records of the company. Respondent No. 2 will be entitled to continue negotiations with the financial institutions during the period of stay but will not conclude any negotiation. No letter will be issued on behalf of the company without the approval of the special officer who will initial the office copies of all letters signifying his approval.

All parties and the special officer to act on a signed copy of the minutes of this order on the usual undertaking.

[1988] 64 COMP. CAS. 19 (P&H)

HIGH COURT OF PUNJAB AND HARYANA

Col. Kuldip Singh Dhillon

v.

Paragaon Utility Financiers P. Ltd.

RAJENDRA NATH MITTAL, J.

COMPANY PETITION NO. 79 OF 1982

MAY 15, 1986

Arun Jain for the Petitioners.

N.K. Sodhi, H.S. Bajwa, N.C. Sahni and Rajiv Narain Raina for the Respondents.

JUDGMENT

Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the Companies Act, 1956.

Briefly, the facts are that the respondent is a private limited company having authorised capital of Rs. 10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up capital is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in arrears amount to Rs. 59,000. It was incorporated on August 21, 1961, under the provisions of the Companies Act (hereinafter referred to as "the Act"). The petitioners hold 150 shares as detailed below:

Col. Kuldip Singh, petitioner

No. 1

20

Hardev Singh Minhas,"

No. 2

30

Maj. K. Gurdev Singh,"

No. 3

20

Smt. Nasib Kaur,"

No. 4

20

Iqbaljit Singh,"

No. 5

20

Smt. Kirpal Kaur,"

No. 6

20

Smt. Chanan Kaur,"

No. 7

20

It is alleged that the affairs of the company are being conducted prejudicially to public interest and in a manner oppressive to the petitioners, who are in minority, as detailed below:

        (i) The company had been allotted 490 equity shares of Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as "PISCO"). The paid-up amount in respect of the above shares was Rs. 3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife, Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife (124 shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares). These were transferred in a clandestine manner and without having been offered to any other shareholder including the petitioners, for a consideration of Rs. 3.90 lakhs in a meeting of the board of directors of the company held on December 30, 1978. No money in cash was paid by the purchasers to the company as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited with the company was adjusted towards the purchase price and the balance amount of Rs. 1,90,000 was given by the company as loan to the purchasers with interest at the rate of 15 per cent, per annum. The meeting in which the shares were transferred was illegal and void for want of quorum. Some other irregularities were also committed by the board of directors in calling and holding the meeting. Thus, the transfer of shares is not binding on the company.

(ii)            Shri Ramesh Inder Singh was the managing director of the company in the year 1976 and he had been operating the bank account of the company maintained in the Central Bank of India, Civil Lines, Jalandhar City, without any authority. He issued cheques in fictitious names with the result that amounts to the tune of lakhs of rupees were misappropriated.

(iii)           Mohinder Singh had been appointed as manager-cum-cashier of the company during the regime of Pavittar Singh, father of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh. As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by him in the year 1976. The board of directors decided to take action against him. The matter was taken in various meetings of the board of directors but no action was taken against him. Thus, the interest of the shareholders was not protected by the management.

(iv)           The minutes book of the company relating to the meetings of the board of directors and shareholders was not kept properly from November, 1978, to September, 1979. Some of the proceedings have not been signed by the chairman. There are various violations of the provisions of section 193 of the Act. Therefore, the business transacted in the meetings during that period is illegal and void ab initio.

(v)            The company had been advancing loans to some persons without any documents. It is alleged that it advanced loan without interest and without getting executed any document to PISCO. An amount of Rs. 14,309.57 stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder Singh as on December 31, 1978, but no action has been taken to recover the amounts from them.

The aforesaid allegations, it is pleaded, go to prove the mismanagement on the part of the management which is prejudicial to public interest and oppressive to the minority members of the compauy. Thus, the circumstances are such in which it would be just and equitable that the company can be ordered to be wound up. Consequently, it is prayed that action be taken under the aforesaid section. The respondents in the petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No. 2, late Pavittar Singh, was ordered to be deleted.

The petition has been contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two written statements have been filed, one on behalf of respondent No. 1 and the other on behalf of the latter respondents. Respondent No. 1 alleged that the affairs of the company were meticulously looked after during the period when Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application for rectification of the register of shareholders of PISCO under section 155. The application was decided against him but an appeal is pending in this court against that order.

In the written statement on behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the allegations in the petition do not make out a case of oppression and mismanagement of the affairs of the company and its winding up on just and equitable grounds. The petition is mala fide and had been filed at the behest of Col. P. S. Dhillon who had been the managing director till April 20, 1982, when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in the petition, it is stated, related to the transfer of 490 shares held by the company in PISCO. The matter had been decided in company petition filed by Col. P. S. Dhillon which had since been dismissed. It is further pleaded that rectification of the transfer of shares cannot be the subject-matter of a petition under sections 397 and 398. The allotment cannot also be declared invalid in the absence of PISCO. The other allegations in the petition have been controverted by the said respondents.

On the pleadings of the parties, the following issues were framed:

1. Whether the petition is maintainable in view of the preliminary objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and paragraph No. 6 of the written statement of respondent No. 1? [Opp].

2. Whether the affairs of the company are being conducted in a manner prejudicial to the interest of the company and public? [Opp].

3. Whether the acts of the majority are oppressive to the interest of the minority? [Opp].

A. Relief.

Issue No. 1: The first preliminary objection raised by Mr. Sodhi is that the petitioners have no right to maintain the present petition as they did not own 10 per cent, shareholding on the date of filing the petition. On the other hand, Mr. Jain, counsel for the petitioners, has argued that the petitioners had 150 shares out of 1,000 shares on the date of filing the petition as given in the petition. Thus, they had the right to file the petition.

I have duly considered the arguments of learned counsel and find force in the contention of Mr. Jain. The petitioners, as given in the list of members, exhibit P-88, filed with the Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June 30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the time of filing the petition, the petitioners were shareholders of the company. From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that the petitioners had more than 10 per cent, shareholding in the company.

At this, Mr. Sodhi sought to urge that the position reflected in exhibit P-88 relates to the month of June, 1982, whereas the petition was filed in October, 1982. He argues that it was incumbent on the petitioners to show the total number of shareholding held by them on the date of filing the petition which they failed to do. He made reference to Rajahmundry Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of the board of directors dated October 29,1978, wherein 20 shares held by Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh and Amarjit Singh Bajwa, son of Rattan Singh.

I do not find any substance in this submission of learned counsel as well. The petitioners have shown that according to the latest list of members filed with the Registrar of Companies, they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement that all the petitioners were shareholders of the company on the date of filing the petition. The proceedings of the board of directors dated October 29, 1978, however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner. It cannot be ruled out that 20 shares might have been again transferred in the name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not been transferred to her subsequently, the remaining petitioners still had more than 10% shareholding on the date of petition and thus they were entitled to file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case. [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant after obtaining the consent of more than one-tenth in number of the members presented the petition under section 153C of the Indian Companies Act, 1913 (section 397 of the Companies Act, 1956). Subsequent to the presentation of the petition, some of the members withdrew their consent. It was held that subsequent withdrawal of the consent could not affect the right of the petitioner to proceed with the petition or the jurisdiction of the court to dispose of it on merits. In my view, the observations in the above case are of no assistance to Mr. Sodhi. Consequently, I overrule this preliminary objection.

The second objection of Mr. Sodhi is that the allegations made in the petition should be such that a prima facie case for winding up of the company has been made out under section 433(f), but from the allegations in the petition, no such case stands established. In support of his contention, he places reliance on Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976 SC 565.

There is no dispute about the proposition that an action under section 397 can be taken only if a prima facie case for winding up has been made out on the allegations in the petition. In the above observations, I find support from Rajahmundry Electric Supply Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows (at page 95):

".before taking action under section 153C, the court must be satisfied that circumstances exist on which an order for winding up could be made under section 162".

Sections 153C and 162 of the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956 Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC). It was further observed therein that the conduct of the majority shareholders must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression by the majority in the management of the company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.

It is now to be determined whether the allegations in the petition make out a prima facie case for the winding up of the company under section 433(f). The section says that a company may be wound up by the court if it is of opinion that it is just and equitable to do so. The question arises what the words "just and equitable" mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that the principle of "just and equitable" baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would be so done in a particular case cannot be put in the strait-jacket of an inflexible formula. Clause (f) is not to be read as being ejusdem generis with the preceding five clauses. Whether the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words "just and equitable" themselves. In view of sections 397, 398 and 443(2), relief under section 433(f) based on the just and equitable clause is in the nature of a last resort, when other remedies are not efficacious enough to protect the general interest of the company. There must be materials to show when the just and equitable clause is invoked that it is just and equitable not only to the persons applying for winding up but also to the company and to all its shareholders. It is further observed that the court will have to keep in mind the position of the company as a whole and the interest of the shareholders and to see that they do not suffer in a fight for power that may ensue between the two groups. Similar observations were made in Seth Mohan Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in making an order for winding up on the ground that it is just and equitable that a company should be wound up, the court shall consider the interest of the shareholders as well as of the creditors. It is not necessary to dilate further on this matter. It is sufficient to observe that if the allegations in the petition are taken to be established, the petitioners are entitled to obtain an order of winding up under section 433(f).

The third preliminary objection of Mr. Sodhi is that the oppression should continue up to the date of the petition. He contends that the petition in this case does not show that the oppression is continuous and, therefore, it is liable to be dismissed. To fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand, Mr. Jain has argued that if the effect of a single act is continuously oppressive, the court is entitled to pass an order under sections 397 and 398. He refers to In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal).

I have duly considered the argument. The matter does not require any elaborate discussion as it has been settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas 351 that in order to file an application under section 397, if must be shown that the conduct of the majority shareholders was oppressive to the minority members and this requires that events have to be considered not in isolation but as part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. Same view was expressed by P. N. Bhagwati, J. as he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777 (Guj). It was observed therein that sections 397 and 398 postulate that there must be at the date of the application a continuing course of conduct of the affairs of the company which is oppressive to any shareholder or shareholders or prejudicial to the interests of the company. I am in respectful agreement with the above observations. It is true that in Sindhri Iron Foundry's case [1964] 34 Comp Cas 510, it was held by a learned single judge of the Calcutta High Court that if the court is satisfied that a single wrongful act is such that its effect will be a continuous course of oppression and there is no prospect of remedying the situation by the voluntary act of the party responsible for the wrongful act, the court is entitled to interfere by an appropriate order under section 397 of the Act. However, the above observations are not in consonance with those of the Supreme Court in Shanti Prasad Jain's [1965] 35 Comp Cas 351. Consequently, it is not possible for me to rely upon the view expressed by the Calcutta High Court.

It is clear from the facts that the petitioners have alleged oppression relating to the year 1978-79. Thereafter, Col. P. S. Dhillon was appointed as the managing director who remained as such for many years, but during that period, the petitioners remained quiet and took no action. Thus, it cannot be said that there are continuous acts of the majority shareholders which have been oppressive to the petitioners. Consequently, the petition is liable to be dismissed on this short ground.

Issues Nos. 2 and 3.—Though, in view of the above finding, it is not necessary to deal with the arguments of Mr. Jain on these issues, in order to avoid the possibility of remand in appeal, I consider it proper to deal with them.

In the first instance, counsel for the petitioners has challenged the resolutions passed in the meetings of the company held on November 30, 1978, December 30, 1978, January 15, 1979, and February 28, 1970. It was highlighted by him that several directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt. Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt. Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh. Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother of Smt. Nasib Kaur. He submits that the matter is to be examined in this background. He has challenged the legality of the resolution dated November 30, 1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in which the resolution was passed was incomplete; secondly, no notice of the meeting was given to the directors and, thirdly, that, in fact, no meeting was held on that date.

The first question that arises for determination is as to whether the quorum for the meeting in which resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that there were 32 directors of the company on November 30, 1978, and, therefore, the quorum for the meeting was 11. However, only 8 directors were present. Out of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on September 27, 1977, and January 30, 1978, respectively, as they failed to attend three consecutive meetings and thus they would be deemed to be not present in the meeting. In this way, only six directors would be deemed to be present.

On the other hand, Mr. Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of directors on that date was 24. The number for determining the quorum will be deemed to be 24 and not 32. Therefore, the quorum would have been complete if eight directors were present. He further contends that Shri Pavittar Singh had been re-elected as director on June 30, 1978, and, therefore, he did not suffer from any disability on November 30, 1978.

I have duly considered the arguments of learned counsel. It has been admitted by Mr. Jain that out of the 32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh had ceased to be directors prior to November 30, 1978. Subsection (2) of section 287 provides that the quorum for a meeting of the board of directors of the company shall be one-third of its total strength or two directors, whichever is higher. In clause (a) of sub-section (2) of section 287, the total strength of the board of directors of a company has been denned as the total strength of the board of directors as determined in pursuance of the Act, after deducting there from the number of directors, if any, whose places may be vacant at the time. It is thus evident that for constituting quorum, l/3rd of the total number of directors who do not suffer from any disability are to be taken into consideration. The effective number of directors who admittedly ceased to be so is 8. Thus, the number of effective directors was 24 and out of them 8 directors could constitute the quorum. The directors present in the meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt. Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt. Inderjit Kaur and Shri Ravinder Singh ceased to be directors. There is a dispute as to whether Shri Pavittar Singh was re-elected as a director or not. Even if it may be assumed that Shri Pavittar Singh had been re-elected as director, the quorum was incomplete as only six directors were present.

The second question to be determined is whether notice of the meeting was given to the directors and if not with what effect. Mr. Jain has argued that the copy of the despatch register of the company from October 16, 1978, to February 19, 1979, exhibit P-74, does not show that any notice was issued for the said meeting. On the other hand, Mr. Sodhi, has argued that the only requirement under section 286 is that the notice of the meeting should be in writing. It does not prescribe the manner in which it is to be served on the directors. The notice under article 82 of the articles of association can be served personally. He submits that notices were not sent by post but through a messenger.

It is not disputed by Mr. Sodhi that the notices were not entered in the despatch register. There is no reliable evidence on record to prove that notices were sent through messenger and, therefore, it cannot be held that notices were given to the directors. It is essential that the notices of the meetings have to be sent to all the directors, otherwise, the resolutions passed in such meetings are invalid. In this view, I am fortified by the observations of the Supreme Court in Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC 2389, wherein it was observed that notice to all the directors of a meeting of the board of directors is essential for the validity of any resolution passed at the meeting and where no notice was even given to one of the directors, the resolution passed at the meeting of the board of directors is invalid. Consequently, I am of the opinion that the resolution dated November 30, 1978, is invalid on this ground.

The third question to be determined is whether the meeting was held on November 30, 1978, or the minutes were recorded without holding the meeting. Mr. Jain has argued that no meeting was held but the minutes were recorded subsequently by the eight directors in collusion with each other. In support of his contention, he brought to my notice the fact that the signatures of the chairman at the end of the minutes bear the date November 30, 1979, instead of November 30, 1978. The arguments have been considered by me but I do not agree with them. The proceedings book is page-marked and consists of several resolutions even after this resolution. This resolution cannot be said to have been incorporated therein subsequently merely because under the resolution, Shri Pavittar Singh purported to have signed on November 30, 1979. The year and the date might have been mentioned through an oversight.

Now, I advert to the resolution, exhibit P-2, passed in the meeting held on December 30, 1978. Mr. Jain has challenged the said resolution on four grounds, out of which three grounds are the same on which resolution, exhibit P-1, was challenged. The fourth ground is that 5 transferees of the shares of PISCO, namely, Smt. Nasib Kaur, Shri Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri Swaran Singh, took part in the meeting without disclosing their interest in the proposed transaction and, therefore, they ceassed to be directors on that date. The first question to be seen is whether the quorum for the meeting was complete or not. This meeting was attended by the following ten directors:

1.

Smt. Nasib Kaur.

2.

Smt. Mohinder Kaur,

3.

Smt. Rajinder Singh Johal,

4.

Smt. Gurbax Kaur,

5.

Shri Pavittar Singh,

6.

Shri Ravinder Singh,

7.

Shri Swaran Singh,

8.

Smt. Inderjit Kaur,

9.

Shri Rameshinder Singh, and

10.

Shri Amar Singh.

The resolution was passed for transferring 490 shares of PISCO held by the company in favour of the following persons for full consideration:

 

Shares

        1. Shri Pavittar Singh and his wife, Smt. Nasib Kaur

122

        2. Shri Ravinder Singh and his wife, Smt. Santosh

124

        3. Shri Rameshinder Singh

122

        4. Shri Swaran Singh

122

 

490

N.B. Out of 6 transferees, all except Smt. Santosh were directors of the company.

Mr. Jain has contended that out of the ten directors present in the meeting, five directors were transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to be a director. If the presence of the five transferee-directors and that of Smt. Inderjit Kaur is not taken into consideration, then the quorum is incomplete. On the other hand, Mr. Sodhi has argued that Shri Pavittar Singh, after he had ceased to be a director, was re-elected on June 30, 1978. However, he admits that Smt. Inderjit Kaur ceased to be a director. He further submits that the transferees did not cease to be directors at the time of passing the resolution and at the most they ceased to be so after the resolution had been passed.

First, it is to be seen whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the shareholders dated June 30, 1978, from which it is clear that he was re-elected as director on June 30, 1978. Thereafter, it is not shown that he ceased to be so. Consequently, I am of the opinon that he was a director on December 30, 1978.

It is next to be seen whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder,Singh and Shri Rameshinder Singh had ceased to be directors on that date because they took part in the meeting at the time of passing the resolution, exhibit P-2. Relevant parts of sections 283(1)(i) and 299 read as follows:

"Section 283. Vacation of office by directors.—(1) The office of a director shall become vacant if—.

        (i)     he acts in contravention of section 299.

                Section 299. Disclosure of interests by director.—(1) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors.".

From a reading of section 283, it is clear that the office of the director becomes vacant when a director acts in contravention of section 299. It is enjoined by section 299 that a director, who is interested in a contract entered into by or on behalf of the company, should disclose the nature of his interest at a meeting of the board of directors. If he fails to do so, he ceases to be a director. In view of the aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of the company.

Now, the question arises, whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1) of section 300 provides that no director of a company shall, as a director, take any part in the discussion or vote on any contract by or on behalf of the company, if he is in any way, whether directly or indirectly interested in the contract, nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void. Sub-section (2)(a), which is in the nature of a proviso to sub-section (1), says that sub-section (1) shall not apply to a private company which is neither a subsidiary nor a holding company of a public company. A reading of the above provisions makes it clear that sub-section (1) applies to a public limited company and not to a private company which is not a subsidiary or a holding company of a public company. Therefore, it is in the case of a public company and a private company which is a subsidiary or a holding company of a public company, that if a director takes part in the proceedings of the board of directors and votes regarding any contract in which he is interested, his presence for the purposes of forming a quorum shall not be counted and his vote shall be void. However, it will not be so if the company is a private company. In the present case, the company is a private company. Therefore, the presence of the aforesaid five directors for the purposes of quorum and their vote for the purpose of passing the resolution cannot be excluded. They shall, however, cease to be directors after the passing of the said resolution. Consequently, the resolution, exhibit P-2, cannot be held to be invalid on this ground. However, it may be reiterated that the shares were transferred in the names of some of the directors. Thus, the action of the directors in passing the resolution amounts to oppression of the minority shareholders in spite of the fact that it is not an invalid resolution. In the above observation, I find support from Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it was held that a resolution may be passed by the directors which is perfectly legal in the sense that it did not contravene any provision of law, and yet it may be oppressive to the minority shareholders or prejudicial to the interest of the company. Such a resolution can certainly be struck down by the court under section 397 or 398.

Now, it is to be seen whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt. Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978, and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter she ceased to be so. Consequently, she was a director on the date of the meeting. Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be directors. If the presence of two directors, namely, Ravinder Singh and Smt. Inderjit Kaur, is not taken into consideration, eight directors were still present in the meeting. The total number of directors, as already mentioned, was 24. Thus, the quorum was complete.

Mr. Jain next submits that no notice of the meeting was sent to the directors and, consequently, the meeting was illegal. There is force in this submission. The copies of the despatch register from October 16, 1978, to February 19, 1979, exhibit P-74, show that no notice was sent regarding the meeting. A similar argument was raised earlier and was dealt with while determining the validity of the resolution dated November 30, 1978. For similar reasons, the resolution dated December 30, 1978, is also invalid.

Mr. Jain has then argued that in the resolution dated November 30, 1978, it was decided that the shares be offered to the existing shareholders. Shri R. S. Johal was authorised to do so. However, he did not offer the shares to the other shareholders and, therefore, the transfer of shares to Pavittar Singh, etc., amounts to oppression on the minority shareholders.

I find substance in this submission. Before deciding to whom the shares should be sold, it was the duty of Shri Johal to make an offer of sale to all the shareholders. Those should have been transferred to one who made the highest offer. However, it was not done. It is true that Shri Johal says that he told orally all the shareholders in this regard. This part of the statement, however, cannot be accepted. Consequently, transfer of the shares to the transferees without offering the shares to the other shareholders in terms of the resolution dated November 30, 1978, exhibit P-1, is oppressive to the other shareholders.

Mr. Jain has further argued that the consideration for the 490 shares purchased by Shri Pavittar Singh, etc., was not paid in cash by them. The purchase price of the shares was Rs. 4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them from the company for interest at the rate of 15% per annum and that amount has not been repaid till today.

I have duly considered the argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some amount was shown payable to the transferees in the account books of the company. In case that amount was got adjusted by them towards the payment of consideration of the shares, no fault can be found therein. However, the act of advancing a loan by the company to the transferee-directors at the juncture when the company was not in sound financial condition was an oppressive act on the minority shareholders. It is also relevant to point out that they have not repaid the amount of loan or interest thereon up-to-date.

The third resolution of the company, which has been challenged by the petitioners, is dated January 15, 1979, exhibit P-17. By this resolution, the minutes of the meeting dated December 30, 1978, were confirmed and the loans given to the directors for purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took part in the meeting dated December 30, 1978, without disclosing their interest in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and Shri Avtar Singh admittedly ceased to be directors. The total number of directors present was eleven and in case the aforementioned seven directors are excluded, the number of directors present remained four. The quorum of the meeting should have been eight and thus the resolution is invalid. I agree with the submission of learned counsel. It is not necessary to dilate (further) on the paint as the matter has already been discussed above.

Mr. Jain has further challenged the validity of the resolution on the ground that the notices of the meeting were not despatched to the directors. He, in support of his contention, referred to the despatch register, exhibit P-74. I agree with this submission as well. The matter has already been discussed above. For similar reasons, this resolution is also invalid.

Mr. Jain has next challenged on similar grounds the resolution passed in the meeting held on February 28, 1979, exhibit P-18, by which the sale of 490 shares in favour of Shri Pavittar Singh, etc., was approved. The first thing to be seen is as to whether the quorum of the meeting was complete. Eleven directors were present in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As already held, they ceased to be directors on December 30, 1978. Out of the remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt. Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six directors are to be excluded for the purposes of quorum. Consequently, five directors would be deemed to be present in the meeting. The quorum for the meeting was eight. I am, therefore, of the opinion that the resolution dated February 28, 1979, is also invalid.

The second question is whether the resolution is invalid as the notices of the meeting were not sent to all the directors. In the despatch register, exhibit P-74, admittedly, the despatch of the notices of the meeting to the directors is entered. Therefore, I am of the view that this formality had been fulfilled by the company and the resolution cannot be held to be invalid on this ground.

Mr. Jain has further argued that the resolution was invalid as Shri R. S. Johal and ten other directors protested against the resolution and walked out of the meeting. He made reference to the letter dated February 28, 1969, exhibit P-76. There is force in this submission also. It is stated in the letter, exhibit P-76, that in the meeting of the board of directors held on February 28, 1979, the directors who signed the letter did not agree to the proposal for transfer of the 490 shares held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh, Ravinder Singh and Swaran Singh and voted against the resolution. The resolution, therefore, stood defeated. The directors who signed the letter walked out of the meeting in protest against the overbearing, arbitrary, unconstitutional and illegal action, arrogant attitude and threatening behaviour of the directors interested in the transferees. The latter prevailed upon the managing director and, therefore, he refused to record their disapproval and vote of dissent. It was requested by them that the minutes be not recorded, contrary to the will and verdict of the majority of the directors. The letter is signed by 11 directors and addressed to the managing director. From the above letter, it is evident that eleven other directors were present in the meeting but neither their presence nor their vote of dissent against the resolution was recorded. Shri R. S. Johal appeared in the witness-box as P.W.-4 and affirmed the stand taken in the letter, exhibit P-76. He stated that in the meeting held on February 28, 1979, there was a dispute regarding the sale of shares in favour of Rameshinder Singh and his partymen and that some of the directors, namely, Shri N. S. Domeli, Shri Puran Chand, Smt. Beant Kaur, Shri Didar Singh, Smt. Ravinder Kaur, Smt. Rattan Kaur, Shri Puran Singh, Shri Hardev Singh, Smt. Nasib Kaur and Mrs. Vaneet, walked out of the meeting. There is no mention about the dispute in the minutes. Shri Domeli also admits his signature on the letter. I am, therefore, of the opinion that the resolution dated February 28, 1979, exhibit P-18, is invalid.

The petitioners have also challenged the resolutions passed in the annual general meeting held on June 30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and loss account for the year ending December 31, 1978, were passed. It is contended by Mr. Jain that 21 days' clear notice for holding the meeting was required to be iven to the shareholders under section 171, but that was not done. The notices were despatched on June 13, 1979, and thus 21 days' clear notice was not given to them. He also contends that the copies of the balance-sheet should have been sent with the notices but the same were not sent.

Mr. Sodhi has not disputed that the notices given to the shareholders were of less than 21 days. Section 171 reads as follows:

"171. Length of notice for calling meeting.—(1) A general meeting of a company may be called by giving not less than twenty-one days' notice in writing.

(2)A general meeting may be called after giving shorter notice than that specified in sub-section (1), if consent is accorded thereto—

(i)     in the case of an annual general meeting, by all the members entitled to vote thereat; and

(ii)    in the case of any other meeting, by members of the company (a) holding, if the company has a share capital, not less than 95 per cent, of such part of the paid-up share capital of the company as gives a right to vote at the meeting, or (b) having, if the company has no share capital, not less than 95 per cent, of the total voting power exercisable at that meeting:

Provided that where any members of a company are entitled to vote only on some resolution or resolutions to be moved at a meeting and not on the others, those members shall be taken into account for the purposes of this sub-section in respect of the former resolution or resolutions and not in respect of the latter".

A reading of the section shows that 21 days' notice is necessary for convening the annual general meeting. However, a shorter notice for such a meeting can be given, if all the members who are entitled to vote in the meeting accord their consent for doing so. Previously, fourteen days' notice was provided but later the period of notice was extended to 21 days on the report of the Company Law Committee. The reasons for extension of period have been given in the report, the relevant portion of which reads as follows:

"We further recommend that twenty-one day's notice should be given of all resolutions to be passed at a general meeting—ordinary or special. The extension of the period of notice from fourteen to twenty-one days is necessary to enable shareholders to combine and canvass for proxies if they so desire. The present period of fourteen days is too short for all the processes that are involved before the shareholders canvass their opinion in favour of or against a particular resolution proposed to be considered at any meeting of the company".

After taking into consideration the provisions of the section and the reasons for incorporating the same, I am of the view that the period of notice cannot be curtailed except on the ground mentioned in the section itself. The provisions of the section are mandatory and if they are not complied with, the resolutions passed in such a meeting cannot be held to be valid. The members in this case admittedly did not agree for curtailing the period of notice. Therefore, the resolutions passed in the meeting dated June 30, 1979, are invalid.

The petitioners have further challenged the validity of the resolution of the board of directors dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and loss account for the year ending December 31, 1978. Mr. Jain submits that the quorum in the meeting was not complete and, therefore, the resolution was invalid. I do not find any substance in the argument. In the meeting, eight directors were present. As already mentioned, there were only twenty-four directors of the company. Consequently, eight directors constituted the quorum. I am, therefore, of the view that the resolution cannot be said to be invalid.

The next contention of Mr. Jain is that the shares which were transferred to Shri Pavittar Singh, etc., had more value than that for which they were sold. In support of his contention, he places reliance on the balance-sheet ending December 31, 1976, exhibit R. 2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and the balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find substance in this submission. The shares were not quoted on the stock exchange. No reliable data has been provided by the petitioners showing that the value of the shares was more. In the first two balance-sheets, the company is shown to have suffered losses to the tune of several lakhs of rupees. In the balance-sheet ending December 31, 1978, some profit is shown to have been earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs odd. The aforesaid figure shows that PISCO was not faring well.

The respondents produced Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the shareholders during the aforesaid period. The face value of each share was Rs. 1,000. He further deposed that, according to the assets of the company, the value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs. 625 in the year 1978.

After taking into consideration the circumstances, it cannot be accepted that the value of the shares was more than Rs. 1,000 per share when they were transferred to the respondents.

Mr. Jain then contends that the accounts of the company were not even operated by duly authorised persons. To fortify his argument, he made reference to the copy of the resolution of the board of directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of directors.

I have duly considered the matter. In the copy of the resolution, exhibit P-3, it is stated that Shri Pavittar Singh, managing director, would remain out of station for two months with effect from April 10, 1976. The accounts of the company with the Central Bank of India, Civil Lines, Jullundur, and Indian Overseas Bank, Jullundur, would be jointly operated by Shri Naranjan Singh Domeli, chairman of the company, and Shri Rameshinder Singh, director of the company in place of Shri Pavittar Singh, managing director. It was further stated that in future any two of the three persons, namely, Shri Naranjan Singh Domeli, Shri Pavittar Singh and Shri Rameshinder Singh, would jointly operate the accounts. It has been certified to be a true copy by Shri Mohinder Singh as the managing director. The original resolution purports to bear the signatures of Shri Bir Singh Johal, chairman. However, Mohinder Singh was not the managing director of the company nor was Bir Singh Johal its chairman. The resolution does not find a place in the original minutes book of the board of directors. Some resolutions dated April 11, 1976, are entered in the minutes book (copy exhibit P. 3-A). These resolutions are different from the resolution, exhibit P-3. Mr. Sodhi has not been able to show any other resolution in the minutes book, copy of which is exhibit P-3. In the circumstances, it is evident that the affairs of the company were mismanaged by the respondents.

Mr. Jain has further argued that Shri Rameshinder Singh operated the accounts on the basis of that resolution and advanced loans to the persons in the names of some fictitious persons and thus misappropriated the amounts. He submits that the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there was no such person. On the other hand, Mr. Sodhi has placed reliance on the statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a payee's account cheque and the payment of the cheque was made to the Punjab and Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it cannot be held that Jagtar Singh was a fictitious person.

The next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a manager by the respondent had embezzled a huge amount of the company but no effective step was taken to recover the amount from him. In order to prove the aforesaid facts, Mr. Jain placed reliance on the resolutions of the board of directors, exhibit P-87, dated December 30, 1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977, exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda. However, Shri Mohinder Singh reconstructed the record and showed an amount of Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was given to the company. It is further stated that Shri Mohinder Singh had introduced false credits in the account books in favour of Sarabha Land and Motor Finance (P.) Ltd. in connivance with Shri Raghbir Singh of the said company. These entries were got fictitiously made by him. In the resolution, exhibit P-67, it was said that certain irregularities were committed by Shri Mohinder Singh and, therefore, his services had been terminated. It was resolved that a sub-committee consisting of the chairman and the managing director be appointed to go into the accounts and submit a report for taking appropriate action against him.

In the resolutions, exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the report of the sub-committee had not been received. In exhibit P-71, it was said that Mohinder Singh had not rendered accounts and had handed over the cash. Consequently, it was decided to approach him for that purpose. In the resolution, exhibit P-72, dated December 13, 1977, the matter again came up before the board of directors and it was resolved that action against Shri Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that taking of appropriate action against Shri Mohinder Singh was being deferred without any reason even though it stood established that he had misappropriated the funds of the company. It is true that Shri Naranjan Singh Domeli made a statement that a FIR was lodged against Shri Mohinder Singh but the particulars of the FIR have not been brought on the record. It has not been shown that any further action was taken by the directors to recover the amount. It appears that the FIR was lodged to complete the formalities and the directors were not serious in taking any action against him. Thus, the allegation of the petitioners that the company was mismanaged stands established.

Mr. Jain has also argued that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri Paramjit Singh. Even no document was got executed from them in token of having received the amounts. The act amounts to mismanagement. I find substance in this submission. The argument regarding the payment of loans to the aforesaid persons and PISCO stands established from the copies of the ledger of the respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30, 1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on January 1, 1977. No amount of interest was debited to their account. No document was got executed from the said debtors. The aforesaid amounts have not been repaid by the said persons. Col. K. S. Dhillon, petitioner, deposed that Shri Pavittar Singh was the managing director of PISCO and Shri Swaran Singh, Shri Ravindar Singh, Shri Rameshin-der Singh and Amar Singh were its directors. It appears that the amounts were advanced to PISCO without interest because the said directors wanted to help their concern. After taking into consideration all the circumstances, I am of the view that the affairs of the company were conducted by the respondents in a manner oppressive to the petitioners.

Before parting with the judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the directors, they could not be challenged in view of section 290 of the Act. In support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).

I do not agree with the argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner, five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits P-l, P-17 and P-18 have been declared invalid on the ground that the quorum at the meetings was incomplete and no proper notice of the meeting was given to the directors, exhibit P-2 on the ground that no proper notice was given to the directors and exhibit R. 2/6 on the ground that no notice of requisite period was given. Exhibit P-18 was declared invalid also on the ground that the resolution was opposed by the majority of the directors and, therefore, it could not be deemed to have been passed. Section 290 of the Companies Act provides that the acts done by a person as a director shall be valid notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Act or in the articles. It is evident from the language of the section that it gives protection to the acts of the directors if their appointments were invalid on account of any defect or disqualification or the same had come to an end. It does not give protection to their acts which are otherwise illegal. Thus, the resolutions passed in a meeting which had not been properly convened are not valid resolutions. Consequently the resolutions, exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot be held valid under the said section.

It is true that the resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground that the quorum for the meeting was incomplete as some of the directors present there ceased to be so. But, in the facts and circumstances of this case, the section does not give protection to the resolutions passed in such meetings. The reason is that the resolutions in the present case have not been passed bona fide by the directors, as out of the six beneficiaries, five were directors of the company and the sixth was the wife of one of them. The sole object of the directors in passing the resolution was to promote their self-interest. Moreover, the benefit of the said section can normally be taken by a third person and not by the directors or their close relations. It is further noteworthy that some of the resolutions were oppressive to the minority shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it was observed by me that even if a director ceased to be so in view of section 283, the resolution of the board of directors could not be held illegal in view of section 290 which provided that the acts done by a person would be valid notwithstanding that it might afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Act or in the articles. The facts of that case were that a boiler was sold by the company after a decision had been taken in a meeting of the board of directors. The purchaser had no concern with the company. He took a plea that he was a bona fide purchaser for valuable consideration. The case is clearly distinguishable and, therefore, the observations therein are of no help in deciding the petition.

Consequently, in view of the finding that there were no continuous acts of the majority shareholders which had been oppressive to the petitioners, I dismiss the petition. However, the parties are left to bear their own costs.

[1986] 60 COMP. CAS. 65 (ORI)

HIGH COURT OF ORISSA

Prafulla Kumar Rout

v.

Orient Engineering Works P. Ltd.

P. C. MISRA J.

COMPANY ACT CASE NO. 4 OF 1984

MARCH 1, 1985 

 

Asok Mohanty, Bimal Pr. Das and Sashi Das for the petitioner.

Jagannath Das, I. C. Das, R. Ch. Mohanty and R. K. Mohanty for the Respondent.

JUDGMENT

P. C. Misra J.—This is an application under sections 237, 397, 398 read with section 402 of the Companies Act of 1956 (for short, hereafter "the Act"), praying for appointment of a special officer or administrator to take custody of the books, papers, documents and assets of M/s. Orient Engineering Works (P.) Ltd. (hereafter called "the company") and also to take over the affairs and management of the company. A further prayer has also been made for directing an investigation to be made into the dealings of the funds, assets and affairs of the company by opposite parties Nos. 2 to 6 and for other consequential reliefs.

The petitioner claims to have become a shareholder of the company in the year 1975-76 and after acquiring 460 equity shares of Rs. 100 each became a full time executive director in the year 1979 with a remuneration of Rs. 1,500 subject to an enhancement of Rs. 250 per year. Opposite party No. 2, Trailokyanath Mohanty, is the managing director of the company. According to the petitioner, the company after its incorporation took various loans from the Orissa State Financial Corporation and from the State Bank of India which were to be operated by the managing director and/or the petitioner. The company engages itself in manufacturing various agricultural equipments and in the interest of the company, the petitioner went to Japan, Philippines, Malaysia, Singapore, Hong Kong and Taiwan in December, 1980, and came back in January, 1981. After his return, the petitioner alleges that he is being treated indifferently by opposite party No. 2, instead of allowing him to implement his knowledge and ideas acquired during the visit to the foreign countries. He has further alleged that opposite party No. 3, who is the son-in-law of the managing director-opposite party No. 2, and opposite party No. 4, who is the wife of opposite party No. 2, started interfering in all the affairs of the company and opposite party No. 3 was appointed as a full-time manager of the company. Various acts of mismanagement have been alleged and it has been stated that both opposite parties Nos. 2 and 3 are maintaining the accounts of the company in an irregular manner and there has been no audit of the company since 1980. They have also withdrawn a huge amount of money of the company under false vouchers and it is alleged that the general body meeting of the company has not been conducted since September, 1980. When the petitioner went to the office of the Registrar of Companies for verification of the records of the company, he found that Form No. 32 has been filed under the signature of the managing director on March 11, 1983, wherein it has been shown that the petitioner has resigned from the directorship which, according to the petitioner, is not a fact. The petitioner alleges that all these acts are being done to defraud the petitioner and the company for which the present application has been filed.

A preliminary counter-affidavit has been filed on behalf of opposite parties Nos. 1,2,4 and 5 denying all the allegations made in the application. It has been stated in the counter-affidavit that the petitioner not being a member or a shareholder of the company on the date of filing of the application has no locus standi to maintain the same.

I need not make a mention of all the objections taken in the counter-affidavit as by order dated December 14, 1984, an inquiry was directed on the preliminary issue as to whether the petitioner has the locus standi to maintain this application. In the counter-affidavit, it has been alleged that the petitioner has transferred all his shares in the company and has voluntarily resigned from the directorship of the company more than a year back and thus he was not a shareholder of the company on the date of presentation of this application on March 23, 1984. Both the parties were allowed to lead evidence, both oral and documentary, on this preliminary issue. Admittedly, the petitioner was a shareholder of the company at some point of time. The opposite parties have alleged that the petitioner has transferred all his shares in the company in favour of opposite party No. 2 which became effective from March 8, 1983, by necessary entry in the share register whereafter the petitioner ceased to be a shareholder of the company. The petitioner disputes the fact of transfer of shares as also of the validity thereof. In these circumstances, the burden of proof that the petitioner has transferred all his shares in the company in favour of opposite party No. 2 as alleged in the counter-affidavit lay on the opposite parties and, therefore, the opposite parties were directed to lead evidence first.

The opposite parties have examined three witnesses including opposite party No. 2 himself whereas the petitioner has examined himself as the sole witness on his behalf. Several documents have been exhibited on behalf of the opposite parties.

Before I go into the evidence adduced by the parties, it may be mentioned that this is a composite application in which reliefs under sections 397 and 398 of the Act have been claimed. Unless the petitioner is found to be a shareholder of the company, he would have no locus standi to maintain this application and in such an event, the court need not go into the merits of the allegations made in the application.

The first witness examined on behalf of the opposite parties is opposite party No. 2 who is the managing director of the company—opposite party No. 1. According to him, the petitioner joined the company in the year 1979 and initially purchased 60 shares each of Rs. 100 from one Gopinath Das and thereafter purchased 400 shares for which he partly paid the money. In the meeting held on November 24, 1982, the managing director of the company informed the board of directors that the petitioner was no more interested to continue in the company and had been intending to offer his resignation from the company. It was, however, agreed in that meeting that the managing director would persuade the petitioner to continue in the company and to remain in charge of some of the affairs of the company. The minutes of the proceedings dated November 24, 1982, have been marked as exhibit 1 which are in the handwriting of O.P. W. 1. The minutes of the proceedings were confirmed in the next meeting held on February 8, 1983, the minutes of which have been marked as exhibit 2. In the meeting held on February 8, 1983, opposite party No. 2 intimated the board of directors that the petitioner intended to sell away his entire share as he no longer wanted to remain in the company. Opposite party No. 2 also expressed his desire to purchase the said shares as no others in the company came forward to purchase the same. It was resolved in the said meeting that opposite party No. 2 would be permitted to purchase the said shares. According to this witness (O. P. W. No. 1), he and the petitioner both went to the house of Shri G. Pande, the chartered accountant, who has been examined in this case as O. P. W. No. 2, to consult him as to how the transfer of shares should be effected. In accordance with the advice of O. P. W. No. 2, the prescribed form was presented before the Registrar of Companies on March 1, 1983, and was brought back by this witness (O. P. W. No. 1), from the Registrar of Companies after the same was duly sealed and signed by the Registrar of Companies. Opposite party No. 2 thereafter went to the house of Shri Pande (O. P. W. No. 2) on the following day along with the accountant of the company, who has been examined in this case as O. P. W. No. 3, and the petitioner where the form was filled up and signed by the petitioner and by opposite party No. 2 in the presence of O. P. W. No. 2. The form was thereafter kept with the petitioner and all of them, namely, opposite party No. 2, the petitioner and the accountant of the company (O. P. W. No. 3), proceeded to the office of the company, where opposite party No. 2 claims to have paid Rs. 26,000 to the petitioner in cash. On receipt of the said amount, the petitioner made over the form to the opposite party No. 2 along with the letter of resignation from the directorship of the company. The prescribed form containing the signatures of the petitioner, opposite party No. 2 and the witnesses has been marked as exhibit 3, in this case. The letter of resignation said to have been typed and signed by the petitioner has been marked as exhibit 4. The transfer of shares thus made in favour of opposite party No. 2 was approved in the meeting of the board held on March 8, 1983, the minutes of which have been marked as exhibit 5 in the resolution book. Opposite party No. 2 has proved the certified copy of the intimation in Form No. 32 to the Registrar of Companies (exhibit 8) in which the resignation of the petitioner has been intimated to the Registrar of Companies. The annual general body meeting was held on September 30, 1980, the proceedings of which are exhibit 9. Opposite party No. 2 has also proved exhibit 10, the certified copy of the annual return of the company made up to September 30, 1983. O. P. W. No. 2 is the chartered accountant who has deposed that the petitioner and the opposite party No. 2 came to him in connection with the transfer of shares and he advised them as to how the statutorily prescribed form was to be filled up. He also deposes that the form was filled up in his presence and both the petitioner and opposite party No. 2 signed thereunder. He is one of the witnesses to the statutory form in exhibit 3 and his signature appearing thereon has been marked as exhibit 3/a .The last witness examined on behalf of the opposite parties is the accountant of the company who has stated that he had accompanied the petitioner and opposite party No. 2 to the house of O. P. W. No. 2 in connection with the transfer of shares and on the advice of O. P. W. No. 2, the prescribed form was filled up and signed in his presence. He has further deposed that prior to their visit to the house of O. P. W. No. 2, he had applied for the statutory form to the Registrar of Companies and had obtained the form which was taken with them to the house of O. P. W. No. 2 on March 2, 1983. He is also one of the witnesses to exhibit 3 and his signature appearing on exhibit 3 has been marked as exhibit 3/b. The petitioner in his affidavit dated December 14, 1984, denies having signed any instrument of transfer on March 2, 1983, or at any point of time as alleged. The receipt of Rs. 26,000 by him as alleged by opposite party No. 2 has also been denied in the said affidavit. But in his evidence, the petitioner has admitted his signatures appearing in exhibit 3, the statutory transfer of shares form, and in exhibit 4, the letter of resignation, which have been marked as exhibits 3/c and 4/a respectively. It was suggested to O. P. W. No. 1, that the signature of the petitioner was taken in the share transfer form (exhibit 3) without his knowledge and nothing was suggested to him so far as his signature in exhibit 4 is concerned. Similarly, nothing was suggested to O. P. W. No. 3 relating to the petitioner's signature in exhibit 3 though he purports to be a witness to the execution of exhibit 3. In his evidence, the petitioner does not explain as to how his signatures were obtained in exhibits 3 and 4.

Section 41 of the Act defines who is a member of a company. According to the said definition, the test of membership of a company is whether the name of the person appears on the register of members of the company. Section 164 of the Act provides that the register of members of the company and the returns, etc., thereof shall be the prima facie evidence of any matter authorised to be inserted therein by this Act and the court shall accept the same as correct until it is rebutted. Exhibit 6 is the relevant entry relating to the petitioner in the register of shareholders of the company. In the said entry, it has been mentioned that the transfer of the shares of the petitioner has been registered on March 8, 1983, and exhibit 10 which is the certified copy of the annual return of the company made up to September 30, 1983, omits to mention the name of the petitioner as a shareholder of the company. Therefore, under the' circumstances, the presumption would be that the petitioner no more continues to be a shareholder of the company until the same is rebutted by the petitioner. Section 155 of the Act provides for rectification of the register of shares if the name of a person is entered in the register or omitted therefrom without sufficient cause. On an application made under this section, the court may decide any question relating to the title of the person aggrieved by the improper omission of his name from the register. Evidently, the petitioner has not filed any application for such relief.

The evidence of the managing director (O. P. W. No. 1) has been fully corroborated by O.P.W. Nos. 2 and 3. Nothing substantial has been brought about in the cross-examination of O.P.W. No. 2 to disbelieve his testimony. O.P. W. No. 2 is admittedly the statutory auditor of the company. It was argued on behalf of the petitioner that O. P. W. No. 2 is highly interested in opposite party No. 2 and he had borne a grudge as the petitioner had pointed out to him that he had not audited the accounts of the company for 10 years. But the petitioner in his evidence does not breathe a word about the same. In these circumstances, the evidence of O. P. W. No. 2 cannot be disbelieved. O. P. W. No. 3 is the accountant of the company who is admittedly interested in opposite party No. 2, the managing director of the company. His presence at the time of execution of the document of transfer cannot be disbelieved and he is one of the witnesses to the same. I have already stated that the petitioner does not dispute his signature in exhibit 3, the share transfer form, and no explanation has been furnished in his evidence as to how his signature appears therein. In the circumstances, there is no other alternative than to hold that the share transfer form (exhibit 3) was signed by the petitioner with the full knowledge of its contents. The petitioner is admittedly an educated person having passed M.Sc. and was looking after the affairs of the company as one of its directors from 1979. It cannot be believed that he has put his signature in exhibit 3 without going through its contents and even if he has done so, he would be bound by the document he has executed. So far as exhibit 4 is concerned, the only explanation that has been offered by the petitioner is that he does not know typing and the evidence adduced on behalf of the opposite parties that he himself typed out that document and had put his signature thereon should not be believed for that reason. I have already mentioned that the petitioner has not offered any explanation as to how his signature in exhibit 4 came into existence. The learned counsel appearing for the petitioner has argued that the petitioner was required to put his signature on various forms, papers and registers during his continuance as a director of the company and in that process, his signature was obtained in a piece of paper which was later on converted into the letter of resignation. Such a story cannot be believed on the basis of the evidence of the petitioner in court where he says that on exhibit 4, the signature and the date have been given in his hand. The petitioner does not say that on March 2, 1983, he had signed any other paper of the company. But on the other hand, his definite case is that after his return from foreign tour in January 1981, he was not allowed to participate in the management of the company. Though there are no materials to believe that the contents of exhibit 4 were not typed out by the petitioner himself, but assuming that it is so, it cannot be believed that the petitioner put his signature on exhibit 4 without going through its contents. Consequently, the petitioner will be bound by the effect of the documents in exhibits 3 and 4 to which he is a party.

Exhibit 5 is the minutes of the proceeding of the meeting of the board of directors held on March 8, 1983, in which a resolution was adopted accepting the transfer of shares by the petitioner in favour of the opposite party No. 2 and directing recording of necessary entry in the register of members of the company maintained under section 150 of the Act. The letter of resignation of the petitioner was placed before the board and the board accepted the same. An objection was taken by the petitioner that it is opposite party No. 2 who alone has signed the said resolution and it does not contain the signatures of all the members of the board of directors. The said objection is misconceived in view of the provisions in section 193 of the Act. Section 193 of the Act requires the minutes of the proceedings of the meeting of the board of directors to be signed by the chairman of the said meeting or by the chairman of the next succeeding meeting. It does not require that all the members of the board of directors should sign the same. Section 194 of the Act provides that the minutes of the meetings kept in accordance with the provisions of section 193 of the Act shall be the evidence of the proceedings recorded therein and section 195 of the Act provides that the meeting in which the said minutes were recorded shall be deemed to have been called and held until the contrary is proved. Thus, the transfer of shares effected under exhibit 3 shall be taken to have been duly accepted and given effect to in pursuance of which a correction was made in the share register (exhibit 6).

Nothing has been pointed out by the petitioner that the transfer of shares as per exhibit 3 does not comply with the requirements of section 108 of the Act except that the same was not duly stamped on the date of execution. According to the petitioner, the stamps were obtained from the treasury on March 8, 1983, whereas exhibit 3 is purported to have been executed on March 2, 1983. An application was filed on January 18, 1985, in this court praying to call for the (stamp) register from the Treasury Officer, Main Treasury, Cuttack, to show that the stamps were obtained for the purpose on March 8, 1983. By order dated January. 18, 1985, this court did not pass any order and allowed the said application to lie over till the next date as the learned counsel for the petitioner wanted some time for obtaining the certified copy of the relevant entry in the said register. The learned counsel for the petitioner argued that he had applied for the certified copy but the same was not granted by the concerned authority. Accepting that the stamps were obtained on March 8, 1983, the learned counsel for the opposite parties had stamps to be affixed on the document prior to its execution. He refers to section 108(1A)(b) of the Act which provides that every instrument of transfer in the prescribed form with the date of such presentation stamped or otherwise endorsed thereon shall, after it is executed by or on behalf of the transferor and the transferee and completed in all other respects, be delivered to the company within the time specified in the said section. According to the learned counsel for the opposite parties, all that the aforesaid provision in section 108(1A)(b) of the Act requires is that before delivery, the stamps should be affixed and it does not require the stamps to be affixed prior to execution of the document. This argument of the opposite parties appears to be acceptable in view of the language used in this section. Some arguments were also advanced as to the due compliance of the requirements of section 110 of the Act. In my view, unless an application is made by the transferor, no notice under the said section is required to be issued to the transferee.

The learned counsel for the petitioner has pointed out some discrepancies in the evidence of the witnesses examined on behalf of the opposite parties to build up an argument that the incident deposed to by the said witnesses leading to the execution of exhibit 3 and payment of consideration thereunder cannot be believed being highly discrepant. Having recorded the evidence of each of the witnesses and having gone through the same carefully, I do not find any material discrepancy in the evidence which would discredit the intrinsic evidence of the said witnesses.

It has been argued by the learned counsel for the petitioner that the board of directors has not issued any notice in writing offering to sell the shares to the existing members of the company and, therefore, the transfer made under exhibit 3 must be held to be invalid being violative of clause 9 of the articles of association of the company. This argument advanced on behalf of the petitioner is not acceptable in view of the fact that the petitioner cannot be said to be aggrieved even if it is held that clause 9 of the articles of association of the company has been violated. Besides, there has been substantial compliance of the said clause inasmuch as the matter was discussed in the meeting of the board of directors and the proposal for transfer in favour of opposite party No. 2 was accepted. The learned counsel for the petitioner has next contended that the stamps affixed to exhibit 3 have not been duly stamped. For the aforesaid proposition, the learned counsel has relied upon a decision in Coronation Tea Co. Ltd., In re AIR 1961 Cal 528 ; [1962] 32 Comp Cas 568. It is not the case of the petitioner that exhibit 3 has been insufficiently stamped. Adhesive stamps have been affixed on the reverse of exhibit 3. The said stamps have been cancelled by putting "cross" ("X") marks in ink over the same. The learned counsel for the petitioner relying on the aforesaid decision of the Calcutta High Court has urged that the adhesive stamps used in exhibit 3 have not been properly cancelled as putting of cross ("X") marks is not sufficient cancellation. Section 12 of the Indian Stamp Act, 1899, provides the mode of cancellation of adhesive stamps. It says that whoever affixed 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. In the Calcutta case, the State Government issued a notification under section 75 of the Indian Stamp Act, 1899, prescribing the mode of cancellation of share transfer stamps under which it was stated that the stamps shall be cancelled by the company by means of a punch which can perforate either the word "cancel" or an abbreviation thereof. Nothing has been brought to my notice that in this State any such rule has been issued by the State Government. The manner in which the "cross" ("X") marks have been put on the stamps in exhibit 3 renders the same unfit for use and, therefore, amounts to proper cancellation in the language of section 12 of the Indian Stamp Act.

On a discussion of the evidence on record, I, therefore, come to the conclusion that the petitioner has duly transferred his shares in the company in favour of opposite party No. 2 which has taken effect in the relevant registers of the company. The petitioner was, therefore, not a person having any share in the company and the petition filed by him under sections 397 and 398 of the Act is, therefore, not maintainable.

In the result, the application is dismissed, but in the facts and circumstances of the case, there would be no order as to costs.

The order of stay granted on December 14, 1984, by this court in M.C.No. 27 of 1984 is hereby vacated. The amount of rent damages so far deposited by the petitioner shall be continued to be in deposit until the fixation of the quantum, if any, payable by the petitioner for the house he is occupying, is decided by an appropriate court in which event the said amount shall be withdrawn and adjusted by the company.

[1988] 63 Comp. Cas. 644 (Kar)

High Court OF Karnataka

P.K. Varghese

v.

J.T.V. Metal Finishers (P.) Ltd.

M.P. Chandrakantaraj Urs, J.

COMPANY PETITION NO. 54 OF 1986.

March 26, 1987

 

S.P. Khanna for the Petitioner.

M/s. Jayaram and Jayaram for the Respondent.

JUDGMENT

M. P. Chandrakantaraj Urs, J.—This is a petition under section 433 of the Companies Act, 1956. The petitioner has alleged in the petition that the respondent company, M/s J.T.V. Metal Finishers P. Ltd., owes to him a sum of Rs. 29,356.36 which he had advanced to the company as a loan. He also claims that he has pledged his fixed deposit receipt for Rs. 50,000 with the Karnataka State Financial Corporation as a collateral security for the loan advanced by that Corporation to the respondent company. He has further claimed that Rs. 1,000 invested by him in 10 shares is also liable to be refunded to him. Thus, he has made a total claim for Rs. 80,356.36. It is alleged that he was a director of the company till he resigned some time in late June or early July of the year 1986. As there were differences between him and other shareholders and directors, he got a notice issued demanding payment of Rs. 29,326.36 and that not having been paid, he has approached this court with the petition for winding up the respondent company as it is unable to pay its debts.

Respondent company has entered, appearance through counsel and contested the prayer for winding up. It is pleaded by the respondent company that the petitioner is a shareholder of the company; it contends that a sum of Rs. 80,356.36 is not due by the company to the petitioner. It is stated that the sum of Rs. 50,000 is not an amount lent by the petitioner to the company, but is only a receipt of a fixed deposit in the bank which has been offered as collateral security to get the loans advanced by the Financial Corporation and that since the filing of the petition, he has been relieved of his pledge and the fixed deposit receipt has been returned to him. The company contends that the share money of Rs. 1,000 invested by him cannot be reimbursed by the company as claimed by the petitioner. It, however, admits that a sum of Rs. 29,356.36 is due and liable to be paid by the company to the petitioner subject to the conditions to which the petitioner himself agreed at a board meeting on June 4, 1986. It is alleged that the agreement was that the company would repay the said sum of Rs. 29,856.36 after two years from the date it goes into production and in token of his acceptence of that condition, the petitioner is alleged to have affixed his signature at the board meeting when he was a director of the company.

In that circumstance, the respondent company has prayed that the petition is misconceived and not maintainable and is liable to be rejected.

Before the enquiry commenced, the respondent company made available the minutes of the board meetings maintained in loose sheets of paper which was given for inspection of counsel for the petitioner as well as the petitioner himself. Petitioner denied that he had signed at the place his signature was found on the minutes of the meeting of the board of directors held on June 4, 1986. In that circumstance enquiry was commenced for ascertaining whether the signature was genuine or a forgery.

The petitioner has examined himself in support of the allegations made in the petition. Briefly stated, his deposition is to the following effect: He was a director of the respondent-company. He admits that exhibit P-1 is the statement given by the respondent-company to him. He admits the accuracy of the statement. He has been confronted with exhibits P-2, P-3, P-4, P-5 and P-6 which are all copies of minutes of the board meetings of the directors of the company held on various dates indicated therein. He admits the signature at exhibit P-3(a) which is the minutes maintained of the meeting held on June 4, 1986. However, he contends that at a meeting held on June 12, 1986, of the board of directors, he objected to the recording of the alleged agreement in the matter of repayment of his investment in the sum of Rs. 29,000 odd as no such agreement was reached. But in the cross examination, it is elicited that he did not protest in writing on June 16, 1982, at the meeting called subsequent to September 12, 1986.

As against this evidence, one of the directors of the company has examined himself as R.W. 1. Through him the various minutes of the meetings of the board of directors were marked. He has spoken about maintaining the minutes on loose sheets, getting the same typed and at the next meeting getting the signatures of the participants as evidence of ratification of the earlier proceedings. He has also spoken to the fact that though a meeting was scheduled to be held on June 12, 1986, it was cancelled at the request of one of the directors and that the petitioner was informed of the same and that no meeting took place on June 12, 1986, but the meeting took place on June 16, 1986, at which the petitioner was present. That subsequently, after two other meetings, the petitioner resigned from his directorship. He also admits the liability to repay the sum of Rs. 29,000 odd but only after the lapse of two years from the date the company goes into production. He has stated in his evidence that the company is likely to go into production within about one month or two from the date on which he gave evidence which was on March 5, 1987.

All that this court at this stage may determine on the pleadings and the evidence is whether the company has immediate liability to discharge its obligation to repay the amount. The board resolutions dated June 4, 1986, are as follows:

"...2. Once the above proposal is materialised, Mr. P.K. Varghese has agreed to resign his directorship from M/s. J.T.V. Metal Finishers (P.) Ltd. and shall not be involved in any of the company's affairs. As regards balance amount of Rs. 26,442.36 (Rupees twenty-six thousand four hundred forty-two and paise thirty-six only) already invested by Mr. P.K. Varghese, it shall be repaid within two years after commencement of the plant.

3. It is decided that a profit and loss account and balance-sheet will be drawn up as on the date of resignation by Mr. P.K. Varghese from directorship and ¼th share of the profit/loss will be either credited or debited to Mr. P.K. Varghese's account.

4. In case K.S.F.C. fails to release further loan, the assets of the company whatsoever will be sold and liabilities cleared to the extent of funds available."

Once the petitioner admits his signature at exhibit P-3(a), this court has no choice but to come to the conclusion that he was aware of the resolution passed as recorded. His contention that it was not so passed and that he objected to that at the meeting held on June 12, 1986, is not supported by any other evidence except his own assertion in the witness box. A person who is deprived of nearly Rs. 30,000 for a period of two years and more will not react in the manner the petitioner did having regard to the nature of human conduct. If his objections were not recorded and resolution No. 2 at the meeting on June 4, 1986, was rescinded, he would have taken steps to recover the loan advanced by filing a suit. The fact that he has waited for some time going about issuing lawyer's notices which were not marked as exhibits in the course of recording of oral evidence, it cannot be said that the respondent has no tenable defence had he gone to the civil court.

The tenability of the defence depends on the evidence led by the parties. If in this regard, no evidence is led to support the assertion that there was no agreement reached on June 4, 1986, in regard to the repayment in the manner indicated, then, it is likely that the respondent company would succeed in postponing its liability even if a suit was filed having regard to the fact that the present petition must be construed by this court as a petition filed to coerce the repayment of the amount which is not immediately due to be paid to the petitioner, as laid down by the Supreme Court in the case of M/s. Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. [1972] 42 Comp Cas 125 (SC). Section 433 cannot be made use of to coerce a company to make payments (not immediately due) even though the liability is admitted. This is the position in England as well.

In any event, as there is an admission by the company of the liability, the petitioner is bound to wait out that period and recover his dues; if there is unreasonable delay in the commencement of production, he is free to take legal steps to attach the assets of the company in order to secure repayment of his loan. That is possible only if he files a civil suit and seeks attachment before judgment if he is apprehensive that he may be defrauded by the activities of the other directors with whom he has obviously fallen out.

In this view of the matter, I have no hesitation to come to the conclusion that this petition is not maintainable and the petitioner may, if he is so advised, recover the amount admitted to be due to him in a civil suit.

Without prejudice to that right, this petition is dismissed.

[2000] 26 SCL 253 (SC)

Supreme Court of India

Nazir Hoosein

v.

Darayus Bhattena

A.P. Misra and M.B. Shah, JJ.

Civil Appeal No. 3425 of 2000

May 12, 2000

Section 285 of the Companies Act, 1956 - Directors - Meetings of - Resolutions passed in meetings of Board of Direc­tors held on 8-11-1995, 29-3-1997 and 17-4-1997 were subject-matter of dispute between appellants and respondents - By these resolutions it was resolved to remove appellant No. 1 as Chairman of Board of Directors and to appoint respondent No. 1 in his place as chairman, to appoint 12 additional directors on Board of directors and to induct 57 life members - By consent order dated 30-6-1997/2-7-1997 High Court directed fresh meeting of board of directors to be held with only those directors who were on board on 8-11-1995 under Chairmanship of an advocate to consider earlier agenda of 8-11-1995 - Whether very reconsidera­tion of earlier agenda of meeting dated 8-11-1995 Clinchingly revealed that what was resolved in said meeting was wiped off and had become non est - Held, yes - Whether as a consequence re­spondent No. 1 had no authority to preside over meeting held on 17-4-1997 which was challenged by petitioner and Court had injuncted respondents from implementing resolutions passed in said meeting - Held, yes - Whether, therefore, since dis­pute as to who should preside was still not resolved in spite of long-drawn litigation, direction of High Court to hold annual general meeting under Chairmanship of company Registrar was proper - Held, yes

Section 193 of the Companies Act, 1956 - Meetings and proceedings - Minutes of - Whether minutes of meeting of Board of Directors prepared by person appointed by Court to preside over said meeting in view of conflict between two directors for Chairmanship of board; should be accepted as authentic and not those prepared by secretary of company - Held, yes

Facts

The appellants and respondent Nos. 1 to 3 were elected as direc­tors and the first appellant as the chairman of the board of directors at the annual general meeting of the company held on 29-12-1993. The case of the appellant was that on 8-11-1995 the respondent Nos. 1 to 3 purportedly held a meeting, without serv­ing any notice upon appellant No. 1 and other 4 directors sup­porting him and passed resolutions to shift the office of the club to respondent No. 1’s office, to remove appellant No. 1 as chairman, to appoint respondent No. 1 as chairman in his place and to appoint 12 additional directors on the board of directors. The minutes of this meeting were approved in another meeting held on 13-11-1995 by the same group. On 16-11-1995 the appellants and two other directors filed a suit in which the city Civil Court by an order dated 18-3-1997 declined to interferewith the resolu­tion regarding shifting of the office and removal of appellant No. 1 but injuncted the 12 additional directors, which included defendant Nos. 4 to 8 from acting as directors. Both the parties filed appeals before the High Court against the order of the city Civil Court.

Subsequently, a notice was issued on 21-3-1997 for a meeting of the board of directors for 29-3-1997 for the co-option of anoth­er set of additional 12 directors in place of injuncted directors. This led to filing of another application by appel­lants on 27-3-1997 praying for injunction to restrain these respondents from holding the said meeting. The Court, however, did not injunct the said meeting, but directed that any resolution passed at the meeting shall not be implemented for specified period. The said meeting as scheduled was held in which again 12 new additional directors were appointed including respondent Nos. 4 to 8. On 17-4-1997 another meeting was held under the chairman­ship of respondent No. 1 which the appellants attended under protest and without prejudice and in which the question of the induction of more new life members came up for consideration. While this legal battle was going on, both parties reached some understanding. The High Court in the appellants’ appeal passed a consent order on 30-6-1997/2-7-1997 to the effect that a fresh meeting of board of directors be held with only those who were on the board of directors on 8-11-1995 under the chairmanship of S, an advo­cate, to consider earlier relevant agenda. Thereafter, in pursu­ance of the aforesaid consent order, a meeting of the board of directors was held on 4-7-1997 in which two major decisions were taken, namely, that 16-9-1997 was fixed as the next date for holding the annual general meeting and the proposal to appoint 12 additional directors was turned down by the majority of 4 to 2. Again disputes arose between the parties and one was in respect of recording of the minutes of meeting dated 4-7-1997 because of difference in the minutes recorded by the secretary and by the chairman.

Thereafter, a meeting was held on 13-11-1997 following notice dated 6-11-1997 in which the appellants raised objection about respondent No. 1 presiding over the meeting instead of the advocate and about the presence of respondent Nos. 4 to 8. The appellants’ demand for fixing an early date of annual general meeting was overruled and minutes of various meetings including minutes of meeting dated 4-7-1997 as prepared by the secretary of respondent No. 1 and not as prepared by the advocate were ap­proved. Thereafter, another meeting was held on 19-11-1997 for the approval of the minutes of the meeting dated 13-11-1997. The appellants attended the meeting and reiterated their demand, but the same was overruled. Thereafter on 18-12-1997, the appellants filed the second suit for the declaration that the resolutions dated 13-11-1997 and 19-11-1997 were null and void, including the induction of new life members after November 1995 as also the appointment of 12 new additional directors which included re­spondent Nos. 4 to 8. The Trial Court dismissed the appellants’ prayer for injunction and also the contention that the consent order dated 30-6-1997 wiped off the earlier resolutions passed by the board of directors. The appellants’ appeal against the Trial Court’s order was dismissed by the High Court holding that there was no effective resolution annulling, rectifying or modifying the resolution dated 8-11-1995 and that neither party agreed nor the Court set aside the resolution dated 8-11-1995. It ordered for holding the annual general meeting under the chairmanship of the Company Registrar to hold the election afresh of the board of directors.

On appeal :

Held

It was very unfortunate, though very common, that in any organisation, including companies, there is tussle for holding dominant posi­tion to control the functioning of such organisation. It is often said, ‘it is not like sportsman spirit’, meaning, the spirit of a sportsman is treated to be highly cooperative even in the hour of defeat. He is always in the best of spirit. But such spirit now even in the field of sports seems to have receded to oblivion. The present company was also one of such companies, working in the field of sports. But this spirit between the parties was lacking. The battle of supremacy to control started between the respondent No. 1 and the appellant since 8-11-1995 leading to two separate suits and the battle was still raging for about five years. The culmination of the appeal, the suit, by its withdrawal as per Court’s order, as a consequence of the consent order, indicated one and the only inference that once the parties agreed to hold a fresh meeting under the chairmanship of S to re-consider afresh the agenda of the meeting dated 8-11-1995, then it implicitly voiced what was resolved in the said meeting earlier was wiped off and had become non est. The very re-consideration of the earlier agenda clinchingly revealed that what was done then was wiped off. Of course, it was open to the Board to pass the same, modify or pass entirely different resolution. Thus, company would be bound by the resolution passed in this later meeting. The High Court committed error of law by concluding to the contrary. The effect of the order passed by the Court was to undo what was done on 8-11-1995 and consider the matter afresh. This was done in the background of the appellants’ case that it was held without notice to the appellants. Hence all that was passed on 8-11-1995 could not be treated to be alive after the consent order followed by resolution dated 4-7-1997. Thus, ap­pointment of 12 additional directors on that date also went. So far as removal of the appellant No. 1 and appointment of respondent No. 1 in his place was concerned and, it was fairly agreed to that both would not preside over the meetings of the Board, instead. S will preside. In other words, no one could be treated to be the chairman of the Board.

Section 193 casts an obligation on the chairman of the Board to authenticate the minutes of the meeting of the Board. Further when the Court directed S to preside over the meeting of the Board, he acted as the chairman in the said meeting. This apart when, in the past, because of the conflict between two groups, a via media was found to eliminate this mistrust by appointing a third agreeable person then even if there be conflict, the minutes prepared by such third person were to be accepted and not of the other who belonged to one of such conflicting group. Hence, for all these reasons, the minutes prepared by S were to be accepted as authentic.

According to the minutes authenticated by S under item No. 6, the Board considered the question of appointment of 12 additional directors and after discussion between the two contesting groups, which was also recorded therein, the proposal of appellant No. 1 that this item did not survive as it had been agreed to hold the annual general meting was accepted and objection of respondent No. 1 that they should be appointed was rejected by the majority of 4:2. Thus, question of appointment of 12 additional directors came to an end by the passing of this resolution. If this was the position how could resolution dated 8-11-1995 or resolution dated 29-3-1997, survived so far as appointment of these 12 additional director was concerned. So if on 4-7-1997 it was resolved not to appoint 12 additional directors then any such resolution including that of 29-3-1997 could not be sustained. It would be treated to have died both on account of consent order and the resolution dated 4-7-1997. The resolution dated 29-3-1997 was itself a consequential resolution to the resolution dated 8-11-1995, as it appointed 2nd set of 12 additional directors in its place till injunction against the first set was in operation. This 29-3-1997 resolution itself was temporary in nature. Hence, after passing of the consent order and passing of the resolution dated 4-7-1997 appointment of 12 additional directors could not survive.

As regards the last relevant resolution dated 17-11-1997 in which 57 life members were inducted, this was a meeting admittedly presided by respondent No. 1 of which appellants had due notice. Appellant No. 1 also participated, under protest and without prejudice. So far as those inducted as life members were concerned, the court tried to find out from the parties whether there was any pre-requisite or minimum qualification for their induction. Parties could not point any such qualification. The dispute, if any, could be that those induct­ed were brought in by respondent No. 1 to muster his majority in the annual general meeting.

The chairman of the board of directors is the central figure in holding the meeting and is the controlling factor in the conduct of meeting. He authenticates the minutes of the meeting and perform such other functions as empowered under the Act. A chairman is always elected by the board of directors: thus he has the full support of the majority of directors which helps him in the control of meeting and recording of authenticated minutes.

In the instant case, unfortunately since 1994 no annual general meeting could be held both on account of aforesaid dispute and also, as per the respondents, the accounts could not be fina­lised. When appointment of S to chair Board meeting was made, both appellant No. 1 and respondent No. 1 fairly conceded their claim to preside over the meeting. Thus, their serious dispute got temporary respite. Still the question remained as to who could have presided in the meeting dated 17-4-1997, which was antecedent to the consent order. It was true that by that date consent order was not in existence and the tussle between the two was continuing. If the resolution dated 8-11-1995 evaporated, author­ity of respondent No. 1 to preside under it also dissolved, unless some fresh authority was given to him. Thus, without any fresh authority respondent No. 1 could not preside in any Board’s meeting. In fact this meeting dated 17-4-1997, at that point of time, was challenged and the Court on this date injuncted the respondents from implementing the resolution passed in this meeting. It was during continuation of this injunction order that the said consent order was passed. The consent order was to consider the 8-11-1995 agenda de novo. In view of this then, how could resolution passed in this meeting survive after passing of the consent order?

In the meeting dated 4-7-1997, no resolution was passed as to who would henceforth preside in the meeting of the board of direc­tors. The resolution dated 4-7-1997 could be construed to mean that the parties deferred the question as to who shall preside the meeting till holding of fresh election.

This also indicated that the Board desired holding an early annual general meeting and in favour of all members of the Board resigning. In the context, presiding by respondent No. 1 as chair­man of the meeting held on 17-4-1997 could not be held to be proper. However, on the other hand, a submission was made that even where there was no chairman or in case the chairman was not present or, as in the present case, it was in dispute, it was open for the board of directors to elect any one to function as such in any meeting. But this was neither the respondent’s case nor it was shown that he was elected as such on that date. His authority, if at all, was only through the resolution dated 8-11-1995. Strong submission for the respondents was that appointment of respondent No. 1 as chairman was held to be valid by a competent court of law by order dated 18-3-1997. But this order was challenged by the appellants in the High Court. It was in this context that consent order was passed which obliterated various resolutions including that of 8-11-1995. So this submission of respondents had no force.

Lastly, with regard to the question of induction of 57 new life members, so far in their applications no defect could be pointed out. It was true that these new life members were not parties here. It would be in the best of interest that question of their induc­tion as life members instead of being rejected be placed for consid­eration in the annual general meeting to be held by the company. So the meeting dated 17-4-1997 was not only not conducted in the proper perspective but it also suffered from procedural irregu­larities. This was part of the tussle between the two groups to gain the majority over the other. However, it would not be proper to reject the life members’ application. So in order to keep the interest of the life members alive, their cases be placed before the next annual general meeting to be held for its consideration.

Since the dispute as to who shall preside, was still not re­solved, in spite of this long-drawn litigation which could only come to an end by fresh election of the board of directors in the next annual general meeting, it was proper in the interest of the company that neither appellant No. 1 nor respondent No. 1 presided in any board of directors’ meeting.

Thus, the direction of the High Court to hold annual general meeting under the chairmanship of the Company Registrar seemed to be proper; hence it needed no interference to that extent.

Accordingly, the appeal against the High Court decision was to be allowed except to the aforesaid extent, i.e., direction to High Court for holdings annual general meeting.

Case referred to

Clark v. Workman [1920] 1 IR 107.

M.M. Sakharidande, Nikhil Sakhardande, Ms. Meenakshi Sakhardande, S. R. Grover and Ms. S. Tondon for the Applicant. Navin Parikh and Mrs. V.D. Khanna for the Respondent.

Judgment

Misra, J.— Leave granted.

2.         The present appeal is directed against the order dated 10-2-1999 passed by the Bombay High Court in Assessing Officer No. 1058 of 1998 in N/M No. 6325 of 1997 in Suit No. 6559 of 1997 dismissing appellants’ appeal from Bombay City Civil Court order dated 9-9-1998 dismissing aforesaid appellants’ notice of motion in the aforesaid suit. In the suit following interim injunctions were sought :

“(a)    Respondents 1 to 3 from acting on the resolution dated 13th November, 1997.

        (b)      Respondents from enrolling new members.

(c)      Respondents 4 to 8 from acting as directors of the suit club and restraining respondents 1 to 8 and life members enrolled after 7th November, 1995 from casting their votes at the AGM.

(d)      Respondents 1 to 8 from holding Board of directors’ meeting dated 19th December, 1997.

(e)      for an order appointing Mr. Satish Shah, advocate, as a chairman of the meetings of the club/company.”

3.         The appellants are the directors of the Indian Automotive Racing Club (‘the company’). As per the appellants, appellant No. 1 is the chairman of the board of directors of the said company. Respondent Nos. 1 to 3 are the directors and respondent Nos. 4 to 8 are additional directors allegedly appointed along with 7 others under the challenged resolution dated 29-3-1997. The appellants challenged this resolution to be illegal and void, as it stood obliterated by the agreed and consent order dated 30-6-1997/2-7-1997 in Assessing Officer No. 274 of 1997 before the High Court.

4.         In order to appreciate the controversy it is necessary to shortly dwell upon certain antecedents and essential short matrix of facts. At the annual general meeting of the company held on 29-12-1993 the appellants and respondent Nos. 1 to 3 were elected as directors and the first appellant as the chairman of the board of directors. The case of the appellants is : on 8-11-1995 respondent Nos. 1 to 3 with under current designs, purport­edly held a meeting, without serving any notice upon appellant No. 1 and other 4 directors supporting him and passed the follow­ing resolutions :

        “(a)    to shift the office of the club to respondent No. 1’s office;

        (b)      to remove appellant No. 1 as chairman;

        (c)      appoint respondent No. 1 as chairman in his place; and

        (d)      appoint 12 additional directors on the board of direc­tors.”

5.         Thereafter on 13-11-1995, another meeting was held by the same group, viz., respondent Nos. 1 to 3, to approve the minutes of the meeting held on 8-11-1995. On 16-11-1995, the appellants and two other directors filed the first Suit No. 7179 of 1995, chal­lenging the said resolutions passed at the behest of respondent Nos. 1 to 3 and 4 out of the 12 newly appointed directors. On 18-3-1997, the City Civil Court by means of an order did not inter­fere with the resolution, so far the shifting of the office and removal of appellant No. 1 as a chairman but injuncted the 12 additional directors, which included defendant Nos. 4 to 8, from acting as directors. Aggrieved by one part of the order, viz., non-interference with shifting of the office and removal of appellant No. 1, the appellants filed FAO No. 274 of 1997 before the High Court. On the other hand, respondent Nos. 1 to 3 and 5 additional directors being aggrieved by the other part of the order, viz., injuncted 12 additional directors from functioning filed a cross appeal.

6.         Subsequently, on 21-3-1997, a notice was issued for a meeting of the Board of directors for 29-3-1997 for the co-option of another set of additional 12 directors, in place of the injuncted directors which included respondent Nos. 4 to 8. This led to the appellants to file another application on 27-3-1997 for injunc­tion to restrain these respondents from holding the said meeting. The Court, by an order dated 27-3-1997, however, did not injunct the said meeting, but directed that any resolution passed at the meeting shall not be implemented for two weeks which was subse­quently extended. As scheduled the said meeting was held, in which again 12 newly additional directors were appointed, includ­ing respondent Nos. 4 to 8, till such time as the injunction against the first set of twelve additional directors remained in operation. Next on 11-4-1997 notices were issued and served upon directors including those covered by the aforesaid order dated 27-3-1997, proposing a meeting for 17-4-1997. This, according to the appellants, was in breach of the order dated 27-3-1997, not to implement the resolution appointing them as directors. On an application thereafter made by the appellants, the Court by an order dated 17-4-1997 recorded respondents’ statement that co-opted directors will not be permitted to participate in the said meeting. That meeting was held on 17-4-1997, under the chairman­ship of respondent No. 1. The appellants though attended the meeting but did so under protest and without prejudice, which was recorded in the minutes of the meeting. It is relevant to record, in this meeting, question of the induction of more new life members came up for consideration. Relevant portion of the dis­cussion as recorded in the minutes is quoted hereunder :

“Mr. Hoosein (appellant No. 1) raised the topic of new applicant and whether the old practice would be adopted in deciding member­ship of new applicant.

Regarding the interview the life member category applicant Mr. Bhathena (respondent No. 1) pointed out that in the past life member applicant was not physically called for the interview. . . ., Mr. Bhathena proposed and Mr. G.L. Goenka seconded and it was resolved that all life members applications, as well as any other 3 category, be invited and become members in their respective categories.”

7.         When this series of on-going resolutions was going on at the behest of respondent No. 1 and the appellants were protesting repeatedly through various applications in the Court, as afore­said, then reached some understanding between the parties.

8.         On 30-6-1997/2-7-1997, the appellants’ appeal from order, as aforesaid, came up for admission in the High Court. On this date, a consent order was passed that a fresh meeting of the board of directors be held with only those who were on the board of direc­tors on 8-11-1995 under the chairmanship of Mr. Satish Shah, advocate, to consider the earlier agenda of 8-11-1995. Hence, the High Court passed the following order on 2-7-1997 :

“In view of this, appeal stands disposed of civil application also does not survive. Same also stands disposed of. In view of the fact that appeal has been disposed of, nothing survives in the suit. Parties to withdraw the suit.”

            This is how proceedings in the first Suit No. 6559 of 1997 is said to have culminated.

9.         Thereafter, in pursuance to the aforesaid consent order, a meeting of the board of directors was held on 4-7-1997 under the chairmanship of Mr. Satish Shah. Two major decisions were taken therein. First, 16-9-1997 was fixed as the next date for holding the annual general meeting, and secondly, it turned down the proposal to appoint 12 additional directors by the group of respondent No. 1 by the majority of 4 to 2. When parties are at variance, then they try to put each other down, disputes start cropping up from an insignificant to other magnified issues. One of such disputes raised is of the recording of the minutes of the meeting dated 4-7-1997. According to respondent No. 1, it was the prerogative of the secretary to write the minutes and, thus, the minutes recorded by him should be accepted. This dispute is because of the difference in the recording of the minutes between one recorded by the secretary of respondent No. 1 and the other submitted by Mr. Satish Shah. The significant difference is in the recording of item No. 6, of the agenda of 8-11-1995, under which the appointment of twelve additional directors was consid­ered. There is neither recording nor any reference about this consideration in the minutes prepared by the secretary, while in the recording by Mr. Satish Shah, it clearly records this. The relevant part of his report under item No. 6 is quoted hereunder :

“To appoint 12 additional directors whose influence, contact would assist the club to procure attractive sponsorships as also those who could spare time to assist in organising and running events.

Mr. Hoosein (appellant No. 1) said that this item did not survive because it had been agreed in principle to hold the annual gener­al meeting. Mr. Swadi, Mr. Futehally and Mr. Bhiwandiwalla concurred.

Mr. Bhathena (respondent No. 1) and Mr. Goenka opposed. Mr. Bhathena said that “he was disagreeing because in his view fresh blood was required on the Board”. Mr. Rao abstained. The view of Mr. Hoosein was adopted by a majority of 4 to 2.” [Emphasis supplied]

10.       It was thought, the aforesaid meeting will resolve the con­flict and parties shall restrain themselves from precipitating any other issue till the annual general meeting. But it was so done. Now the succeeding facts and resolutions gave rise to the cause for the filing of the present second suit. On 6-11-1997, notice was issued proposing a meeting, for 13-11-1997 for the ‘adoption of the previous minutes’ and for fixing a date for holding the annual general meeting. On 13-11-1997, a meeting was held in which the appellants raised objection about respondent No. 1 presiding the meeting instead of Satish Shah and about the presence of respondent Nos. 4 to 8. The appellants’ demand for fixing an early date of annual general meeting was overruled and the minutes of the meeting dated 13-11-1995, 29-3-1997, 17-4-1997, and minutes of meeting dated 4-7-1997 (held as per Courts order under chair of Mr. Satish Shah), as per the minutes pre­pared by the secretary of respondent No. 1 and not as prepared by Mr. Satish Shah, were approved. Thereafter, a notice was served, proposing for a meeting on 19-11-1997 to approve and confirm the minutes of the meeting dated 13-11-1997. The appellants attended the meeting and reiterated their demand, but the same was over­ruled. Thereafter, on 18-12-1997 the appellants filed the afore­said suit No. 6559 of 1997 for the declaration that the resolu­tions dated 13-11-1997 and 19-11-1997 are null and void, includ­ing the induction of new life members after November 1995, as also the appointment of 12 new additional directors which includ­ed respondent Nos. 4 to 8.

11.       The respondents contested the said claim of the appellants. Their reply is that the suit is misconceived, non-maintainable, Mr. Satish Shah’s minutes cannot be relied, because it is the prerogative of the secretary and it is his obligation to prepare the minutes of that meeting. Further, all decisions and resolu­tions other than the resolution dated 8-11-1995 are valid and binding on the appellants. When earlier suit was withdrawn all interim orders came to an end.

12.       The trial court dismissed the appellants’ injunction applica­tion and also the contention that the consent order dated 30-6-1997 wiped off the earlier resolutions passed by the board of directors. The appellants earlier sought injunction in the earli­er suit, against holding of this meeting dated 17-4-1997 in which new life members were to be taken in and the Court did pass an order not to implement any resolution passed therein. The appel­lants being aggrieved by the dismissal of the injunction applica­tion filed an appeal before the High Court which was dismissed. The High Court held, there was no effective resolution annulling, rectifying or modifying the resolution dated 8-11-1995. The Court rejected the appellants’ contention that order dated 30-6-1997, wiped off all the earlier resolutions passed. It held, neither party agreed nor the Court set aside the resolution dated 8-11-1995. It ordered for holding the annual general meeting under the chairmanship of Shri A.P. Kothari, the Company Registrar, to hold the election afresh of the board of directors. Aggrieved by this the appellants have filed the present appeal.

13.       The main thrust of submission on behalf of the appellants is, “whether the consent order dated 30th June, 1997 wipes off—

        (i) the resolution dated 8th November, 1995, in which—

        (a)    12 additional directors were appointed,

        (b)    appellant No. 1 was removed as the chairman of the board,

(c)    the respondent No. 1 was appointed as the chairman of the board of directors, and

        (d)    the administrative office of the company was shifted;

(ii)    the resolution dated 29th March, 1997 appointing the second set of 12 additional directors in place of the 12 afore­said additional directors;

(iii)   the resolution dated 17th April, 1997 enrolling, according to respondent No. 1, 57 additional life members of the company.”

14.       The submission is, on composite reading of the orders dated
30-6-1997 and 2-7-1997, in the background of the aforesaid meet­ing dated 4-7-1997 of the board of directors, it clinchingly proves that the impugned resolution dated 8-11-1995 is scored of. In further support, it is submitted that the first respondent unambiguously admits this position in his affidavit in reply to the affidavit of appellant No. 1 in the notice of motion in Suit No. 6559 of 1997. There respondent No. 1 clearly averred that there could be no dispute that the meeting to be held under the chairmanship of Mr. Satish Shah would consider the matter de novo and except the resolution passed in the meeting held after 8-11-1995 all other resolutions are valid, impliedly admit that the meeting and the resolutions dated 8-11-1995 were not valid. Thus, it proves that the clock was set back to 8-11-1995. Hence, all edifices built on it subsequently, through various resolutions since looses its base and also goes. In any case, the appointment of first respondent as the chairman of the board of directors and of the 12 additional directors is also knocked off. In fact with­drawal of both the appeals before the High Court and the suit shows that the entire dispute including removal of first appel­lant as the chairman, appointment of 12 additional directors including induction of life members stood dissolved and settled between the parties. In view of this, all resolutions passed in a meeting at the behest of the first respondent where he presided as chairman, are patently illegal and have no force of law.

15.       Challenge to the resolution dated 29-3-1997 is also the same. Its base is also the resolution dated 8-11-1995, which was also held under the chairmanship of the first respondent and it also stands wiped off by the consent order dated 30-6-1997. As said before, when this meeting was to be held, appellants applied for injunction to restrain respondents from holding this meeting. On this, the Court ordered that any resolution passed in this meet­ing shall not be implemented. By this resolution, as aforesaid, 2nd set of 12 additional directors was appointed.

16.       Next challenge is to the resolution dated 17-4-1997. This resolution is also challenged on the same ground, viz., it was illegally chaired by respondent No. 1. Even for this meeting court directed resolution passed therein shall not be implemented. Submission is, this meeting was also held in hot haste to overreach the order of the Court. On 10-4-1997, the aforesaid A O No. 274 of 1997 was adjourned to 21-4-1997 for admission. Coming to know of this, on 11-4-1997, notice was issued for a meeting on 17-4-1997. This clearly exhibits the unholy motive of the respondents to overreach the order of the Court. At this meeting it is said 57 new life members were en­rolled. This was opposed by the appellants in the meeting which was turned down by the respondent No. 1.

17.       For the respondents the aforesaid submissions were chal­lenged. Submission is, both meetings dated 29-3-1997 and 17-4-1997, were validly held. Even the Court did not grant any stay against holding of these meetings. These meetings were attended by duly qualified directors. The meetings were chaired by re­spondent No. 1 whose appointment as the chairman was held to be valid by a competent court by an order dated 18-3-1997 in the Notice of Motion No. 6337 of 1995 in the earlier Suit No. 7179 of 1995. Reference is also made to section 175 of the Companies Act, 1956, i.e., members present at the meeting could elect among one of themselves to be the chairman, hence no illegality would arise even otherwise, if respondent No. 1 presided the meeting. The order by consent on 30-6-1997 did not and could not wipe off what was done on the aforesaid two dates of meetings. There is no order of the Court setting aside these resolutions.

18.       The crux of the grievance of the appellants which requires our consideration is three-fold: (i) removal of appellant No. 1 and the appointment of respondent No. 1 as chairman of the board of directors by means of resolution dated 8-11-1995; (ii) the induction of 12 additional directors through resolution dated 29-3-1997; and finally (iii) the induction of 57 life members through resolution dated 17-4-1997, both of these two last meet­ings were presided by respondent No. 1.

19.       The aforesaid facts reveal that the proceedings of the first suit culminated in the passing of the consent order dated 30-6-1997/2-7-1997. It was expected that litigation would come to an end but that was not to be. The present second suit is filed in view of resolution dated 13-11-1997 which in effect brings back to life the matter which was subject-matter of the earlier suit. In the meeting dated 13-11-1997, the minutes of the meeting dated 13-11-1995, 29-3-1997 and 17-4-1997 including the minutes of the meeting dated 4-7-1997 as prepared by the secretary and not by Mr. Satish Shah, were approved. The meeting dated 19-11-1997 approved and confirmed the minutes of meeting dated 13-11-1997. The question is, whether passing of the consent order in the earlier suit obliterates the meeting and resolutions passed on 29-3-1997 and 17-4-1997? Also what was the resolution passed in the meeting dated 4-7-1997 and in this context, whether the minutes prepared by the secretary or what is prepared by Mr. Satish Shah should be accepted?

20.       It is very unfortunate, though very common, in any organisation, including companies, there is tussle for holding dominant position to control the functioning of such organisa­tion. It is often said, “It is not like sportsman spirit”. Mean­ing, the spirit of a sportsman is treated to be highly coopera­tive even in the hour of defeat. He is always in the best of spirit. But such spirit now even in the field of sports seems to have receded to oblivion. The present company is also one of such companies, working in the field of sports. But this spirit be­tween the parties is lacking. The battle of supremacy to control started between respondent No. 1 and appellant since 8-11-1995 leading to two separate suits and the battle is still raging for about five years.

21.       Now, we proceed to test the submissions for the appellants regarding the consent order obliterating the resolutions dated 29-3-1997 and 17-4-1997. As we have said, the nucleus of conflict started on 8-11-1995 when in this Board’s meeting, appellant No. 1 was removed and respondent No. 1 was appointed in his place as the chairman of the board of directors and 12 additional direc­tors were also appointed. When the first suit was filed by the appellants, they challenged this meeting as it was held without any notice to them. The very texture of this resolution shows two clear distinctive groups, and the group of respondent No. 1 by removing appellant No. 1 came in full control of the Board. Next, another meeting was held on 13-11-1995 to confirm the resolution dated 8-11-1995. It is at this stage appellants filed their first suit on 16-11-1995 along with injunction application, in which 12 additional directors were injuncted to function. However, un­daunted another meeting was held under the chairmanship of re­spondent No. 1, of the board of directors on 29-3-1997 in which resolution was again passed appointing another set of 12 addi­tional directors till injunction against earlier 12 additional directors remained in operation. When this stress and strain between the parties was going on, with various interim orders of the Court, good sense prevailed on both the parties which led to the passing of the consent order. Though the consent order dated 30-6-1997 and 2-7-1997, the parties agreed for holding a fresh meeting of the Board, under the chairmanship of Mr. Satish Shah, to consider afresh the original agenda of 8-11-1995. In this regard submission for the appellants is, even concerned respond­ents including respondent No. 1 understood that agenda was going to be considered de novo. For this, reliance is on the following affidavit filed by respondent No. 1 in reply to the notice of motion filed before the trial court by the appellants. The rele­vant portion of the said statement is reproduced below :

“I say that the gravamen of the charge, inter alia, levelled in the previous suit revolved round the allegation that the meeting of the Board of Directors of the club held on 8th November, 1997 was never held and no notice therefor was given. In view of the fact that the club is primarily brought into existence to promote motor sports, it was felt that no scope would be left for any complaint and, therefore, it was agreed that the items of agenda of the said meeting which was held on 8th November, 1995 should be convened de novo and under the said Mr. Satish Shah, Advocate.”

22.       On the other hand, the learned counsel for the respondents submits that neither the said consent order nor the resolution passed on 4-7-1997, in any way sets aside any resolutions passed prior to the said consent order. Thus, it would be deemed that they continued notwithstanding holding of the said meeting dated 4-7-1997.

23.       We have considered the submissions made by the parties in­cluding the various orders passed, both in the earlier and the present suit. In our considered opinion, the culmination of the appeal, the suit, by its withdrawal as per Court’s order, as a consequence of the consent order indicates one and the only inference that once the parties agreed to hold a fresh meeting under the chairmanship of Mr. Satish Shah to re-consider afresh the agenda of the meeting dated 8-11-1995, then it implicitly voices, what was resolved in the said meeting earlier is wiped off and has become non est. The very re-consideration of the earlier agenda clinchingly reveals that what was done then is wiped off. How can earlier resolution dated 8-11-1995, would survive when it is to be considered afresh? Of course, it is open to the Board to pass the same, modify or pass entirely different resolution. Thus, company would be bound by the resolution passed in this later meeting. The High Court committed error of law by concluding to the contrary. The High Court misdirected itself and misconstrued the consent order that “neither parties agreed nor did the Court set aside the resolution of the board of directors dated 8th November, 1995”. The effect of the order passed by the Court was to undo what was done on 8-11-1995 and consider the matter afresh. This was done in the background of the appellants’ case that it was held without notice to the appellants. This is also clearly spelt out from the aforesaid quoted statement of respondent No. 1 himself. The meeting which was held under the chairmanship of Mr. Satish Shah was not a meeting to confirm, modify or annul the resolutions dated 8-11-1995 but was to consider the agenda afresh. Hence all that was passed on 8-11-1995 cannot be treated to be alive after the consent order fol­lowed by resolution dated 4-7-1997. Thus, appointment of 12 additional directors on that date also goes. So far removal of appellant No. 1 and appointment of respondent No. 1 in his place, it was fairly agreed to that both will not preside the meetings of the Board, instead Mr. Satish Shah will preside. In other words, no one could be treated to be the chairman of the Board.

24.       Next we proceed to scrutinise the resolution dated 4-7-1997, which was held as a consequence of the Court’s order, under the chairmanship of Mr. Satish Shah. But here again we find a dispute is raised, whether the minutes prepared by the secretary or the one by the chairman Mr. Satish Shah be accepted. We find the minutes recorded are at variance between the two. The relevant variance is under item No. 6. In the secretary report there is no reference of the consideration by the Board for the appointment of 12 additional directors, while in the report of Mr. Satish Shah it records so under item No. 6, which is reproduced below :

“Item No. 6 : To appoint 12 additional directors whose influence, contract would assist the club to procure attractive sponsorships as also those who could spare time to assist in organising and running events.

Mr. Hoosein said that this item did not survive because it has been agreed in principle to hold the annual general meeting. Mr. Swadi, Mr. Futehally and Mr. Bhiwandiwalla concurred.

Mr. Bhathena and Mr. Goenka opposed. Mr. Bhathena said that he was disagreeing because in his view fresh blood was required on the Board. Mr. Rao abstained. The view of Mr. Hoosein was adopted by a majority of 4 to 2.”

25.       Before drawing our conclusion we may refer to section 193 of the Act. The relevant portion of section 193 is quoted below :

      “Minutes of proceedings of general meetings and of Board and other meetings—(1)**   **      **

(1A) Each page of every such book shall be initialled or signed and the last page of the record of proceedings of each meeting in such books shall be dated and signed—

(a)      in the case of minutes of proceedings of a meeting of the Board or of a committee thereof, by the chairman of the said meeting or the chairman of the next succeeding meeting. . . .

        **                  **        **

Explanation: The chairman shall exercise an absolute discretion in regard to the inclusion or non-inclusion of any matter in the minutes on the grounds specified in this sub-section.”

(6) If default is made in complying with the foregoing provisions of this section in respect of any meeting, the compa­ny, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees.

26.       With reference to minutes of the proceedings as to who shall initial or sign, the sub-section (1A) mandates, every page of every book shall be initialled or signed including the last page of the record of proceedings by the chairman of the Board. Under Explanation to sub-section (6) of the aforesaid section, chairman is empowered to exercise an absolute discretion in regard to the inclusion or non-inclusion of any matter in the minutes. Sub-section (6) makes defaulters for not complying the foregoing provisions punishable with fine. Thus, this section casts an obligation on the chairman of the board to authenticate the minutes of the meeting of the Board. Further when the Court directs Mr. Satish Shah to preside the meeting of the Board, he acts as the chairman in the said meeting. This apart, in the past, because of the conflict between two groups, a via media was found to eliminate this mistrust by appointing a third agreeable person then even if there be conflict, the minutes prepared by such third person is to be accepted and not of the other who belong to one of such conflicting group. Hence, for all these reasons we have no hesitation to conclude that the minutes pre­pared by Mr. Satish Shah are to be accepted as authentic.

27.       According to the minute authenticated by Mr. Satish Shah, under item No. 6, the Board considered the question of appoint­ment of 12 additional directors and after discussion between the two contesting groups, which is also recorded therein, the pro­posal of appellant No. 1 that this item does not survive as it had been agreed to hold the annual general meeting was accepted and objection of respondent No. 1 that they should be appointed was rejected by the majority of 4:2. Thus, question of appoint­ment of 12 additional directors came to an end by the passing of this resolution. If this is the position how can resolution dated 8-11-1995 or resolution dated 29-3-1997, survive so far appoint­ment of these 12 additional directors. So if on 4-7-1997 it was resolved not to appoint 12 additional directors then any such resolution including 29-3-1997 cannot be sustained. It would be treated to have died both on account of consent order and the resolution dated 4-7-1997. The resolution dated 27-3-1997, was itself a consequential resolution to the resolution dated 8-11-1995, as it appointed 2nd set of 12 additional directors in its place till injunction against the first set was in operation. This 27-3-1997 resolution itself was temporary in nature. Hence, we conclude after passing of the consent order and passing of the resolution dated 4-7-1997 so far appointment of 12 additional directors cannot survive.

28.       This leaves us to the last relevant resolution dated 17-11-1997 in which 57 life members were inducted. This is a meeting admittedly presided by respondent No. 1 to which appellants had due notice. Appellant No. 1 also participated, under protest and without prejudice. So far those inducted life members, we tried to find out from the parties, whether there is any prerequisite or minimum qualification for their induction. Parties could not point any such. The dispute, if any, could be that those inducted, were brought in by respondent No. 1 to muster his majority in the annual general meeting.

29.       The learned counsel for the appellants referred to The Con­duct of Meetings by TPE Curry and J Richard Sykes, 20th edn., which is quoted hereunder :

      “Board meetings : To constitute a valid Board meeting the follow­ing conditions must be complied with :

(1) The proper person must be in the chair.—His appointment is generally governed by the articles. Regulation 101 of Table A, for example, provides that the directors may elect a chairman of their meetings and determine the period for which he is to hold office, and that if no such chairman is elected, or if at any meeting the chairman is not present within five minutes after the time appointed for holding the same, the directors present may choose one of their member to be chairman of the meeting.

An appointment of a chairman of directors made in contravention of the articles is void and is not regularised by mere acquies­cence, and consequently resolutions carried by the casting vote of such a chairman are inoperative.”

30.       The learned counsel for the appellants also referred to a decision of Clark v. Workman [1920] 1 IR 107. Relevant portion of the headnote is quoted hereunder :

“An appointment of a chairman of directors made in contravention to articles of association is void, and is not regularised by mere acquiescence and consequently resolutions carried by the casting vote of such a chairman are inoperative.”

31.       It cannot be disputed that the chairman of the board of directors is the central figure in holding the meeting and is the controlling factor in the conduct of meeting. He authenticates the minutes of the meeting and performs such other functions as empowered under the Act. A chairman is always elected by the board of directors : thus he has the full support of the majority of directors which helps him in the control of meeting and recording of authenticated minutes.

32.       In the present case, unfortunately since 1994 no annual general meeting could be held both on account of aforesaid dis­pute and also, as per the respondents, the accounts could not be finalised. When appointment of Mr. Satish Shah to chair Board meeting was made, both appellant No. 1 and respondent No. 1 fairly conceded their claim to preside over the meeting. Thus, their serious dispute got temporary respite. Still the question remains, as to who could have presided in the meeting dated 17-4-1997, which was antecedent to the consent order. It is true by that date consent order was not in existence and the tussle between the two was continuing. If the resolution dated 8-11-1995 evaporated, authority of respondent No. 1 to preside under it also dissolved, unless some fresh authority was given to him. Thus, without any fresh authority respondent No. 1 could not preside in any Board’s meeting. In fact this meeting dated 17-4-1997, at that point of time was challenged and the Court on this date injuncted the respondents to implement the resolution passed in this meeting. It is during continuation of this injunction order the said consent order was passed. Consent order was to consider 8-11-1995 agenda de novo. In view of this then, how could resolution passed in this meeting survive after passing of the consent order ?

33.       In the meeting dated 4-7-1997, no resolution was passed as to who shall henceforth preside in the meeting of the board of directors. The resolution dated 4-7-1997 could be construed that the parties deferred the question as to who shall preside the meeting till holding of fresh election of the board of directors in the annual general meeting. It is significant in the minutes recorded by Mr. Satish Shah that before item No. 1 was taken up Mr. Bhiwandiwalla and Mr. Bhathena (respondent No. 1) stressed the need to hold an early annual general meeting. Another director Mr. Swadi also suggested the same for electing a new Board which could finalise the accounts. Finally, Mr. Bhiwandiwalla suggested the following :

        “(i)     that the accounts be finalised and approved as soon as possible.

(ii)      that all the members of the present Board should resign and an entirely new Board should be elected; and

(iii)     that in any event the annual general meeting should be convened as early as possible even if the accounts were not ready.

The other members were agreeable to this and it was resolved that the annual general meeting should if possible be held on 16th September, 1997.”

This also indicates that the Board desired holding an early annual general meeting and in favour of all members of this Board resigning. In this context presiding by respondent No. 1 as chairman of the meeting held on 17th April, cannot be held to be proper. However, on the other hand, a submission is, even where there is no chairman or in case the chairman not present or as in the present case it is in dispute, it is open for the board of directors to elect any one to function as such in any meeting. But this is neither the respondents’ case nor it is shown that he was elected as such on that date. His authority if at all was only through the resolution dated 8-11-1995. Strong submission for the respondents was that appointment of respondent No. 1 as chairman was held to be valid by a competent court of law by order dated 18-3-1997 in Notice of Motion No. 6337 of 1995. But this order was challenged by the appellants through AO No. 274 of 1997 in the High Court. It is in this context that consent order was passed which obliterated various resolutions including of 8-11-1995. So this submission of respondent has no force.

34.       Lastly, we have considered the question of induction of 57 new life members. So far in their application no defect could be pointed out. It is true, these new life members are not parties before us. It will be in the best of interest that question of their induction as life members instead of rejecting, be placed for consideration, in the annual general meeting to he held by the company. So we come to the conclusion that meeting dated 17-4-1997 was not only not conducted in the proper perspective but it also suffers from procedural irregularities. This was part of the tussle between the two groups to gain the majority over the other. However, it would not be proper to reject the life members’ application. So in order to keep the interest of the life members, we direct that their cases be placed before the next annual general meeting to be held for its consideration.

35.       Since the dispute, as to who shall preside, is still not resolved, in spite of this long-drawn litigation which can only come to an end by fresh election of the board of directors in the next annual general meeting, it is proper in the interest of the company that neither appellant No. 1 nor respondent No. 1 pre­sides in any board of directors’ meeting.

36.       Thus, so far the direction of the High Court to hold annual general meeting under the chairmanship of Mr. A.P. Kothari, the Company Registrar, seems to be proper, hence needs no interfer­ence to that extent. The relevant portion of this is quoted hereunder :

“However, it is clear that a meeting of the Board of directors had been held pursuant to an order passed by this court and it is common ground before me that the Board of directors decided to hold the annual general meeting of the company immediately, in this view of the matter, therefore, in my opinion, it would be just and proper to direct that the annual general meeting of the company should be held for holding elections to the Board of Directors of the company. In my opinion, considering that the parties are fighting, it would be proper to direct that the annual general meeting should be held under the chairmanship of Shri A.P. Kothari, the Company Registrar.”

37.       Hence, for all the aforesaid reasons we allow the appeal of the appellants, set aside both the judgments of the High Court dated 10-2-1999, except to the aforesaid extent, and the trial court order dated 9-7-1998, and further direct holding of annual general meeting at the earliest under the chairmanship of Mr. A.P. Kothari, Company Registrar as aforesaid. Even if any prior meeting before annual general meeting is to be held of the board of directors, the same shall also be presided by the same Mr. A.P. Kothari, Registrar. In view of the aforesaid findings our conclu­sions are :

                (A)       Neither appellant No. 1 nor respondent No. 1 shall preside in any of the meetings of the board of directors.

                (B)       The appointment of 12 additional directors cannot be sustained. Hence resolutions dated 8-11-1997 and 29-3-1997 and 17-4-1997 stand obliterated in view of the consent order dated 30-6-1997/
2-7-1997.

                (C)       So far resolution dated 17-4-1997 for the induction of 57 life members, in view of our findings, they not be deemed to have been inducted on that date as member but their induction as such would be placed for consideration before the annual general meeting to be held later.

                (D)       Annual general meeting shall be held under the chair­manship of Mr. A.P. Kothari, Company Registrar, who shall expedite the holding of annual general meeting at a very early date, possibly within three months of this order being communi­cated to him.

38.       Accordingly, the aforesaid appeal is allowed. Costs on the parties.

[1994] 79 COMP. CAS. 417 (KAR)

HIGH COURT OF KARNATAKA

Karnataka Bank Ltd.

v.

A. B. Datar

A.B. MURGOD J.

Miscellaneous First Appeals Nos. 2385 and 2386 of 1992

APRIL 22, 1993

 

Sundaraswamy, Ramadas and Anand for the appellant.

H.B. Datar and S. Shaker Shetty for the respondent.

JUDGMENT

A.B. Murgod J.—Miscellaneous First Appeal No. 2385 of 1992 is filed by the first defendant under Order 43, rule 1(r) of the Civil Procedure Code against the order dated November 11, 1992, passed in Original Suit No. 6835 of 1992, by the 15th Additional City Civil Judge, Bangalore, allowing the prayer for temporary injunction in I.A.I. under Order 39, rules 1 and 2 read with section 151 of the Code of Civil Procedure.

Miscellaneous First Appeal No. 2386 of 1992 is filed by the first defendant under Order 43, rule 1(r) of the Civil Procedure Code against the order dated November 16, 1992, in Original Suit No. 6843 of 1992, on the file of the 15th Additional City Civil Judge, Bangalore, partly allowing the prayer for temporary injunction in I.A.I. under Order 39, rules 1 and 2 read with section 151 of the Civil Procedure Code.

Since the appeals involve common questions of facts and law, they are disposed of by the following common judgment.

The facts giving rise to these appeals are as under :

The Karnataka Bank Ltd. is a well known banking institution and it is registered under the Companies Act, 1956. The board of directors in its meeting on September 16, 1992, decided to hold the sixty-eighth annual general meeting of the Karnataka Bank Ltd. on October 29, 1992, and accordingly issued notices to all the shareholders. The appellant has despatched the annual report for 1991-92 and notice convening the sixty-eighth annual general meeting to be held on October 29, 1992, to the shareholders between September 25, and October 3, 1992. On October 3, 1992, one of the shareholders, Sri B. Narayana Somayaji, gave notice to the secretary, the Karnataka Bank Ltd. (hereinafter referred to as "the bank"), under section 190 of the Companies Act, 1956, of his intention to move three resolutions as ordinary resolutions under section 284 of the Companies Act, 1956 (hereinafter referred to as "the Act of 1956"), at the sixty-eighth annual general meeting of the bank to be held on October 29, 1992.

"Resolutions :

(1)    Resolved that Sri A. B. Datar, who was appointed as a director of the Karnataka Bank Ltd. at the sixty-seventh annual general meeting of the bank be and is hereby removed from the office of director of the Karnataka Bank Ltd.

(2)    Resolved that Sri Ravishankar Adiga, who was last appointed as a director of the Karnataka Bank Ltd. at the sixty-sixth annual general meeting of the bank be and is hereby removed from the office of director of the Karnataka Bank Ltd.

(3)    Resolved that Sri H.N. Rao, who was last appointed as a director of the Karnataka Bank Ltd. at the sixty-seventh annual general meeting, be and is hereby removed from the office of director of the Karnataka Bank Ltd."

Sri K. Krishna Holla, another shareholder, gave similar notice dated October 13, 1992, notifying his intention to move similar resolutions under section 284 of the Companies Act, 1956, at the sixty-eighth annual general meeting of the bank for the removal of the directors (1) Sri A.B. Datar, (2) Sri H.N. Rao and (3) Dr. Ravishankar Adiga. The bank notified the concerned directors of the notices received from Sri B. Narayana Somayaji and Sri K. Krishna Holla of their intention to move the resolutions in the sixty-eighth annual general meeting to be held on October 29, 1992, for removal of the named directors in compliance with section 284(3) of the Act of 1956. Since the notices calling the annual general meeting had already been issued by the bank between September 25, 1992, and October 3, 1992, the bank issued notice dated October 21, 1992, in the English daily newspaper Indian Express pursuant to sub-section (2) of section 190 of the Companies Act, 1956, about the notice in writing under section 190 of the Companies Act from Sri B. Narayana Somayaji and Sri Krishna Holla of their intention to move the resolutions for removal of the directors, Sri A.B. Datar, Sri Ravishankar Adiga and Sri H.N. Rao. A similar publication was issued in the Kannada daily Udayavani dated October 19, 1992. After these notices were issued, three suits came to be filed against the bank. Original Suit No. 6835 of 1992 has been filed by Sri A.B. Datar against the Karnataka Bank Ltd., and two shareholders, Sri B. Narayana Somayaji and Sri Krishna Holla, who had issued notices of their intention to move the resolutions for the removal of Sri Datar and two other directors for the reliefs of (1) declaration that the general meeting notice dated September 16, 1992, of the first defendant-company and the special notice under section 284 issued by the second defendant on October 3, 1992, and the special notice issued by the third defendant under section 284 served on October 19, 1992, are bad in law and void ab initio, (2) permanent injunction restraining the first defendant from conducting the annual general meeting on October 29, 1992, in pursuance of the notices for general meeting dated September 16, 1992, and (3) restraining the first defendant from allowing to move the resolutions proposed to be moved by the special notices of defendants Nos. 2 and 3, and (4) permanent injunction against defendants Nos. 2 and 3 from moving the resolutions as per the special notices issued by them dated October 3, 1992, and another notice received on October 19, 1992, as published in the Udayavani on October 19, 1992, respectively.

Original Suit No. 6843 of 1992 is a suit filed by Dr. K. Ravishankar Adiga, another director of the bank, for reliefs in terms identical to those found in the suit filed by Sri A.B. Datar. Another suit filed in this behalf is by one of the shareholders, namely, Sri B.R. Shetty. in Original Suit No. 6840 of 1992, for the reliefs of permanent injunction restraining the defendants from conducting the annual general meeting by virtue of notice dated September 16, 1992, and also restraining defendants Nos. 2 and 3 from moving the resolution and restraining the first defendant from passing the resolution by virtue of the special notices dated October 3, 1992, issued by the second defendant and October 13, 1992, issued by the third defendant for removing the directors, Sri A.B. Datar, Dr. Ravishankar Adiga, and H.N. Rao from the directorship. The allegations in all these suits are similar and identical. The material averments found in the plaint in Original Suit No. 6835 of 1992 by Sri A.B. Datar, the plaintiff, are as under :

The chairman-cum-managing director of the bank at the instigation of some other shareholders has been working detrimental to the interest of the bank and the shareholders at large. The bank has advanced loans of over crores of rupees to Fair Growth Company without taking proper security. The plaintiff and other directors objected in the board of directors meeting and one of the directors intimated the same to the Reserve Bank as well. Certain powers of the chairman-cum-managing director were removed by the board of directors. Subsequently, those powers were restored on the advice of the Reserve Bank. Thus, being aggrieved, the chairman-cum-managing director has set up defendants Nos. 2 and 3 to issue notices to move the resolutions for removing the plaintiff and two others from the directorship. The plaintiff and others are working in the best interests of the institution. The board of directors met on September 16, 1992, and in the meeting at item No. 64, a resolution was moved to increase the number of directors by taking three more directors. This resolution required to be confirmed in the next meeting of the board of directors and only after confirmation it would become a resolution. In the next meeting of the board of directors held on October 3, 1992, three directors dissented from the resolution and only two directors agreed for its confirmation. But the chairman-cum-managing director made it appear that the resolution was confirmed. Thus, the resolution though not confirmed was made to appear that it was confirmed. As the resolution is not confirmed by the board of directors, the bank has no right to incorporate the same in the general meeting and the notice issued is illegal and not in accordance with company law and the first defendant-company has no right to hold a general meeting on October 29, 1992. The special notices issued by defendants Nos. 2 and 3 under section 284 were not moved before issuing notices for general meeting to enable the bank to incorporate the same in the notice of the general meeting. After collecting the proxies from various shareholders giving them various hopes including sanctioning of loans to them through the branch managers, the chairman-cum-managing director set up defendants Nos. 2 and 3 to issue notices to move the resolutions stated above. The first defendant purposely did not send the notices to the individual shareholders and only published the notice in Udayavani newspaper even though there was sufficient time to send the notice to all the shareholders as contemplated under section 190(2) of the Act of 1956. The special notice itself is not in accordance with law and there is no notice of 14 clear days as contemplated under section 190 of the Companies Act. The notice is, therefore, invalid. The publication of notices in Udayavani is not sufficient publication and it is not proper. The circulation of Udayavani is limited to Udupi and some parts of Mangalore only and the shareholders are scattered all over India and abroad. The publication in Udayavani newspaper is made in bad faith with dishonest intention. Section 188 of the Companies Act lays down that a resolution cannot be moved by an individual. On the contrary, a resolution should be moved by the members with representation of not less than one-twentieth of the total voting power and not less than 100 members having the right aforesaid and holding shares of company on which there has been paid-up an aggregate sum of not less than one crore of rupees in all. Admittedly both the notices were issued by one of the shareholders and there is no compliance with section 188 of the Companies Act. Under section 190 of the Companies Act, notice to move the resolution cannot be given by one individual and it must be given as contemplated under section 188. The notice is, therefore, illegal. Under section 284 of the Companies Act, when a special notice is issued the reasons for removing the directors should be mentioned and an opportunity should be given to the directors to explain. Admittedly, in the notice, no explanation is given and no reasons are assigned. The notice is defective and, therefore, no resolution can be passed. Notice of the general meeting is not issued as contemplated under sections 165 and 166 of the Companies Act. Hence, the general meeting cannot be held as the provision is mandatory.

The averments in the plaints in the two other suits are identical to those referred to above. With similar grounds, applications for interim injunction under Order 39, rules 1 and 2 read with section 151 of the Code of Civil Procedure were made in each of the suits. In those applications it is contended that the balance of convenience is in favour of the plaintiff-applicant and that irreparable injury would be caused in the event of refusal to grant injunction. These applications are opposed by filing the objections and counter-affidavits on behalf of the bank.

One Sri N. Ranganath, the Assistant General Manager, Bangalore Region of the first defendant bank, filed the affidavit by way of objections to I.A.I filed by the plaintiff-applicant. He has stated in the affidavit as follows:

The relief sought in the application is misconceived and the application is vexatious, groundless, untenable and is liable to be rejected. There is inordinate delay in approaching the court. The applicant was notified on October 3, 1992, that the first defendant had received a special notice from defendant No. 2 to the effect that a resolution would be moved at the annual general meeting to be held on October 29, 1992, to remove him from the office of director of the bank under section 284 of the Companies Act. A similar notice was received by the bank on October 13, 1992, and it was communicated to the plaintiff by registered post on October 15, 1992. The applicant has filed the suit on October 27, 1992, after a delay of 23 days without any proper explanation. The allegations have been levelled against the chairman of the first defendant-bank without making him a party to the suit and these allegations are untenable and false and are meant to prejudice the mind of the court. The proposal of the two members to move the resolutions to remove the directors is legal. The well-settled principle of corporate management is the existence of corporate democracy, vesting in the members of the company, the power to appoint or remove a director from his office. The plaintiff by his proposed action is attempting to subvert the process recognised by law by seeking the relief of injunction. Section 188 of the Companies Act does not apply to cases of removal of directors under section 284 of the Companies Act. Section 284 does not refer to section 188. The object of section 284 is to enable the exercise of the right by any member to move a resolution for the removal of any director and such a right is not circumscribed by the provisions of section 188 of the Companies Act.

There is no provision in the articles of association of the first defendant bank or in the Companies Act requiring the minutes to be confirmed before they are acted upon. Implementation of the decisions of the board of directors cannot be deferred till the minutes are confirmed at a subsequent meeting. Confirmation of minutes is only to ensure correctness of the recording of the minutes. The notice of the meeting for the annual general meeting has been issued in accordance with the decision of the board of directors and there is no illegality in the same. At the board meeting held on September 16, 1992, the board of directors approved all the items on the agenda including the proposal to increase the strength of the board of directors. The only dissent at the meeting was recorded by the plaintiff. According to the provisions of section 195 of the Companies Act, the minutes of the meeting of the board of directors shall be presumed valid and that the meeting was to be duly called and held and all decisions taken shall be deemed to be valid. Therefore, the inclusion of item 8 in the agenda of the meeting notice dated September 16, 1992, is legal and valid. The allegation that the chairman had manipulated the documents and made false statement in the notice of the meeting is false.

Under section 190 (2) of the Companies Act immediately after the company receives a notice of the intention to move a resolution, it shall give notice of the resolution to the members of the company in the manner notice of meetings is normally given or if that is not practicable, notice shall be given by advertisement in a newspaper having appropriate circulation not less than seven days before the meeting. It was impracticable to give individual notices of the special notice to all the members in the instant case and, therefore, the first defendant bank got published an advertisement in Udayavani, a Kannada daily of Manipal, dated October 19, 1992, and one issue of Indian Express dated October 21, 1992. The Udayavani newspaper has a wide circulation in the whole of Karnataka and particularly in Dakshina Kannada where the registered office of the first defendant-bank is situated. Therefore, the contentions relating to the legality of the same have no substance. On the question of balance of convenience, the order of injunction will seriously and prejudicially affect the first defendant bank. The first defendant-bank has over 26,000 shareholders and for convening a general body meeting, it has to spend over Rs. 1 lakh. The shareholders come from different places and all the preparations for holding the meeting on October 29, 1992, have been completed. The plaintiff-applicant, though notified of the resolution as long ago as October 3, 1992, took no action till October 27, 1992. The balance of convenience lies in favour of the defendants as the delay has not been explained properly in filing the suit. The plaintiff will not suffer any irreparable injury and the decision to remove or not to remove ultimately rests with the members of the bank and the status of the applicant-plaintiff has no relevance so far as the position of the director of the company is concerned. The allegations made against the chairman-cum-managing director with regard to lending of Rs. 1 crore without proper security is denied as false. A substantial portion of the amount advanced to Fairgrowth with the approval of the board of directors is stated to have been already recovered. The grant of credit facility to FFSL was approved by the board of directors of the bank on April 9, 1992, with the plaintiff concurring in the decision. It is, therefore, submitted that he cannot object to that decision. The allegation with regard to setting up of defendants Nos. 2 and 3 by the chairman is denied as false. It is also contended that in law, it is not necessary for a member to disclose any reasons for the removal of a director and, therefore, the notices are contended to be in accordance with law. The allegation of manipulation of documents by the chairman is stated to be false. The applicant has not stated that irreparable injury would be caused to him and he is, therefore, not entitled to the relief of injunction.

Subsequently, the chairman-cum-managing director of the appellant, Sri H.M. Ramarao, has filed his affidavit stating that on his instruction Sri R. Ranganath, Assistant General Manager, Bangalore Region of the bank, had filed his objections and counter-affidavit. Sri Rama Rao denied the allegations of instigation to shareholders to give notices under section 284 of the Companies Act for removal of the three directors, namely, Sri A.B. Datar, Dr. K. Ravishankar Adiga and Sri H.N. Rao. He also denied the allegations of advancing large sums of money to Fairgrowth Financial Services Ltd. without taking proper security. He asserted that the plaintiff had participated in the board meeting unanimously resolving to continue the existing limit of Rs. 250 lakhs granted to M/s. Fairgrowth Financial Services Ltd. He asserted that a substantial portion of the amount advanced had been recovered. He denied the manipulation of records and the minutes of the meeting alleged against him. He contended that he had no animosity against any of the directors and refuted the allegations of misuse of funds, etc., levelled against him.

As per the documents placed on record, it is to be noticed that Sri B. Narayana Somayaji, the second respondent in these appeals, had filed O.S. No. 212 of 1992 against the appellant-bank in the Court of the Civil Judge, Mangalore, and had obtained an interim injunction to consider the notice dated October 3, 1992, issued by him and to allow him to move the resolutions mentioned in the said notice at the sixty-eighth annual general meeting to be held on October 29, 1992, or consider the same in the adjourned meeting if the annual general meeting is not held on October 29, 1992. This order is passed on October 22, 1992.

The third respondent, Sri Krishna Holla, filed O.S. No. 1309 of 1992, on the file of the Principal Munsiff, Mangalore, against the present appellant and obtained an interim order directing it to transact the entire business of the sixty-eighth annual general meeting scheduled to be held on October 29, 1992, as published in the notice under section 190 of the Companies Act and the authorities concerned in strict adherence to the rules and procedure in conducting the meeting as envisaged.

One Sri M. Iyanna filed O.S. No. 204 of 1992 in the court of the Munsiff and J.M.F.C, Holenarasipur, for a permanent injunction restraining the appellant-bank from holding the sixty-eighth annual general meeting on October 29, 1992, and moved for an interim injunction. On October 28, 1992, the court observed that a notice of 21 days had not been given to the plaintiff for holding the annual general meeting on October 29, 1992, and, therefore, the learned Munsiff issued a temporary injunction preventing the appellant-bank from holding the meeting on October 29, 1992, as prayed for.

The lower court took up for consideration I.A.I. filed in Original Suit No. 6840 of 1992 filed by Sri B.R. Shetty and by the order dated October 29, 1992, held that the plaintiff therein had failed to make out a prima facie case and he had failed to prove that irreparable injury would be caused if injunction prayed for by him was refused. The balance of convenience was also not found in his favour. Accordingly the lower court dismissed the application for temporary injunction. In doing so, the lower court held that it was of the opinion that section 188 of the Companies Act did not apply to the case of removal of the directors under section 284 of the Companies Act by placing reliance on the decision in Gopal Vyas v. Sinclair Hotels and Transportation Ltd. [1990] 68 Comp Cas 516; AIR 1990 Cal 45. It also rejected other contentions raised by the plaintiff in the plaint and the application for temporary injunction. However, in the order passed on I.A.I. in O.S. No. 6835 of 1992, filed by Sri A.B. Datar, the lower court accepted all the contentions of the plaintiff (first respondent in M.F.A. No. 2385 of 1992) and found that he was able to make out a prima facie case and that he had come with clean hands and that the appellant had not come with clean hands and that irreparable injury would be caused to the plaintiff if injunction was not issued and the balance of convenience was in favour of the plaintiff. On these findings and in view of the meeting having taken place on October 29, 1992, in which resolution removing Sri A.B. Datar from the directorship had been passed, the lower court directed not to give effect to the resolution of the general body meeting held on October 29, 1992, only in respect of the removal of Sri A.B. Datar from the office of the director and appointing any other director in his place pending disposal of the suit. This order was passed on November 11, 1992. In respect of the interim application arising out of Dr. Ravishankar Adiga's suit in O.S. No. 6843 of 1992 out of which M.F.A. No. 2386 of 1992 arises, the lower court held on all the contentions raised by the plaintiff in his favour and went a step further in awarding relief to him by ordering that the appellant bank shall not give effect to the resolutions of the general body meeting held on October 29, 1992, in respect of removal of Dr. Ravishankar Adiga from the office of directorship and appointing any other director in his place and further ordering that all the directors who were on the board before October 29, 1992, should be continued as directors of the appellant-bank and preventing the bank from giving effect to the resolutions passed in the general body meeting in respect of items 8 and 9 in the agenda of the sixty-eighth annual general meeting. In passing these impugned orders in the suits filed by Sri A.B. Datar and Dr. Ravishankar Adiga, the lower court held that the provisions of section 188 of the Companies Act were applicable to the special notice in respect of the resolution for removal of the director under section 284 of the Companies Act and that Sri Narayana Somayaji and Sri Krishna Holla had not given the notices of their intention to move the resolutions before issuing the notice of the annual general meeting and that the chairman-cum-managing director had, through the branch managers, managed to secure proxies from the shareholders and there was considerable force in the allegations of mala fides levelled against the managing director and, therefore, all was not well in the case and there were serious disputes to be considered at the time of trial. The lower court also held that the appellant-bank had failed to issue individual notices to the shareholders about the proposed resolutions to remove the directors as required under section 190 of the Companies Act. The lower court opined that both Sri A.B. Datar and Dr. Ravishankar Adiga were efficient and honest directors and no reasons were given for their removal in the notices and their reputation would be affected in the event of their removal from the directorship and, therefore, the court passed the impugned orders.

On the basis of the above, learned counsel for the appellant in the two appeals submitted that the trial court was in error in passing three different orders in three different suits when the grounds made out in the plaints and the applications for interim orders in all the suits were identical and similar ; that the court heard no further arguments and there was no justification for the court to change its views from those expressed in the order dated October 29, 1992, passed in the suit filed by Sri B.R. Shetty. The orders passed by the trial court are contended to be perverse as the court failed to consider the affidavit of the chairman. The opinion of the trial court in regard to the collection of the proxies is contended to be perverse and not warranted from the material on record. It is further contended that section 284 of the Companies Act is a complete code and is not subject to the provisions of section 188 of the Companies Act and having regard to large number of shareholders numbering 26,000 and above it was not practicable to issue individual notice to all the shareholders under section 190 of the Companies Act and, therefore, the appellant rightly issued notice by publication in the newspaper under section 190(2) of the Companies Act and the observations and findings of the trial court in that behalf are stated to be incorrect. With regard to the minutes of the meeting, it is submitted that the board of directors of the appellant resolved on September 16, 1992, to increase the strength of the board from 8 to 11 and an extract of the minutes of that meeting duly signed by the chairman is maintained in accordance with the provisions of the Companies Act and there is no need to ratify those minutes in the next meeting as contended and the contention of the respondents that the decision of the board dated September 16, 1992, is not confirmed and, therefore, the inclusion of the item in the agenda is illegal is untenable. It is also contended that the findings with regard to prima facie case, balance of convenience and the resultant irreparable injury are all unsustainable. The appellant also submitted that the trial court was not right in granting the relief by restoring status quo ante as on October 29, 1992, in respect of all the members that constituted the board of directors. It was submitted that the court exceeded its jurisdiction in granting the relief in those terms as it affected persons who were not parties before it. Learned counsel for the appellant submitted that in the special notice for removal of the directors, there was no need to give reasons. Learned counsel for the appellant also submitted that for grant of an interim injunction the arguments put forth by the bank have not been properly considered by the trial court and Sri A.B. Datar and Dr. Ravishankar Adiga had failed to make out the alleged grounds and had not shown how they would sustain injury much less irreparable injury. It was submitted that corporate management is based on the democratic system and it is open to the shareholders to entrust the management of the company to the persons in whom they have confidence and it is equally open to them to remove such of the directors in whom they have no confidence. It is also submitted that a person had no right to be a director as such and Sri A.B. Datar and Dr. Ravishankar Adiga had no right to make any grievance when they were sought to be removed from the office of the directorship as per the provisions available in the Companies Act.

As against the above, it was submitted on behalf of the respondents-plaintiffs that their reputation was affected and special notice for removal of a director under section 284 of the Companies Act was subject to the provisions of section 188 of the Companies Act and, therefore, a single shareholder, without complying with the provisions of section 188 of the Companies Act, could not have issued a notice for moving a resolution to remove them. It was contended that the appellant company had committed contempt of court by holding a meeting on October 29, 1992, in breach of the injunction issued by the learned Munsiff, Holenarasipur, in the suit instituted by one Iyanna and unless that contempt was purged by the appellant-bank, there was no question of hearing the appellant and the appellant had no right of audience and right to prosecute the appeals. It was submitted that since the appellant-bank had conducted the meeting in defiance of the order of the court, it was open to the trial court to pass orders restoring the positions held by Sri A.B. Datar and Dr. Ravishankar Adiga and in such cases it is open to the court to pass orders of mandatory injunction to restore status quo ante as on the date of the breach of the order in conducting the meeting. Further, it was contended that notice for removal of a director required reasons to be given and such reasons had not been admittedly mentioned and that the appellant's notice for holding the annual general meeting on October 29, 1992, was based on the board of directors meeting held on September 16, 1992, and the minutes of that meeting had not been confirmed in the subsequent meeting and, therefore, the meeting called without such confirmation was contended to be illegal and learned counsel for the respondent-plaintiff submitted that the lower court had power to correct its own mistake and in the instant case the trial court had chosen to set right the mistake committed by it in the order passed in B.R. Shetty's suit.

Referring to the articles of association, learned counsel submitted that under article 23 the bank had to comply with the provisions of sections 165 to 167, 169, 171 to 191 and 193 of the Act in the calling and conduct of meetings and under article 28 subject to the provisions of section 188 of the Companies Act, members' resolutions shall be circulated to the members of the bank entitled to receive notice of the next annual general meeting and in view of the express provisions contained in the Companies Act in sections 188 and 190, it was contended that the special notice of the resolution for removing the directors, Sri A.B. Datar, Dr. Ravishankar Adiga, and another was not according to law and that the annual general meeting called on October 29, 1992, was also not legal and, therefore, the interim orders passed and impugned in the appeals were contended to be correct and no interference was called for by this court. It is also contended by the respondents-plaintiffs that the appellant-bank is not an aggrieved party and, therefore, it has no right of appeal and the order impugned is one passed under section 151 of the Civil Procedure Code, and, therefore, also the appeals filed by the appellant are not maintainable.

The questions for consideration are:

(1)            Whether the appellant is not the aggrieved party and whether the appeals filed by it are not maintainable as contended ?

(2)            Whether the notice of the annual general meeting to be held on October 29, 1992, issued on the basis of the decision of the board's meeting arrived at on September 16, 1992, is illegal for want of confirmation of the meeting on October 3, 1992, as contended ?

(3)            Whether the special notices issued by respondents Nos. 2 and 3 for moving the resolutions for removal of the directors, Sri A.B. Datar, Dr. Ravishankar Adiga and Sri H.N. Rao, are bad in law for non-compliance with sections 188 and 190 of the Companies Act as contended ?

(4)            Whether the finding of the lower court that the chairman-cum-managing director was motivated by mala fides in collecting the proxies is sustainable ?

(5)            Whether there was any contempt committed by the appellant-bank by holding the meeting on October 29, 1992, in breach of the injunction issued by the learned Munsiff, Holenarasipur, as contended ? If so, is not the appellant to be heard unless the appellant purges itself of the contempt as contended ?

(6)            Whether the impugned orders are illegal, perverse and unsustainable as contended ?

        (7)            What relief the appellant is entitled to ?

Point No. 1.—.It is contended on behalf of the respondents that the appellant-bank is managed by the board of directors and the bank is not concerned as to who are the members of the board of directors and, therefore, by the impugned order if Sri A.B. Datar, Dr. Ravishankar Adiga and some others are continued as directors the bank cannot be said to be aggrieved by that decision and, therefore, it has no right of appeal. It is also contended that the impugned order is one passed under section 151 of the Civil Procedure Code, and, therefore, there is no right of appeal to the appellant-bank. No doubt the respondents-plaintiffs filed the suit and sought the interim order for preventing the bank from holding the sixty-eighth annual general meeting scheduled for October 29, 1992, and for preventing the respondents, Sri Narayana Somayaji and Sri Krishna Holla, from moving the resolutions for removing the directors. Since the meeting had been held and Sri Datar and Dr. Ravishankar Adiga had been removed from the directorship, the court had passed the orders restoring them to their positions of directorship and, therefore, these orders are stated to be not appealable and the bank not being an aggrieved party is not competent to maintain the appeals. The board of directors is the executive body of the bank and the bank which consists of a large number of shareholders elects the executive body of the board of directors. The board of directors being the executive organ of the company acts on behalf of each and every shareholder constituting the corporate entity and this corporate entity as the legal person chooses such of the persons who in its wisdom deserve to carry on the management of the institution. The company is required to carry out the collective decisions of the shareholders through its chief executive who is the chairman-cum-managing director. The appeals filed by the bank through its chairman-cum-managing director to effectively bring into execution the resolutions passed by the company in its annual general meeting are maintainable. The orders impugned are passed on the applications filed under Order 39, rules 1 and 2 of the Civil Procedure Code, and such orders are appealable as per the provisions contained in Order 43, rule 1(r) of the Civil Procedure Code. There is no scope for splitting the orders passed on the applications under Order 39, rules 1 and 2 of the Civil Procedure Code, filed in the suits of Sri A.B. Datar and Sri Ravishankar Adiga. The impugned orders are to be read as integral orders and the remedy sought for by preferring the appeal under the provisions of Order 43, rule 1(r) of the Civil Procedure Code, cannot be said to be unavailable as contended. The appellant-bank is aggrieved in the sense that it is not being allowed to give effect to the resolutions passed by the whole body of the shareholders constituting it. It is undisputed that the general body is the supreme authority in the company and the company is democratic in its set up and the will of the majority of the members will have to prevail. It is for these reasons that the company is an aggrieved party and the appeals filed by it are maintainable.

Point No. 2.—The first and foremost contention put forth on behalf of the respondents is that the minutes of the meeting of the board of directors held on September 16, 1992, had not been confirmed in the meeting held on October 3, 1992, and that, therefore, the notice calling the annual general meeting to be held on October 29, 1992, issued on the basis of unconfirmed minutes is illegal. Section 166 of the Companies Act provides for holding an annual general meeting. Section 172(1) of the Companies Act states that every notice of a meeting of a company shall specify the place and the day and hour of the meeting, and shall contain a statement of the business to be transacted thereat. Under section 171(1) of the Companies Act a general meeting of a company may be called by giving not less than twenty-one days' notice in writing. Section 173(1)(a) states that for the purposes of that section 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. Section 190(1) of the Companies Act states that where, by any provision contained in the Companies Act or in the articles, special notice is required of any resolution, notice of the intention to move the resolution shall be given to the company not less than 14 days before the meeting at which it is to be moved, exclusive of the day on which the notice is served or deemed to be served and the day of the meeting. Section 188 deals with circulation of members' resolutions. No provision of the Companies Act requiring confirmation of the decisions of the previous meeting is brought to the notice of the court. In the instant case, according to the decision of the board of directors held on September 16, 1992, the annual general meeting of the company was sought to be called on October 29, 1992, and in that meeting item No. 8 for raising the strength of the directors from 8 to 11 in pursuance of section 258 of the Companies Act was proposed to be moved as an ordinary resolution. The notice calling the annual general meeting issued to the members is dated September 16, 1992, and it is the contention of the respondents-plaintiffs that this resolution was not confirmed in the meeting of the directors held on October 3, 1992. The affidavit of the chairman-cum-managing director discloses that there was such confirmation. This has been lost sight of by the trial court. According to the affidavit of Sri Rama Rao, the chairman at the meeting held on October 3, 1992, the only director who dissented for the confirmation of the minutes was Sri A.B. Datar and all the remaining directors who attended the meeting voted in favour of the confirmation of the minutes. Sections 193, 194 and 195 of the Companies Act deal with the minutes of meetings. Section 193 requires that every company shall cause minutes of all proceedings of every general meeting and of all proceedings of every meeting of its board of directors or of every committee of the board, to be kept by making within 30 days of the conclusion of every such meeting concerned, entries thereof in books kept for that purpose with their pages consecutively numbered. Section 194 states that minutes of meetings kept in accordance with the provisions of section 193 shall be evidence of the proceedings recorded therein. Section 195 deals with the presumptions available in respect of the minutes duly drawn. Nowhere do these provisions require confirmation of the proceedings of the earlier meeting in subsequent meeting. On page 83 in Shackleton on the Law and Practice of Meetings, 7th Edition, by Ian Shearman, it is noted as under:

"Decisions once arrived at do not need confirmation. —At a vestry meeting it was the usual procedure to read over at the next meeting the resolutions of the preceding one. At the second of two meetings there was considerable diversity of opinion as to the votes admitted at the first meeting, but judgment was to the effect that there was no necessity for the confirmation by the second vestry of what was legally done at the first. If the first was a legal vestry the election thereat was legal.

However, confirmation of the minutes as an accurate record of the decisions made at the previous meeting is usually obtained by submitting them to the chairman of the next meeting for signature. If they have not been previously circulated he will ask the secretary to read them, and, if the meeting confirms (usually on a show of hands) that they are a correct record, he will sign them. If they have previously been circulated, he will sign them without their being read out if the meeting so agrees.

The chairman who signs the minutes at the next meeting need not necessarily have been present at the meeting of which the minutes are a record. His action in signing them is merely to record that they are a correct record of the business transacted."

It is, therefore, apparent that the confirmation of the minutes reflects an accurate record of the decisions made at the previous meeting and there is no law requiring confirmation of the same in the subsequent meeting. In that view the contention of the respondents that the notice issued without confirmation of the minutes of the meeting held on September 16, 1992, is bad in law is not sustainable.

Point No. 3. -Another contention raised on behalf of respondents Nos. 2 and 3 is that the notice of the intention to move the resolution for removing Sri A.B. Datar and others from directorship was issued by Sri B. Narayana Somayaji on October 3, 1992, and on the same day notice thereof was given to Sri A.B. Datar but the appellant-company did not issue notice of the said resolution to all the shareholders even though there was considerable time available to the company. Similar notice dated October 13, 1992, proposing resolution for the removal of Sri A.B. Datar and others dated October 13, 1992, issued by Sri Krishna Holla was received by the bank and the notice thereof was given to Sri A.B. Datar and Dr. Ravishankar Adiga and another intimating them about the notice under section 284 of the Companies Act, 1956. It is the contention of the plaintiffs-respondents that the appellant-bank should have issued individual notices giving intimation of the special notices under section 284 of the Companies Act, 1956, and the appellant was waiting for the second notice from Sri Krishna Holla and without assigning any reasons, it issued paper publication to show compliance with section 190(2) of the Companies Act. It is contended that reasons are not given for issuing the paper publication of the special notices by the shareholders, Sri B. Narayana Somayaji and Sri Krishna Holla. It is also contended that these notices issued under section 284 of the Companies Act are not in compliance with section 188 of the Companies Act and, therefore, the proposed resolutions are bad in law. It is also contended that the reasons for removal of the directors which are required to be mentioned in the notice are not mentioned and, therefore, the notices issued in that behalf are stated to be bad. In this behalf, learned counsel for the respondents has relied on Balwant Singh Sethi v. Sardar Zorawarsingh Hushnah Singh Anand [1988] 63 Comp Cas 310 (Bom) and Jawahar Mills Ltd. v. Sha Mulchand and Co. Ltd. [1949] 19 Comp Cas 138 ; AIR 1951 Mad 572, to contend that shortness of notice vitiates the notice. In Jawahar Mills' case [1949] 19 Comp Cas 138 (Mad) the irregularity of the shortness of notice under article 25 was held to result in making the forfeiture voidable at the instance of the shareholder. In Balwant Singh's case [1988] 63 Comp Cas 310 (Bom), the court considered section 53(2)(b)(i) of the Companies Act in respect of notice of a meeting deemed to be served at the expiration of forty-eight hours after the posting of the letter of notice and held that where notices for a meeting to be held on September 21, 1987, were posted on August 31, 1987, and September 1, 1987, they could be deemed to have been received on September 2, and 3, 1987, respectively, and the members, therefore, could not be held to have had twenty-one days' clear notice of the meeting. In the instant case special notices issued by Sri B. Narayana Somayaji and Sri Krishna Holla were published in Udayavani, a Kannada newspaper, dated October 19, 1992, and the Indian Express issue, dated October 21, 1992. Under section 190(2) of the Companies Act, the company shall, immediately after the notice of the intention to move any such resolution as referred to in section 190(1) has been received by it, give its members notice of the resolution in the same manner as it gives notice of the meeting or if that is not practicable, shall give them notice thereof either by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the articles, not less than seven days before the meeting. Under this provision, seven days' notice is necessary. The meeting was to be held on October 29, 1992. Notice published in the newspaper dated October 19, 1992, or October 21, 1992, clearly gives notice of more than seven days when the meeting is to be held on October 29, 1992. In that view, it cannot be said that the notice given by an advertisement in a newspaper was short notice.

The contention of the plaintiffs-respondents is that no explanation is given as to how it was not possible to give notice by sending individual notices in the manner notices of annual general meeting dated September 16, 1992, were issued. The explanation is available in the counter-affidavit filed on behalf of the appellant-bank. Therein it is stated that the number of shareholders of the appellant-bank is more than 26,000 and notices of the sixty-eighth annual general meeting to be held on October 29, 1992, to the shareholders had been despatched between September 25, 1992, and October 3, 1992 (both days inclusive). It is also stated in the affidavit that for sending such notices expenditure would exceed rupees one lakh and above. It is further to be remembered that when a special notice under section 284 is issued under sub-section (3) thereof, on receipt of notice of a resolution to remove a director, the company shall forthwith send a copy thereof to the director concerned and the director shall be entitled to be heard on the resolution at the meeting. Under sub-section (4) of section 284 where notice is given of a resolution to remove a director and the director concerned makes with respect thereto representations in writing to the company and requests their notification to members of the company, the company shall send a copy of the representations to every member of the company to whom notice of the meeting is sent. Therefore, under this provision after issuing notice to the concerned director, the company shall have to wait for a reasonable time awaiting his representation if any under sub-section (4) and if he makes such a representation, the same will have to be circulated to all the members. Therefore, the conclusion of the lower court that it had more than 23 days after receipt of notice dated October 3, 1992, from Sri B. Narayana Somayaji to issue notices individually to members and had kept quiet without taking any action and that it was awaiting a second notice from Sri Krishna Holla is without any basis. The inference drawn in this behalf prima facie does not appear to be justifiable. These are the practical difficulties obvious from the affidavit filed on behalf of the appellant-bank to justify circulation by advertisement in the newspaper of the notices of respondents Nos. 2 and 3 for removal of the directors under section 284 of the Companies Act.

The appellant contended that section 284 of the Companies Act, 1956, is a self-contained code and an individual shareholder can issue a notice thereunder intimating his intention to move a resolution for removal of a director and it is open to a shareholder to take advantage of the provisions in section 284 in a meeting called by the company itself and as such the resolution to be moved for the removal of directors under section 284 of the Companies Act is not subject to the provisions of section 188 of the Companies Act. In this behalf the lower court in the order passed in Sri B.R. Shetty's suit in O.S. No. 6840 of 1992 held that section 284 of the Companies Act is not subject to sections 188 and 190 of the Act whereas in the other two suits out of which the present appeals have come up before this court it held that section 188 applied to notices issued under section 284 of the Companies Act and accordingly held that the notices issued in the present appeals were not valid. Learned counsel for the respondents justified this finding by referring to the articles of association and the decision in Pedley v. Inland Waterways Association Limited [1977] 1 All ER 209 (Ch D). No doubt this decision supports the contention of the respondents-plaintiffs. The procedure for removal of a director has been specially provided in the Companies Act, 1956, in section 284. In Gopal Vyas v. Sinclair Hotels and Transportation Ltd. [1990] 68 Comp Cas 516 ; AIR 1990 Cal 45, a Division Bench of the Calcutta High Court has held as under (at page 524 of 68 Comp Cas):

"The procedure for removal of a director has been specially provided in our Companies Act."

Dealing with the decision in Pedley's case [1977] 1 All ER 209 (ChD), the learned editors in the twenty-fourth edition at page 841 in paragraph under "Special notice" in Palmer's Company Law observed as under :

"Special notice.—The decision in Pedley v. Inland Waterways Association Ltd. [1977] 1 All ER 209 (Ch D) presents some practical problems. The most widely encountered of the resolutions requiring special notice is a resolution for the reappointment of an over-age director (section 293 (5)). Special notice of the resolution is invariably given by another director in his capacity as a member and the resolution is included in the notice of meeting, although the director giving the notice may derive no right from the articles or section 376 to have his resolution included in the agenda of the meeting. If special notice of the resolution had been given by another member (not being a director) and the proposed reappointment was not supported by the directors, they might refuse, on the basis of the decision, to include the resolution in the agenda, thereby depriving the company in general meeting from voting on the resolution. Similar considerations could apply in relation to other resolutions requiring special notice."

In Guide to the Companies Act by A. Ramaiya, 12th Edition, 1992, at page 835, it is observed as under :

"Scope of section.—The section deals with members' resolutions intended to be moved at an annual general meeting or at any other meeting, after circulation to members in each case, of the text of the proposed resolution with explanatory statement, if any, not exceeding one thousand words, in respect of the resolution or other business. It may be noted that it does not in any way affect the right of members to move any resolutions at an annual general meeting or other meeting which can properly be moved at such meeting.

The object of the section is to confer on shareholders an important right to give, through the company machinery, publicity among all the members of the company for resolutions which they intend to propose or for statements which they want to make at the annual general meeting.

Unless one or more shareholders satisfy the requirements of subsection (2) they have no right to move any resolution, ordinary or special, at an annual general meeting or at any extraordinary general meeting or insist on the company including such resolution in the agenda for the meeting, Pedley v. Inland Waterways Association Ltd. [1977] 1 All ER 209; [1978] Tax LR 2218 (Ch D). According to this decision, resolutions requiring special notice under section 190 (English section 142) must also comply with the requirements of section 188 (English section 140). But it has been held distinguishing this case in Gopal Vyas v. Sinclair Hotels and Transportation Ltd. [1990] 68 Comp Cas 516 ; [1990] 1 Comp LJ 388, 394; AIR 1990 Cal 45, that in view of the clear cut provision in sections 257 and 284 enabling a shareholder to inform the company by special notice of his intention to propose a candidate for appointment to directorship or removal of a director from office, these enabling provisions cannot be whittled down by the requirements of section 188 about the circulation of members' resolutions."

Having regard to the opinion of the learned authors of Palmer's Company Law, 24th Edition, subjecting special notice under section 284 of the Companies Act for removal of a director to the provisions of section 188 would result in great hardships. Section 284 which provides for removal of a director contains nothing to indicate that it is subject to section 188 of the Companies Act.

Section 188 provides for circulation of members' resolution and it reads as under:

"188. (1) Subject to the provisions of this section, a company shall, on the requisition in writing of such number of members as is hereinafter specified and (unless the company otherwise resolves) at the expense of the requisitionists,—

(a)    give to members of the company entitled to receive notice of the next annual general meeting, notice of any resolution which may properly be moved and is intended to be moved at that meeting ;

(b)    circulate to members entitled to have notice of any general meeting sent to them, any statement of not more than one thousand words with respect to the matter referred to in any proposed resolution, or any business to be dealt with at that meeting.

(2) The number of members necessary for a requisition under sub-section (1) shall be—

(a)    such number of members as represent not less than one-twentieth of the total voting power of all the members having at the date of the requisition a right to vote on the resolution or business to which the requisition relates ; or

(b)    not less than one hundred members having the right aforesaid and holding shares in the company on which there has been paid up an aggregate sum of not less than one lakh of rupees in all.

(3) Notice of any such resolution shall be given, and any such statement shall be circulated to members of the company entitled to have notice of the meeting sent to them, by serving a copy of the resolution or statement on each member in any manner permitted for service of notice of the meeting ; and notice of any such resolution shall be given to any other member of the company by giving notice of the general effect of the resolution in any manner permitted for giving him notice of meetings of the company:

Provided that the copy shall be served, or notice of the effect of the resolution shall be given, as the case may be, in the same manner and, so far as practicable, at the same time as notice of the meeting, and where it is not practicable for it to be served or given at that time, it shall be served or given as soon as practicable thereafter.

(4) A company shall not be bound under this section to give notice of any resolution or to circulate any statement unless—

(a)    a copy of the requisition signed by the requisitionist (or two or more copies which between them contain the signatures of all the requisitionists) is deposited at the registered office of the company—

(i)         in the case of a requisition requiring notice of a resolution, not less than six weeks before the meeting ;

(ii)        in the case of any other requisition, not less than two weeks before the meeting ; and

(b)    there is deposited or tendered with the requisition a sum reasonably sufficient to meet the company's expenses in giving effect thereto :

                Provided that if, after a copy of a requisition requiring notice of a resolution has been deposited at the registered office of the company, an annual general meeting is called for a date six weeks or less after the copy has been deposited, the copy, although not deposited within the time required by this sub-section, shall be deemed to have been properly deposited for the purposes thereof.

(5) The company shall also not be bound under this section to circulate any statement if, on the application either of the company or of any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter ; and the court may order the company's cost on an application under this section to be paid in whole or in part by the requisitionist, notwithstanding that they are not parties to the application.

(6) A banking company shall not be bound to circulate any statement under this section, if, in the opinion of its board of directors, the circulation will injure the interests of the company.

(7) Notwithstanding anything in the company's articles, the business which may be dealt with at an annual general meeting shall include any resolution of which notice is given in accordance with this section, and for the purposes of this sub-section, notice shall be deemed to have been so given, notwithstanding the accidental omission, in giving it, of one or more members.

(8) If default is made in complying with the provisions of this section, every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees."

Section 284 which deals with removal of directors reads as under:

"284. (1) A company may, by ordinary resolution, remove a director (not being a director appointed by the Central Government in pursuance of section 408) before the expiry of his period of office:

Provided that this sub-section shall not, in the case of a private company, authorise the removal of a director holding office for life on the 1st day of April, 1952, whether or not he is subject to retirement under an age limit by virtue of the articles or otherwise:

Provided further that nothing contained in this sub-section shall apply where the company has availed itself of the option given to it under section 265 to appoint not less than two-thirds of the total number of directors according to the principle of proportional representation.

(2) Special notice shall be required of any resolution to remove a director under this section, or to appoint somebody instead of a director so removed at the meeting at which he is removed.

(3) On receipt of a notice of resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director (whether or not he is a member of the company) shall be entitled to be heard on the resolution at the meeting.

(4) Where notice is given of a resolution to remove a director under this section and the director concerned makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so,—

(a)    in any notice of the resolution given to members of the company state the fact of the representations having been made ; and

(b)    send a copy of the representations to every member of the company to whom notice of the meeting is sent (whether before or after receipt of the representations by the company) :

                and if a copy of the representations is not sent as aforesaid because they were received too late or because of the company's default, the director may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting:

                Provided that copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this subsection are being abused to secure needless publicity for defamatory matter; and the court may order the company's costs on the application to be paid in whole or in part by the director notwithstanding that he is not a party to it.

(5) A vacancy created by the removal of a director under this section may, if he had been appointed by the company in general meeting or by the board in pursuance of section 262, be filled by the appointment of another director in his stead by the meeting at which he is removed, provided special notice of the intended appointment has been given under sub-section (2).

A director so appointed shall hold office until the date up to which his predecessor would have held office if he had not been removed as aforesaid.

(6) If the vacancy is not filled under sub-section (5), it may be filled as a casual vacancy in accordance with the provisions, so far as they may be applicable, of section 262, and all the provisions of that section shall apply accordingly:

Provided that the director who was removed from office shall not be reappointed as a director by the board of directors.

(7) Nothing in this section shall be taken—

(a)    as depriving a person removed thereunder of any compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director ; or

(b)    as derogating from any power to remove a director which may exist apart from this section."

A comparative view of the two sections shows that section 284 is an independent provision providing for removal of directors and it is available for any shareholder for moving a resolution for removal of a director in meetings called by the company and there is nothing to insist on compliance with the provisions in section 188(2) to call a meeting to move a resolution as urged. Therefore, prima facie the view of the law to be taken having regard to the provisions of the two sections would be to hold that section 284 of the Companies Act is not subject to section 188 of the Companies Act and it is independent of that section. The same view is also taken in Gopal Vyas' case [1990] 68 Comp Cas 516 ; AIR 1990 Cal 45. Section 9 of the Companies Act provides that the provisions of the Act shall have an overriding effect on the memorandum or articles of a company. Therefore, despite the submission that the articles of the appellant-company make section 188 of the Companies Act applicable to circulation of members' resolutions prima facie, the finding recorded by the trial court with regard to non-applicability of section 188 to the special notice under section 284 of the Companies Act in B. R. Shetty's case appears to be the proper view to be taken in these cases.

In Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 568 ; AIR 1986 SC 1370, in paragraphs 95, 99 and 100, the Supreme Court has observed as under (at pages 631, 635) :

"A company is, in some respects, an institution like a State functioning under its 'basic Constitution' consisting of the Companies Act and memorandum of association. Carrying the analogy of constitutional law a little further, Gower describes 'the members in general meeting' and the directorate as the two primary organs of a company and compares them with the legislative and the executive organs of a Parliamentary democracy where legislative sovereignty rests with Parliament while administration is left to the Executive Government, subject to a measure of control by Parliament through its power to force a change of Government. Like the Government, the directors will be answerable to 'Parliament' constituted by the general meeting. But in practice (again like the Government) they will exercise as much control over the Parliament as that exercises over them. Although it would be constitutionally possible for the company in general meeting to exercise all the powers of the company, it clearly would not be practicable (except in the case of one-or two-man companies) for day to day administration to be undertaken by such a cumbersome piece of machinery. So the modern practice is to confer on the directors the right to exercise all the company's powers except such as the general law expressly provides must be exercised in general meeting. (Gower's Principles of Modern Company Law). Of course, powers which are strictly legislative are not affected by the conferment of powers on the directors as section 31 of the Companies Act provides that an alteration of an article would require a special resolution of the company in general meeting. But a perusal of the provisions of the Companies Act itself makes it clear that in many ways the position of the directorate vis-a-vis the company is more powerful than that of the Government visa-vis Parliament. The strict theory of Parliamentary sovereignty would not apply by analogy to a company since under the Companies Act, there are many powers exercisable by the directors with which the members in general meeting cannot interfere. The most they can do is to dismiss the directorate and appoint others in their place, or alter the articles so as to restrict the powers of the directors for the future. Gower himself recognises that the analogy of the Legislature and the executive in relation to the members in general meeting and the directors of a company is an over-simplification and states 'to some extent a more exact analogy would be the division of powers between the Federal and the State Legislature under a Federal Constitution.' As already noticed, the only effective way the members in general meeting can exercise their control over the Directorate in a democratic manner is to alter the articles so as to restrict the powers of the directors for the future or to dismiss the Directorate and appoint others in their place. The holders of the majority of the stock of a corporation have the power to appoint, by election, directors of their choice and the power to regulate them by a resolution for their removal. And, an injunction cannot be granted to restrain the holding of a general meeting to remove a director and appoint another.

Again in Bentley-Stevens v. Jones [1974] 2 All ER 653 (HL), it was held that a shareholder had a statutory right to move a resolution to remove a director and that the court was not entitled to grant an injunction restraining him from calling a meeting to consider such a resolution. A proper remedy of the director was to apply for a winding-up order on the ground that it was 'just and equitable' for the court to make such an order. The case of Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL) was explained as a case where a winding-up order was sought. In the case of Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL), the absolute right of the general meeting to remove the directors was recognised and it was pointed out that it would be open to the director sought to be removed to ask the company court for an order for winding-up on the ground that it would be 'just and equitable' to do so. The House of Lords said (at page 500 of [1972] 2 All ER);

'My Lords, this is an expulsion case, and I must briefly justify the application in such case of the just and equitable clause ... The law of companies recognises the right in many ways, to remove a director from the board. Section 194 of the Companies Act, 1948, confers this right on the company in general meeting whatever the articles may say. Some articles may prescribe other methods, for example, a governing director may have the power to remove (cf Wondoflex Textiles Pty. Ltd., In re [1951] VLR 758). And quite apart from removal powers, there are normally provisions for retirement of directors by rotation so that their re-election can be opposed and defeated by a majority, or even by a casting vote. In all these ways a particular director-member, may find himself no longer a director, through removal, or non-re-election : this situation he must normally accept, unless he undertakes the burden of proving fraud or mala fides. The just and equitable provision nevertheless comes to his assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that if broken, the conclusion must be that the association must be dissolved.'

Thus, we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting including, in particular, the nature of the concern or the interest, if any, therein, of every director, the managing agent if any, the secretaries and treasurers if any, and the manager, if any. This is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Life Insurance Corporation of India, as a shareholder of Escorts Limited, has the same right as every shareholder to call an extraordinary general meeting of the company for the purpose of moving a resolution to remove some directors and appoint others in their place. The Life Insurance Corporation of India cannot be restrained from doing so nor is it bound to disclose its reasons for moving the resolutions."

Learned counsel for the respondents relied on the decision in Ruttonjee and Co. Ltd., In re, AIR 1969 Cal 550, and submitted that the director sought to be removed should be given reasonable opportunity to make reports against the proposal for his removal and that the director should be notified of the reasons for removal. The contention is answered effectively by the observations of the Supreme Court in Escorts' case [1986] 59 Comp Cas 568 extracted above and the law stated therein makes it clear that the law of companies recognises the right in many ways to remove a director from the board and there is no need to give reasons in the resolutions proposed for removal of a director. The shareholder or any person has no right to be a director. If the majority of the shareholders elects to entrust the directorship to a person, he may accept and execute that office. But one cannot claim such an office as of right and therefore it is not open to any person to prevent the company holding a meeting and passing a resolution for removal of a director.

Point No. 4.—The next ground made out by the respondents-plaintiffs was that after the notice dated September 16, 1992, calling the annual general meeting on October 29, 1992, was issued, the chairman-cum-managing director set up present respondents Nos. 2 and 3 to issue special notices dated October 3, 1992, and October 13, 1992, proposing to move the resolutions as ordinary resolutions under section 284 of the Companies Act, 1956, for removal of the directors, Sri A.B. Datar, Dr. Ravishankar Adiga and Sri H.N. Rao. It is contended that the chairman-cum-managing director through the branch managers made promises of granting loans and collected proxies from shareholders and thereafter got these respondents Nos. 2 and 3 to issue such special notices for removal of the directors and if the shareholders had knowledge of such resolutions to be moved in the annual general meeting for removal of the honest and efficient directors, they would not have issued proxies and therefore the action of the chairman-cum-managing director suffers from mala fides and bad faith. The trial court on the basis of these allegations has proceeded to hold that there is great force in this submission and observed that if the shareholders had been informed of such resolutions earlier in the notice of the annual general meeting, they would not have issued proxies and, therefore, the trial court has proceeded to find against the chairman-cum-managing director of the appellant-bank on the basis of the contentions so raised. In the first place, it is to be seen that the chairman-cum-managing director, Sri Rama Rao, in his counter-affidavit has denied his alleged complicity in collecting proxies through branch managers by promising loans to shareholders. This part of the material has been wholly lost sight of by the lower court. On page 184 of Shackleton on the Law and Practice of Meetings, 7th Edition, it is observed as under:

"A proxy can be revoked. The most sure way in which a member may revoke a proxy is to attend and vote in person:

It was held that there was nothing in the articles of a company to deprive a shareholder who was present at a meeting of the right to vote in person, even though he had given a proxy to some other person to vote for him at the same meeting ; the fact that the proxy was not revoked in the manner laid down in the articles did not prevent the member recording his vote in person to the exclusion of the proxy holder.

Revocation can also be effected by a determination of the authority by the donor himself prior to the meeting (a verbal instruction by the appointer to the chairman would suffice, although in view of the difficulty of proof, this is not a satisfactory method) or by deposit of another instrument in substitution of the former instrument."

From the above it is clear that it is always open to the donor of the proxy to revoke the same before its exercise and the donor himself may personally attend the meeting and exercise his right of voting in the meeting before the proxy exercises that right. The above position of law has not been properly realised by the trial court and its observation that there is great force in the contentions put forth on behalf of the plaintiffs, is not correct. Factually also the lower court is not correct as it has overlooked the affidavit of the chairman-cum-managing director, Sri Ramarao, in that behalf. Further, in paragraph 11 of Puma Investments Ltd. v. Southern Steelmet and Alloys Limited [1977] 47 Comp Cas 752 ; ILR 1977 2 Kar 1365, it is stated as under (at page 758 of 47 Comp Cas) :

"In the present case, we are at the stage of interlocutory orders and trial is yet to commence. Findings on matters such as mala fides, fraud and bad faith cannot, generally, be arrived at on mere affidavits. The matter has to go for trial and I am, therefore, reluctant to take into account the merits of the case at this stage to come to a conclusion which detracts from what an assessment of the balance of convenience in the case suggests."

Therefore, it is not safe at the interlocutory stage to arrive at a finding on the allegations of mala fides. Therefore, the observations made by the trial court do not survive and the resultant order is certainly perverse as submitted on behalf of the appellants.

Point No. 5.—Learned counsel for the respondents submitted that the appellant is guilty of disobeying the order passed by the Munsiff, Holenarasipur by holding the annual general meeting on October 29, 1992, even though there was an injunction restraining the appellant-bank from holding such meeting. Therefore, it is urged that unless the appellant makes amends for contempt committed by it, it should not be heard to prosecute the appeals and it should be asked to make amends for the same. In this behalf, the respondents cited the decision in Hadkinson v. Hadhinson [1952] 2 All ER 567. In this decision, the headnote reads as under:

"On a petition by a wife for the dissolution of her marriage, a decree nisi was granted, and it was directed that the child of the marriage should remain in the custody of its mother, but that he should not be removed out of the jurisdiction without the sanction of the court. On the decree being made absolute, the mother remarried, and without the sanction of the court she removed the child to Australia. On a summons by the father an order was made directing the mother to return the child within the jurisdiction. On an appeal by the mother against the order, the father objected that, as she was in contempt, she was not entitled to be heard.

Held, it was the plain and unqualified obligation of every person against, or in respect of, whom an order was made by a court of competent jurisdiction to obey it unless and until it was discharged, and disobedience of such an order would, as a general rule, result in the person disobeying it being in contempt and punishable by committal or attachment and in an application to the court by him not being entertained until he had purged his contempt ; where an order related to a child the court would be adamant on its due observance for such an order was made in the interests of the welfare of the child, and the court would not tolerate any interference with or disregard of its decisions on those matters, and least of all would permit disobedience of an order that a child should not be removed outside its jurisdiction ; in the present case the mother was not entitled to prosecute or be heard in support of her appeal until she had taken the first and essential step towards purging her contempt of returning the child within the jurisdiction."

But the opinion of Denning Lord Justice is summarised in the headnote which clearly brings out the limitations to the rule that the contemnor has to purge the contempt before being heard as under :

"The court would only refuse to hear a party to a cause when the contempt impeded the course of justice by making it more difficult for the court to ascertain the truth or to enforce its orders and there were no other effective means of securing his compliance. The court might then in its discretion refuse to hear him until the impediment was removed or good reason was shown why it should not be removed."

Extraction of the above discloses per Denning L.J., that the court would only refuse to hear a party to a cause when the contempt impeded the course of justice by making it more difficult for the court to ascertain the truth or to enforce its orders. In paragraph 106 on page 64 of the ninth volume of Halsbury's Laws of England, fourth edition, it is stated as under:

"106. Position of party in contempt.—The general rule is that a party in contempt, that is a party against whom an order for committal has been made, cannot be heard or take proceedings in the same cause until he has purged his contempt ; nor while he is in contempt can be heard to appeal from any order made in the cause, but this is subject to exceptions. Thus, a party in contempt may apply to purge the contempt, he may appeal with a view to setting aside the order in which his contempt is founded, and in some cases he may be entitled to defend himself when some application is subsequently made against him. A plaintiff in contempt has been allowed to prosecute his action when the defendant had not applied to stay the proceedings.

Even in cases where the rule is prima facie applicable, the court appears to retain a discretion whether or not to hear the party in contempt, and may in its discretion refuse to hear a party only on those occasions when his contempt impedes the course of justice and there is no other effective way of enforcing his obedience."

The contention on behalf of the respondents-plaintiffs is that the appellant-bank has disobeyed the order of the court. The respondents contend that the appellant-bank held the annual general meeting in contravention of the order of the Munsiff's Court at Holenarasipur. It is, therefore, obvious that the contempt complained is of the order of the Court of the Munsiff at Holenarasipur. The suit filed by Iyanna in Original Suit No. 204 of 1992, on the file of the Munsiff's Court at Holenarasipur is a separate suit and the question of consideration of contempt of the order of that court does not arise in the appeals before this court, as there is no allegation of disobedience of any order made in the two suits out of which the two appeals arise. Moreover, as per the certified copy of the order passed in Civil Petitions Nos. 619 to 626 of 1992 by this court, further proceedings in Original Suit No. 204 of 1992 on the file of the Court of Munsiff, Holenarasipur are stayed until further orders by the order dated November 25, 1992. The alleged disobedience of the order passed in Original Suit No. 204 of 1992, on the file of Munsiff, Holenarasipur is no ground to stop the proceedings in the two appeals before this court. As per the statement of law extracted from Halsbury's Laws of England, 9th Volume above, the rule is that a party in contempt, against whom an order for committal has been made cannot be heard or take proceedings in the same cause until he has purged his contempt. The "cause" as explained in Ramanatha Aiyar's The Law Lexicon, 1987 Edition, means "in a legal sense 'a suit' or litigation ; an action at law ; prosecution ; a judicial proceeding ; any question, civil or criminal, contested before a court of justice ; the origin or foundation of a thing as of a suit or action ; a ground of action ; the subject of difference between the parties, as settled by the pleadings, whether oral or written." Therefore, the contempt proceedings must have been taken in the same cause of action. The cause of action for the present appeals which arise out of suits O.S. No. 6835 of 1992 and O.S. No. 6843 of 1992 is different from the cause of action alleged in the suit O.S. No. 204 of 1992 before the learned Munsiff, Holenarasipur. Therefore, if at all there is any breach of the order of the Court of the Munsiff, Holenarasipur, and proceedings are to be taken in contempt, it is to be done only before that court and it is only in respect of the breach of the order of the Munsiff and the argument is, therefore, not available to learned counsel for the respondents to contend that the appellant should not be heard in the present appeals or to contend that the appellant has no right to prosecute the present appeals. The decisions cited by learned counsel for the respondents-plaintiffs in support of passing a mandatory injunction to restore status quo ante as on the date of commission of the impugned breach are not necessary to be referred to and gone into. Therefore it is obvious that the appellant cannot be prevented from prosecuting the appeals and there is no merit in the argument that the appellant is guilty of contempt of court. If there is any breach of the order committed by the appellant as alleged, the remedy is available to the respondents-plaintiffs to invoke the provisions under Order 39, rule 2A of the Civil Procedure Code, that too before the court in which the alleged breach of the order has taken place and not before this court. With this observation the contention that the appellant is guilty of contempt and that it should be prevented from prosecuting the appeals is rejected.

Points Nos. 6 and 7.—The trial court is aware of its order dated November 13, 1992, that it cannot pass orders in respect of persons who are not parties before it. Despite knowing this position in law, the trial court, by passing the impugned order in the suit filed by Dr. Ravishankar Adiga, has restored all the directors working on the board as constituted on October 29, 1992, on which date the annual general meeting took place, to the position held by them on that day. By so doing, it has negatived the intention of the appellant-company as to the persons to whom its management should be entrusted. It is stated that some of the directors who were retiring and who were not eligible for re-election and who had not signified their intention to be re-elected have been restored to the board as directors. In such an event the order works great injustice. By restoring ineligible directors to work on the board of directors, the provisions of the Companies Act are violated. By reinstating the directors who retired and who were removed, the democratic process of the company is set at naught. A person who has no right to be elected as a director cannot complain of any injury or loss by his removal. If at all a person is removed from the board of management he loses the power of making decisions and such loss is not the loss of any legitimate right. By removal from the board of directors and by not attending the meetings of the board of directors, a person ceasing to be a director may lose sitting fees and that is not an irreparable loss or injury entitling him to seek the relief of injunction. As held in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 ; AIR 1986 SC 1370, no injunction can be issued to restrain the holding of a general meeting to remove a director and appoint another.

On the other hand, by issuing an injunction, damage and loss would be caused to an institution and a large section of the public and such a step cannot be resorted to, to assuage the feelings of a couple of directors who claim to have been hurt or injured by the alleged removal. Damage to the institution and loss to the shareholders is far greater than the loss or injury complained of by the plaintiffs-respondents. It was submitted on behalf of the plaintiffs-respondents that their reputation and honour were at stake and learned counsel recalled the following from the Bhagavad Gita in Chapter II verse 34:

"Sambhavitasya Chakeertir Maranadatirichyate" (infamy brought on a man enjoying popular esteem is worse than death.)

It was stated that the respondents-plaintiffs were fighting for their reputation for whom dishonour was worse than death. However, in the instant case as already pointed out no one has got a right to become a director of the bank as such and if one were to lose such directorship on account of the shareholders choosing to remove them, one cannot make that an issue involving one's reputation or prestige and the ground urged does not help in tilting the balance in one's favour. Therefore the findings recorded with regard to prima facie case and the balance of convenience and irreparable injury by the trial court are not at all sustainable and they need to be set aside and are accordingly set aside. The observations made in this order are for the disposal of the appeals. It is made clear that these observations shall not influence the trial court in disposing of the suits on merits.

For the reasons stated above, the impugned orders are the result of an improper and illegal approach to the facts and circumstances of the case by the trial court and the findings are wholly perverse and opposed to material on record. Therefore, the appeals deserve to be allowed and the following order is passed:

ORDER

The Miscellaneous First Appeals Nos. 2385 of 1992 and 2386 of 1992 are allowed. The impugned orders passed on November 11, 1992, and November 16, 1992, by the trial court in Original Suits Nos. 6835 of 1992 and 6843 of 1992 respectively are set aside and the applications for the interim injunction filed under Order 39, rules 1 and 2 of the Civil Procedure Code, stand dismissed.

[1973] 43 Comp. Cas. 162 (cal.)

HIGH COURT OF CALCUTA

Bharat Commerce & Industries Ltd., In re

RAMENDRA MOHAN DATTA, J.

Company Petition No. 222 of 1970

NOVEMBER 16, 1971

 

S.C. Sen for the petitioner

P.C. Sen for the employees union

ORDER

Ramendra Mohan Datta, J.—This is an application for the confirmation by the court of the special resolution passed by the above named company relating to the proposed change of its registered office from Calcutta to New Delhi.

It is urged on behalf of the petitioner that the powers conferred on court under section 17 of the Companies Act, 1956, in respect of change of the registered office from one State to another are of a limited nature. Once the court is satisfied that the special resolution has been duly passed and the necessary formalities regarding the service of the notice on the Registrar or on the other parties interested, have been complied with as provided by section 17 of the Companies Act, 1956, the court after hearing the parties will have no other consideration but to confirm the said special resolution as a matter of course. It is urged following the well-established principle that the shareholders are the best persons to decide the questions relating to the internal management and affairs of the company, and that their decision should not be interfered with by the court if the formalities have been so complied with by the company in passing its special resolution. All that the court is to consider in confirming the special resolution is whether the formalities prescribed by the Companies Act, 1956, have been complied with or not.

Section 17 can be divided into two parts. The first part relates to the change of the place of its registered office from one State to another and the second part relates to the alteration of the provisions of its memorandum with respect to the objects of the company. Both the parts relate to the alteration of the provisions of the company's memorandum of association. In this case, this court is concerned only with the first part of section 17 of the Companies Act, 1956.

It is significant to note that in the matter of shifting the registered office of a company within the same State the statute does not require any confirmation of such special resolution by the court (see section 146 of the Companies Act, 1956). The court has been given special powers under section 17 to consider whether such a special resolution should be confirmed or not. The court has to be moved on petition for the said purpose. Such a special resolution shall not take effect until and except in so far as the same is confirmed by the court. Sub-section (3) and clauses (a) and (b) thereof provide:

"(3) Before confirming the alteration, the court must be satisfied—

(a)    that sufficient notice has been given to every holder of the debentures of the company, and to every other person or class of persons whose interests will, in the opinion of the court, be affected by the alteration; and

(b)    that, with respect to every creditor who, in the opinion of the court, is entitled to object to the alteration, and who signifies his objection in the manner directed by the court, either his consent to the alteration has been obtained or his debt or claim has been discharged or has been determined or has secured to the satisfaction of the court:

Provided that the court may, in the case of any person or class of persons, for special reasons, dispense with the notice required by clause (a)".

The above provision, to my mind, clearly indicates that the persons whose interests might be affected by the alteration should be given notice so that the court might be in a position to consider whether such persons' interest would be required to be protected before the court would decide to confirm the said special resolution. Once such a person or persons who might be affected by such special resolution objects to the same being confirmed and if, in the opinion of the court, the interests of such a person or persons are likely to suffer the court has to go into the merits of such special resolution in order to satisfy itself about the bona fides of the company or its shareholders to pass such a resolution.

Sub-section (4) of section 17 provides that after the petition is presented notice thereof would be caused to be served on the Registrar whose objection and suggestion would be considered by the court before making an order on the application.

Sub-sections (5) and (6) of section 17 indicate that the court's power is not limited to the extent as contended for on behalf of the petitioner but the court would be in a position to consider the whole aspect of the matter. The order to be made by the court under this section is discretionary. Such discretion has to be exercised by taking into consideration the facts and circumstances of each case in the matter of exercising its discretion. The court is required to take into consideration the rights and interests of the members of the company and of every class of them as well as the rights and interests of the creditors of the company and of every class of them. These safeguards have been specially provided so that the persons dealing with the company and the persons who are interested in the company as ex-members thereof might not suffer any prejudice by reason of the confirmation of the alteration. In making the order it is incumbent upon the court to consider such rights of the above persons or class of them but this does not mean that the court shall not consider the rights of any other person or persons whose interests might suffer prejudice by reason of such change of the registered office. As stated above, every case has to be judged on its own merits and for that purpose the court has been given wide powers to confirm the alteration either wholly or in part in the manner it thinks best or to refuse the same if the facts justify such refusal.

The English law on this branch relating to the change of the registered office is not similar to the Indian law because in England the question of changing the registered office from one State to another does not arise. Accordingly, the English principle will not be helpful in deciding this point.

In my opinion once the objection is made by the person concerned whose interests might suffer prejudice by reason of such change the court would be justified in requiring the company to satisfy the court about the bona fides of its passing such resolution. Under such circumstances, the court would examine the reasons set out in the petition for such change of the registered office in order to find out whether the resolution has been passed in good faith or mala fide. The court would satisfy itself from the facts placed before it that it would be just, fair and equitable that the special resolution should be confirmed. To my mind the principle that the shareholders are the best persons to decide matters relating to the internal management of the company has to be considered subject to the question of good faith which the court would in such circumstances consider. The court would refuse to confirm such a resolution if it would be found to be unfair or unjust or inequitable.

Rule 38 of the Companies (Court) Rules, 1959, require that the petition must contain the reasons for the alteration of the memorandum and in Form No. 11 thereof a form has been set out which requires that the reasons for such alteration have to be set out and the petition must also contain an averment as follows;

"No one will be prejudiced by the proposed alteration of the memorandum of association of the said company, and it is just and equitable that the alteration should be confirmed by the court".

Accordingly, in my opinion, the question of bona fides is a material consideration for the court in confirming or refusing to confirm a special resolution of the company in an application under section 17 of the Companies Act, 1956. Under those circumstances, it is necessary to examine the reasons set out in the petition herein.

The facts leading to this application are that the company has its registered office at Calcutta. The company runs its mills at four different States,  viz., Madhya Pradesh, Maharashtra, Mysore and East Punjab. The company also earns freight by letting out on hire four helicopters belonging to the company in several places in the State of Assam. The main business of the company is to manufacture yarn and textile goods at the different mills situate in the said States of Madhya Pradesh, Maharashtra, Mysore and East Punjab.

Before holding the extraordinary general meeting the company gave a notice to the shareholders. The said notice contained an explanatory statement. The relevant portion dealing with the unlawful activities of the employees of the company ran as follows:

"Recently the company has been faced with unprecedented disturbances led by just two or three employees of the companies and some outside elements in its registered office with the result that the management of the different units scattered all over India had become virtually impossible from Calcutta. In the interests of the company and its shareholders and for carrying on business more efficiently and economically it was essential to effect a change of the location of the main administrative office. The shareholders of the company are also scattered throughout the country and the company is not in a position to ensure registration of transfer of their shares when called upon to do so or to arrange the smooth holding of the meeting of its shareholders at its registered office in the State of West Bengal".

The extraordinary general meeting was held on May 30, 1970. Twenty-one shareholders were present in person and by proxy. None opposed either on behalf of the shareholders or on behalf of the creditors of the company.

On the basis of the said special resolution, the company made the application for confirmation thereof by this court. Notice was caused to be issued on the Registrar. The State of West Bengal also appeared pursuant to a notice but did not oppose at the hearing of this application nor did it file any affidavit in this proceeding.

Besides the Registrar of Companies, the other party who opposes this application is an employees union by the name of "Birla Brothers and its Allied Concerns Employees Union". One Rajendra Nath Chatterjee is the secretary of the said employees' union. He has affirmed an affidavit-in-opposition to the petition herein on July 24, 1970. It appears from the said affidavit that the said union is a trade union registered under the Indian Trade Unions Act. The said union was formed by the employees of the several Birla concerns in Calcutta including the employees of the above company. It is alleged that the proposed transfer of the registered office from West Bengal to Delhi is mala fide and is sought to be made with an ulterior object as stated in the said affidavit. Some time in August, 1969, the employees of the several Birla concerns in Calcutta organised themselves and formed the aforesaid union. The employees of this petitioner-company who were working at its registered office at No. 10, Camac Street, Calcutta, joined the said union. Since then, there were disputes and differences by and between the management of the various Birla concerns including the petitioner-company and the respective employees. In respect of such disputes and differences the said union took up the cause of the various employees of the various concerns in which the Birlas were interested. There were certain negotiations but ultimately on the question of the recognition of the said union the negotiations with the respective managements fell through. Thereafter, the employees of the several Birla concerns under the guidance of the said union continued their trade union movement and submitted their charter of demands some-time in November, 1969.

It is not necessary to go into the details of the agitations made by the employees in that connection but it is sufficient to mention for the purpose of this application that disputes and differences by and between the employees and the management in respect of the various concerns including the petitioner-company cropped up and the same were at all material times placed before the Labour Directorate of the Government of West Bengal. In paragraph 27 of the said affidavit it is alleged that the union representing the employees in the said industrial disputes will be seriously prejudiced in the pending conciliation/adjudication proceedings on the said dispute if the said special resolution would be confirmed by this court because such an order of this court if made is likely to make the said conciliation/adjudication proceedings infructuous. It is also alleged in the said affidavit that the services of the employees of the petitioner-company are not transferable and that the decision to shift its registered office from Calcutta to New Delhi was mala fide, illegal and was taken with the object of causing harassment and/or hardship and/or inconvenience to its employees and staff; because once the confirmation is made, the same would involve automatic transfer of employees from Calcutta to New Delhi which could not be done by the company directly. It is further contended on behalf of the said employees' union that, save and except the said object of victimising the employees of the petitioner-company, there was no other reason which might be called just or reasonable or legitimate for shifting the registered office.

Furthermore, the fact that the petitioner-company declared a closure of its registered office and stopped payment of the salary to its employees since February 23, 1970, has been totally suppressed in the petition. It is significant that such vital facts which prompted the directors and the persons who are in the management of the company to take action to shift the registered office have been suppressed even from the shareholders as would be revealed from the explanatory statement to the said notice dated April 29, 1970. The said explanatory statement is completely silent about the same and did not give any indication whatsoever about the closure of the registered office and of the fact of the non-payment of salary of its employees employed at the registered office at the date of the said notice. This is clear proof of want of bona fides on the part of the management in respect of the passing of the said special resolution. The other grounds which have been mentioned in the said notice and in the petition herein by themselves could not be of much substance for the purpose of shifting the registered office at the date of the said notice. Those grounds had all along been there but in spite thereof, the company never thought of shifting its registered office from West Bengal to New Delhi or to any other place.

As stated above, the said employees' union filed an affidavit-in- opposition to the petition and has taken several points to contest this application. It is urged that the effect of the shifting of the registered office of the company to New Delhi would involve loss of revenue to the State of West Bengal. It is also urged that the further effect would be that there would be future unemployment in respect of the State of West Bengal. In my opinion such grounds could not be urged on behalf of the said employees' union. The State of West Bengal did not choose to oppose this application. Mr. P.C. Sen appearing on behalf of the said employees' union referred to the various decided cases of this court and of the Orissa High Court and contended that the question of loss of revenue and the loss of employment should be held to be relevant considerations in deciding an application under section 17 of the Companies Act, 1956. He relied on the case of Orient Paper Mills Ud. v. State  and in the case of Orissa Chemicals and Distilleries Private Ltd., In re  and an unreported decision of Sushil Kumar Datta J. delivered on July 19,"1965, in In re Indian Aluminium Co. Ltd  in Company

Petition No. 225 of 1964 (Cal.) and also on certain passages from the case of In re Westburn Sugar Refineries Ltd., Ex parte . As against those cases. Mr. S.C. Sen appearing on behalf of the company relied on the case of Mackinnon Mackenzie & Co. Private Ltd., In re  which was relied on by a Division Bench of this court in the case of Rank Film Distributors of India Ltd. v. Registrar of Companies and the State of West Bengal . The said Division Bench of this court observed that the questions relating to the loss of employment and the loss of revenue of the State could not be matters of relevant considerations in an application under section 17 for transfer of the registered office from one State to another. In the case of In re R. Akoojee Jadwet & Co. Private Ltd., A.N. Sen J. by his judgment dated December 24, 1969, in Company Petition No. 114 of 1969 (Cal.) considered an application under section 17 of the Companies Act, 1956, and also observed that the question of loss of revenue and loss of employment to the territory cannot be matters of relevant considerations.

On behalf of the Registrar of Companies the said points have also been agitated. In any event, I am bound by the Division Bench judgment of this court delivered in Rank Film Distributors of India Ltd. v. Registrar of Companie, and, accordingly, I reject the said contentions raised on behalf of the Registrar of Companies and by the said employees' union.

On the question as to whether the said employees' union have any locus standi to come and to agitate before this court that the proposed transfer of the registered office would prejudicially affect the interests of its members in this application, I am satisfied that the employees' union which is a registered body and which represents quite a number of the employees employed at the registered office of the company, has the right to appear and to oppose this application on the ground that their interests would be likely to be prejudicially affected if such special resolution would be confirmed by this court. It is always open to the employees concerned to bring it to the notice of the court through their union or even individually, if the company in passing such resolution did not act bona fide so as to enable the court to examine the reasons set out in the petition to consider whether it would be just and equitable to confirm such a resolution.

In the petition it is admitted that due to unprecedented disturbances at the registered office instigated by 2 or 3 employees of the company at the instance of the outside elements it had become impossible to manage the business and affairs of the company from Calcutta and that there had been no change in the situation.

It is urged on behalf of the petitioner-company that 15 out of the 18 employees have already filed affidavits signifying their consent to the transfer. Accordingly, there could be no reason to doubt that the interests of the employees would be affected or prejudiced by reason of such change of the registered office. On behalf of the said employees' union it is contended that altogether there are 33 employees including the employees of Bharat Airways who are members of the employees' union. Accordingly, the employees' union should be deemed to be representing the remaining employees who are members of the union.

Mr. P.C. Sen appearing on behalf of the employees' union has referred to the Supreme Court case of State of Bihar v. Kripa Shankar Jaiswal , where it was observed that to constitute an industrial dispute it was not a requisite condition that it should be sponsored by a recognised union. A dispute would become an industrial dispute even where it was sponsored by a union which was not registered. It is contended that the said employees' union is a registered trade union and is the trade union representing numerous employees of the Birla group of industries including that of the petitioner-company. I am satisfied that this employees' union has the locus standi to appear before this court and to contest this application. At the prayer made by them this court granted leave to appear in this application and to file their affidavit to contest the same because this court was prima facie satisfied that the order for change of the registered office could be likely to be prejudicial to the interests of the employees who were members of this union. Moreover, it is urged that this employees' union represents the employees who are employed in various other Birla concerns and all such employees of all Birla concerns who are represented by the said union are likely to be affected by the result of this application. Under those circumstances, as stated above, I am satisfied that this employees' union has the locus standi to appear and to contest this application.

Mr. S.C. Sen appearing on behalf of the petitioner-company admitted in the course of his arguments that the petitioner was not denying the fact that the said agitation by the employees was the main ground for effecting transfer of the registered office from Calcutta to New Delhi. It is necessary here to set out the said ground as pleaded in paragraph 10 of the petition:

"Recently the company was faced with unprecedented disturbances at the registered office instigated by 2 or 3 employees of the company at the instance of outside elements. The employees of the company in general did not approve of or participate in this disturbance and have, in fact, joined the company's present head office at No. 10, Ring Road, Lajpatnagar, New Delhi. As a result of the said disturbance, the management of the business and affairs of the different units of the company situate at (1) different place in India became virtually impossible from Calcutta, and the business of the company at its registered office came to a standstill. There has been no change in the situation yet. The shareholders of the company are also scattered throughout the country and in the present disturbed condition, the company is not in a position to ensure registration of transfer of their shares when called upon to do so or to arrange for holding of the general meetings of its shareholders at its registered office under congenial atmosphere. Further, by reason of the aforesaid disturbance it has become impossible to comply with the statutory provision, namely, filing of returns, preparation and audit of accounts, etc., which has exposed the company and its management to the risk of prosecution without any fault on their part. In the interest of the company and its shareholders and for carrying on the business of the company more efficiently and economically it is essential to effect a change of the location of the registered office of the company".

It is difficult to appreciate why the registered office of the company has to be shifted from Calcutta to New Delhi because of the disturbances created by only 2 or 3 employees of the company. In the absence of any detailed particulars it is difficult to appreciate the said grounds for transfer and, in any event, this court cannot accept the contention that there has been no change in the situation yet. Without going into the merits of the disturbances created therein it is quite clear that the transfer would prejudicially affect the interests of the employees of the registered office.

Mr. S.C. Sen on behalf of the company has admitted that the other grounds mentioned in the petition were subsidiary grounds and the same were added because they were also considered relevant by and on behalf of the company when the company thought of changing the registered office due to the main ground of disturbances created by the said employees. In other words, the additional grounds were added to strengthen the main ground of transfer.

I have searched in vain to find out a genuine ground at this stage for shifting the registered office from West Bengal to New Delhi. Considering the entire facts of this application it is quite obvious that the main reason which prompted the company to shift its registered office from West Bengal to New Delhi was to force the employees to give up their trade union activities by causing harassment which is involved in the transfer of the registered office. Once the registered office is transferred by an order of this court the employees would have no other alternative but to join the Delhi office without being able to question the validity of such transfer of their job.

It is not necessary for this court to go into the details of the agitation by the employees concerned. This court cannot go into such question as to whether the employees were behaving in the manner permitted by law or not vis-a-vis the directors or the management of the company. These are matters for the industrial tribunal if the same would be referred thereto. All that this court is concerned with is to take notice of the fact that the disputes, which the employees called industrial disputes, still exist. This court also takes into consideration the fact that there was closure of the registered office of the company since in or about March, 1970, and that the employees who were unwilling to work in the Delhi office and who did not act in accordance with the wishes of the management were not paid their salary since February 23, 1970. As to whether the management of the petitioner-company was justified in taking such action or not is not for this court to consider or to decide. This court also takes into consideration the fact that the shareholders were kept completely in the dark about the fact of the said closure and of the non-payment of the salaries to the employees as will be evident from the said notice and the explanatory statement thereof. This court also takes into consideration the fact that immediately after the passing of the resolution and before obtaining the order of confirmation of this court the special resolution has been given effect to and the registered office has already been shifted from 10, Camac Street, Calcutta, to 10, Ring Road, New Delhi.

In paragraph 13 of the petition the company admits that at least 2 or 3 employees may not agree to work in any other unit or office of the company except at its Calcutta office. Accordingly, the retrenchment of at least a few employees is certain to happen if the prayer for shifting the registered office is confirmed by this court. It is true that if there would be any retrenchment that would be the matter for the industrial court, and the same could not be considered by this court, but all that this court is concerned with is that the interests of some of the employees, at least as admitted in this petition, would definitely suffer by reason of such change. Whether the closure was justified or not is not for this court to decide but the fact of the closure being effected was a matter which ought to have been disclosed in the petition itself and in the expiatory statement to the notice to the shareholders and by reason of such non-disclosure the petitioner becomes guilty of suppression of material facts. To my mind, the special resolution cannot be called fair or just or equitable or necessary in the facts and circumstances of this case and should not be confirmed by this court.

Mr. P.C. Sen appearing on behalf of the employees' union contends that the company has not only stopped payment of the salary of the 19 employees who were employed in the registered office at No. 10, Camac Street, Calcutta, but has also stopped payment of the salary of the 10 or 11 other employees who were employed with Bharat Airways which is a branch organisation of this company. All these said 29 employees including the employees of the Bharat Airways are members of the employees' union. Even assuming that 18 of these employees voluntarily affirmed affidavits in favour of the company and are agreeable to the transfer of the registered office of the company the remaining employees who are represented by the employees' union are likely to suffer great hardship, harassment and inconvenience by reason of such transfer. It is contended by the learned counsel that by punishing the said employees and by transferring the registered office from this State to the Union Territory of Delhi the company intends to thwart the lawful trade union activities of these employees of the employees' union. It is admitted by and on behalf of both the parties that those employees who have since joined the Delhi office have not only been reinstated in the service of the company but have also been paid the full salary from February 23, 1970.

In my opinion Mr. P.C. Sen's contention that the disputes pending before the conciliation officer are likely to be prejudiced if the registered office is transferred at this stage, has great force. Such pending disputes would undoubtedly be rendered infructuous if the registered office would not remain in Calcutta any longer and if such transfer is confirmed by this court since the employees will have no other alternative but to submit to the court order of change of the registered office.

In my opinion no valid, bona fide or substantial ground has been made out on behalf of the petitioner to enable this court to confirm the special resolution passed by the company in its extraordinary general meeting.

The next point that was urged on behalf of the said employees' union was that the petitioner-company had no power to call the extraordinary general meeting herein for the purpose of passing of the said special resolution because the provisions of section 169 of the Companies Act, 1956, and of article 76 of the articles of association of the company were not complied with. Sub-section (2) of section 169 provides that the requisition shall be signed by the requisitionists and shall be deposited at the registered office of the company. It is urged that the registered office being closed the requisition was not deposited at the registered office. The said sub-section has been made mandatory and that would appear from the explanation to the said section whereby it is provided that the said meeting for passing the said special resolution would not be deemed to have been duly convened if notices were not given as is required by sub-section (2) of section 189.

On behalf of the Registrar of Companies this application was strenuously contested. It is urged on behalf of the Registrar of Companies that the special resolution was not passed at the properly held meeting because the special resolution could be passed only in an extraordinary general meeting which could be convened only at the registered office of the company. The notice itself provided that the meeting would be held at No. 10, Ring Road, Lajpatnagar IV, New Delhi-24. It is urged that the meeting held at the said office instead of at the registered office was invalid and the petitioner-company had no jurisdiction or right or authority to hold its general meeting at the said address at New Delhi and to pass the special resolution there. Accordingly, the said special resolution, and the said general meeting are illegal, invalid, void and of no effect. Mr. S.C. Sen, on behalf of the petitioner-company, in my opinion, rightly argues that assuming but not admitting that there was irregularity in holding the said meeting for the purpose of passing of the said special resolution, yet the same could not be agitated by an outsider. The said point regarding irregularity of the meeting or the proceedings thereof could be challenged as between the shareholders of the company and the company itself. Any outsider other than the members could not be allowed to raise any such objection regarding the defect, if any, in the notice or in the meeting. These are procedural matters affecting the company and its members. Neither the employees' union should be allowed to take such points nor the Registrar of Companies should be allowed to take such points. Mr. S.C. Sen refers to section 195 of the Companies Act, 1956, which provides for drawing presumptions about the regularity of the meeting held where minutes have been duly drawn and signed. Under those circumstances, I do not accept the contentions raised on behalf of the said employees' union and on behalf of the Registrar of Companies on this point and I reject the same.

The only other point which remains to be considered and which has been raised on behalf of the petitioner-company is that for each of the grievances raised by the employees' union there is a remedy provided in the Industrial Disputes Act. If the transfer would be held to be illegal or invalid then the industrial court could provide for adequate compensation for the same. If the change of the registered place would involve retrenchment of any of the employees that also could be remedied by allowing compensation. Even in case of non-payment of salary the industrial court could order compensation to be paid to the aggrieved worker. I have already indicated that I have not decided nor have I intended to decide any of the said questions but I have considered the question of bona fides and mala fides in the manner I have indicated above and I am satisfied that the special resolution has not been passed bona fide. Under those circumstances, in my opinion, this application should not be allowed.

Accordingly, I make an order dismissing this application with costs. Certified for two counsel.

[1977] 47 COMP. CAS. 641 (MAD)

HIGH COURT Of MADRAS

Karlapudi Venkateswara Rao

v.

Registrar of Companies

RAMANUJAM J.

WRIT PETITION NO. 738 OF 1976.

FEBRUARY 20, 1976

R. Krishnamurthy for the Petitioner.

JUDGMENT

Ramanujam J.—The petitioner claims to be a shareholder of a public limited company called K.C.P. Ltd. He has approached this court for the issue of a writ of mandamus directing the Registrar of Companies, the first respondent herein, not to give effect to the resolution passed on January 29, 1976, in the 34th annual general meeting of the company but to take action under sections 234 and 234A of the Indian Companies Act of 1956.

The circumstances under which the writ petition has been filed are these. The 34th annual general meeting was scheduled to take place on 28th December, 1975, in the usual course. But the said meeting did not take place as it is said to have been abandoned in view of the pandemonium that prevailed at the commencement of the meeting. Subsequently, the meeting was notified to be held by the board of directors on January 28, 1976, and notices were issued to the shareholders informing them of the time and place of the said adjourned meeting. It, however, appears that one of the shareholders filed a suit, O.S. No. 45 of 1976, on the file of the District Munsif, Vijayawada, for a declaration that the proposed general meeting notified to be held on January 28, 1976, is not in accordance with the articles of association and also for an interim injunction restraining the company from holding the meeting on January 28, 1976. The said court had granted an ad interim injunction on January 27, 1976. It is said that the said order of injunction was communicated to the company and its directors by telegram. Subsequently, the said ad interim injunction was vacated by the said court at the instance of the company on January 28, 1976. Then the annual general meeting had been held on January 29, 1976.

The petitioner attacks the validity of the said meeting held on January 29, 1976, on the ground that it is invalid for the reason that it was not held in accordance with the provisions of the articles of association, and that notices to the shareholders have not been issued for the meeting to be held on January 29, 1976. The petitioner points out that the meeting as notified to be held on January 28, 1976, could not have been adjourned to January 29, 1976, as interim injunction was in force on January 28, 1976, and the company could not have contemplated that injunction would be vacated and that they will be in a position to conduct the meeting on January 29, 1976.

On the materials placed by the petitioner before this court it is not possible to say that on January 28, 1976, the meeting could not have been adjourned to January 29, 1976, as that will depend upon the time when the ad interim injunction was vacated by the civil court and when the meeting was adjourned to the next day. The petitioner's contention that the meeting held on January 29, 1976, is not valid cannot be gone into in these proceedings as the basis of attack is factual, and this court exercising its powers under article 226 of the Constitution cannot be expected to go into the disputed question of fact. Further, the relief by way of mandamus forbearing the first respondent not to give effect to the resolution passed on January 29, 1976, cannot be granted as that will amount to preventing the statutory authority from exercising his statutory function under the Indian Companies Act. So long as the resolution dated January 29, 1976, passed at the meeting had been recorded in the minutes of the company, the first respondent has to proceed on the basis of the minutes and record the resolution passed at the meeting in view of section 195 of that Act. As and when a shareholder or a person interested successfully challenges the validity of the meeting then it is possible for the petitioner or any person interested to approach the first respondent to modify the entries in his record. But when the resolution passed in the annual general meeting has not been held to be invalid by any court so far, no mandamus can issue to the first respondent not to perform his statutory duties.

This writ petition, therefore, fails and the same is dismissed.

[1968] 38 COMP. CAS. 507 (DELHI)

HIGH COURT OF DELHI

Fdward Keventer Successors Private Ltd.

v.

Krishan Kumar Sud.

HARDAYAL HARDY, J.

CIVIL REVISION NO. 191-D OF 1961

FEBRUARY 12, 1968

 

J.P. Chopra, for the Petitioner.

Gyan Singh Vohra for the Respondent.

JUDGMENT

This civil revision under section 25 of the Provincial Small Cause Courts Act, 1887, arises out of the dismissal of the petitioner's suit for recovery of Rs. 700 from the respondent, by the learned Additional Judge, Small Causes Court, Delhi.

The petitioner is a joint stock company incorporated under the Indian Companies Act, 1913, and is engaged in the business of marketing and sale of milk, butter and other allied products. For the purpose of its business, the petitioner company has opened depots in various parts of the country. One Shri Jai Chand Sud, who is father of the present respondent, Shri Krishan Kumar Sud, was a depot-holder appointed by the petitioner at Delhi. The petitioner alleged that the respondent had borrowed Rs. 1,050 from the petitioner on February 13, 1967, for liquidating the debt of his father because the petitioner was contemplating legal action against his father to recover the amount outstanding against him and that out of the amount thus borrowed by the respondent a sum of Rs. 350 only" was returned by him in various instalments. As the respondent had failed to pay the balance of Rs. 700 in spite of service of notice of demand, the petitioner brought the present suit against him.

The respondent contended that Sri Labhaya Ram Pahuja, who had instituted the suit and signed and verified the plaint on behalf of the petitioner company, had no authority to do so. He also contended that no amount had actually been borrowed by him from the petitioner. All that had happened was that his father, Shri Jai Chand Sud, had gone to East Africa in December, 1956, for a few months. During his absence, the respondent was running the depot and with a view to avoiding litigation in respect of a sum of Rs. 1,050 which the petitioner represented was due from Shri Jai Chand Sud, the respondent agreed to have the said amount debited to his account subject to the condition that if his father returned within six months he would not be liable to pay the same. He further contended that his father actually returned within six months and thus, as per agreement between the parties, his personal liability came to an end. The respondent went on to add that the arrangement arrived at between the parties was duly acted upon and that a sum of Rs. 350 was actually paid by the respondent's father towards partial discharge of the sum of Rs. 1,050 in respect of which the respondent had incurred conditional liability. He also alleged that his relations with his father became strained and that the present suit had been instigated by his father against him.

The suit was dismissed by the learned judge who held against the petitioner on the two points which had been raised by him for determination. He held that the suit had not been instituted by a person duly empowered to do so on behalf of the petitioner company. He also accepted the respondent's defence that the arrangement devised by the petitioner's manager and the respondent during the temporary absence of the respondent's father, Shri Jai Chand Sud, was a stop-gap arrangement which ceased to be operative on the return of Shri Jai Chand Sud and as such the respondent was not liable to pay the amount in question.

The decision of the learned judge has been assailed by Shri J. P. Chopra, learned counsel for the petitioner, on both the points. He has contended that the petitioner company is an incorporated company. According to its articles of association (exhibit PW 3/2), the power to institute legal proceedings on its behalf vests in its directors and they can delegate the same to an attorney, vide article 120, clauses (g) and (u). According to the evidence led by the petitioner, the authority to institute the present suit had been delegated to Shri Labhaya Ram Pahuja, general manager of the company, under a resolution passed by the board of directors of the company on October 2, 1953. The petitioner company had placed on record a copy of the said resolution marked exhibit PW 3/1. It had also placed on record a copy of the power of attorney executed in favour of Shri Labhaya Ram Pahuja (exhibit P-1). According to this power of attorney, Shri Labhaya Ram Pahuja, who had filed the present suit, was fully empowered to institute legal proceedings on behalf of the company. As regards his competency to sign and verify the plaint, learned counsel for the petitioner relied upon the provisions of Order 29, Civil Procedure Code, which lays down that in suits by or against a corporation any pleading may be signed and verified on behalf of the corporation by the secretary or by any director or any principal officer of the corporation who is able to depose to the facts of the case. Shri Labhaya

Ram Pahuja being the general manager of the petitioner company, who according to the respondent himself had entered into the arrangement alleged by the respondent, was obviously the principal officer of the company and he was also able to depose to the facts of the case. There could thus be no doubt about the suit having been instituted and the plaint having been signed and verified by a person duly empowered to do so on behalf of the petitioner company.

Mr. Vohra, learned counsel for the respondent on the other hand contended that the learned trial judge had given a finding that the petitioner had failed to establish the factum of the resolution, exhibit P.W. 3/1, having been passed by the board of directors. The petitioner had no doubt examined its accountant, Shri Suraj Bhan (P.W. 3), to establish that such a resolution had been passed and that the minutes book of the board of directors of the company had also been produced by him, but the resolution in question was alleged to have been passed on October 2, 1953, while the witness had entered the service of the company in 1956 only and had clearly admitted that he had no personal knowledge of the passing of the said resolution. Learned trial judge had also held that the resolution as contained in the minutes book was typed on a loose sheet and had been pasted to a leaf of the said book, but the job of pasting of the paper had also not been done by Suraj Bhan (P.W. 3). Learned trial judge held that half of the book produced by the witness was lying vacant and that the witness could not say if the book was kept in the regular course of business. He also held that the petitioner had withheld the evidence of its secretary or any other person who had personal knowledge of the passing of the resolution and therefore it was legitimate to presume that the resolution said to have been passed by the board of directors on October 2, 1953, was not a genuine one:

Mr. Vohra argued that this was a finding of fact which could not be interfered with in a revision under section 25 of the Provincial Small Cause Courts Act.

The scope of a revision under section 25 of the Provincial Small Cause Courts Act has been authoritatively laid down by the Supreme Court in Hari Shankar v. Rao Girdhari Lal Chowdhury, where their Lordships fully approved of the following observations made by Beaumont C.J. (as he then was) in Bell & Co. Ltd. v. Waman Hemraj:

" 'The object of section 25 is to enable the High Court to see that there has been no miscarriage of justice, that the decision was given according to law. The section does not enumerate the cases in which the court may interfere in revision, as does section 115 of the Code of Civil Procedure, and I certainly do not propose to attempt an exhaustive definition of the circums tances which may justify such interference, but instances which readily occur to the mind are cases in which the court which made the order had no jurisdiction, or in which the court has based its decision on evidence which should not have been admitted, or cases where the unsuccessful party has not been given a proper opportunity of being heard, or the burden of proof has been placed on the wrong shoulders. Wherever the court comes to the conclusion that the unsuccessful party has not had a proper trial according to law, then the court can interfere. But, in my opinion, the court ought not to interfere merely because it thinks that possibly the judge who heard the case may have arrived at a conclusion which the High Court would not have arrived at.'"

It however seems to me that in the present case the finding of fact recorded by the learned trial judge on this point is vitiated by his having laid an impossible burden of proof on the petitioner. Learned judge appears to have been of the view that for the purpose of proving the resolution it was necessary that the petitioner company should have produced its secretary who, according to the Companies Act, was required to maintain the minutes book. It was not disputed that the book had come from proper custody. Shri Suraj Bhan (P.W. 3) had also deposed that the book produced by him was the minutes book of the company. He also identified the signature of R. Sharma, chairman of the meeting, who had signed the resolution in question. The witness stated that he had worked with Shri R. Sharma and could, therefore, identify his signature. He also stated that Shri R. Sharma was dead. In the circumstances, it could not be held that the resolution which was duly entered in the minutes book of the company had not been proved. Learned judge's observation that half of the minutes book was lying vacant and that the witness had not stated that it was kept in the regular course of business, to my mind shows lack of appreciation of the true position regarding maintenance of such books. Minutes book is one of the books which is required to be maintained under the Companies Act. By its very nature, the proceedings of the meetings are recorded therein as and when the meetings are held. If during the period to which the book produced in court pertained, the number of meetings held by the. board of directors and the minutes of proceedings held at those meetings were not numerous and extensive enough to fill the entire book, a part of the book was bound to contain no writing thereon. The book could not have therefore been rejected on this ground. In the circumstances, the conclusion reached by the learned judge that the resolution said to have been passed by the board of directors on October 2, 1953, was not genuine, appears to me to be not only wrong but perverse. I, therefore, hold that the suit was properly instituted by a person fully empowered in law to do so on behalf of the petitioner company.

Mr. Vohra is, however, on a much firmer ground on the second point, on which the decision of the trial court has gone in favour of his client.

The petitioner's case as made out in the plaint was that a sum of Rs. 1,050 had been borrowed from it by the respondent on February 13, 1957, for liquidating the amount due to the petitioner from his father with a view to avoiding legal proceedings being instituted against his father for the recovery of the amount outstanding against him and that the respondent had paid out of the said amount Rs. 350 leaving a balance of Rs. 700 which he had failed to pay in spite of service of notice of demand. This case of the petitioner has been found by the learned trial judge to be false and it has been held that no amount was actually borrowed by the respondent who had been asked to sign a false voucher (exhibit P-2) acknowledging a sum of Rs. 1,050 having been advanced to him in cash.

The petitioner supported its case by the evidence of its accountant, Shri P. N. Kakkar (P.W. 1), who stated that the amount of Rs. 1,050 was paid in cash to the respondent by the cashier of the petitioner company and that he had thereupon made over the said amount to the assistant cashier of the company. To reinforce the position thus taken by the petitioner company, the petitioner's general manager, Shri Labhaya Ram Pahuja (P.W. 2), also supported the statement of Shri P. N. Kakkar and they both denied that the sum of Rs. 350 for which credit had been given by the petitioner to the respondent had actually been paid by the respondent's father, Shri Jai Chand Sud, till they were forced to admit the vouchers, exhibits P-10 to P-15, which were initialled by Shri Labhaya Ram Pahuja and showed that a sum of Rs. 50 was deducted from the commission payable to the depot-holder, Shri Jai Chand Sud, and it was that very amount which was credited to the account of the respondent. It also transpired that all those vouchers were signed by Shri Jai Chand Sud. Shri Labhaya Ram Pahuja was put a specific question in cross-examination as to whether the amount sought to be recovered from the respondent was still shown in the books of the company to be outstanding against Shri Jai Chand Sud. The witness could not deny this fact.

Holding that no payment had actually been made by the respondent against the amount of Rs. 1,050 debited to him and that all the payments towards the liquidation of the said amount were made by the respondent's father, who had returned from East Africa within four months after he had left the country, the learned judge came to the conclusion that the version put forward by the respondent was true. Learned trial judge also held that the document, exhibit P. 2, which formed the basis of the petitioner's suit had not been made with any degree of formality and that its contents had also been found to be incorrect. He therefore came to the conclusion that the respondent's version appeared to be more probable than that put forth on behalf of the petitioner company. This is clearly a finding of fact which cannot be interfered with in a revision petition.

Mr. J.P. Chopra, learned counsel for the petitioner, however submitted that the learned trial judge had completely ignored the respondent's letter dated January 14, 1957 (exhibit P. 4), which had been addressed by him to the general manager of the petitioner company. The letter reads:

"Dear Sir,

We are expecting money from our father who has gone to East Africa shortly. As soon as the money reaches us the o/s will be cleared. In the meanwhile I undertake to pay the sale proceeds daily for the goods received for us for the o/s dues I am responsible to the company.

Your faithfully,

Sd/- K. K. Sud".

Mr. Chopra argued that by this letter the respondent undertook to discharge the liability of his father and was accepted as such by the petitioner company. In these circumstances, the petitioner company's right to enforce payment against the father of the respondent was lost and it could thereafter look to the respondent alone for payment of its dues. Reliance was placed in this connection by the learned counsel on section 41 of the Contract Act. The argument appears to me to be wholly devoid of merit. It is not the petitioner's own case that by the undertaking given the respondent was substituted as a debtor in place of his father. If that were so there was hardly any reason to deduct a sum of Rs. 50 every month out of the commission payable by the petitioner company to the respondent's father. Moreover it is the voucher, exhibit P.2, which is the foundation of the petitioner's case against the respondent and not the letter, exhibit P.4, which was obviously written almost a month before the voucher, exhibit P.2.

The result is that the revision petition fails and is dismissed with costs.

[1991] 72 COMP. CAS. 483 (DEL)

HIGH COURT OF DELHI

Escorts Limited

v.

Sai Autos

MAHINDER NARAIN J.

SUIT NO. 2043 OF 1987

JULY 20, 1990

 

 Avtar Singh and H.R. Arora for the Plaintiff.

JUDGMENT

Mahinder Narain J.—The plaintiff, a company incorporated under the Companies Act, 1956, having its registered office at H-2, Connaught Circus, New Delhi, has filed this suit for recovery of Rs. 1,38,916 against four defendants.

Defendant No. 1 is Sai Autos, defendant No. 2 is Mr. K. Neela Mohan Rao, partner and proprietor of Sai Autos, defendant No. 3 Sri Y. Venkateswar Rao is also a partner and proprietor of Sai Autos and defendant No. 4 is Mr. Bollam Venkatramaiah.

Sai Autos are stated to have been dealers at Karim Nagar (Andhra Pradesh) for the sale of Ford Tractors made by the plaintiff-company.

It is the case of the plaintiff-company that Mr. Charanjit Singh, who has signed and verified the plaint, is the principal officer, as also the vice-president and secretary of the plaintiff-company, and is authorised to sign, verify the plaint and file the present suit, and to prosecute the same on behalf of the plaintiff-company in terms of the general power of attorney dated January 28, 1966, granted to him by the plaintiff-company, and registered in the books and records of the Sub-Registrar, New Delhi at No. 164 in Additional Book No. 4, Volume No. 238 on pages 98 to 101 on January 31, 1966.

It is asserted in the plaint that a Ford Tractor, manufactured by the plaintiff, was purchased by defendant No. 4. The plaintiff says that this was a sale on credit.

The plaintiff has filed affidavit evidence of its officers, by which the said transaction of sale of the tractor to defendant No. 4 stands proved.

It is stated in the affidavit that defendant No. 4 actually paid the money to defendants Nos. 1 to 3, vide his cheque dated July 31, 1986. It is stated that this cheque was collected by defendants Nos. 1 to 3 illegally and unauthorisedly. Defendants Nos. 1 to 3 instead of paying the money realised to the plaintiff-company, kept the money themselves. It is also asserted in the affidavit that as defendant No. 4 was bound to pay the money directly to the plaintiff he was liable to pay the price of the tractor purchased by him to the plaintiff-company, which he had failed to do.

During the course of arguments, it was stressed that defendant No. 4 was liable for the price of the tractor, which amount he had wrongly paid to defendants Nos. 1 to 3. In the plaint, it is clearly asserted that the decree for payment of the suit amount may be passed against defendants Nos. 1 to 3, and only in the alternative the decree may be passed against defendant No. 4. During the course of arguments, I had told counsel for the plaintiff that it would be a travesty of justice if the defendant were to be made to pay again for the tractor, which he had admittedly paid for to defendants Nos. 1 to 3, by passing a decree against him. Counsel for the plaintiff, very fairly, gave up this claim made against defendant No. 4. The claim against defendant No. 4, in this suit, is, therefore, dismissed.

In as much as the power of attorney which is relied upon by the plaintiff-company, executed on the 28th day of January, 1966, by Mrs. Raj Nanda and Sodhi Karta Singh and execution whereof was admitted before the Registrar of Assurances, it was asserted that power to institute suit stands proved.

During the course of arguments, which were heard ex parte, I pointed out to counsel that the presumption as to due execution of the power of attorney was available only to those powers of attorney which were executed in accordance with the provisions of section 85 of the Indian Evidence Act and as the power of attorney dated January 28, 1966, was not in accordance with the provisions of that section, no presumption can arise with respect thereto.

Section 85 of the Evidence Act provides that "the court shall presume that every document purporting to be a power of attorney, and to have been executed before, and authenticated by, a notary public or any court, Judge, Magistrate, Indian Consul or Vice-Consul or representative of the Central Government was so executed and authenticated."

In as much as the power of attorney in question was not registered before the Notary Public or any court, Judge, Magistrate, Consul or Vice-Consul or representative of the Central Government, no presumption can arise with respect to it as Registrar of Assurances is not one of the persons named in section 85 of the Evidence Act. As presumption regarding its due execution of the power of attorney dated January 28, 1966, could not be raised, the benefits of section 85 of the Evidence Act could not be availed of vis-a-vis the said power of attorney. Counsel for the plaintiff did not dispute and he could not, that and Registrar of Assurances is not a "representative" of the Central Government. He is a person who discharges his statutory functions under the Registration Act.

In this view of the matter, as the power to institute the suit had to be proved, a copy of resolution No. 5 passed in the meeting of the board of directors of Escorts Ltd. (plaintiff) held on 16th October, 1965, was placed on record, and this was not enough, the original minutes book containing resolution No. 5 dated October 16, 1965, was brought to court. I saw the original minutes book. It contains the aforesaid resolution No. 5 dated October 16, 1965. This resolution approves the draft power of attorney which was proposed to be granted. The manner of proving the said resolution which has been adopted by the plaintiff is an affidavit of Mr. P.N. Arora, son of Mr. Lekh Raj, being affidavit dated March 22, 1990. In that affidavit, it is stated that the minutes of the board of directors have been written in the hand of Ms. Amarjit Kaur, who is the representative of the plaintiff-company. The deponent says that he can identify the handwriting of the said Amarjit Kaur.

The manner in which such a resolution of the board of directors of companies are to be proved, is clearly stated by Hardayal Hardy J. in a judgment passed in Suit No. 469 of 1986 in Oberoi Hotels (India) Pvt. Ltd. v. Observer Publications (P.) Ltd. In this judgment, it has been stated that "the only way to prove that a particular resolution was passed at a meeting of the board of directors of a company is that the minutes book in which the said resolution was recorded as having been passed should be produced in court as that alone can form evidence of the fact under section 194 of the Act." Section 194 of the Companies Act reads as under:

"194. Minutes of meetings kept in accordance with the provisions of section 193 shall be evidence of the proceedings recorded therein".

In view of the fact that the minutes book of the plaintiff has been produced before me, after seeing the same I am satisfied that resolution No. 5 was passed in the meeting of the board of directors held on October 16, 1965. The plaintiff has thus proved the conferment of the powers of attorney to Shri Charanjit Singh with power to institute the suit. By virtue of the provisions of the Order 29 of the Code of Civil Procedure, a principal officer can sign and verify the plaint. It is also established that Charanjit Singh is a principal officer of the plaintiff-company, who can as such officer, sign and verify the plaint in suit, and he is also authorised to institute this suit by virtue of the power of attorney dated January 28, 1966.

The next question that arises is what amount is due from defendants Nos. 1 to 3 to the plaintiff-company. For this purpose, copies of accounts have been produced by the plaintiff-company. Copies of the accounts produced by the plaintiff-company deal with the transaction between the plaintiff and defendants Nos. 1 to 3. In none of the affidavits filed by the plaintiff, have these accounts been proved in accordance with the provision of section 34 of the Evidence Act, which sets out the manner in which any person can be charged with liability on accounts, and how the liability is to be proved.

Section 34 of the Evidence Act reads as under:

"Entries in books of account, regularly kept in the course of business, are relevant whenever they refer to a matter into which the court has to inquire, but such statements shall not alone be sufficient evidence to charge any person with liability."

In view of the provisions of section 34 of the Evidence Act, entries in the books of account are alone not sufficient evidence to charge any person with liability. Nor can copies of entries in the books of account be sufficient to charge any person with liability. The manner in which entries in the books of account are to be proved to charge any person with liability, has been dealt with by the Supreme Court in Chandradhar Goswami v. Gauhati Bank Ltd., [1967] 37 Comp Cas 108 ; AIR 1967 SC 1058. The Supreme Court has clearly stated that the entries in the books of account are not primary evidence of indebtedness. A plaintiff has to lead evidence in the shape of vouchers, bills, etc., to prove the entries in the books of account.

In this view of the matter, neither the copy of the ledger account, nor the ledgers themselves, in respect of accounts of defendants Nos. 1, 2 and 3 is enough evidence to charge them with liability, and no decree can be passed against the defendants on the basis there of.

Learned counsel for the plaintiff then referred to the affidavit which had been filed in which it has been stated that defendants Nos. 1 to 3 sent the cheques for Rs. 1,06,000 being the cheque dated July 31, 1966, for the purpose of liquidating the amount due, which has been received from defendant No. 4 by defendants Nos. 1, 2 and 3 but had not been paid to the plaintiff. The said cheque was dishonoured when presented, and has been filed along with the documents, and has been proved by, the affidavit of Mr. J.L. Chawla dated March 22, 1990. The dishonoured cheque is on record, and is marked as exhibit PW-2/6. The memo of dishonour is exhibit PW2/5. Counsel for the plaintiff states that after this cheque was dishonoured, further, a reference was made to defendants Nos. 1, 2 and 3 about the dishonoured cheque of Rs. 1,06,000. In lieu of the dishonoured cheque of Rs. 1,06,000, two cheques for Rs. 50,000 and for Rs. 56,000 dated August 30, 1986, and September 30, 1986, respectively, were sent by defendants Nos. 1, 2 and 3. The said cheques are marked as exhibit PW-2/7 and exhibit PW-2/8. These two cheques also, when presented for encashment, were dishonoured and the memo of dishonour is marked as exhibit PW-2/9..

The aforesaid cheques, exhibit PW-2/6, exhibit PW-2/7 and exhibit PW-2/8 go to show that defendants Nos. 1, 2 and 3 owed a sum of Rs. 1,06,000 to the plaintiff-company, and that they purported to pay the same by giving a cheque of Rs. 1,06,000 and thereafter by giving two cheques, one for Rs. 50,000 and the other for Rs. 56,000. The dishonour of the said cheques indicates that the said amount which was due to the plaintiff remained unpaid and the plaintiff is entitled to the payment of Rs. 1,06,000 in lieu of the price of the tractor which was supplied to defendant No. 4, who paid its price to defendants Nos. 1, 2 and 3, but defendants Nos. 1, 2 and 3 failed to give the same to the plaintiff who was actually entitled to receive the said price. The said cheques are an admission and proof of indebtedness of defendants Nos. 1, 2 and 3 to the plaintiff-company.

As regards the claim of interest on the amount which has to be paid to the plaintiff-company, namely, Rs. 1,06,000, counsel for the plaintiff relied upon exhibit PW-2/1 which is the Dealer's Sales Agreement executed by the plaintiff and defendant No. 1. According to clause 14(d) thereof the amount is payable with interest at the rate of 1.5% per mensem which comes to 18% per annum.

Thus, the plaintiffs are entitled to a decree for Rs. 1,06,000 against defendants Nos. 1, 2 and 3 and by virtue of the agency agreement between the plaintiff and defendant No. 1, the aforesaid unpaid amount is payable by the defendants to the plaintiff with interest at the rate of 18% per annum.

The tractor in question was supplied to defendant No. 4 on January 10, 1986. Defendant No. 4 has paid the amount to defendant No. 1. The plaintiff is entitled to interest from the date of supply of the tractor till, realisation of the price of the same.

In this view of the matter, I pass a decree in favour of the plaintiff and against defendants Nos. 1 to 3 jointly and severally for a sum of Rs. 1,06,000.

The plaintiff shall also be entitled to interest on the aforesaid amount at the rate of 18% per annum from the date of supply of the tractor to defendant No. 4, i.e., January 10, 1986, and at the same rate from the date of filing of the suit till its realisation.

No order as to costs.

[1992] 75 COMP CAS 198 (MAD.)

HIGH COURT OF MADRAS

B. Sivaraman

v.

Egmore Benefit Society Ltd.

ARUMUGHAM J.

Original Application No. 288 of 1991 and Applications Nos. 2597 and 2598 of 1991 in Civil Suit No. 420 of 1991 and Original Application No. 289 of 1991 and Applications Nos. 2595 and 2596 of 1991 in Civil Suit No. 421 of 1991

APRIL 29, 1992

 

 

V. Subramaniam, G. Subramaniam, M. Uttam Reddy, C. Harikrishnan and S. Subbulakshmi for the Applicants.

 

JUDGMENT

Arumugham, J.—The applicants/plaintiffs have filed this application under Order 14, rule 8 of the Original Side Rules, read with Order 39, rules 1 and 2 of the Civil Procedure Code, against the respondent/first defendant, seeking an order of interim injunction restraining the respondent from holding any extraordinary general body meeting either on April 2, 1991, or any other date, in pursuance of notice dated March 7, 1991, on the subject noted in the notice dated March 7, 1991, pending disposal of the above suit.

The short facts which are culled out from the affidavit, filed in support of the application, are as follows:

The applicants/plaintiffs herein are the shareholders of the respondent/first defendant company which is more than 100 years old, having been incorporated under the Companies Act and that the applicants had been elected as directors of the respondent at the annual general body meeting held on December 24, 1990, and that since then onwards, they are functioning as the directors of the first respondent company and that defendants Nos. 2 to 5 in the suit were the directors of the respondent company, earlier to the election held on December 24, 1990, and they were to retire by rotation by the abovesaid 120th annual general body meeting and that accordingly, defendants Nos. 2 to 4 stood for being re elected as directors of the first defendant company as well as to fill up the vacancy caused by the retirement of one of the directors by name V. Karthikeyan. Defendants Nos. 4 to 13 in the suit are the requisitionists who had requisitioned an extraordinary general meeting of the first respondent and notice had been given for the holding of an extraordinary general meeting on April 2, 1991. The main business of the respondent is to accept deposits and grant loans on jewels and other approved securities and it is governed by its memorandum and articles of association, registered under the Companies Act for the administration of the respondent itself and that as such, the authorised capital of the company is Rs. 5,00,000 consisting of 5,00,000 shares of Re. 1 each with the paid-up capital of Rs. 1,48,906, each share being Re. 1. According to the memorandum and articles of association of the respondent, it has a board of directors consisting of 12, among whom l/3rd are to retire at every general body meeting of the first respondent by rotation and that the said retiring directors are eligible for re-election under the memorandum and articles of association and that from the l/3rd number of directors, four retiring by rotation as also a vacancy on the retirement of one Mr. V. Karthikeyan in whose place the fifth applicant has been elected.

Pursuant to the notice issued on November 8,1990, by the respondent for its annual general body meeting that was to take place on December 24, 1990, and in which one of the subjects proposed in the said meeting was to elect directors in the place of defendants Nos. 2 to 5 and one Karthikeyan who was co-opted during the year in the place of Thiru Tarapore who resigned in June, 1990, and thereby caused a vacancy and that as such, it was stated in the said notice that the above person has offered himself for reappointment and, consequently, the applicants herein were nominated as the directors of the respondent and that such notification was also published in the Indian Express dated December 14, 1990, and that after having deposited the requisite sums as per section 257 of the Companies Act, the first respondent has received the nomination from the applicants and that, accordingly, the advertisement was given on December 14, 1990, as abovereferred. Thus, the applicant's name had been proposed in the place of all the directors which was one of the items in the agenda to be discussed in the annual general body meeting of the respondent to be held on December 24, 1990.

Accordingly, all the applicants were nominated for being elected to the post of retiring directors as well as for the post of one director which had fallen vacant in the annual general body meeting of the respondent, held on December 24, 1990, and the election of directors was taken up on voting by show of hands, the plaintiffs/applicants were declared had elected as directors, as the chairman directed a poll suo motu to be conducted on the same date, the poll was conducted and the consequent counting was taken up on December 26, 1991, and the results were announced on December 29,1991, wherein all the applicants were declared to be duly elected. Consequently, resolutions were passed to that effect and the same were entered in the minutes book of the company as contemplated by law. While that was so, on January 2,1991, the applicants were duly intimated about their having been elected as directors and, accordingly, they had given their consent letters and the necessary returns to the Registrar of Companies on January 7, 1991, have been filed since then, the applicants had been acting as directors till this date. Frustrated at this, defendants Nos. 4 and 5 in the suit having lost the election held, had been writing certain letters to the first respondent stating falsely that they had mustered some support to call for an extraordinary general body meeting on April 2, 1991, and for which a notice has been given for holding such an extraordinary general body meeting dated March 7, 1991.

In the context of a valid election having been conducted and the applicants were elected duly as provided by law and that the resolution has been entered into the books of the respondent as provided under the provisions of the Companies Act, the resolution itself has become final and cannot be questioned and it cannot be held as null and void by a subsequent resolution and if at all the requisitionists are interested, they could seek the remedy under section 284 of the Companies Act. Based on these grounds, it was averred by the applicants that the extraordinary general body meeting is illegal and in fact void as evident from the explanatory statement given by the first respondent in the notice itself. Apprehending that their rights are being prejudiced by the proposed extraordinary general meeting to be held on April 2, 1991, or on any other subsequent dates, an order of ad interim injunction is being sought for against the respondent.

On moving the above application urgently on March 26, 1991, this court on finding a prima facie case in favour of the applicants, granted the and interim injunction against the respondent and thereby restrained the respondent from convening the extraordinary general body meeting to be held on April 2, 1991, or on any other subsequent date.

The fourth respondent in the suit, though not a party to this application, has filed a counter-affidavit to the above application in his individual capacity or as a member in which it was contended, inter alia, while admitting the averments made in paragraphs 2 and 3 of the affidavit filed by the applicant, that the president who was the chairman of the meeting held on December 24, 1990, had announced a poll only in accordance with the demand by this respondent and others. With regard to the carrying out of the resolutions which were entered in the books of the company, it was the contention of this respondent that the resolution proposing the reappointment of this fourth respondent as the director, must be deemed to have been passed as there were no votes given against the resolution by persons present in person or by proxy at the meeting held on December 24, 1990, and that thereafter, there was no vacancy for proposing any resolution for the appointment of a director in his place and that as such, the resolutions declared to have been passed are void under the provisions of sections 169 and 263 of the Companies Act.

It was the substratum of the main contention of the defendant that this defendant and others had to requisition a general meeting as the scrutineers appointed for the poll had manipulated the poll result and the chairman and the board of directors had accepted the poll result without taking into account the objections taken by this defendant and other retiring directors. The said requisition is in accordance with section 169 of the Companies Act and in accordance with the articles of association of the company and they had called for an extraordinary general body meeting held on April 2, 1991. In short, the alleged resolutions entered in the books of the respondent are void by virtue of the provisions of the company law and that, therefore, no proceedings are necessary for the removal of any of the directors and that since the requisition given for calling the extraordinary general body meeting has been provided by the provisions of company law, the demand for calling the extraordinary general body meeting by these respondents and another were deemed to be held valid in law and that initiating the proceedings and obtaining the interim order is quite against the interest of this defendant and that, therefore, the respondent prays that in the interest of justice, the applicants should not be allowed to function as directors in the context of the interim injunction granted already. To the above extent, this respondent prays for the modification of the order of interim injunction passed, by restraining the applicants from in any manner acting as directors of the respondent, pending disposal of the suit.

The fifth defendant, Yamuna Reddy, in the suit also filed a counter-affidavit to the above application in which she simply followed and endorsed the contentions raised on behalf of the fourth defendant and prayed for the modification of the ad interim injunction order passed against the first respondent and restraining the applicant from acting as the director of the first respondent company.

The first plaintiff, Thiru B. Sivaraman, has filed a reply affidavit to the counter-affidavit filed by defendants Nos. 4 and 5 wherein he has denied each and every one of the contentions raised by defendants Nos. 4 and 5, but at the same time, reiterated his contentions made in the plaint itself.

Upon the abovesaid pleadings, the question that arises for consideration is the following:

"Whether the applicants/plaintiffs have established a prima facie case to sustain the order of interim injunction passed on March 26,1991, as absolute, till the disposal of the suit?"

Applications Nos. 2597 and 2598 of 1991:

Both defendants Nos. 4 and 5 in the suit have filed the abovesaid Applications Nos. 2597 and 2598 of 1991, under Order 14, rule 8 of the Original Side Rules and Order 39, rule 4 and section 151 of the Civil Procedure Code, for modification of the order passed by this court in Original Application No. 288 of 1991 on March 26, 1991, by restraining the applicants from in any manner acting as the directors, on the result of the poll conducted at the 120th annual general body meeting held on December 24, 1990, on the same ground they had raised in the respective separate counter-affidavit filed in O.A. No. 288 of 1991. As I have already briefed the main contentions raised in the counter-affidavit filed in O.A. No. 288 of 1991, there exists no need to traverse each and every one of the same.

Under the above circumstances, the only question which arises for consideration is as follows:

"Whether the applicants in the above Applications Nos. 2597 and 2598 of 1991 have established a prima facie case to seek the indulgence of this court to modify the order of ad interim injunction passed on March 26, 1991?"

O.A No. 289 of 1991 in C.S. No. 421 of 1991:

The applicants/plaintiffs have filed this application under Order 14, rule 8 of the Civil Procedure Code, read with Order 39, rules 1 and 2 and section 151 of the Civil Procedure Code, against the respondents for an order of interim injunction and thereby restraining the respondents, their men and agents from in any manner conducting the extraordinary general body meeting on April 2, 1991, or any other date for. considering the subjects proposed in the notice dated March 7, 1991, pending disposal of the suit.

The short facts as culled out from the affidavit filed in support of the above application are as follows:

The applicants being the shareholders of the first respondent company which is one incorporated under the Companies Act carrying on business of accepting deposits and advancing loans for a long time as per the memorandum and articles of association had attended the annual general body meeting of the first respondent company in which respondents Nos. 2 to 4 sought re-election as directors, but were not elected and that, in their place, new persons were appointed as directors and that had been given effect to and they are functioning as directors of the first respondent company and while that was so, the applicants herein had come to see an advertisement caused in a Tamil news daily, Dinamani dated March 11, 1991, that an extraordinary general body meeting of the first respondent has been convened on April 2, 1991; and that when they made enquiries, they were told by respondents Nos. 2 to 5 that they have challenged the validity of the poll conducted in the extraordinary general body meeting held on December 24, 1990, and that since the first respondent had not agreed with the contention of respondents Nos. 2 to 5, they had given a notice for holding an extraordinary general body meeting of the first respondent and that the subjects proposed for the agenda are to declare the poll conducted on December 24, 1990, void and for electing respondents Nos. 2 to 5 as directors of the first respondent company.

On the basis of these allegations, the applicants have averred that the proposed action of respondents Nos. 2 to 5 is illegal, non est and cannot be permitted. Since the applicants are affected by the proposal of respondents Nos. 2 to 5 individually and also as the shareholders of the first respondent and in order to prevent the illegality, they had instituted the suit for declaration and injunction and that, therefore, with a view to avoid any confusion to be created in the proposed extraordinary general body meeting by respondents Nos. 2 to 5, the applicants want that the said respondents Nos. 2 to 5 are to be restrained from convening the extraordinary general body meeting proposed to be held on April 2, 1991, by means of an injunction as prayed for.

On moving the said application urgently, in filing the suit in C.S. No. 421 of 1991, having identified with the prima facie case inherent with the applicant, this court has granted the ad interim injunction against respondents Nos. 2 to 5 on March 26, 1991.

The fourth respondent, Thiru P. Obul Reddy, has filed a counter-affidavit in which he contends, inter alia, while admitting the poll of the first respondent conducted at the 120th annual general body meeting held on December 24, 1990, that the resolution proposing re-appointment of this respondent as a director must be deemed to have been passed in accordance with section 189 of the Companies Act, as there were no votes cast against the resolution by the persons present or by proxy at the said meeting and that thereafter, there was no vacancy for proposing any resolution for the appointment of a director in his place and that as such, the resolutions declared to have been passed by the respondents are void, under the provisions of the Companies Act.

While admitting the averments made in para 3 of the affidavit, he contends further that the scrutineers appointed for conducting the poll had since manipulated the poll themselves and that the chairman of the meeting and the board of directors had accepted the poll results without taking into account the objection taken by these respondents and other retiring directors, the said results claimed by the applicants effecting the appointment of new persons are not valid in law and binding on him and that, therefore, this respondent wants not only the application to be dismissed but also for vacating the order of interim injunction passed in O.A. No. 289 of 1991.

The fifth respondent, Thirumathi Yamuna Reddy, also filed a counter-affidavit wherein she has followed the same contentions raised by the fourth defendant, Thiru P. Obul Reddy, and endorsed the same views in praying for dismissing and vacating the interim order passed already.

Dr. N.V. Krishna, who has sworn the affidavit filed in support of the above application, has filed a reply-affidavit, wherein he has specifically denied and repudiated everyone of the contentions made by respondents Nos. 4 and 5 in their counter-affidavit and also reiterated his stand which was narrated in his affidavit filed in support of the above application.

Upon the above pleadings, the only question which arises for consideration is as follows.

"Whether the applicants have established a prima facie case, warranting the indulgence of this court to sustain the order of interim injunction passed on March 26,1991, as absolute against the respondents?"

Applications Nos. 2595 of 1991 and 2596, of 1991:

On the basis of the contentions raised in the counter-affidavit by respondents Nos. 4 and 5 in Original Application No. 289 of 1991 who are the applicants in the above respective applications, it is prayed for vacating the ad interim injunction passed against the first respondent on March 26, 1991, on the same grounds. Therefore, there exists no need for me to traverse each and every one of the averments and the counter-affidavit once again for the purpose of the above applications.

The only question that arises for consideration, is as follows:

"Whether the applicants/respondents Nos. 4 and 5 have made out a case to vacate the order of interim injunction passed on March 26,1991, as prayed for in Application No. 289 of 1991?"

As the questions involved in all the above applications are identical and one and the same, relating to the election of the first respondent as claimed by the applicant and controverted by the respondent, I have proposed to dispose of all these applications, together by common considerations.

The relief claimed in the suit in C.S. No. 420 of 1991 is for a declaration that the notice dated March 7, 1991, issued by the first defendant/respondent for holding an extraordinary general meeting on April 2, 1991, is illegal, void and non est in law and not binding on the plaintiffs/applicants and for a permanent injunction restraining the first respondent and their men from holding an extraordinary general meeting either on April 2, 1991, or on subsequent dates pursuant to the notice dated March 7, 1991, issued by the first respondent. This suit was filed by Mr. B. Sivaraman and four others who are the newly elected directors of the first respondent and identical reliefs were asked for in C.S. No. 421 of 1991 by Dr. N.V. Krishna, P.S. Ananthakrishnan and S. Muruganandan in their capacity as shareholders of the. first respondent company. The reliefs claimed in all the above applications are also identical with each other and involve a common question of law and facts to be considered. The fact that the first respondent company has been incorporated on 20th January, 1882, and that the applicants and the respondents are the shareholders of the company and that to elect the directors in order to fill up the vacancy that arose, the 120th annual general meeting was held on December 24, 1990, and that at which carrying on with other subject-matters as per agenda, it was decided that the applicants were to be elected as directors and that, for the said purpose, the chairman has ordered the poll and, accordingly, there was a contest for the election of five directors of the first respondent company and that as such, the poll was conducted and concluded, are all admitted. This was preceded by the annual general body meeting of the first respondent held on December 24, 1990, as scheduled at Swamy Sankaradoss Kalai Arangam, at No. 153, Habibullah Road, Madras 600 017, and it was presided over by Mr. K.D. Parekh, who announced that the meeting had been attended by 810 members in person and that there were 9,727 proxies lodged with the first respondent and that on explaining the procedure to be followed for conducting the elections to be directed by the chairman, counsel for the first respondent, Thiru T. Raghavan, stated that every motion was to be voted individually, firstly, by show of hands and then on poll, if directed by the chairman, and the poll was ordered to be conducted by the chairman on the same date and it was scrutinized by Messrs. D.G. Masilamani and S. Jayaraman and with the approval of all the members present, the chairman directed that the members holding proxy be allowed to use one poll paper for casting votes for themselves and on behalf of the proxies. It was the case of the applicants that after the poll was conducted on the same date, counting had taken place on 26th December, 1990, after all the ballot boxes were duly sealed and kept under safe custody and that after scrutiny, the result of the poll was announced on December 29, 1990, declaring that all the applicants herein were declared as directors of the first respondent which factum was duly recorded in the minutes book, maintained for the general meeting of the first respondent and was signed by the chairman. Then the newly elected applicants-directors had assumed office and their consent was given in Forms Nos. 29 and 32, after having been duly filled up by the first respondent and filed with the Registrar of Companies, Madras, for intimating about the change in the composition of the board of directors of the first respondent. Basing on the abovesaid facts, it was the contention of the applicants in proving that as per the provisions of company law and the memorandum and articles of association of the first respondent, the vacancy arising out of the retirement of the four directors by rotation and one vacancy caused by the resignation and death of one director, it was decided in the annual general meeting held on December 24, 1990, under the chairmanship of Thiru K.D. Parekh, while transacting several other businesses notified in the agenda by show of hands, that the five applicants should be elected for the five vacancies as directors of the board of the first respondent and on an explanatory mode or procedure to be followed by the first respondent, all the members were present and the poll was conducted as ordered by the chairman and counting had taken place on December 26,1990, and after due scrutiny by the respondents, result of the poll was announced on December 29, 1990, and in and by which, all the five applicants were elected as the directors of the board of the first respondent which fact has been duly recorded in the minutes book of the first respondent, maintained for the general meeting as signed by the chairman and in implementing thereof, Forms Nos. 29 and 32 were also prepared with the consent of the newly elected directors, viz., the applicants and the Registrar of Companies was intimated of the change in the composition of the board of directors and that in which the respondents who contested for election had been defeated and that, therefore, everything has been duly and lawfully carried out and there were no laches or infirmities during the completion of the said process and that in pursuance thereof, the administration of the first respondent is being carried on.

All the documents filed along with the plaint numbering exhibits A-1 to A-25 have been relied on by the applicants to substantiate their case abovereferred to. I may refer to the said documents for the purpose of appreciating the facts involved in this application. Exhibit A-1 is the printed book of the memorandum and articles of association of the first respondent; exhibit A-2 is the printed copy of the annual report of the first respondent for the 120th annual general body meeting for the year 1989-90; exhibit A-3 is the copy of the notice published in the newspaper, as contemplated under section 257(1A) of the Companies Act on behalf of the first respondent exhibit A-4 is the photostat copy of the proceedings of the 120th annual general body meeting held on December 24, 1990, at 9.30 a.m. at Swami Sankaradoss Kalai Arangam, No. 153, Habibullah Road, T. Nagar, Madras 600 017, signed by the chairman on January 22, 1991. These documents assume every significance in this case in the sense that the whole procedure which had taken place on the annual general meeting held on December 24, 1990, has been narrated as contemplated by law and these documents provide a clear answer to the contentions raised on behalf of the respondents herein; exhibits A-5 to A-9 are the copies of letters addressed by the chairman of the annual general meeting to all the applicants herein on January 2, 1991, intimating them that they have been duly elected as the directors of the first respondent company; exhibits A-10 to A-15 are the copies of the necessary forms filled up by the first respondent-company as contemplated by the company law and sent to the Registrar of Companies for legal intimation; exhibits A-16 to A-23 are the copies of exchange of letters and reply letters among counsel for the applicant, the first respondent and other respondents, reiterating their contention made in the affidavits and the counter-affidavits. Exhibit A-24 dated March 4, 1991, is the explanatory statement given by Thiru T. Raghavan, counsel for the first respondent; and, lastly, exhibit A-25 is the printed notice dated March 7,1991, sent by the secretary of the first respondent, calling for the extraordinary general meeting, issued under section 169 of the Companies Act, to be held on April 2, 1991, to discuss and carry out the resolutions pertaining to the result of the poll and the consequent resolutions passed on the appointment of the applicants as directors at the 120th annual general body meeting of the company announced on December 29, 1990, to be declared as void and that in their places, Thiru C.A. Ramakrishnan, Thiru N. Seshachalam, Thiru P. Obul Reddy and Thirumathi Yamuna Reddy have to be declared as directors and this notice forms the basis for the filing of the above suit and applications by the applicants.

The plaintiff in C.S. No. 421 of 1991 also filed the printed memorandum and articles of association covered under exhibit A-1; the printed annual report of the 120th annual general body meeting of the first respondent for the year 1989-90 was also filed by the plaintiffs and marked as exhibit A-2; exhibit A-3 dated December 24, 1990, is the same copy of the proceedings of the 120th annual general meeting of the shareholders, which was marked in the other suit; exhibit A-4 is the copy of the report sent by scrutineers by name Messrs. S. Jayaraman and D.G. Masilamani on December 26, 1990, to the chairman of the meeting which assumes every importance and occupies a very predominant role in the instant case about which I will discuss later; exhibit A-5 is the public notice caused to be published in the English newspaper about the calling of the extraordinary general meeting along with the explanatory statement by the secretary of the first respondent as required under section 173 of the Companies Act; exhibit A-6 is the copy of the same impugned notice marked as exhibit A-2 5 in the other suit. The abovesaid documents which were relied on by the plaintiffs in both the suits and the applicants in all the original applications are more or less identical and one and the same.

A careful perusal of exhibit A-4 in C.S. No. 420-of 1991, the copy of the proceedings of the 120th annual general meeting of the shareholders of the first respondent held on December 24,1990, at 9.30 a.m. at Swamy Sankaradoss Kalai Arangam at No. 153, Habibullah Road, T. Nagar, Madras 600 017, signed by the chairman of the said meeting provides a complete and clear answer to all the disputes raised by the respondents herein. The other clinching document available in this case marked as exhibit A-4 in C.S. No. 421 of 1991, is the copy of the report of the scrutineers who scrutinized the poll result by name Messrs. D. Jayaraman and D.G. Masilamani, dated December 26, 1990. Exhibits A-5 to A-10 and A-11 to A-15 in C.S. No. 420 of 1991 clearly demonstrate the fact that consequent on the appointment of the applicants as directors on the basis of exhibit A-4 in C.S. No. 421 of 1991, the same was duly intimated to all the applicants by the chairman and the prescribed forms were filled up and sent to the Registrar of Companies as provided by law and thus the resolutions passed in the said annual general meeting and the subsequent resolutions were all duly entered in the minutes book of the first respondent as provided under section 173 of the Companies Act. Exhibit A-4 filed in C.S. No. 421 of 1991, viz., the report of the scrutineers, clinches the fact that the total votes polled on that date are 68,582 and the number of invalid votes are 3,235 and deducting the same, the valid votes polled on that date are 65,347. Then it was categorised that among the said total, the number of votes polled in person are 33,501 and by proxy 35,081; itemising the votes polled for the respective candidates who stood for contest, firstly, between Thiru C.A. Ramakrishnan and the first applicant, Thiru B. Sivaraman, it seems that the first applicant, Thiru B. Sivaraman, obtained 34,557 votes and Thiru C.A. Ramakrishnan obtained 30,783 votes, that, secondly, among the two candidates, Thiru N. Seshachalam and Thiru T.T. Selvam, the second applicant, Thiru T.T. Selvam, obtained 35,074 votes as against 30,260 votes obtained by Thiru N. Seshachalam; that between Thiru P. Obul Reddy and Thiru R.S. Jeevarathinam, Thiru P. Obul Reddy obtained 29,661 votes as against 35,683 votes obtained by Thiru R.S. Jeevarathinam, the third applicant; that between Tmt. Yamuna Reddy and Thiru M.A. Mohanakrishnan, Thiru M.A. Mohanakrishnan, the fourth applicant, secured 34,557 votes as against Tmt. Yamuna Reddy who secured 30,790 and that the fifth applicant, Thiru C.R. Vedachalam, alone contested and for whom among the shareholders of the first respondent company who have participated in the poll on that date cast their votes in favour of Thiru C.R. Vedachalam numbering 36,743 and against him 28,088 votes.

It has to be seen that on the basis of the votes secured on that date, the applicants were declared as elected and the rival contestants, viz., the fourth and the fifth defendants, were declared as defeated.

It was the main plank of attack brought on behalf of respondents Nos. 4 and 5, Thiru P. Obul Reddy and Tmt. Yamuna Reddy, that since there were no votes polled against their candidature and they obtained considerable votes, they should be deemed and declared as elected. Reiterating the contentions, Thiru G. Subramaniam, counsel for the contesting respondents, strenuously argued before me that since there were no votes polled against their clients and as they secured a large number of votes, they are to be declared as elected in the said annual general meeting and that the said aspect has not been considered either by the scrutineers or by the chairman of the said meeting and the said election claimed to have been conducted on December 26, 1990, has to be set aside and that only with the said object, exhibit A-25 in C.S. No. 420 of 1991 and exhibit A-6 in C.S. No. 421 of ,1991, the notice calling for the extraordinary general meeting of the first respondent was being requisitioned by all the members of the first respondent at the behest of the contesting respondents who were defeated. Having perused very meticulously the report of the scrutineers covered under exhibit A-4 filed in C.S. No. 421 of 1991, I feel totally unable to subscribe any view in favour of the contentions of the contesting respondents or the arguments advanced on their behalf by Thiru G. Subramanian, learned counsel. There is a fallacy in his arguments that since there were no votes polled against the candidates, viz., Thiru C.A. Ramakrishnan, Thiru N. Seshachalam, Thiru P. Obul Reddy and Smt. Yamuna Reddy, they are to be declared as elected. After a careful scrutiny of the said report, I am able to see that for the vacancy of the directorship, there were two contestants by name Thiru C.A. Ramakrishnan and Thiru B. Sivaraman between whom the latter has secured more votes, that is, 34,557, than the former who secured 30,783; that between Thiru N. Seshachalam, and Thiru T.T. Selvam, the latter has secured more votes, i.e., 35,074 than the former who secured 30,260; that between Thiru P. Obul Reddy and Thiru R.S. Jeevarathinam, the latter has sequred more votes, that is, 35,683 than the former who secured 29,661; and that between Tmt. Yamuna Reddy and Thiru M.A. Mohanakrishnan, the latter has secured more votes, that is 34,557 than the former who secured 30,790 and that as such, the contestants who have secured more votes than their rivals were declared as duly elected. The votes were polled in person and by proxy and the total number of votes polled are 65,347 and the voters by casting the votes preferred the said applicants to the contesting respondents. In the cases of two persons contesting the election, it is he who secured more votes who was declared as duly elected, but in the case of a contest for one post of directorship, the question of votes polled against the candidates does not arise, as was contended by learned senior counsel. For example, Thiru C.R. Vedachalam, the fifth applicant herein, is the only one candidate who stood for contesting the election for directorship and among the total number of votes both in person and proxy, 36,743 votes were polled in his favour and 28,088 were polled against him. That virtually means, 28,088 were against him but the majority of 36,743 votes were polled in his favour which are more than the votes polled against him and he was declared as elected. I would like to make it clear that in such of the directorship posts, if there is a contest among two or more candidates, whoever secures the majority of votes among the contesting candidates is the only one criterion and that alone has to be taken into consideration for declaring him elected. But, in the case of only one person seeking approval of his being elected, then alone the question of polling the votes for and against him comes into the picture. In the context of the above position, I may reject the contentions raised on behalf of respondents Nos. 4 and 5 that since there were no votes against them, they should be declared to be elected as directors. In my firm view, their contentions seem to be absolutely meaningless and no legal sanctity can be attached to that and cannot be sustained for any moment.

Then another attack was brought on behalf of the respondents that the scrutineers appointed during the annual general meeting, in filing the report, have mishandled and committed so many malpractices in declaring the applicants as elected and they have not adopted the normal procedure and mode and that, therefore, their contentions cannot be accepted. To substantiate this written plea, there were no arguments advanced by counsel on behalf of the respondents. Even so, there was no material or iota of evidence made available to suspect the report filed by the scrutineers, covered under exhibit A-4. The counter-affidavit filed by respondents Nos. 4 and 5 contains no iota of materials to substantiate the plea of misdeeds, malpractices and mishandling in the votes polled in preparing a report by the scrutineers. Therefore, I may straightaway reject their contention as not at all maintainable either in law or on facts.

But a careful and meticulous perusal of the report filed by the scrutineers with all the details and the proceedings of the report of the annual general meeting held on December 24, 1990, proves that it is a vital document which clearly demonstrates the fact that the poll conducted during the 120th annual general meeting of the first respondent and completed by electing the fifth applicant herein, as was rightly and justifiably contended by Thiru V.S. Subramaniam, learned counsel appearing for the applicant in C.S. No. 420 of 1991 and Thiru C. Harikrishnan, learned counsel appearing for the plaintiff in C.S. No. 421 of 1991, that the election has been conducted and held lawfully and in keeping with the legal norms as contemplated by law and procedure being followed by the respondents, as advised by their legal adviser and as such, the said aspect was proved and recognised by the resolutions passed and entered in the minutes book which was duly intimated to the Registrar of Companies as contemplated by law. All the above facts have been clearly fortified by the minutes of the annual general body meeting held on December 24, 1990, prepared by the chairman of the first respondent company.

On a careful perusal of the entire documents relied on behalf of the applicants/plaintiffs in both the suits, I am fully satisfied to hold that there are no infirmities or laches or any malpractices committed by the scrutineers on behalf of the applicants/plaintiffs in conducting the elections and electing of the applicants herein as abovereferred. Accordingly, the recomposition of the board of directors on the basis of the election results was duly intimated to the Registrar of Companies, as contemplated under the provisions of the Companies Act, after having entered the said resolutions in the minutes book of the annual general meeting of the first respondent company. At this juncture, it will be worth referring to sections 193 to 195 of the Companies Act, 1956, as amended up-to-date.

"193. (1) Every company shall cause minutes of all proceedings of every general meeting and of all proceedings of every meeting of its board of directors or of every committee of the board, to be kept by making within thirty days of the conclusion of every such meeting concerned, entries thereof in books kept for that purpose with their pages consecutively numbered.

(1A) Each page of every such book shall be initialled or signed and the last page of the record of proceedings of each meeting in such books shall be dated and signed—

(a)    in the case of minutes of proceedings of a meeting of the board or of a committee thereof, by the chairman of the said meeting or the chairman of the next succeeding meeting;

(b)    in the case of minutes of proceedings of a general meeting, by the chairman of the same meeting within the aforesaid period of thirty days or in the event of the death or inability of that chairman within that period, by a director duly authorised by the board for the purpose".

It is relevant to advert to section 194 of the Act which reads as follows:

"Minutes of meetings kept in accordance with the provisions of section 193 shall be evidence of the proceedings recorded therein".

This section is followed by section 195 which occupies a significant role and the same is as follows:

"Where minutes of the proceedings of any general meeting of the company or of any meeting of its board of directors or of a committee of the board (have been kept in accordance with the provisions of section 193), then, until the contrary is proved, the meeting shall be deemed to have been duly called and held, and all proceedings thereat to have duly taken place, and in particular, all appointments of directors or liquidators made at the meeting shall be deemed to be valid".

Thus, a cursory perusal of this section 195 regarding the presumption to be drawn where minutes of the company duly drawn and signed, clearly proves that the presumption arising in this section is a rebuttable one by adducing contrary evidence; that if a proper minutes book is kept and proceedings of meetings are duly recorded, it shall be deemed that the meeting has been duly called, held and all proceedings thereat have duly taken place and the consequent appointment of director or directors has been validly made. If the minutes are not recorded or signed within the prescribed period, then it is to be presumed that it is not properly kept and it will not be receivable in evidence.

Keeping the above legal norm provided in section 195, based on sections 193 and 194 of the Companies Act to the facts of the present one, with reference to exhibit A-4, the proceedings of the minutes, covering the 120th annual general body meeting of the first respondent held on December 24, 1990, at a place called Swami Sankaradoss Kalai Arangam, T. Nagar, Madras, from 9.30 a.m. till the evening, as was signed by its chairman, Thiru K.D. Parekh, duly passed and entered in the minutes book, it is manifest that the same squarely comes within the legal limbs of the above provisions of law.

The legal presumption arising out of this minutes as was entered in the books of the annual general body meeting of the company by its chairman and which was duly intimated to the Registrar of Companies, as contemplated under section 264 of the Companies Act, clearly and totally is in favour of the applicants herein and unless and until the contrary is proved by respondents Nos. 4 and 5, the meeting held on December 24, 1990, shall be deemed to be duly called and held and all the proceedings shall be held as having duly taken place and in particular, the election of all these applicants as directors of the board of directors of the first respondent shall be valid one. However, the onus cast on the person who challenges the resolution or the entering of the minutes on the ground of malpractice or misdeed is only upon the contesting respondents Nos. 4 and 5 as has been clearly provided by this section and though the respondents had attempted to cast aspersions or a challenge against the lawful contention of the election of the applicants, they have virtually and deliberately failed to prove even a semblance of proof as contemplated by this section.

Under the circumstances, I am fully satisfied to hold that in conducting the annual general body meeting of the first respondent on December 24, 1990, as claimed and contended on behalf of the applicants/plaintiffs, is valid, lawful and completed without any iota of laches or infirmities or irregularities whatsoever and that with regard to the same in the context of the duly recorded minutes in the books of the first respondent as duly intimated to the Registrar of Companies, as provided under sections 177, 178, 179, 184 and 264 of the Companies Act, it has been clearly made out that the applicants have established a strong prima facie case against the respondents herein.

I have carefully perused the memorandum and articles of association of the first respondent which is available in the printed book form covered under exhibit A-l in both the above original applications. The memorandum and articles of association of the first respondent do not contain any article providing the mode upon which the elections to the board of directors to fill up the vacancies are to be conducted. In the absence of any specific articles or provision, what is the mode of election to be followed in electing the directors or the managing directors of the company, viz., the first respondent. It is the case of the plaintiff that on the date of the annual general body meeting held on December 24, 1990, all the five applicants were declared as the real contestants by show of hands. The chairman who presided over the meeting then ordered the poll and, consequently, the legal adviser of the first respondent, viz., learned counsel, Thiru T. Raghavan, explained the various procedures and modes to be followed in conducting the poll for electing the five directors of the board of the first respondent company to all the shareholders and members of the first respondent, who were on the eve of the election and thus everyone was apprised of the mode and that at the meeting, the contesting respondents Nos. 4 and 5 as well as the other defeated candidates were also present. It has to be seen that it is not the case of the respondent that they were not aware of the mode of election followed by the chairman of the annual general meeting or the manner in which the poll was conducted on the subsequent dates. It is the undisputed case among the parties that pursuant to the decision taken in the annual general meeting held on December 24, 1990, by appointing the scrutineers, the poll was conducted on December 26, 1990, and that following the poll, the scrutineers had taken charge and they completed their job and the chairman announced the result of the poll on December 29, 1990. Therefore, with regard to the mode of poll conducted by the first respondent company in electing the five directors, there is no dispute among the parties herein. What the respondent contended was that the scrutineers appointed for the purpose of completing the poll have committed malpractices, misdeeds and so many nefarious activities in declaring all the present applicants as the successful candidates. But for which, as I have already observed, the proceedings of the minutes of the annual general meeting held on December 24, 1990, and the report of the scrutineers, with the subsequent documents, exhibits A-6 to A-15 would clearly provide a fitting reply and answer for the same. It, therefore, follows that the contesting respondents were not able to point out a single infirmity in the results of the poll conducted by the first respondent on December 24, 1990, and announced on December 29, 1990. They have miserably failed to do so and except a mere self-serving and ipse dixit of the claim, there is no semblance or iota of evidence made available before this court to substantiate the contentions of the respondents herein. Their contentions with regard to the above said aspect of poll is vitiated by fraud and so on, remains as a solitary aspect as not having been brought to prove to any extent. On the other hand, by adducing documentary evidence and written pleadings, the applicants had candidly established a strong prima facie case in their favour against the respondent and about the mode of conducting the elections and the result of the same, consisting of every legal formalities had been performed in doing so. In this context, the arguments advanced on behalf of the plaintiffs in both the suits by Thiru V.S. Subramaniam and Thiru Harikrishnan, learned counsel for the applicants in both the suits, are to be countenanced in their entirety and, accordingly, I accept the same.

Then comes the question of the legal aspects of the requisition given by the respondents and their group, viz., the defeated shareholders and their supporters calling for a requisition to the first respondent company to convene the extraordinary general meeting of the shareholders of the first respondent, covered under exhibits A-6 and A-25, in both the above suits. A casual look at the notice dated March 7, 1991, abovereferred to clinches the fact that this notice has been given under section 169 of the Companies Act, 1956, for the purposes of convening the extraordinary general meeting to consider the business set out in the agenda by means of carrying out the resolution, viz., (i) to declare that the result of the poll on the resolutions on the appointment of directors held on 24th December, 1990, at the 120th annual general meeting of the company and announced on 29th December, 1990, and (ii) to declare that Thiruvalargal C.A. Ramakrishnan, N. Seshachalam, P. Obul Reddy and Smt. Yamuna Reddy, the defeated candidates, as the directors of the company. This notice has been given in compliance with the legal terms provided under section 169 of the Companies Act. On receipt of this notice on February 18, 1991, the first respondent company sought legal opinion and gave an explanatory statement. It was on the basis of this notice that the proposed calling for the extraordinary general meeting of the first respondent by the requisitionists of this notice has been stayed by the order of this court, on moving the abovesaid applications, urgently.

Thiru G. Subramaniam, the learned senior counsel appearing for the respondent, contends by relying on this section, viz., section 169 of the Companies Act, that the requisitionists had complied with all the legal norms and ingredients in sending this notice to the first respondent calling for the extraordinary general meeting of the first respondent by virtue of the provision of this section and that the requirement provided in this section amounts to a mandatory one, the first respondent cannot evade the calling of the extraordinary general body meeting or refuse to comply with the demand made therein for the reason that this section is an exhaustive one and provided every remedy to such of the shareholders who may have every grievance over the mode of functioning of the directors of a company and that, therefore, the prayer asked for by the contesting respondents in the respective applications in both the suits, can safely be granted.

At this juncture, it may become useful to refer to section 169 of the Companies Act, which is extracted as hereunder, though not in full, but with the relevant clauses alone:

"169. Calling of extraordinary general meeting.—(1) The board of directors of a company shall, on the requisition of such number of members of the company as is specified in sub-section (4), forthwith proceed duly to call an extraordinary general meeting of the company.

(2) The requisition shall set out the matters for the consideration of which the meeting is to be called, shall be signed by the requisitonists, and shall be deposited at the registered office of the company.

(3) The requisition may consist of several documents in like form, each signed by one or more requisitionists".

Then the relevant clause for the purpose of this case is sub-clause (6) which reads as follows:

"If the board does not, within twenty-one days from the date of the deposit of a valid requisition in regard to any matters, proceed duly to call a meeting for the consideration of those matters on a day not later than forty-five days from the date of the deposit of the requisition, the meeting may be called—

        (a)    by the requisitionists themselves,

(b)    in the case of a company, having a share capital, by such of the requisitionists as represent either a majority in value of the "paid- up share capital held by all of them or not less than one-tenth of such of the paid-up share capital of the company as is referred to in clause (a) of sub-section (4), whichever is less, "...

Sub-section (7)(a) has some relevance to be referred to which is as follows:

" (a) shall be called in the same manner, as nearly as possible, as that in which meetings are to be called by the board; but

(b) shall not be held after the expiration of three months from the date of the deposit of the requisition,"

Thus, it has been made clear that if the respondent company received a notice from the required number of shareholders, under this section, that they intended to move resolutions for. the removal of the applicants who were the directors and also to move resolutions for appointment of other persons as directors, then it was for the company to circulate the notice to all the directors and that upon doing so, the company should call for an extraordinary general meeting for the purpose of carrying on the business specified in the said notice and in the event of not convening the extraordinary general meeting, it was provided in this section that the requisitionists may by themselves convene the extraordinary general meeting after and within the stipulated time and carry out the resolution.

It has to be seen that a legal obligation is placed on a company to convene the extraordinary general meeting on the receipt of a valid notice under section 169 of the Companies Act, and the convening of an extraordinary general meeting is mandatory. If that is so, then the contesting respondents along with their supporters may subsequently add and carry the resolutions as clearly specified in the notice, exhibit A-25, in this case and that in such position, the duly elected directors, viz., the applicants herein, are to be removed which no law would recognize and it follows to that extent, the mandatory provisions and requirement provided under section 169 of the Companies Act are to be followed by the first respondent company.

In the context of the specific purpose and object, the respondents had called for the extraordinary general meeting, taking shelter under section 169 of the Companies Act in exhibit A-25, the notice dated March 7, 1991, to remove all the applicants herein who were duly elected in a poll conducted in accordance with the procedure and accepted mode, and announced that there were no laches of any kind in appointing the requisitionists themselves, as directors, in their place. This anomaly may provide a good ground to stop the normal and regular administration of the first respondent company, under the shelter of section 169 of the Companies Act.

Nevertheless, I may observe in the above context that what subsection (6) of section 169 of the Act provides is that the requisitionists may themselves call a meeting, if the board does not call a meeting within 21 days from the date of deposit of a valid requisition. The word "valid" provided in this sub-section clearly indicates that the requisition which was made must be valid and lawful. In other words, such a requisition was for consideration of a resolution which would amount per se to a valid requisition; otherwise, it would clearly mean that the directors were not required to call a meeting. May be true that the word "valid", adopted in this section, has no reference to the object of the requisition but rather to the requirements in that section itself. Therefore, it is clear that what is required to be seen is whether the requisition deposited with the first respondent was in accordance with the provisions of this section, as to its contents and other aspects. But, if it is considered to be valid, then the directors of the company shall not refuse to act on the requisition, but if the object for which the requisition was made is not for carrying out a valid purpose, then it may provide a speculation or a deadlock in this context. It is only at this juncture, that the applicants had approached this court for their redressal, by means of granting interim injunction and that accordingly, on finding a prima facie case, this court had granted the order and the same is in force.

Here is a case in which it has been candidly established that the election of the applicants/plaintiffs was lawfully and legally conducted pursuant to all the legal formalities and lawful modes accepted and adopted and entered in the minutes book of the company and followed by duly intimating to the Registrar of Companies in compliance with all the legal formalities which would virtually mean that the resolution carried in the annual general meeting held, has been fully implemented and accordingly, all the applicants and plaintiffs have been working constituting the board of directors of the first respondent and discharging their duties in carrying out the administration of the first respondent.

Then the question that remains to be solved is what is the remedy open to the applicants herein in the context of a notice lawfully complying with the ingredients contemplated under section 169 of the Companies Act given by the respondent herein contemplating their removal and appointing the respondents and their men as directors of the company, under the pretext of the majority? If I answer this question, that the applicant has no remedy, then, I am afraid that I shall be guilty of not rendering justice to the parties and I shall be guilty of encouraging the respondents in dislodging the due and lawful election conducted by the first respondent. A careful perusal of almost all the relevant provisions contained in the company law clinches the fact that no specific provision has been provided in the said Act projecting a remedy to the aggrieved person like the applicants in the instant case. But, in the context of the present position, I am of the firm view that this court can interfere in a matter of this kind and provide a legal remedy to the aggrieved person, viz., the applicants herein, because I find that there is no provision, barring the jurisdiction of the civil court in matters where relief is sought for in respect of the personal rights of the shareholders, directors and so on, such denial of their right of voting or attending the general meeting and so on. It has to be seen further that the ordinary civil courts are not deprived of their jurisdiction to decide the rights of parties except where the Companies Act expressly excludes it such as in matters relating to winding up. It is, therefore, clear that in the present context, section 9 of the Code of Civil Procedure can be made applicable to cases of this nature, except where the jurisdiction of the civil court is expressly excluded. It would follow that the civil court has jurisdiction in respect of matters "falling within the jurisdiction of this court, having jurisdiction under the Companies Act which would mean that the power or jurisdiction of the civil court operates only in respect of matters falling within the Companies Act. It is also the accepted norm that as a rule, except in matters for which the Companies Act itself provides remedies, the civil court may have jurisdiction over all other matters of civil nature.

In this context, it has become useful for me to refer at this stage to section 9 of the Code of Civil Procedure which is as follows:

"9. Courts to try all civil suits unless barred.—The courts shall (subject to the provisions herein contained) have jurisdiction to try all suits of a civil nature excepting suits of which their cognizance is either expressly or impliedly barred.

Explanation I.—A suit in which the right to property or to an office is contested is a suit of a civil nature, notwithstanding that such right may depend entirely on the decision of questions as to religious rites or ceremonies.

Explanation II.—For the purposes of this section, it is immaterial whether or not any fees are attached to the office referred to in Explanation I or whether or not such office is attached to a particular place".

A mere reading of this section visualises the fact that in so far as the jurisdiction of the civil court is concerned, there shall be a presumption in favour of its jurisdiction and to have it otherwise, the exclusion of the jurisdiction of the civil court is not to be readily inferred and that such exclusive jurisdiction must be explicitly expressed or merely implied. It, therefore, follows that there must be a clear provision of law available ousting the jurisdiction of the civil court which must be strictly considered and that the onus for the same lies on the party who claims the ousting of the jurisdiction.

Importing the said legal norm and the presumption I find that there is no difficulty in holding that the civil court shall take cognizance of every matter, because it possesses jurisdiction to do so under the purview of section 9 of the Code of Civil Procedure and not because of anything contained in the Companies Act. Having followed the above legal norm, I am able to gauge that the personal right conferred in favour of all the applicants herein, viz., the directorship of the board of directors of the first respondent company is at stake by the contemplated convening of an extraordinary general meeting as specifically provided under the notice given by virtue of section 169 of the Companies Act, covered under exhibits A-6 and A-25 in both the suits, the personal right and interest of the applicants will be dissipated, if allowed.

Having considered the established factual aspects of the case, I am so clear in my mind to hold that the respondents are not entitled to give notice pursuant to the legal ingredients provided under section 169 of the Companies Act to call for an extraordinary general meeting of the first respondent for the purpose specified in the said notice for which, they are not legally entitled to do so. The reason being is that it may be true that after the election was over, the defeated candidates, viz., the respondents and their supporters may be able to muster huge strength by adopting one mode or other obviously known to themselves and that in consequence thereof, the respondents would have been able to comply with the legal requirements provided under section 169 of the Companies Act in calling for an extraordinary general meeting. But that strength of the respondent cannot be allowed to obliterate or remove the personal remedy provided to all the applicants herein by dislodging themselves from their directorship who were duly elected under the due process, mode and law. There is no law to recognize such kind of covert act now being adopted by the respondents. It does not mean that the respondents are remedyless, but what they could say at the present circumstances is that since they are not entitled to, in my view, to convene the extra-ordinary general meeting for the purpose of removing the directors from the directorship of the first respondent, but to declare them as self-styled directors of the first respondent. At best, in my firm view, the respondents can wait till the next vacancy arises either by rotation or otherwise in the board of directors of the first respondent and that before the same occurs, they are not entitled to convene the extraordinary general meeting for the purpose mentioned in the notice covered under exhibits A-6 and A-25 in the respective suits and for which there is no law recognising the activities of the respondent in dislodging the applicants from their duly elected board of directors and declare themselves as directors of the first respondent company which may at the extreme amount to a self-styled one. In the context of the pleadings raised in the affidavit as well as the pleadings narrated in the plaint and by the documentary evidence relied on on behalf of the applicants/plaintiff in both the cases, Thiru Harikrishnan and Thiru V.S. Subramanian, learned counsel appearing for the applicants/plaintiffs, would strenuously and justifiably contend that if the order of ad interim injunction granted already is not made absolute or vacated, then it would confer every right or strength to the respondents to virtually stop the entire administration of the first respondent by dislodging the applicants from their duly elected directorship position and the respondents would occupy the said position, which would cause every hindrance and irreparable loss and prejudice to the applicants herein and that further, on such contingency, the entire provisions of the company law would be defeated. There is every force in the argument of learned counsel for the plaintiffs. Per contra, learned counsel, Thiru G. Subramaniam, was not able to counter the arguments advanced on behalf of the applicants.

One of the contentions raised on behalf of the respondents was that by virtue of the combined effect of sections 169 and 263 of the Companies Act, by carrying out a single resolution for the appointment of all the applicants herein as directors of the board of the first respondent, they are necessarily to be removed, but since the very resolution entered in the books of the first respondent itself is not valid under the above sections of law. Having considered the gamut of sections 169 read with section 263 of the Companies Act to the facts of the instant case, I am so clear in my mind that the above contentions of the respondents cannot be sustained for any purpose for the simple reason that all the applicants herein have not been appointed by carrying out a single resolution held on December 24, 1990. But this is a case where all the five applicants were declared to be the nominees for the election by show of hands and consequently, the chairman of the annual general meeting ordered the poll and in pursuance thereof the poll was conducted in accordance with the mode announced by the legal adviser of the first respondent and explained in the open meeting as evident from the explanatory statement given by the first respondent and scrutineers were appointed by the chairman as provided by law and they have submitted their report on the basis of which the chairman has declared and announced the result of the poll by getting the consent of the applicants, complied with the legal requirements as provided under section 264 of the Companies Act. In the context of the above compliance with all the legal ingredients and formalities by the applicants as I have referred to, I feel totally unable to accept the contention raised in the counter-affidavit as well as the arguments advanced by learned counsel, Thiru G. Subramanian on behalf of the respondents that the election was vitiated by fraud.

Then learned counsel, Thiru V.S. Subramanian and Thiru Harikrishnan, appearing for the plaintiff in both the suits have cited the following text books and case-laws in support of the contentions and arguments advanced on behalf of the applicants.

(1)            Gold Company, In re [1874-1880] All ER (reprint) 957 at 964; [1879] 11 Ch 701 (Ch D),

        (2)            Palmer's Company Law, 22nd edition, at page 530,

(3)            Sections 193, 195, 177, 179, 257, 195 and 505 of the Companies Act,

(4)            Shackleton on Meetings (Company Law), 6th edition (1977), at pages 198 and 199,

(5)            Holmes v. Keyes (Lord) [1958] 28 Comp Cas 414; [1958] 2 All ER 129 (CA), and

        (6)            Shaw v. Tati Concessions Ltd. [1913] 1 Ch 292.

Per contra, relying on sections 169, 177, 178, 179 and 184 of the Companies Act, Thiru G. Subramaniam, appearing for the respondent, added the following case-laws in support of the arguments advanced by him on behalf of the respondents:

(1)            Isle of Wight Railway Company v. Tahourdin [1884] 25 Ch 320, 334 (Ch D),

(2)            Cricket Club of India Ltd. v. Madhav L. Apte [1975] 45 Comp Cas 574 (Bom) at pages 584, 585,

        (3)            Pennington's Company Law, fifth edition, at page 724,

(4)            Life Insurance Corporation of India v. Escorts Limited [1986] 59 Comp Cas 548; [1986] 1 SCJ 38,

        (5)            State of Uttar Pradesh v. Singhara Singh, AIR 1964 SC 358.

(6)            Raghunath Swarup Mathur v. Dr. Raghuraj Bahadur Mathur [1967] 37 Comp Cas 304; AIR 1967 All 145,

(7)            K.P.M Aboobucker v. K. Kunhamoo, AIR 1958 Mad 287, and lastly,

        (8)            Hakhitan Law of Meetings at page 115.

I have carefully perused the above text books on company law and the case-laws cited above, in the context of the proved and established factual aspects of the instant case. Though I have absolutely no discontent with the legal ratios held out in the above case-laws as well as the text books pertaining to the rights of the shareholders of a company and the various modes to be adopted in appointing and removing the directors and conducting the elections and so on, since they were on different facts not at all germane to the present case, the ratio held therein may not render any help or assistance to the respective parties in this case. Therefore, under the circumstances, I feel that it is totally not necessary to traverse or import or refer to any of the citations individually one by one in this case.

On the basis of the pleadings and the arguments advanced on behalf of the parties by the respective learned counsel, I have fully considered the same to the very depth of the matter and I am so clear in my mind to hold that the plaintiffs in both the suits, viz., the applicants, being the elected directors of the first respondent duly elected as the shareholders of the first respondent company have established a strong prima facie case in their favour against the respondents and that there was no iota of evidence even to the extent of semblance of prima facie are not available on behalf of the respondents and that, therefore, I am fully satisfied to accept the case advanced on behalf of the applicants herein. In the result, I feel totally unable to accept any of the arguments advanced on behalf of the respondents herein, nor their contentions raised in the affidavit.

In the result, I answer point No. 1 in both the Original Applications Nos. 288 and 289 of 1991, in favour of the applicants/plaintiffs and with regard to the points in Applications Nos. 2597 and 2598 of 1991 and 2595 and 2596 of 1991, I answer the same against the applicants, viz., the contesting respondents.

Accordingly, I hereby allow the Original Applications Nos. 288 and 289 of 1991. The order of interim injunction passed on March 26, 1991, is hereby made absolute till the disposal of the suit, as contemplated by Order 39 of the Civil Procedure Code and sections 36 and 37 of the Specific Relief Act. Accordingly, both the above applications are allowed with no order as to costs.

Applications Nos. 2595, 2596, 2597 and 2598 of 1991 filed by the respondents/defendants Nos. 4 and 5 fail and, accordingly, the same are dismissed with no order as to costs.

[1996] 86 COMP CAS 842 (P&H)

HIGH COURT OF PUNJAB AND HARYANA

Bhankerpur Simbhaoli Beverages (P.) Ltd.

v.

Sarabhjit Singh

V.K. JHANJI J.

C.R. NO. 1109 OF 1994.

FEBRUARY 14, 1995

 

G. Ramaswamy, M.L. Sarin and Ms. Alka for the Petitioners.

Dr. A.M. Singhvi, Harbhagwan Singh, S. Mitra, P.K. Bansal, Arun Bansal, Arun Monga and B.S. Jandu for the Respondents.

JUDGMENT

V.K. Jhanji J.—This shall dispose of Civil Revision No. 1109 of 1994 and also application under Order 39, rules 1 and 2 read with section 151 of the Code of Civil Procedure, 1908, praying for ad interim injunction against the defendants in Civil Suit No. 460 of 1994 titled as Bhankerpur Simbhaoli Beverages Pvt. Ltd, v. Utpal Kumar Ganguly, pending in the court of the Additional Senior Sub-Judge, Rajpura. Civil Revision No. 1109 of 1994 has been directed against the ad interim order dated March 18, 1994, passed by Sh. G.S. Khurana, Additional District Judge, Patiala, in the pending appeal arising out of Civil Suit No. 33 of 1994 pending in the court of the Senior Sub-Judge, Patiala.

Initially, Civil Revision No. 1109 of 1994 directed against the order of the Additional District Judge, Patiala, was filed in this court, but before the matter could be finally decided, Civil Suit No. 460 of 1994 was filed in the court of the Additional Senior Sub-Judge, Rajpura. Since the matter involved was common in both the suits, i.e., the civil suit out of which Civil Revision No. 1109 of 1994 has arisen and Civil Suit No. 460 of 1994 learned counsel for the parties, on October 17, 1994, stated at the Bar that this court should finally decide the application under Order 39, rules 1 and 2 of the Code of Civil Procedure, filed by the plaintiff in Civil Suit No. 460 of 1994 and also the matter which was pending in appeal before the Additional District Judge, Patiala, arising out of the application under Order 39, rules 1 and 2 of the Code of Civil Procedure, in Civil Suit No. 33 of 1994. They further stated that on decision by this court, the appeal pending before the Additional District Judge would become infructuous. Not only the counsel made a statement at the Bar, but also filed a joint application, Civil Miscellaneous No. 6474-CII of 1994 in which a prayer had been made for transfer of the application under Order 39, rules 1 and 2 of the Code of Civil Procedure in Civil Suit No. 460 of 1994 pending before Sh. Balbir Singh, Sub-Judge, 1st Class, Rajpura, to this court for decision along with Civil Revision No. 1109 of 1994. It may be mentioned at this stage that although this court while sitting on the revisional side was reluctant to decide the application under Order 39, rules 1 and 2 of the Code of Civil Procedure in Civil Suit No. 460 of 1994 at Rajpura and also the subject-matter of appeal arising out of application under Order 39, rules 1 and 2 of the Code of Civil Procedure at Patiala, but since the parties had made a joint prayer and also stated at the Bar before this court that both the matters be taken up and disposed of by a common order, this court vide order dated July 15, 1994, allowed the prayer and, therefore, both the matters are being disposed of finally in this revision petition.

The facts are taken from Civil Suit No. 460 of 1994 at Rajpura, titled as Bhankerpur Simbhaoli Beverages Pvt. Ltd. v. Utpal Kumar Ganguly.

The suit at Rajpura has been filed by Bhankerpur Simbhaoli Beverages Pvt. Ltd. (B.S.B. in short) through Sh. Sarabhjit Singh, stated to be managing director and ex-factory manager of B.S.B. The suit is for declaration with the prayer that extraordinary general meeting (E.G.M. for short) of B.S.B. pursuant to the alleged notice dated January 3, 1994, or January 27, 1994, was not held at 4, Community Centre, Lawrence Road, Industrial Area, New Delhi, or at any other place ; that resolutions alleged to have been passed at the said extraordinary general meeting on February 22, 1994, as claimed by defendants Nos. 1 to 9 are non-existent, fictitious and are of no effect; that resolution purported to be passed at the extraordinary general meeting of B.S.B. allegedly held on February 22, 1994, even if actually held, are illegal and void and are of no effect. A perpetual injunction is being sought to restrain defendants Nos. 1 to 10 or any of them or servants and agents from giving effect to or relying upon or touching within furtherance of the alleged resolution dated February 22, 1994, allegedly passed at the said impugned extraordinary general meeting of B.S.B. allegedly held on February 22, 1994, and further restraining defendants Nos. 1 to 9 from acting or holding themselves out as directors of B.S.B. in reliance upon the resolutions purported to be passed in the alleged extraordinary general meeting and further restraining defendants Nos. 1 to 10 from interfering with or obstructing or disputing the acting of defendants Nos. 10 and 16 to 25 as directors of B.S.B. It has been averred in the plaint that B.S.B. is a company incorporated under the provisions of the Companies Act, 1956 (in short, the Companies Act), and has its registered office at Bhankerpur Simbhaoli Beverages Pvt. Ltd., Bhankerpur, Dera Bassi, District Patiala, Punjab. The main objects of the company, i.e., B.S.B., are to carry on the business of brewers, distillers, bottlers, wine manufacturers and to prepare, buy, store, sell, distill, manufacture, redistill and deal in all kinds of beers, wine, liquors, etc. B.S.B. was earlier owned by Simbhaoli Industries Pvt. Ltd. (S.I.L. in short). The shareholding position of B.S.B. immediately before the takeover of the same by S.I.L. was as under :

"1.

Mr. S. Sandhu

:

10 equity shares of Rs. 10 each.

2.

Mr. Gurpal Singh

:

10 equity shares of Rs. 10 each.

3.

Mr. G.S. Mann

:

10 equity shares of Rs. 10 each.

4.

Mr. J.S. Mann

:

10 equity shares of Rs. 10 each.

5.

Simbhaoli Industries Pvt. Ltd.

:

5,50,000

-do.-

 

Total

 

5,50,040"

 

The management of the Shaw Wallace group of companies entered into negotiation with S.I.L. and it was agreed that the entire issued equity shares amounting to 5,50,000 as held by S.I.L. would be taken over by a subsidiary company of Shaw Wallace and Company (in short, the SWC) under the control of the Shaw Wallace group at the face value aggregating to Rs. 55 lakhs. The management of the Shaw Wallace group selected one Budgam Finance and Investment Co. Pvt. Limited (in short, Budgam) for the said takeover of the shares. The said Budgam had no funds to pay the price of the said shares as the paid-up issued share capital of the Budgam was only Rs. 100 and the said company was having only a nominal amount in its bank account. One SICA Breweries Private Limited advanced an amount totalling Rs. 60,50,000 as inter-corporate deposit to Budgam. It was from this amount that Budgam acquired its 5,50,000 shares from S.I.L. After the acquisition of shares by Budgam from S.I.L., the following was the shareholding position of B.S.B. :

"1.

Mr.P.S. Sandhu

:

10 equity shares of Rs. 10 each.

2.

Mr. Gurpal Singh

:

10 equity shares of Rs. 10 each.

3.

Mr. G.S. Mann

:

10 equity shares of Rs. 10 each.

4.

Mr. J.S. Mann

:

10 equity shares of Rs. 10 each.

5.

Mr. P.R. Pandya

 

10 equity shares of Rs. 10 each.

6.

Budgam Finance and Investment Co.

:

5,50,000

-do.-

 

Total

 

5,50,050"

 

Ten equity shares of Rs. 10 each were allotted to one P.R. Pandya after the takeover of shares by Budgam. It has further been stated that Mr. P.S. Sandhu has since expired and is not a shareholder any more. It is further averred that as per the articles of association of B.S.B., there has to be a minimum of two directors and the maximum limit of directors has been fixed at 11 which can be changed. The first directors of the company were S/Sh. Pritam Singh Sandhu, Gurmeet Singh Mann, Jagraj Singh Mann and Gurpal Singh. However, after acquiring B.S.B., S.W.C. nominated its employees on the board of directors of B.S.B. Seven additional directors namely S/Sh. Y.P. Sud, T.K. Ramaswamy, M.G. Ramachandran, Madan Mohan Suri, R. Ganesan, A. Roy Chowdhury and S.N. Pandey were appointed on July 8, 1989. The original four directors of the B.S.B. namely S/Sh. Pritam Singh Sandhu, Gurmeet Singh Mann, Jagraj Singh Mann and Gurpal Singh ceased to be the directors with effect from June 27, 1990. It is further averred that presently, the lawfully constituted board of directors of B.S.B. are S/Sh. Sarabhjit Singh, managing director, P.R. Pandya, director (secretary, SKOL Breweries Ltd.—a subsidiary of SWC), A.S. Chatterjee, director (manager, SWC), A. Sadasivam, director, (asst. vice-president, SWC), V. Jayaraman, director (general manager, Cruickshank and Co.—A subsidiary of S.W.C), Srijit Mullick, director (manager, SWC), M.M. Gupta, director (general manager, SWC), T.K. Ravishanker, director (general manager, SWC), A. Sabharwal, director (general manager, SWC), Rajiv K. Viz, director (deputy general manager, SWC) and Harsh Wardhan Sen, director (vice-president, SWC). It has been alleged that B.S.B. is/has been under the supervision and control of SWC as the whole of the board of directors consists of employees of SWC. Para 6 of the plaint then describes the name of the shareholders and also the board of directors of Budgam. In para 7 of the plaint, it has been averred that one Arun Kumar Jain, i.e., defendant No. 8 had been taken as director of B.S.B. on September 26, 1991, by the board of directors to fill a casual vacancy caused by the resignation of one of the directors of the board. The same was, however, subject to ratification at the annual general meeting which was to be done in the third annual general meeting to be held on September 29, 1992. However, the said Arun Kumar Jain ceased to be director with effect from September 29, 1992, i.e., the date when the annual general meeting was held and his name was not ratified/confirmed by said annual general meeting. B.S.B. also filed a civil suit in the court of Sh. J.S. Bhatia, Sub-Judge, 1st Class, Rajpura, for a declaration that the appointment of Arun Kumar Jain as a director of B.S.B. was invalid, illegal and void and that he has ceased to be a director. It has further been averred that one K.R. Chhabria was once the managing director of SWC. The said K.R. Chhabria was removed as such due to his diverse acts prejudicial to the company. On being stripped of his powers, due to abuse of his powers and for acts detrimental to the interest of SWC and due to acts for his personal gains, the said K.R. Chhabria started harbouring a grudge against SWC. Certain other employees who were his associates were also removed from SWC on discovery of their illegal acts prejudicial to the interest of SWC. All of them are acting in connivance with each other to destabilize SWC and its other associate companies. The said Arun Kumar Jain after his cessation, has also become hostile to the company and has joined hands with several people who were at certain points of time engaged at different executive positions with SWC. On February 21, 1994, the said Arun Kumar Jain filed a complaint under section 145 of the Criminal Procedure Code, 1973, before the Sub-Divisional Magistrate, Rajpura, claiming himself to be a director of B.S.B. The said complaint was dismissed by the Sub-Divisional Magistrate on March 2, 1994, with the observation that the complaint filed by Arun Kumar Jain is an abuse of process of the court. Arun Kumar Jain also filed a civil suit on February 21, 1994, in the court of Sh. J.S. Bhatia, Sub-Judge, First Class, Rajpura, and tried to obtain an ex parte stay order against all the directors of B.S.B. by misleading the court. However, he failed to do so. Hence, the ex parte stay order was declined on February 21, 1994. The said suit is titled as Arun Kumar Jain v. T.K. Ramaswamy. It has been averred that the said suit has been filed by Arun Kumar Jain to thwart the earlier suit filed by B.S.B. against him. Upon such failure on the very next day, i.e., February 22, 1994, Arun Kumar Jain got another suit filed purported to be on behalf of B.S.B., the plaintiff in the present suit through one of his associates, J.C. Vohra, which was also filed before Shri J.S. Bhaia, Sub-Judge, First Class. The said suit came up for hearing on February 23, 1994, and a prayer for an ex parte stay order, restraining the defendants therein from interfering in the affairs and management of B.S.B. was made, which too was declined. Thereafter, on March 2, 1994, Arun Kumar Jain, filed another suit before the Senior Sub-Judge, Patiala, purported to be on behalf of Budgam along with one Ashok Jain who purported himself to be a director of B.S.B. In that suit, an ex parte stay order dated March 2, 1994, was passed against the defendants therein. An appeal was filed by Sarbjit Singh against the said order and the learned Additional District Judge, vide his order dated March 18, 1994, modified the order of the trial court. Against the order passed by the Additional District Judge, Arun Kumar Jain has filed a revision petition, C.R. No. 1109 of 1994. In the suit filed before the Senior Sub-Judge, Patiala, Arun Kumar Jain claims to have convened an extraordinary general meeting of B.S.B. on February 22, 1994. Pursuant to the said extraordinary general meeting, he claims to have removed all the earlier lawfully constituted directors of B.S.B. and further claims to have appointed defendants Nos. 1 to 9 as directors of B.S.B. on the basis of resolutions alleged to have been passed in the said extraordinary general meeting. It is thus averred that defendants Nos. 1 to 9 are wrongly claiming to be directors of B.S.B. on the basis of resolutions alleged to have been passed in the extraordinary general meeting alleged to have been held at New Delhi on February 22, 1994. The purported claim of defendants Nos. 1 to 9 is absolutely illegal and void on the grounds that defendants Nos. 1 to 10 in collusion and conspiracy with each other have fabricated the records to create a claim that on February 22, 1994, an extraordinary general meeting was held, while in fact, no such meeting was at all held and also that even if the extraordinary general meeting was held on February 22, 1994, the holding of any such meeting and any resolution passed there at is illegal and void ; that notice dated January 3, 1994, issued in the name of Budgam signed by Utpal Kumar Ganguly calling upon the B.S.B. to hold an extraordinary general meeting for removal and appointment of directors, was not in compliance with section 169 of the Companies Act, 1956 ; that one member of B.S.B. alone could not call an extraordinary general meeting that the alleged notice dated January 3, 1994, was never circulated to the lawful board of directors of B.S.B., who were controlling the affairs of B.S.B. ; that notice dated January 3, 1994, was not issued by any valid board resolution from the board of directors of Budgam. Utpal Kumar Ganguly was not a director of Budgam ; that the decision to remove the existing directors and appoint new directors was for drastic reconstitution of the board of directors of B.S.B. and amounted to a policy decision of Budgam. Under the orders of the Jammu and Kashmir High Court dated February 22, 1993, Budgam has been specifically directed not to take or execute any policy decision. The said notice dated January 3, 1994, having been issued in the name of Budgam in violation of the order of the Jammu and Kashmir High Court dated February 22, 1993, is illegal and void ; that the alleged notice dated January 27, 1994, issued in the name of Budgam by Utpal Kumar Ganguly as a purported director is again in violation of the order of the Jammu and Kashmir High Court dated February 22, 1993. The said notice dated January 3/January 27, 1994, contained a decision of Budgam to drastically reconstitute the board of directors of B.S.B. which was a matter of policy decision and which Budgam was expressly restrained from taking by the order of the Jammu and Kashmir High Court; that there being no valid notice for convening the extraordinary general meeting of the shareholders of B.S.B., the purported meeting alleged to have been held on February 22, 1994, is consequently illegal and void ; that the alleged notice dated January 27, 1994, was not served to S/Sh. P.S. Sandhu, Gurpal Singh, J.S. Mann, Gurmeet Singh Mann and P.R. Pandya, i.e., five undisputed shareholders of B.S.B. and as such, the said extraordinary general meeting is illegal and void ; that the venue of the extraordinary general meeting is alleged to be : 4, Community Centre, Lawrence Road, Industrial Area, New Delhi, where B.S.B. never had nor has a registered office or even a branch office. The holding of the extraordinary general meeting at New Delhi is not in compliance with the provisions of section 169 of the Companies Act ; that no notice far from special notice or resolution to remove the directors of B.S.B. was ever given/sent to any of the existing directors sought to be removed, nor were they heard on the resolution for removal at the extraordinary general meeting; that none of the directors sought to be removed, was present at the alleged extraordinary general meeting and they were not given opportunity to be heard at the alleged meeting, if at all held. It has also been averred that K.R. Chhabria is, the ex-managing director of S.W.C. and he has ceased to be managing director of S.W.C. on and from April 19, 1992. K.R. Chhabria is only interested in hijacking the companies belonging to the S.W.C. group for his personal benefit and to the detriment of the S.W.C. group. Budgam and B.S.B. both belong to the S.W.C. group. The plaintiff has alleged in para 18 of the plaint that the validity of the alleged extraordinary general meeting and resolutions passed thereat on February 22, 1994, became the subject-matter of contempt proceedings initiated before the Jammu and Kashmir High Court. In the said contempt proceedings, the Jammu and Kashmir High Court passed order on April 18, 1994. Against the said order, the K.R. Chhabria group through Arun Kumar Jain in the name of Budgam filed a special leave petition in the Supreme Court. The Supreme Court, vide order dated May 16, 1994, observed that the validity of the said extraordinary general meeting was to be decided in a substantive proceeding to be filed before an appropriate court and not in contempt proceedings. The Supreme Court, while setting aside the contempt proceedings, did not disturb the order for stay of resolutions passed in the extraordinary general meeting dated February 22, 1994, passed by the Jammu and Kashmir High Court and continued the order for stay for a period of two weeks from the said date to enable the appropriate substantive legal proceedings for challenging the said extraordinary general meeting and the resolution passed thereat to be taken in the appropriate court. The plaintiff has, thus, stated that pursuant to the stay order of the Supreme Court, the plaintiff is filing this suit for challenging the alleged extraordinary general meeting and the resolutions passed thereat.

The written statement has been filed on behalf of defendant No. 8, namely, Arun Kumar Jain and by defendant No. 15 purported to be on behalf of Budgam. Arun Kumar Jain in his written statement has taken exception to the filing of the suit by Sarbjit Singh, alleging to be the managing director of B.S.B. It has been alleged in the written statement that he has no right, title, interest, authority or competency to institute the suit, and the name of the said company shown as the plaintiff is illegal, unauthorised, wholly without jurisdiction and without authority. It has further been stated that the company, i.e., B.S.B., is wholly owned and controlled by Budgam having its registered office in Jammu which holds and owns 99.9% of the equity shares of B.S.B. In turn, one M.D. Chhabria and R.D. Chhabria hold and own respectively 39.87% and 60.08% of the shares in Budgam, i.e., 99.95% of the shareholding of Budgam and, consequently, the said company is wholly owned and controlled by M.D. Chhabria and R.D. Chhabria through the said Budgam. The said company in its meeting of 22nd February, 1994, reconstituted its board of directors. The said company has already filed a suit for injunction in the court of the Senior Sub-Judge, Patiala, for restraining the persons removed from directorship at the meeting dated February 22, 1994, from interfering in the affairs and management of the said company and from representing themselves as directors of the said company. In this suit, the said company was granted interim relief in the application under Order 39, rules 1 and 2 of the Code of Civil Procedure, and the removed directors were restrained as prayed by the said company. Against this order, Sarbjit Singh filed an appeal in his individual capacity in which the said company is one of the respondents and, thereafter, the matter is pending in this court and the stay application is also pending disposal with this court. In the appeal filed by Sarbjit Singh, as also the contempt proceedings and civil revision, the said company is represented by S/Sh. Ashok Jain and Arun Jain and not by Sarbjit Singh. It has also been stated in the suit that the same is liable to be stayed under section 10, Civil Procedure Code, inasmuch as in the suit, the challenge is to the board meeting held by the said company on February 22, 1994, and actions and/or decisions taken at the said meeting, whereas the meeting held by the said company on February 22, 1994, is the subject-matter of the suit for injunction legally and validly filed by and on behalf of the said company in the court of the Senior Sub-Judge, Patiala, which is till date pending and is a previously instituted suit and the same is liable to be stayed. Arun Kumar Jain in his written statement has admitted that the issued, subscribed and paid-up capital of the said company is Rs. 55,00,500 divided into 5,50,050 equity shares of Rs. 10 each, out of which 5,50,000 shares are owned by Budgam which constitutes over 99.99% of the equity capital in the said company. These shares were acquired by Budgam on September 27, 1989, and till date the same are owned by Budgam. The original four directors and P.R. Pandya own 10 shares each and nobody else has any share in the said company. It has also been stated that the said company has reconstituted its board of directors in the meeting of the board of directors on February 22, 1994, and since the removed directors were threatening interference in the affairs and management of the said company, the said company filed an injunction suit before the Senior Sub-Judge, Patiala, which is till date pending. Arun Kumar Jain has denied that the management of S.W.C. negotiated the purchase of the said company, as alleged in the plaint. He has also denied that Budgam had no funds to pay the price, though he has admitted that money advanced by Sica Breweries Pvt. Ltd. was a mere intercorporate deposit to Budgam. In para 5 of the written statement, Mr. Jain has given the names of nine persons alleged to be only directors of B.S.B., namely, S/sh. Arun Kumar Jain, T.K. Ramaswamy, M.D. Chhabria, U.K. Ganguly, N.D. Chhabria, Ashok Jain, Shyam Luthria, S.K. Basu and Shiv Shankar Sanyal. He has also denied that he has ceased to be a director as alleged by B.S.B. As regards the order of the Sub-Divisional Magistrate dropping the proceedings on March 2, 1994, he has stated that the same are arbitrary, non est and violative of the principles of natural justice. He has also stated that the cause of action and the matter in issue are different in both the suits and the proceedings are not liable to be stayed. According to him, the relief sought for in the Rajpura suit was for injunction as the defendants therein were trying to dispossess the lawful owners in violation of the status quo order dated February 21, 1994, passed by the Sub-Divisional Magistrate under section 145, Criminal Procedure Code, whereas the case in the Patiala suit is that Budgam being 99.99% owner of B.S.B. had exercised its legitimate rights under the provisions of the Companies Act and had validly upon requisition being made in this regard had changes effected in the board of directors of B.S.B. It was to restrain the other persons who are acting as directors and representing and/or holding themselves out to be directors, that the suit for injunction was filed wherein certain interim orders were passed. He has denied the averment in the plaint that no extraordinary general meeting was held on February 22, 1994. Notices issued in this regard have been stated to be valid. Mr. Jain has further stated that Gurpal Singh is now seeking to retract from his presence at the said meeting because of threat and pressure which have been imposed on said Gurpal Singh. In order to show that the extraordinary general meeting was held, he has submitted that Form 32 dated February 22, 1994, was filed with the Registrar of Companies on March 2, 1994. However, he has denied that the said return is fictitious as alleged by B.S.B. In regard to the resignation of P.R. Pandya, Mr. Jain has averred that Mr. Pandya in fact had resigned and this he admitted in his affidavit filed before the Company Law Board, Principal Bench, New Delhi, in Company Petition No. 29 of 1993 and now wholly contrary to his said stand of resignation, P.R. Pandya turns around and in the present suit, takes an entirely new stand that he had not resigned from the plaintiff companies and continues to be director/shareholder. Hence, the affidavit filed by P.R. Pandya is a concocted and fabricated document, wholly contrary to the truth. With reference to the order of the Jammu and Kashmir High Court, Arun Kumar Jain has submitted that no order from the Jammu and Kashmir High Court was necessary to have been obtained before exercise of voting rights in Budgam, since liberty to exercise voting rights had been reserved to Budgam by the said order. He has, thus, prayed that the suit filed by B.S.B. be dismissed being misconceived, arbitrary and fraudulent.

One S.S. Sanyal, purporting to be director of Budgam, has filed a written statement on behalf of defendant No. 15 which contains almost the identical averments as in the written statement filed by Arun Kumar Jain.

The plaintiff, B.S.B., has filed replication to the written statements filed by Arun Kumar Jain, defendant No. 8 and defendant No. 15 wherein the plaintiff has denied the averments made in the written statements and has reiterated the stand taken by it in the plaint. The pleadings in Civil Suit No. 33 of 1994 out of which Civil Revision No. 1109 of 1994 has arisen are not necessary to be mentioned because the plaint and the written statements filed in Civil Suit No. 460 of 1994 cover the controversy raised in Civil Suit No. 33 of 1994.

From a perusal of the pleadings of the parties, it is evident that S/Sh. P.S. Sandhu, Gurpal Singh, G.S. Mann, J.S. Mann and P.R. Pandya hold 10 shares of Rs. 10 each, whereas Budgam holds 5,50,000 equity shares of Rs. 10 each. The total shareholding of the company is 5,50,050 shares of Rs. 10 each. P.S. Sandhu has since expired and on the date when the extraordinary general meeting is alleged to have been held, only five shareholders were in existence which includes Budgam. It may also be noticed at this stage that as to who owns Budgam, is a matter pending before the Additional District Judge, Jammu, in a suit filed on behalf of Budgam through its alleged directors, Arun Kumar Jain, R.D. Chhabria and M.D. Chhabria. The Additional District Judge, Jammu, vide his order dated January 20, 1993, restrained the defendants therein from acting or representing themselves as directors of the company, alienating, selling or altering, transferring or in any other manner, the assets of the plaintiff-company and interfering or inter-meddling with the smooth functioning of the plaintiff-company. Having felt aggrieved against this order, the defendants therein filed a petition before the Jammu and Kashmir High Court in C.I.M.Y. No. 14 of 1993 and Mr. Justice V.K. Gupta disposed of the appeal by an agreed order, which reads as under :

"(1)  The appellants shall file written statement in the suit before the trial court before March 5, 1993. The suit shall be taken up by the trial court, along with the application for temporary injunction on March 5, 1993, irrespective of any date earlier fixed by him. Objections to the application for temporary injunction shall also be filed by the appellants before March 5, 1993.

(2)    Uninfluenced by the order dated January 20, 1993, in any manner whatsoever and totally uninfluenced by any observations or comments, made by this court in this order, the trial court shall reconsider the question of grant or otherwise of the temporary injunction in its entirety after perusing the pleadings on the file, the documents and after hearing the parties in all respects. The trial court shall not postpone the proceedings in the matter of consideration of the temporary injunction by more than a day till the order is ultimately passed. The order dated January 20, 1993, impugned in this appeal is modified and altered to the following extent :

(i)         The plaintiffs in the suit, like the defendants in the impugned order are also restrained from alienating, selling, altering, transferring or encumbering in any manner, any assets, nvestment or property of the plaintiff's company.

(ii)           The plaintiffs shall not take or execute any policy decision and if the plaintiff company has to exercise any voting right in other company, this right shall be exercised provisionally only and shall remain subject to the orders to be passed ultimately.

(iii)       The operative part of the impugned order as also the arrangements made hereinabove shall immediately come to an end on the passing of fresh order by the trial court."

The issue as to who is the true owner of Budgam, is pending and hotly disputed before the Jammu and Kashmir court and does not call for consideration in the present proceedings. During the course of arguments of Dr. A.M. Singhvi, senior advocate, who argued on behalf of the plaintiffs in Civil Suit No. 460 of 1994 and contesting the respondents in Civil Revision No. 1109 of 1994 and Mr. G. Ramaswami, senior advocate, who argued on behalf of the contesting the defendants in Civil Suit No. 460 of 1994 and on behalf of the petitioners in Civil Revision No. 1104 of 1994, it was repeatedly clarified that no enquiry could be contemplated or conducted in the present proceedings to enquire as to who is the true owner of Budgam. In these proceedings, it was also fairly admitted by Mr. G. Ramaswami, senior advocate, that at no time prior to February 22, 1994, did the contesting defendants in the Rajpura suit come to control, run or manage the B.S.B. Mr. Ramaswami has accepted that the management, control and operation of B.S.B. at all times prior to February 22, 1994, was in the hands of the plaintiffs, i.e., S.W.C. employees. The sole issue raised in this case is prima facie the holding of the meeting on February 22, 1994, or its legal validity. It was also agreed that in case this court finds that in fact the valid extraordinary general meeting was held on February 22, 1994, then the plaintiffs in Civil Suit No. 460 of 1994 would not be entitled to any injunction, but in turn the contesting respondents, i.e., the plaintiffs in Civil Suit No. 33 of 1994 pending before the Senior Sub-Judge, Patiala, shall be entitled to the injunction.

It may also be mentioned at this stage that on April 18, 1994, the defendants in Civil Suit No. 33 of 1994 approached the Jammu and Kashmir High Court in a contempt petition, alleging that the convening of the extraordinary general meeting on February 22, 1994, was a violation of the order of Mr. Justice V.K. Gupta, dated February 22, 1993. The Jammu and Kashmir High Court issued notice for contempt and stayed the giving of effect to the extraordinary general meeting. The matter was assailed by the plaintiff by way of S.L.P. (C) No. 7925 of 1994 in the Supreme Court. The Supreme Court, vide order dated May 16, 1994, dismissed the contempt petition, but gave liberty to the respondents therein to file a suit. The operative part of the judgment of the Supreme Court is reproduced here-under :

"5. On a consideration of the matter, it appears to us that if the respondents were aggrieved by the convening of the extraordinary general meeting of Bhankerpur and the subsequent resolution dated February 22, 1994, they ought to have had recourse to appropriately constituted, substantive proceedings to assail their validity and not invoke the contempt jurisdiction. It is a moot question whether that part in para 2(ii) of the earlier order, whose violation was complained of in contempt, merely constituted terms of agreement between the parties or whether there was, in addition, the imprimatur of the court placed on it and, whether it was a 'direction' or only an 'observation' of the court. In view of the latter part of para 2(ii) of the earlier order dated February 22, 1993, the subsequent convening and holding of the extraordinary general meeting of Bhankerpur and the resolution dated February 22, 1994, cannot be said to be a willful disobedience of the said earlier order.

6. We, accordingly, set aside the order dated April 18, 1994, of the High Court of Jammu and Kashmir in CMP(COA) No. 139 of 1994. We also dismiss the contempt proceedings."

Pursuant to the order of the Supreme Court, Civil Suit No. 460 of 1994 has been filed.

Dr. A.M. Singhvi, senior advocate, has contended that no extraordinary general meeting of B.S:B. was held on February 22, 1994, and :he minutes, if any, and notices alleged to have been sent under certificate of posting have been manipulated by the defendants. In the alternative, he has contended that the meeting, if any, held was illegal and was in violation of the Jammu and Kashmir High Court order dated February 22, 1993, whereby the two warring factions of Budgam were prohibited to take any steps of policy nature. He has also referred to certain provisions of the Companies Act to submit that the alleged removal of directors was not valid and the meeting could not be held at a place other than the one where the registered office of the company is situate. He has also contended that the defendants are not entitled to relief of injunction in the suit at Patiala because of suppression of material facts and also that the court at Patiala lacked territorial jurisdiction.

The plaintiffs as well as the defendants have filed on record numerous documents in order to prove or disprove the factual existence of the extraordinary general meeting alleged to have been held on February 22, 1994. Thus, the first question which arises for consideration is with regard to the factual existence of the holding of the extraordinary general meeting on February 22, 1994, at New Delhi. In order to support that the meeting was held, the defendants have placed on record notice dated January 3, 1994, alleged to have been served by Budgam to B.S.B. and to all those directors sought to be removed by notice. The certificates of posting in proof of posting of letters/notices dated January 3, 1994, have been placed on record. They have also placed on record notice dated January 27, 1994, alleged to have been served by Budgam on other shareholders of B.S.B. and also certificates of posting as proof of posting of notice dated January 27, 1994 ; copy of Form No. 32, dated February 22, 1994, filed with the Registrar of Companies, Jalandhar, intimating about the reconstitution of the board of directors of B.S.B. in the extraordinary general meeting ; the alleged minutes of the extraordinary general meeting of B.S.B. held on February 22, 1994 ; the affidavit of T.K. Ramaswamy, director of B.S.B. ; the affidavit of Shalendra Sharma, who was allegedly authorised by Budgam to vote and represent on behalf of Budgam at the extraordinary general meeting. It may be noticed that apart from Budgam who held 5,50,000 equity shares of Rs. 10 each on the date when the meeting is alleged to have been held, there were only four other shareholders in existence, namely, Gurpal Singh, G.S. Mann, J.S. Mann and P.R. Pandya, who held 10 equity shares of Rs. 10 each. In order to give a finding as to whether the extraordinary general meeting was held, it is necessary to find out first, as to whether at least two shareholders were present in the meeting because a single person cannot constitute a meeting. This proposition is not being disputed by Mr. G. Ramaswami, senior advocate, and rightly so, because in Stroud's Judicial Dictionary, 1973 edition, "meeting" has been described thus—(1) one swallow does not make a summer, nor does the presence of one shareholder constitute a "meeting" (Sanitary Carbon Co., In re [1877] WN 223). The word "meeting" implies a concurrence, or coming face to face of "at least two persons" (per Coleridge C.J. in Sharp v. Dawes [1876] 2 QBD 26 (CA)). There is accordingly and speaking generally, no "meeting" of shareholders or other bodies, if only one attends ; though "no doubt in a particular statute the word might be used in a special sense, so that the attendance of one might satisfy it" (per Coleridge C.J. in Sharp v. Dawes [1876] 2 QBD 26 (CA)) : see East v. Bennett Bros. Ltd. [1911] 1 Ch 163. In Oxford Companion to Law, 1980 edition, "meeting" has been described thus : "A gathering of two or more persons called to receive a report, take a decision or otherwise take some lawful action." According to Jowett's Dictionary of English Law, 1977 edition, a single person cannot constitute a meeting (Sharp v. Dawes [1876] 2 QBD 26 (CA)). In Venkataramaiya's Law Lexicon with Legal Maxims, 1983 (second edition), for a meeting, there must be at least two persons, and that this is the ordinary and natural meaning of the word.

One man could not hold a meeting within the meaning of the Companies Act.

According to The Law Lexicon, 1989 edition, "in the second case, East v. Bennett Bros. Ltd. [1911] 1 Ch. 163, Warrington J. following Sharp v. Dawes [1876] 2 QBD 26 (CA) and also the decision of Jessel M.R. in Sanitary Carbon Co., In re [1877] WN 223, observed that in an ordinary case it was quite clear that a meeting must consist of more than one person, Awadhoot v. State of Maharashtra, AIR 1978 Bom 28 at 39, 40 ; [1977] Mah L.J. 689." In C.A. Lyon v. S.W. Oppenheim [1970] 1 Comp LJ (Ch D) edition, appointment of himself as liquidator at a meeting consisting of only one shareholder present was declared as nullity because when he proposed himself as liquidator, the other shareholders had left the meeting and from that moment, only one shareholder was present.

In State of Kerala v. West Coast Planters Agencies Ltd. [1958] 28 Comp Cas 13 ; AIR 1958 Ker 41, the meaning of the word "meeting" has been described thus (headnote of AIR 1958 Ker 41) :

"The common sense view is that for a meeting there must be at least two persons. This common sense view is also the true view in law. According to the ordinary use of the English language, a meeting can no more be held by one person than it can be by none : [1876] 2 QBD 26 and [1911] 1 Ch 163, relied on."

The minutes of the extraordinary general meeting of the shareholders of B.S.B. alleged to have been held on Tuesday, February 22, 1994, at 10 a.m. at No. 4, Community Centre, Lawrence Road, Industrial Area, New Delhi, have been placed on record. A reading of the said minutes reveals that only three persons were present in the meeting, namely, T.K. Ramaswamy who has been described as director, B.S.B. ; Mr. Shalendra Sharma who has been described as authorised representative of Budgam, and Gurpal Singh, as member. The minutes of the meeting further show that T.K. Ramaswamy was elected chairman of the meeting and thereafter, the chairman declared the meeting open. Notice dated January 27, 1994, alleged to have been served by Budgam, convening of the extraordinary general meeting of the shareholders of B.S.B. was tabled and read. Notice dated January 3, 1994, was also tabled and read. Thereafter, in the meeting, special business of removal of directors and appointment of directors was allegedly taken up and resolutions to that effect were passed. The minutes of the meeting appear to have been signed by T.K. Ramaswamy, chairman.

A reading of the minutes shows that out of the shareholders who hold 10 shares of Rs. 10 each, only one shareholder, namely, Gurpal Singh was present and Shalendra Sharma, alleged authorised representative of Budgam, second shareholder, was present. On the record, there is a letter of Gurpal Singh dated April 7, 1994, whereby he had informed the board of directors of B.S.B. that he neither received notice regarding convening of the extraordinary general meeting of B.S.B., nor did he attend any such meeting purported to have been held on February 22, 1994, at New Delhi, either in person or by proxy. He has also mentioned that the question of his father, P.S. Sandhu, attending the meeting does not arise as he had expired last year. Gurpal Singh has also filed an affidavit dated July 27, 1994, in Civil Suit No. 460 of 1994 in which he has affirmed and sworn that he never attended any meeting, nor received notice of convening of the extraordinary general meeting alleged to have been held on February 22, 1994, at New Delhi. In his affidavit, he has stated that he contacted other shareholders who too have confirmed that they never received any notice, nor attended any such meeting. He has made mention of letter dated April 7, 1994, which he had written to the board of directors of B.S.B. in this regard.

If the contents of letter dated April 7, 1994, and affidavit dated July 27, 1994, are accepted, the extraordinary general meeting allegedly held on February 22, 1994, has to be declared as invalid for the reason that only one shareholder, namely, Shalender Sharma, representing Budgam, was present. Mr. G. Ramaswami, counsel for the defendants, has submitted that at the relevant time, Gurpal Singh not only attended the meeting, but was supporting the defendants. He is now seeking to get out of the same under the pressure of the plaintiffs. Mr. Ramaswami on the basis of presumption to be drawn under section 195 of the Companies Act, as also on the basis of notice dated January 3, 1994, served by Budgam on B.S.B. and to all those directors sought to be removed, certificate of posting of letters dated January 3, 1994, notice dated January 27, 1994, served by Budgam on the other shareholders of B.S.B., certificate of proof of posting of letter dated January 27, 1994, copy of Form No. 32, dated February 22, 1994, filed with the Registrar of Companies, Jalandhar, minutes of the extraordinary general meeting of B.S.B., affidavit of T.K. Ramaswamy and affidavit of Shalendra Sharma, authorised by Budgam to vote and represent at the said extraordinary general meeting, has contended that this court should hold that a valid extraordinary general meeting was held and the board of directors were reconstituted. The course suggested by Mr. Ramaswami cannot be accepted for the reason that suspicious circumstances as pointed out by Dr. A.M. Singhvi, senior advocate, are so many and their consideration gives rise to an inference that the meeting was not held. The following are the suspicious circumstances :

(i)             Apart from certificate of posting—no evidence has been brought on record to show that notice of the extraordinary general meeting was served on Gurpal Singh or any other shareholder ;

(ii)            No signature of Gurpal Singh are claimed to have obtained in any attendance register or any attendance slip or even by way of initials or in the so-called minutes book ;

(iii)           Defendants in para 7 of their replication in Civil Suit No. 33 of 1994 have stated to the following :

"The plaintiffs reaffirm and reiterate that an extraordinary general meeting of the first plaintiff was held after compliance of all the provisions of the Companies Act, and the defendants who have no interest and/or can possibly claim no interest in the first plaintiff are making feeble attempts to attack the validity of the said meeting. The plaintiffs crave reference to the minutes book, attendance register and the other statutory records of the first plaintiff to unequivocally demonstrate the veracity of the stand of the plaintiffs." (emphasis supplied). Having averred that the attendance register was maintained, no attendance register has been placed on record ; rather during the course of hearing of the matter, it was fairly conceded by counsel for the defendants that in fact there exists no attendance register.

(iv)       Budgam had allegedly issued notice dated January 3, 1994, to the directors sought to be removed and notice dated January 27, 1994, to other shareholders for convening of extraordinary general meeting, but no mention of these notices calling for the extraordinary general meeting was made by Arun Kumar Jain in his application dated February 21, 1994, which he had filed before the Sub-Divisional Magistrate, Rajpura, under section 145 of the Criminal Procedure Code, 1973. In his application under section 145 of the Criminal Procedure Code, 1973, he has given the history of the litigation between the parties, but has conveniently not mentioned in regard to the meeting which had already been convened for February 22, 1994.

(v)        Arun Kumar Jain filed Civil Suit No. 154 of 1994, on February 21, 1994, at Rajpura, praying for a declaration that he is a director and shall not be removed from the board of directors except in due course of law. If the extraordinary general meeting had already been convened for February 22, 1994, then where was the apprehension. In this suit, he had also prayed for ad interim injunction, but the same was not granted.

(vi)       Again on February 22, 1994 itself, another suit, namely, Civil Suit No. 158 was filed at Rajpura, seeking permanent injunction, restraining the defendants therein (plaintiffs in Civil Suit No. 460 of 1994) from interfering in any manner in the affairs and management of the company. A reading of the plaint, Civil Suit No. 154 of 1994 reveals that no mention with regard to the extraordinary general meeting has been made. In this suit, relief of temporary injunction was sought for, but was not allowed. Later on, the suit was withdrawn after the filing of Civil Suit No. 33 of 1994 at Patiala.

It be noticed that in Company Petition No. 29 of 1993 before the Company Law Board, apart from other reliefs, the defendants had sought the relief of convening of the extraordinary general meeting and to restrain the respondents therein to act as directors and also from interfering in the affairs and management of the company. In this petition, they had prayed for interim relief, but the interim relief was not granted. One of the interim reliefs sought in the company petition was convening of the extraordinary general meeting. It appears that having failed to obtain that relief from the Company Law Board, the records have been manipulated by the defendants to show that the extraordinary general meeting was held on February 22, 1994. It may also be noticed at this stage that the Company Petition No. 29 of 1993 was filed with the specific averment that "the remaining 5 shareholders who holds 10 shares each in the first respondent-company have started acting according to the whims and fancies of SWC and MRC and consequently prejudicial to the interest of the petitioners who undisputedly hold 99.99 per cent. paid-up equity capital of the first respondent-company". The stand of the respondents thus clearly was that all the shareholders of B.S.B. except Budgam were colluding with the S.W.C. group. The stand now taken that Gurpal Singh had come to attend the meeting, seems to be improbable. Moreover, having made the averment that the remaining five shareholders including Gurpal Singh were colluding with the S.W.C. group, the simplest thing for the defendants to have done would have been to take signatures of Gurpal Singh on the requisition notice or on the attendance register. The contention of Mr. Ramaswami is that the modes provided under section 53 of the Companies Act for serving of notice or documents by the company are either by way of certificate of posting or by registered post, with or without acknowledgment due and in this case, the requisitionists having sent the notice under certificates of posting, the presumption in law is required to be drawn. According to him, once a certificate of posting has been placed on record, the court has to presume valid service of notice. It is true that under section 53 of the Companies Act, the only modes for the service of documents/notices are the one as suggested by Mr. Ramaswami, but the presumption to be drawn under section 53 of the Companies Act is not absolute, but. rebuttable. The court, on the facts and circumstances of a case, may refuse to draw a presumption. In L.M.S. Ummu Saleema v. B.B. Gujral, AIR 1981 SC 1191 ; [1983] 53 Comp Cas 312 in the context of certificates of posting and drawing of presumption under sections 16 and 114 of the Evidence Act, the Supreme Court opined that (at page 318) :

"The certificate of posting might lead to a presumption that a letter addressed to the Assistant Collector of Customs was posted on August 14, 1980, and in due course reached the addressee. But, that is only a permissible and not an inevitable presumption. Neither section 16 nor section 114 of the Evidence Act compels the court to draw a presumption. The presumption may or may not be drawn. On the facts and circumstances of the case, the court may refuse to draw the presumption. On the other hand, the presumption may be drawn initially, but on a consideration of the evidence the court may hold the presumption rebutted and may arrive at the conclusion that no letter was received by the addressee or that no letter was ever despatched as claimed. After all, there have been cases in the past, though rare, where postal certificates and even postal seals have been manufactured". Again, in Shiv Kumar v. State of Haryana [1994] 87 FJR 66, 68 ; [1994] 4 JT 162, 163, the apex court held that "we have not felt safe to decide the controversy at hand, about the service of notice on employees, on the basis of the postal certificates produced before us, as it is not difficult to get such postal seals at any point of time". In Malleswara Finance and Investments Company P. Ltd. v. CLB [1995] 82 Comp Cas 836, a Division Bench of the Madras High Court in some dispute between some parties to these proceedings had also an occasion to deal with the presumption required to be raised in regard to service of notice/documents sent under certificate of posting. Before the Division Bench, it was argued that reading of the section amounts to a deemed fiction and once a certificate of posting is produced with the address of the addressee, there is a deemed fiction that the cover is received by the addressee. The learned judges of the Division Bench repelled the argument by saying that (at page 881) : "A presumption can be drawn only if there is no other evidence available. In this case, the primary evidence regarding the posting of the letter is not produced. The best evidence that can be produced in this case is the despatch register of the company and the books of account showing the expenses incurred by the company for posting the letters, etc. None of these documents is produced. When the primary evidence is not produced, a presumption on the basis of section 53(2) of the Companies Act cannot be made use of since the posting of the letter is in dispute. Only if a document is sent by post, the presumption under section 53 of the Companies Act can arise. When there is no evidence regarding the posting of the letter, the document relied on by the appellant cannot be made use of". In the circumstances of that case, service of documents/letters sent under alleged certificates of posting was not accepted. In this case, what has been produced are the plain papers on which addresses are typed, containing seals of one post office situate at New Delhi, and the postal stamps are also of one type, though there is a gap of 24 days in sending of the first notice and the second notice. The despatch register or books of account showing the expenses incurred by the requisitionists towards the posting of letters have not been produced. These circumstances read with other circumstances as detailed in the earlier part of the judgment, lead to an inference that these notices were not sent. No reliance whatsoever can be placed on the certificates of posting under which notices were allegedly sent to the directors and the shareholders. In this view of the matter, the contents of the letter of Gurpal Singh, shareholder, dated April 7, 1994, and his affidavit dated July 27, 1994, deserve to be accepted in preference to the affidavits of T.K. Ramaswami and Shalendra Sharma. Gurpal Singh has 10 shares of Rs. 10 each and has no interest as such in the affairs of the company, but T.K. Ramaswami and Shalendra Sharma are certainly interested persons and have reasons to support the cause of their masters. So far as the presumption under section 195 read with section 193 of the Companies Act in regard to minutes of the alleged extraordinary general meeting is concerned, the same is neither applicable nor available to the requisitioned extraordinary general meeting under section 169 of the Companies Act. In V.G. Balasundaram v. New Theatres Carnatic Talkies P. Ltd. [1993] 77 Comp Cas 324 (Mad), it has been held by the Madras High Court that (at page 345) : "No presumption of the minutes would arise with reference to the minutes of the requisitioned meeting. Sections 193 and 195 of the Companies Act will not be applicable to the minutes of the requisitioned meeting and the minutes have to be proved as a matter of fact". Mr. G. Ramaswami then referred to internal FAX message of one Gurpal Singh to one S.C. Majumdar of S.W.C., to contend that the plaintiffs in Civil Suit No. 460 of 1994 had the knowledge of convening and holding of the extraordinary general meeting. The FAX message referred to by Mr. Ramaswami, is dated March 4, 1994, by which date the civil suit at Patiala had been filed wherein reference was made to the alleged E.G.M. The contempt petition too had been filed on March 3, 1994, again in which, reference had been made to the convening and holding of the extraordinary general meeting. Counsel for the plaintiffs in Civil Suit No. 460 of 1994 had appeared on behalf of the caveator on March 3, 1994, when the matter was taken up in contempt proceedings. The FAX message merely raised a query as to the convening and holding of the extraordinary general meeting and is neither of any consequence nor in any way establishes that the plaintiffs knew the factum of convening and holding of the extraordinary general meeting, before February 22, 1994.

In order to determine as to whether proceedings of the meeting and resolution passed therein are valid, it is necessary to notice the provisions of section 169 of the Companies Act. Under the section, the board of directors of the company on requisition of such number of members of the company as is specified in sub-section (4), has the duty to call forthwith the extraordinary general meeting of the company. If the board does not, within 21 days from the date of valid requisition, proceed to call the meeting for consideration of the matter set out in the requisition, the requisitionists themselves are empowered to call a meeting of the company. Under sub-section (7), the meeting of the requisitionists is to be called in the same manner as nearly as possible, in which meetings are to be called by the board. The meeting held in pursuance of a valid requisition is an extraordinary general meeting of the company. In the present case, the record reveals that Budgam vide notice dated January 3, 1994, addressed to B.S.B. and to the directors, called upon the company to convene the extraordinary general meeting. The operative part of it reads—"Pursuant to section 169 of the Companies Act, 1956, we, Budgam Finance and Investment Co. Pvt. Ltd. holding 5,50,000 out of the total 5,50,050 paid up equity shares of Bhankerpur Simbhaoli Beverages Pvt. Ltd., amounting to 99.9 per cent. of the paid-up equity capital of (and voting rights in) Bhankerpur Simbhaoli Beverages Pvt. Ltd., require you to convene an extraordinary general meeting and if thought fit, passing ordinary resolutions, the resolutions set forth of which we give you special notice in accordance with sections 190 and 284(2) of the said Act". The notice appears to have been sent by one Utpal Kumar Ganguly, director. Along with the notice, the explanatory statement has been annexed, giving the purpose of calling of the extraordinary general meeting. In the explanatory statement, it has been mentioned that the directors who are employees/associates of S.W.C., namely, S. Roy, A.S. Chatterji, A. Sadasivam, Deepak Das Gupta, Srijit Mullick, R.S. Ahluwalia, V. Jayaraman and P.R. Pandya (who is alleged to have resigned with effect from May 29, 1992), are acting against the interest of the company and their removal and acceptance the resignation of P.R. Pandya from the board is sought by the requisitionists. It has further been mentioned therein that persons proposed to be appointed as directors of the company are—S/Sh. M.D. Chhabria, Utpal Kumar Ganguly, Ashok Jain, Shyam Luthria, C.K. Wasu, Shiv Shankar Sanyal and Nandu "S. Chhabria. It is the case of the defendants that after they had served notice, dated January 3, 1994, along with the explanatory statement on the company and the directors sought to be removed, the board at directors failed to convene the extraordinary general meeting as sought for by the requisitionists within 21 days of the sending of notices and, therefore, as provided under sub-section (7) of section 169 of the Companies Act, the requisitionists convened the extraordinary general meeting and notice dated January 27, 1994, in this regard was sent to the other shareholders, namely, P.S. Sandhu, Gurpal Singh, G.S. Mann, J.S. Mann and P.R. Pandya, who hold 10 shares of Rs. 10 each. Notice dated January 27, 1994, has not been addressed to any other person except the shareholders and on the U.P.C. receipts, the names of these very persons are mentioned, meaning thereby that notice dated January 27, 1994, had not gone to anybody else except the shareholders. The business to be transacted in the extraordinary general meeting was for the removal of directors and appointment of new directors. The manner in which directors may be removed, is laid down in section 284 of the Companies Act. As per sub-section (1), a director may be removed by ordinary resolution, but under sub-section (2), special notice is required to be given to the company of any resolution to remove a director or to appoint somebody instead of directors so removed at the meeting at which he is removed. Under sub-section (3), on receipt of notice of resolution to remove a director, the company has to forthwith send a copy thereof to the director concerned and the director, whether or not he is a member of the company, is entitled to be heard at the resolution of the meeting. Thus, to remove a director under section 284 of the Companies Act, certain essential requirements are to be fulfilled. The director concerned must be given a reasonable opportunity to make a representation against the proposal for his removal and the shareholders should have also adequate opportunities of being acquainted with such representation(s) before they subscribe to such resolution for removal. Under section 190 of the Companies Act, special notice of the resolution to remove directors as required by section 284 of the Companies Act, has to be given to the company not less than 14 days before the date of meeting at which he is to be removed. On receipt of notice of intention to move any such resolution, the company has to give its members notice of the resolution in the same manner as it gives notice of the meeting and if that is not practicable, then notice is required to be given either by advertisement in a newspaper having appropriate circulation or in any other mode alleged by the requisitionists, not less than seven days before the meeting. Admittedly, no special notice of the resolution was given to the company. It has been held by the Kerala High Court in Queens Kuries and Loans (P.) Ltd. v. Sheena Jose [1993] 76 Comp Cas 821, that "omission to serve special notice is a serious error in the conduct of the proceedings. The directors have been denied their statutory right to the notice of making representation and to persuade the members to reject the resolution. A resolution removing the directors is violated by failure to fulfill the requirement of law. The resolution in removing the directors is, therefore, invalid". Respectfully agreeing and following the view taken in Queens Kuries and Loans (P.) Ltd.'s case [1993] 76 Comp Cas 821). I hold that the resolution, removing the directors, alleged to have been passed in the extraordinary general meeting held on February 22, 1994, is invalid. Yet there is another aspect of the matter with regard to removal of the directors. Form No. 32 filed with the Registrar of Companies, pursuant to section 303(2) of the Companies Act, placed on record shows that as on March 12, 1992, the directors, namely, S. Roy and R.S. Ahluwalia had resigned and on July 30, 1993, in their place, T.K. Ravishankar and M.M. Gupta had been appointed as such. On September 16, 1993, D. Dasgupta had resigned. However, in notices dated January 3, 1994, and January 27, 1994, served under section 169 of the Companies Act, S. Roy, R.S. Ahluwalia and D. Dasgupta were sought to be removed and were allegedly removed in the extraordinary general meeting stated to have been held on February 22, 1994. But, as is apparent from Form No. 32 filed with the Registrar of Companies, on March 12, 1992, S. Roy and R.S. Ahluwalia and on September 16, 1993, D. Dasgupta had already resigned. This fallacy in the resolution alleged to have been passed in the extraordinary general meeting dated February 22, 1994, was brought to the notice of the defendants by the Registrar of Companies when Form No. 32 regarding reconstitution of the board of directors in the extra ordinary general meeting dated February 22, 1994, was sought to be registered with the Registrar of Companies. The minutes of the meeting of the extraordinary general meeting show that T.K. Ramaswamy attended the alleged extraordinary general meeting and indeed presided over it. However, he was not even sent U.P.C. notice. T.K. Ramaswamy is admittedly not a shareholder of B.S.B. It is not understood as to in what capacity he had attended the extraordinary general meeting and had presided over the meeting, whereas section 175 of the Companies Act, provides that shareholders may elect a chairman from amongst themselves. I have my doubts that the minutes alleged to have been signed by T.K. Ramaswamy who presided over the meeting, can be said to be valid minutes of the meeting or any presumption under section 195 of the Act can be raised on these minutes.

Dr. A.M. Singhvi, senior advocate, as well as Mr. G. Ramaswami, senior advocate counsel, had cited various judgments for and against the proposition that under sub-section (2) of section 166 of the Act, the meeting could be held only at the registered office of the company or at some other place of the city, town or village in which the registered office of the company is situate. In view of my finding that the meeting was not held and that the resolution, if any, passed was not valid, it is not necessary to go into the merits of contentions of the respective counsel and also the judgments cited by them.

The question of suppression of material facts is not academic as has been contended by Mr. G. Ramaswami, learned counsel. Civil Suit No. 33 of 1994 was filed on March 2, 1994, purporting to be on behalf of B.S.B. and Budgam through Arun Kumar Jain, director. The relief sought in the suit was for injunction against the defendants therein restraining them from holding out as directors/representatives of B.S.B. and from interfering in any manner in the management and affairs of the company. It was in this case for the first time that it was revealed that the extraordinary general meeting was held on February 22, 1994, in pursuance of notices dated January 3, 1994, and January 27, 1994, and the board was reconstituted on February 22, 1994. A suit was filed before the Senior Sub-Judge, Patiala, but in the plaint, no mention has been made about Civil Suit No. 154 of 1994, dated February 21, 1994, which Arun Kumar Jain had filed at Rajpura, and relief of interim injunction was not given. A mention has also not been made of Civil Suit No. 158 of 1994, dated February 22, 1994, filed at Rajpura, seeking injunction restraining the defendants therein from interfering in any manner in the affairs and management of the company. In this suit too, interim relief was not given. It was to the knowledge of Arun Kumar Jain that B.S.B. through Sarabhjit Singh had filed a suit at Rajpura against Budgam and others, i.e., Suit No. 831 of 1993 and also Civil Suit No. 261 of 1993 against Arun Kumar Jain, seeking the declaration of his appointment as director as void and illegal and also injunction against the defendants for restraining them from interfering in the affairs and management of the company, but no mention of these suits too was made. The filing of Company Petition No. 29 of 1993 before the Company Law Board and declining of the prayer for the interim relief of convening the extraordinary general meeting too was within the knowledge of Arun Kumar Jain, but this fact has been omitted. The Senior Sub-Judge, Patiala, registered the suit on March 2, 1994, and on the application, pending notice to the other side, granted interim injunction restraining the defendants therein from holding out as directors/representatives of B.S.B. and from interfering in any manner in the affairs and management of the company. Aggrieved by the aforementioned order of interim injunction, an appeal was filed on behalf of Sarabhjit Singh and others. The learned additional District Judge, Patiala, vide his order dated March 18, 1994, vacated the order of the trial court by an interim order pending the appeal. Aggrieved against the order of the Additional District Judge, Civil Revision No. 1109 of 1994 has been filed in this court wherein with the consent of the parties, the revision petition is being disposed of along with application under Order 39, rules 1 and 2 of the Code of Civil Procedure, filed in the court at Patiala. The contention of Mr. Ramaswami that the suits filed earlier at Rajpura were on a different cause of action, whereas the suit at Patiala is based on another cause of action and as such, the filing of the earlier suits was not a material fact requiring disclosure, and that being so, there is no suppression of material facts, cannot be accepted. In the earlier suits filed at Rajpura, the relief sought was similar to the one claimed in the Patiala suit, i.e., for restraining the defendants from interfering in the management and control of the company. It is a well recognised principle that for the grant of equity relief the plaintiff must come to the court with clean hands and he must disclose all the facts for and against him in order to claim the discretionary relief of injunction. A reference may be made to the decision in King v. General Commissioners for the purposes of the Income-tax Acts for the District of Kensington [1917] 1 KB 486, wherein the court held that "if on the argument showing cause against a rule nisi the court comes to the conclusion that the rule was granted upon an affidavit which was not candid and did not fairly state the facts, but stated them in such a way as to mislead and deceive the court, there is power inherent in the court, in order to protect itself and prevent an abuse of its process, to discharge the rule nisi and refuse to proceed further with the examination of the merits". The Madras High Court in V. Tamilselvan v. State of Tamil Nadu [1993] 1 MLJR 26, refused the relief in a writ petition by saying that the court would be fully justified in refusing to exercise its discretion in favour of a person who has abused the process of a court and suppressed the relevant facts and obtained orders. It also held that the court should not be a party and extend help to a party who is playing fraud on the court. In Udai Chand v. Shankar Lal, AIR 1978 SC 765, special leave was obtained by making false and misleading assertions in the petition. The Supreme Court relying upon Hari Narain v. Badri Das, AIR 1963 SC 1558 and Rajabhai Abdul Rehman Munshi v. Vasudev Dhanjibhai Mody, AIR 1964 SC 345, revoked the leave and held that "a party who approaches this court invoking the exercise of this overriding discretion of the court must come with clean hands. If there appears on his part any attempt to overreach or mislead the court by false or untrue statements or by withholding true information which would have a bearing on the question of exercise of the discretion, the court would be justified in refusing to exercise the discretion or if the discretion has been exercised, in revoking the leave to appeal granted even at the time of hearing of the appeal". In All India State Bank Officers Federation v. Union of India [1990] 2 JT 243, and G. Narayanaswamy Reddy v. Government of Karnataka [1991] 3 JT 12, the Supreme Court not only disapproved of the conduct of the petitioner therein in making statements in the petitions and affidavits recklessly and without proper verification, but also refused to grant relief, when it found that the petitioner therein seeking relief had not come to the court with frank and full disclosure of facts. In this context, a Full Bench of this court in Charanji Lal v. Financial Commissioner, AIR 1978 P & H 326, held thus (headnote):

"Mala fide and calculated suppression of material facts which, if disclosed, would have disentitled the petitioners to the extraordinary remedy under the writ jurisdiction or in any case would have materially affected the merits of both the interim and ultimate relief claimed—Failure to mention all these material facts was neither inadvertent nor was occasioned by any bona fide omission—Held that the writ petitioners, in the present case, had by their own conduct disentitled themselves to the relief which they sought to claim".

Although some of the judgments, referred to earlier, are in regard to special leave petitions and writ petitions, there is no reason as to why the principle as laid down in the said judgments cannot be applied to suits and applications for injunction filed under Order 39, rules 1 and 2 of the Code of Civil Procedure. For this (see AIR 1992 Delhi 197). As already noticed, in the Patiala suit, the plaintiffs therein have not chosen to mention about the proceedings pending in various suits at Rajpura and that they were unsuccessful in getting interim relief from the court at Rajpura and also from the Company Law Board in Company Petition No. 29 of 1993. The reason for not mentioning the above facts is obvious. If they had disclosed about the earlier proceedings, in all probability the Senior Sub-Judge, Patiala, would not have granted the interim relief. Although in the light of the aforementioned judgments, I would be justified in not embarking on the merits of the case, but having considered the case on the merits too, I am of the view that the plaintiff in Civil Suit No. 33 of 1994 has failed to make out any ground for grant of interim relief as prayed for in the civil suit.

Last, but not least, "forum-shopping" by the plaintiffs in Civil Suit No. 33 of 1994 deserves to be taken note of. In para 20 of the plaint, the plaintiffs have mentioned "that the cause of action to file the present suit has arisen to the plaintiffs when the defendants hatched the conspiracy at Patiala .... Moreover, the branch offices of two of defendants Nos. 13 and 14, who are interfering in the management, are at Patiala, whereas all other defendants are the agents/employees of defendants Nos. 13 and 14". Again in para 21, it has been stated that the registered office and the factory unit of the first plaintiff is situated in District Patiala and the cause of action has arisen to the plaintiffs within the local limits of the jurisdiction of the court and thus, the court has ample jurisdiction to entertain and try the suit. The description of defendants Nos. 13 and 14 as given in the plaint is, "13. Shaw Wallace Company Ltd., 4, Bankshall Street, Calcutta-700 001, with branch office at Patiala, and, 14. Cruickshank and Company Ltd., 40, Bankshall Lok Community, Vasant Vihar, New Delhi-110 057, with branch office at Patiala". It has not been disclosed as to at what place, the branch office at Patiala of defendants Nos. 13 and 14 is situate. Admittedly, the industrial unit and the registered office of B.S.B. is at Dera Bassi which falls within the jurisdiction of the civil courts at Rajpura. Sections 15 to 20 of the Code of Civil Procedure, regulate the forum for institution of the suits. Section 15 of the Code states that every suit shall be instituted in the court of the lowest grade competent to try it. Section 16 states that a suit shall be instituted where the subject-matter is situate. Section 20, inter alia, provides that subject to the limitations prescribed in sections 16 to 19 of the Code of Civil Procedure, a suit shall be instituted in a court within the local limits of whose jurisdiction the defendant or each of the defendants, where there are more than one, at the time of commencement of the suit, actually and voluntarily resides or carries on business, or personally works for gain ; or any of the defendants where there are more than one, at the time of commencement of the suit, actually and voluntarily resides, or carries on business, or personally works for gain ; provided that in such case either the leave of the court is given, or the defendants who do not reside or carry on business or personally work for gain, acquiesce, in such institution. The Explanation to section 20 of the Code provides that a corporation shall be deemed to carry on business at its sole or principal office in (India) or in respect of any cause of action at any place where it has also a subordinate office at such place. On a perusal of the averments made in the plaint and in the light of the aforementioned provisions of the Code of Civil Procedure, I am of the view that the plaintiff has failed to show that cause of action had accrued to the plaintiff within the territorial jurisdiction of the court at Patiala. What has been stated in paras 20 and 21 of the plaint is that the defendants had hatched a conspiracy at Patiala. The averment is not only vague but also gives no particulars of the kind and nature of conspiracy. The registered office and factory unit of B.S.B., no doubt, is situated within the jurisdiction of Patiala district, but the registered office and factory unit falls within the territorial jurisdiction of the Rajpura court, and the Rajpura court alone has jurisdiction to entertain and try the suits where the subject-matter is situate. In Shrikant Gupta v. Subodh Kumar Gupta [1993] 2 PLR 621, a suit was entertained by the Senior Sub-Judge, Chandigarh, on the mere allegation that the branch office of the firm is situate within the territorial jurisdiction of the Chandigarh court. The order entertaining the suit was set aside in revision by this court. The Supreme Court in Subodh Kumar Gupta v. Shrikant Gupta [1993] 2 PLR 728, while affirming the judgment of this court in Shrikant Gupta's case, held that a mere bald allegation that the firm was having a branch office at Chandigarh, will not confer jurisdiction unless it is shown that a part of the cause of action arose within the territorial jurisdiction of that court. In this case too, the only allegation is that branch offices of two of defendants Nos. 13 and 14, who were interfering in the management, are at Patiala and the other defendants are the agents/employees of defendants Nos. 13 and 14. This bald allegation cannot confer jurisdiction on the court at Patiala when no cause of action had accrued within the territorial jurisdiction of the Patiala court. No doubt, the District Judge, Patiala, has the administrative control over the courts at Rajpura, but for the matters relating to the subject-matter falling within the territory of Rajpura, powers have been given to the civil courts at Rajpura to entertain and try the civil suits. It was for this reason that the earlier suits were filed by the parties at Rajpura. Since the plaintiffs had failed to obtain any interim relief from the court at Rajpura, the suit at Patiala was filed. Thus, I am prima facie of the view that the court at Patiala has no territorial jurisdiction to entertain and try the suit.

During the course of arguments, some controversy was raised as to who was in possession as on the date when the suit at Patiala was filed, but it was fairly conceded by Mr. G. Ramaswami that the plaintiffs in the Patiala suit, at no time prior to February 22, 1994, came to control, run or manage B.S.B. The reason for this concession is apparent from the proceedings before the Sub-Divisional Magistrate, Rajpura. Arun Kumar Jain filed a complaint on February 21, 1994, under section 145 of the Criminal Procedure Code, in the Court of the Sub-Divisional Magistrate, Rajpura, and the prayer made in this complaint was for restraining the respondents therein from interfering in the peaceful possession of the property in dispute, besides a prayer for police protection. On this complaint, the Sub-Divisional Magistrate vide his order of even date, having found a prima facie case for taking action under section 145 of the Criminal Procedure Code, ordered the summoning of the respondents therein for March 17, 1994, and meanwhile, the respondents were restrained from interfering in the possession of the rightful claimants, including Arun Kumar Jain who described himself as the director of B.S.B. The order also mentions that a copy of the order be sent to the S.H.O. of P.S. Dera Bassi for compliance. It was on the strength of this order that the plaintiffs in the Patiala suit tried to take control of the industrial unit. It further appears from the record of the proceedings before the Sub-Divisional Magistrate, Rajpura, that on March 2, 1994, the Sub-Divisional Magistrate on a fresh consideration of the matter, as also on a perusal of the report of the S.H.O., P.S. Dera Bassi, felt satisfied that the proceedings initiated at the behest of Arun Kumar Jain are vitiated and an intended abuse of the process of the court. In his order dated March 2, 1994, the Sub-Divisional Magistrate recorded that "as a matter of fact there is no such dispute with regard to possession of the subject-matter referred to above which is likely to cause breach of peace or disturb the public tranquillity. Even as per the latest report of the S.H.O. P.S. Dera Bassi dated February 9, 1994, as also the report as recent as February 28, 1994, Shri Sarabhjit Singh representing party No. 2 is in peaceful possession along with his work force and no imminent danger to peace is apprehended. Being satisfied that it is unnecessary to carry on these proceedings under section 145 of the Criminal Procedure Code, I hereby drop all the proceedings in respect of the above said distillery". It was only on March 2, 1994, when the Sub-Divisional Magistrate decided to drop the proceedings, that the suit at Patiala was filed and on that very date the plaintiffs were successful in obtaining the interim injunction. After having obtained the interim injunction from the Senior Sub-Judge, Patiala, C.O.C.P. No. 199 of 1994 was filed in this court on March 3, 1994. On March 4, 1994, G.R. Majithia J. on finding that the parties were at issue as to which of the parties is in actual physical possession of the company, on agreement of counsel for the parties directed the Chief Judicial Magistrate, Patiala, to supervise the working of the company till March 9, 1994, and that order is continuing till date. In view of the order in the contempt petition, none of the parties is in control of the company. As a matter of fact, no manufacturing activity took place between February 22, 1994, and presently too, no manufacturing is being done in the industrial unit and, therefore, as to who was in possession at the time of filing of the Patiala suit is not very important for the decision of the revision petition and the application under Order 39, rules 1 and 2 of the Code of Civil Procedure.

Mr. G. Ramaswami, senior advocate, has also contended that the civil suit at Rajpura is liable to be stayed because the same was filed subsequent to the filing of the suit at Patiala. Both the suits are at the initial stage and it would cause no prejudice to any of the parties if both the suits are ordered to be consolidated for purposes of evidence and decision. Accordingly, it is ordered that Civil Suit No. 33 of 1994 pending in the Court of the Senior Sub-Judge, Patiala, shall stand transferred to the Court of the Additional Senior Sub-Judge, Rajpura, whereafter it shall be tried and decided along with Civil Suit No. 460 of 1994.

In view of what has been discussed above, I am of the considered view that the plaintiffs in Civil Suit No. 33 of 1994 have miserably failed to satisfy this court that they have in their favour a prima facie case or the court's interference is necessary before their rights can be established on trial. On the other hand, I am also of the considered view that the plaintiffs in Civil Suit No. 460 of 1994 have a prima facie case and the balance of convenience is also in their favour and they would suffer an irreparable loss and injury in case the defendants in that suit are not restrained from interfering with the working/affairs of the company on the basis of the alleged resolutions passed in the extraordinary general meeting purportedly held on February 22, 1994. Thus, during the pendency of the suit, an ad interim injunction is granted in favour of the plaintiffs in Civil Suit No. 460 of 1994 restraining the defendants from interfering in the affairs of the company and acting on the basis of the alleged resolutions passed in the extraordinary general meeting purportedly held on February 22, 1994. The Chief Judicial Magistrate, Patiala, who is in possession of the industrial unit, under the orders of this court in the contempt petition, is directed to give physical possession of the industrial unit to the plaintiffs in Civil Suit No. 460 of 1994.

In consequence of the aforementioned order, the revision petition and also the application for injunction filed in Civil Suit No. 33 of 1994 shall stand dismissed. As a result of dismissal of the revision petition and application under Order 39, rules 1 and 2 of the Code of Civil Procedure, the appeal pending before the Additional District Judge, Patiala, having become infructuous too shall stand dismissed. There shall, however, be no order as to costs.

It is made clear that the decision given in this revision petition is only for the purpose of deciding the revision petition as also the application under Order 39, rules 1 and 2 of the Code of Civil Procedure, filed in Civil Suit No. 460 of 1994 as had been agreed by learned counsel for the parties. Therefore, any observation made herein shall not be construed to be an expression on the merits of the cases.

Records of the civil suits and also the documents which have been filed in this court be sent to the Court of the Additional Senior Sub-Judge, Rajpura, who has been ordered to decide both the suits on the merits.

[1996] 85 COMP CAS 325 (BOM)

HIGH COURT OF BOMBAY

B.D.A. Breweries and Distilleries Ltd.

v.

Cruickshank and Co. Ltd.

M.F. Saldanha J.

APPEAL FROM ORDER NO. 303 OF 1993.(TRANSFERRED MISC. CIVIL APPEAL NO. 128 OF 1992.)

APRIL 27/JULY 30, 1993

 

V.R. Manohar, T.N. Subramaniam, Ajit Kapadia, Ms. Usha Purohit, Mahesh Jethmalani, Arif Bookwala, Pankaj Sawant and Craigie Blunt for the Appellants.

K.K. Venugopal, M.G. Ramachandran, Parag Tripathi, Dwarhadas, S.A Divan and V.Z. Kankaria for the Respondents.

 

JUDGMENT

M.F. Saldanha J.—I need to prefix this judgment with the observation that learned counsel appearing on both sides have done a truly excellent job of presenting every conceivable aspect of the dispute that is the subject-matter of this litigation with their characteristic skill and ability, both of which are of a very high order. While deciding on interim application, normally, this court would have circumscribed itself to the minimum and, consequently, refrained from an elaborate adjudication of the manifold facets, both factual and legal, that have been canvassed. It .was, however, pointed out to me by both sides that there are something like three dozen interconnected litigations effectively between the same parties, including an identical suit pending before the Calcutta High Court, in all of which proceedings the subject-matter of this litigation is in issue. All those litigations are in a manner of speaking dependant on the outcome of this proceeding which explains why the parties have virtually treated this one as the "mother of all battles"—to borrow an expression that has now become current, judicial time is precious and it is equally necessary that in order to curtail repetitive hearings and litigations in different parts of the country, the High Court which hears the proceedings, first, must set at rest all the points that are canvassed in view of the principles of res judicata. That, in other words, explains the length of this judgment which inevitably involved an elaborate factual and legal exercise of some magnitude. I need to also observe here that the courts which are groaning under the load of arrears can ill-afford multiple litigations and the immediate fall-out of these skirmishes is the disastrous effect on the companies and units that are being fought over which should not be driven to ruination. A total, final resolution of the entire matter is obviously in the interests of all concerned. Shri Manohar, on behalf of the appellants, was almost driven to summarise the plight of his clients as being best expressed by the phrase "to be or not to be" and, to my mind, it is imperative that legal process, to be just, must afford relief where it is deserved and in cases of injury—provide the much-needed healing touch.

The present appeal is directed against an order dated May 5, 1992, passed by the learned Second Joint Civil Judge, Junior Division, Aurangabad, confirming the ex parte injunction order passed by him on April 16, 1992. The appellants before me are the original defendants, who are aggrieved by the order in question. The suit in question, namely, Regular Civil Suit No. 321 of 1992 was filed before the learned Civil Judge, Junior Division, Aurangabad, by Cruickshank and Co. Ltd. and its erstwhile manager and presently the factory manager of B.D.A. against B.D.A. Breweries and Distilleries Ltd. and the remaining defendants, who are the chairman, the managing director, the chief executive and others connected with the management and control of defendant No. 11 need to mention, in passing, at this stage, that an appeal was presented at Aurangabad, against the impugned order which was heard by the learned Additional District Judge and reserved for orders at which stage, an application for transfer was filed by the original plaintiffs making allegations against the learned judge. What followed thereafter was something most distressing and what has been aptly summarized by the learned judges of the Supreme Court, when the litigation in relation to that transfer was carried up to the apex court, as "unsavoury". Ultimately, the appeal was transferred to Bombay from Aurangabad and it was decided that it would be heard as an appeal from order by a single judge of the High Court. That is how the litigation, though instituted in Aurangabad where defendant No. 1-company is located, has come to be decided at Bombay.

As indicated earlier, the starting point of this litigation was the institution of the civil suit in question and it is very necessary in the context of this appeal for me to summarise as to what precisely was the case made out by the plaintiffs before the trial court. I consider this crucial because this is a vigorously contested litigation in which the pleadings are voluminous, but the greater part of this material has seen the light of day at a subsequent point of time. The plaintiffs are necessarily circumscribed to the case made out by them before the trial court and no amount of padding and grafting on at later stages in the litigation is really permissible because this appeal is essentially a review of an ad interim order passed by the trial court and then confirmed on the basis of certain material before it and of a specific case made out. It is, therefore, necessary to assess, in the first instance, as to what was the cause of action pleaded at that point of time.

The plaintiffs are a wholly owned subsidiary of Shaw Wallace and Co. Ltd. (hereinafter referred to as "Shaw Wallace"), which company, in turn, is engaged, inter alia, in the business of manufacture and sale of Indian made foreign liquor and beer for the past about one hundred years. The plaintiffs contend that Shaw Wallace and Co. Ltd. conceived, developed and promoted various brands of liquors, which were well-received and which are virtual market-leaders. The plaintiffs go on to aver that during 1987-88, Shaw Wallace and the plaintiff-company decided to promote new brands of liquors in the plaintiff-company and that this was done to provide internal competition to the sale of such products amongst Shaw Wallace and the plaintiff-company. Consequently, the plaintiff-company conceived, developed and promoted, among others, three brands, namely, Officer's Choice, 1000-Guiness and Calypso Rum. In respect of these three products, the plaintiffs filed an application for registration of the brands with the Registrar of Trade Marks on April 21, 1988, which applications are pending. It is contended that these three brands were marketed by the plaintiffs from the end of 1988 onwards, that they virtually rocketed to the top of the market and that they were virtual money spinners. The plaintiff-company, however, did not establish or maintain any manufacturing unit and arranges to get these products manufactured from different units.

The first defendant-company, B.D.A. Breweries and Distilleries Ltd. (hereinafter referred to as "BDA"), is a company incorporated under the provisions of the Companies Act, 1956, and its registered office was situated at Udyog Bhavan, 29, Walchand Hirachand Marg, Ballard Estate, Bombay. The premises in question are taken on lease by Shaw Wallace. The manufacturing unit of the first defendant-company is at Plot No. 6, MIDC Industrial Area, Chikalthana, Aurangabad. The plaintiffs contend that BDA has also been a part of the group companies of Shaw Wallace since 1988. The plaintiffs, as indicated earlier, are a wholly owned subsidiary of Shaw Wallace and the plaintiffs, in turn, through investment companies, namely, Paraganas Investment Ltd. and Arunava Investments Ltd. had been controlling BDA since the year 1988. BDA had been manufacturing and supplying to the plaintiffs the above three brands of liquor as per its specifications since 1988 and it is further averred that BDA has not undertaken manufacture of IMFL products for any company outside the Shaw Wallace group.

Next, it is contended that the plaintiff-company "faced certain difficulty" in some of the northern states on account of the Central Excise Regulations because the authorities in those States permitted only those brand owners who manufactured IMFL products to import the same into those States. It is pleaded that because of this difficulty, the plaintiff-company decided to assign the aforesaid three brands to BDA. Since, it had manufacturing facilities, BDA was in a position to obtain excise licences for import of IMFL products in the States mentioned above. I need to observe, at this stage, that this is the solitary ground set out in justification for the assignment of the three brands in question to BDA though it was sought to be argued at a subsequent stage that the difficulty was, in fact, a genuine one, nothing has been produced in support of this crucial averment. As I shall presently point out, that does not make much difference because the assignment in question did take place which is a matter of record and the reasons that prompted it, genuine or weak, are not of consequence because it is a case of documents vs. statements in the air.

The plaintiffs further contended that they continued to control the manufacture of the products of the above brands at the factory of BDA and that Shaw Wallace had provided various types of equipment for use in the factory on lease basis. The technical and other personnel of the plaintiff-company are supposed to have been deputed/assigned from time to time to undertake the supervision of the manufacture of these products and the plaintiffs contend that they have been looking after the marketing, sale and distribution of the products in question through its offices and representatives. The plaintiffs have also pointed out that they have provided a corporate guarantee from the Central Bank of India for the loans and the advances made available to BDA and that the guarantee provided is to the extent of Rs. 5,50,00,000. I would have expected in an important litigation of the present type that generalisation with regard to equipment, technical know-how and personnel would have been avoided, that facts, figures and specific details would have been set out and that, if at all a case was being built up, it would have been on the basis of concrete material and not vague statements that carry one nowhere. Even the reference to the guarantee provided is devoid of all particulars and is virtually floating in a vacuum.

In paragraph (10) of the plaint, a bald statement has been made that BDA and the plaintiffs have been "part of the Shaw Wallace group for all intents and purposes" and in the latter part of that paragraph, there is a reference to an "arrangement" whereby the officers of the plaintiff-company from the corporate head office at Delhi have been supervising and controlling the operations of the first defendant-company's factory and offices which, the plaintiff contends, is continuing as on the date of the filing of the suit. I need to only observe here that we are concerned with two separate public limited companies and a so-called working arrangement has been pleaded, but I do not find the requisite resolutions, documents or anything in support of what is contended therein.

In paragraph (12), the plaintiffs point out that the third respondent, K.R. Chhabria, has been the managing director of Shaw Wallace since 1987. The fourth defendant, U.K. Ganguly, was one of the vice-presidents of Shaw Wallace until April, 1992, when he submitted his, resignation. The fifth defendant, S.S. Sanyal, was appointed as a chief executive officer of BDA and it is alleged that he had been reporting to the officers' of the plaintiff-company in Delhi.

Paragraph (13) of the plaint sets out the incident that has given rise to the litigation. The third defendant, K.R. Chhabria, in his capacity as the chairman of BDA issued a circular dated April 10, 1992, to the effect that the fourth defendant has been appointed as the managing director of BDA with effect from April 9, 1992, and that all functions of the company shall be under supervision and control of the fourth defendant and that he will be assisted in his functions by the fifth defendant. The circular specifically states that all sanctions and approvals in regard to BDA are to be obtained from the fourth defendant only and these documents have been issued to the executives of BDA. In other words, what is pleaded is that by virtue of this act on the part of defendant No. 3, BDA was to function independently of the supervision and control of the plaintiffs which, according to them, was being exercised pursuant to an arrangement. I repeat that the plaintiffs have neither produced the agreement, resolution or any other document under which the so-called agreement was arrived at nor have they spelt out in the plaint as to how an agreement of that type is to be considered as enforceable in a court of law.

The plaintiffs proceed to state in paragraph (14) that the issuance of the circular dated April 10, 1992, is contrary to the "arrangement" existing for the supervision and control of the affairs of the BDA. They contend that the appointment of the third defendant as the chairman and the fourth defendant as the managing director of BDA are without the consent or knowledge of the plaintiff-company and the Shaw Wallace group and contrary to the existing arrangements made between the parties and further that it has been issued in an attempt to get control of BDA and take it out of the Shaw Wallace group. It is further alleged that defendants Nos. 3 to 7 and certain other persons who are not named but who are alleged to have been supporting them are making efforts to illegally appropriate BDA, its assets and property to the personal benefit, and to the exclusion of the Shaw Wallace group.

In paragraph (15), the plaintiffs have set out their case with regard to the shareholding of BDA. It is necessary for me to reproduce this because learned counsel for the appellants devoted considerable time to these transactions and learned counsel for the appellants has seriously contested the validity of what transpired and, in the plaint itself, there is a submission that the transaction is illegal and void. The total issued and subscribed capital of BDA was Rs. 2,50,000 consisting of 25,000 equity shares of Rs. 10 each as on March 31, 1990. The entire lot of equity shares was held by Arunava Investments Ltd. Another company by the name of Paraganas Investments Ltd. in turn held the entire shareholding of Arunava Investments Ltd. The plaintiff-company, in turn, holds 110 equity shares out of the total 130 equity shares in Paraganas Investments Ltd. and, consequently, the plaintiff-company was in total control of the equity shares of BDA. It is contended that any change in the shareholdings of the various companies was required to be done within the group and it is alleged that defendant No. 3 by utilising his position as the managing director of Shaw Wallace, which post he then held, arranged for Arunava Investments Ltd. to transfer the entire lot of shares in BDA to another company. This transfer, it is contended, is illegal and void. The first ground urged in support of this contention is that the transfer of the shares by Arunava Investments Ltd. was without the approval of the shareholders of the company and it is contended that these shares constituted a substantial asset and a substratum of the company and that this disinvestment could not have been done without the shareholders' approval. Secondly, what is pointed out is that at the time of the transfer of these shares, the price paid was inadequate. The plaint is silent with regard to the all important details such as dates, consideration, the manner in which the transfer took place, etc.

A scheme for amalgamation of Arunava Investments Ltd. and Shaw Wallace was pending before the High Court of Judicature at Calcutta. That scheme provided for the shares of Arunava Investments, i.e., the shares held in BDA to be transferred and vested in Shaw Wallace. The scheme for amalgamation, which has so far not been approved of by the High Court nor has it become final, provided that with effect from the appointed day and up to the effective date that the transferor companies shall carry on their business and activities and stand possessed of all their property for and on account of and in trust for the transferee-company and shall account for the same to the transferring company ….. It is contended that the board of directors of Arunava Investments Ltd. had no authority or power to transfer the shares to any third party contrary to the scheme of amalgamation and contrary to the decision of the shareholders in regard to the above scheme. Unfortunately, though an impression is created that the shareholders of Arunava Investments Ltd. have disapproved of such a transfer, the material in support of this contention has neither been stated nor set out.

Another serious accusation made by the plaintiffs, and which has been very strongly agitated by Shri Venugopal, learned counsel on behalf of the respondents before me, is that the third defendant, who at the relevant time was the managing director of the Shaw Wallace group, has acted in breach of his fiduciary capacity and has acted contrary to the interest of the Shaw Wallace group of companies and their shareholders.

Lastly, under this head, it is the generalised averment that the transfer of shares is contrary to the provisions of law and the regulations of the company. This statement again is vague and nebulous because neither the provisions of law nor the regulations of the company have been set out.

The next grievance of the plaintiffs is that the name of the first defendant-company, which was BDA Breweries and Distilleries Ltd., has been changed to BDA Limited without the sanction or approval of the plaintiffs or of Shaw Wallace. I assume that the plaintiffs ought to have indicated the legal justification in support of this charge by pointing out the provisions of law under which such sanction or approval is condition precedent, but there is not even a whisper in this regard.

It is thereafter contended that defendant No. 3 to defendant No. 7 and certain other persons who are not named and who are alleged to have been supporting them are making attempts to snatch BDA, its factory premises and property of the company out of the reach of the Shaw Wallace group and out of the arrangement made between the parties since 1988. I have earlier observed that what is pleaded is an arrangement, obviously not an agreement and there is nothing in support thereof. The grievance that is projected is regarding the acts of defendant No. 3 and others and it appears to indicate that if with effect from April 10, 1992, BDA proposed to manage itself and function independently that it constitutes a breach which gives rise to a cause of action in the present suit. The difficulty in comprehending what exactly the plaintiffs are alleging arises from the fact that the term "out of the reach of the Shaw Wallace group" appears to signify that BDA was required to function under the dominion and control of the Shaw Wallace group and any attempt to function independently can be stopped by order of the court.

In ground (d), a vague allegation is made to the effect that defendants Nos. 3 to 7 "and certain other persons supporting them" are threatening and pressurising employees of BDA and at other offices which again are unnamed, to the effect that they will suffer if they do not submit to their dictates. It is also alleged that defendants Nos. 4 to 7 have been in the city of Aurangabad since April 13, although ordinarily their presence is not required, and that they have been meeting the employees working in the factory and asking for records and papers, access to various departments and the general control over the premises, and that they are adopting coercive and intimidative attitudes towards the above employees. April 14th and 15th were public holidays and the plaintiffs contended that after the factory reopened, defendants Nos. 4 to 7 and other persons supporting them will cause interference in the working of the factory. A general averment thereafter follows, which is as nebulous and vague as could be, that the defendants will interfere with the working of the factory and the manufacturing activities and cause serious damage and disruption. All these and with the sentence  "If the defendants are allowed to interfere with the working of the factory premises, there will be industrial unrest." It is on the basis of these averments that the plaintiffs approached the trial court on April 16, 1992, and I consider it equally necessary to reproduce the four prayers which are as follows :

"(a)   A decree in favour of the plaintiffs and against the defendants restraining the defendants from giving effect to the circular issued to the executives of the first defendant-company and attached hereto as annexure "A" or from issuing any other or further circular/s or directions.

(b)    A decree in favour of the plaintiffs and against the defendants restraining the defendants from interfering with the working of the first defendant-company and/or its factory premises and assets.

(c)    A decree be passed in favour of the plaintiffs and against the defendants restraining the defendants from making any change in the manufacturing, distribution, selling, marketing and working arrangements including and in particular the operation of bank accounts, appointment or removal of executives and employees of the company, appointment of director/s.

(d)    A decree in favour of the plaintiffs and against the defendants directing that the first defendant-company shall continue to be managed as a part of the Shaw Wallace group and all arrangements prevalent in regard to the functioning of the first defendant-company since 1988, shall continue to be in full force and effect."

Normally, it would have been totally unnecessary for me to recount in detail the contents of the plaint, but on the special facts of the present case, there is a specific reason for doing so, even at the expense of burdening this judgment. It is necessary to examine as to what was the case and cause of action pleaded before the trial court and the material produced in support thereof. At a subsequent stage, a pointed reference would also be necessary to the other aspect as it would be equally imperative to note as to how much of the material was suppressed from the trial court at this point of time. For this purpose, it would be worthwhile to also summarise the annexures to the plaint which are as follows :

(i)             The circular dated April 9, 1992, appointing defendant No. 4 as the managing director of BDA.

(ii)            Letter dated April 24, 1989, from the plaintiffs to BDA confirming that the plaintiffs will continue to market all the products of BDA and that they will provide the managerial inputs necessary to sustain the operation of the unit and that certain representatives would be posted there for running the day to day operations the cost of which would be to the account of BDA.

(iii)           Letter dated May 20, 1991, from BDA to Central Bank of India including the requisite corporation guarantee from the plaintiffs for the sum of Rs. 5,50,00,000 along with the requisite board resolution and a copy of the guarantee.

        (iv)           Scheme for the amalgamation and merger of various companies, including Arunava Investments Ltd. and Paraganas Investments Ltd. with Shaw Wallace Co. Ltd., which is pending before the Calcutta High Court.

Then follows the interim application for the grant of the injunction prayed for supported by an affidavit of Shovan Roy, who is a vice-president and duly constituted attorney of the plaintiff-company. On the basis of this material, the learned trial judge passed an ex parte order wherein he has reproduced the submissions canvassed by the plaintiff's learned counsel which have gone way beyond anything contained in the plaint or the documents in support thereof and it would be interesting to reproduce the reasoning and the ultimate order that came to be passed, which are as follows :

"I am satisfied that to protect the interest of the plaintiffs' company and its affairs and to protect the name and dignity of the Shaw Wallace group and to avoid any unrest in the industrial area, it is necessary to pass emergent orders. Therefore, I am satisfied that the plaintiffs have shown to this court at this stage that there is a prima facie material on record to pass ex parte orders dispensing mandatory notice. On the other hand, as stated earlier, if till appearance of the parties and particularly till the appearance of defendants Nos. 5 to 7 if such ex parte orders remains in force, no prejudice will be caused to them, if really they intend to maintain the dignity and name of the Shaw Wallace group. Therefore, dispensing the mandatory notice, I pass the following order.

Order

        1. The defendants/non-applicants Nos. 3 to 7 are restrained by this ex parte injunction order from interfering with the working of plaintiff No. 2 as factory manager and to interfere in his affair or affairs of plaintiff No. 1 in the premises at plot No. 6, MIDC, Industrial Area, Chikalthana, or making any interference or change in the existing manufacturing, distribution, selling, marketing, working arrangement and operation of the bank accounts, etc., till the appearance of these defendants either by themselves or with the help of any other persons acting under them. As far as circular in dispute is concerned I order that status quo as on today existing be maintained and effect to that circular should not be given till the appearance of these defendants and till their filing of say and hearing.

        2. The plaintiffs to comply with the provisions of Order 39, rule 3(a) of the Civil Procedure Code, 1908, as to supply of copies of plaint and documents to these defendants and should swear affidavit in this behalf on April 13, 1992, as tomorrow is holiday. E. Allowed.

        3. Issue emergent notice to these defendants asking them why such ad interim ex parte injunction should not be made absolute."

At this stage, the only observation that needs to be made is that there was little justification for dispensing with the notice and the subsequent order that was passed by the learned judge which can never be condoned having regard to the type of plaint that had been filed and the material placed before him. A court is obliged to weigh the consequences of judicial orders and to act with a degree of utmost restraint and caution when they are passed ex parte. The material before the court does not justify an order that virtually had the effect of handing over the management and control of a public limited company, namely, the first defendants, to the plaintiffs and at the same time restraining all those who were lawfully entitled to the management and control of that company from performing their functions. The defendants filed their reply and the matter was argued in detail after which the learned judge passed an order dated May 5, 1992, not only confirming the initial order but virtually expanding its scope. It is this order that is the subject-matter of the present appeal. Though the order runs into as many as fifty pages, I intend summarising the contents of that order because, in my considered view and as indicated in my earlier order dated April 27, 1993, both the ex parte order and the subsequent one dated May 5, 1992, confirming the initial order are thoroughly unjustified, they are unwarranted and, if I may say so, ought not to have been passed. Learned counsel for the appellants had much to say about these orders and in particular about how they came to be passed, but I would prefer to avoid dealing with that unpleasant subject. Suffice it to say, however, that one is reminded of Hamlet's "all is not well in the kingdom of Denmark".

After summarising the pleadings in paragraph (5), the learned judge deals with the contention that defendant No. 3 was the managing director of Shaw Wallace since 1987, and that defendant No. 4 was the vice-president of Shaw Wallace until April, 1992. He deals with the contention of the plaintiffs to the effect that the transfer of shares by Arunava Investments Ltd. is a questionable transaction and that defendant No. 3 is alleged to have acted fraudulently and dishonestly in manipulating this transaction which he ought not to have done when he was legally and morally required to safeguard and look after the affairs of Shaw Wallace Ltd. I shall deal with the grounds on the basis of which the transaction is challenged subsequently. The learned judge proceeds to reproduce the allegations which are to the effect that pursuant to the aforesaid transaction or transfer of shares an all-out effort was made by the third defendant to take over complete control of BDA, which was for all intents and purposes under the virtual dominion of Shaw Wallace Ltd.

I need to specifically record that the learned judge was conscious of the fact that the defendants had, among other things, specifically pleaded that no cause of action exists, that the transfer of the shares in question that was sought to be debated had taken place in 1990 virtually two years earlier, that the transaction in question is not challenged and, consequently, that no relief can be claimed unless that is done.

With regard to this crucial aspect of the matter, the learned judge has reproduced the stand of the defendants, which was to the effect that on May 4, 1990, a meeting of the board of directors of Arunava Investments was held and a resolution was passed to the effect that the 25,000 equity shares of defendant No. 1 be sold at face value and that an application be made to the Central Government in terms of section 30(c) of the Monopolies and Restrictive Trade Practices Act, 1969, and that any director of the company be authorised to make the said application and to complete the transaction relating to transfer of the shares. Relying on the minutes of the meeting dated May 4, 1990, the defendants contended that the shares were then held by Intrust Securities Pvt. Ltd. The transfer of such shares was notified to the Department of Company Affairs, which department by letter dated July 18, 1990, authorised the company to transfer the shares of defendant No. 1 to Intrust Securities Pvt. Ltd. They pointed out that Shri S. Roy, signatory to the plaint, was present in the meeting of May 4, 1990, and has confirmed the resolution. They pointed out that in the said meeting, S. Roy had tendered his resignation. The defendants have also pointed out that on or about August 30, 1990, an agreement of assignment was entered into between plaintiff No. 1 and BDA whereby BDA purchased the three disputed brands. It is their case that these three brands of liquors are essentially manufactured by BDA, that it was because of the efforts of BDA that they became market leaders and that it is for this reason that an attempt is now being made by Shaw Wallace in the name of the plaintiffs to try and secure control of BDA because these three brands are virtually money-spinners. The defendants have also pointed out that on October 26, 1990, defendant No.1 company have applied for registration of these three brands under the Trade and Merchandise Marks Act, 1958, and that the matter is pending. They further pointed out that the first defendant has obtained a certificate from the Additional Registrar of Companies that with effect from January 17, 1992, the name of the company has also been changed. They have placed heavy reliance on the fact that as per the deed of assignment dated October 26, 1990, plaintiff No. 1 has, in fact, received the consideration of Rs. 15,00,000 and has assigned to BDA all the proprietary rights, benefits and interest in respect of these three brands. The defendants have also pointed out that on April 9, 1992, an extraordinary general meeting of defendant No. 2 was held at Bombay and a resolution was passed empowering the board to elect a chairman and to determine the period for which office will be held by him. Immediately after the extraordinary general meeting, the board of directors' meeting was held and the third defendant was elected as chairman. The learned judge has thereafter reproduced in some detail the denials of the averments in the plaint, affidavit-in-support, etc., and has basically noted that in sum and substance what is contended in defence is that as far as the transfer of shares has become final and binding, that the plaintiffs have no right whatsoever to claim any dominion over BDA which is a wholly independent and separate entity and which is entitled in law to administer itself in the manner as provided for by the Companies Act without any outside interference. The linkage that is the bedrock of the plaintiffs' case, namely, that BDA is a subsidiary of Shaw Wallace and Co. and that the plaintiffs, therefore, have the right to administer it and to control it is without substance in so far as the process of desubsidiarisation has become complete as early as in August, 1990. As far as the main bone of contention, namely, the rights in respect of the three brands of liquors are concerned, the defendants have asserted that the assignment having been completed and having become final these three brands are virtually their property which they are entitled to use without any hindrance, obstruction or interference from the plaintiffs or any other parties. I need to reiterate once again that the defendants had specifically pointed out to the trial court that the desubsidiarisation of the company and the assignment of the brands both of which have not been challenged in the plaint nor is there any relief claimed under these heads, (for which purpose I have reproduced the prayer clauses earlier) and that the plaintiffs are, in these circumstances, wholly and completely precluded from claiming any incidental reliefs. The fact that arguments were advanced in effect calling these transactions into question would not serve as a means to get over the basic fact that the plaint proceeds on the footing that there is no relief claimed under these two heads. It is not a matter of technicality, but the fact remains that the effect of this situation is not only far-reaching but would provide a complete barrier to the type of reliefs asked for by the plaintiffs being granted. The defendants had, therefore, pleaded that unless the courts were to be satisfied that BDA is, in fact, legally subordinate to the plaintiffs by virtue of the act of severance being required to be struck down and, furthermore, if it were to be apparent to the court that the plaintiffs' rights in respect of the three brands still subsist in so far as the assignment will have to be ignored or set aside, then alone could the plaintiffs prayer for the type of reliefs as had been done. Conversely, the plaintiffs not having asked for a declaration that the transfer of BDA shares is void and that the assignments of the three brands be struck down or set aside, there would be no basis for them to have any case for the grant of reliefs vis-a-vis BDA, even assuming all the remaining allegations were true.

In a serious case like this, where the survival of a public limited company, i.e., BDA, as also its shareholders, employees and all those who are dependant on its business is concerned, it is my view that any court dealing with the matter regardless of the angles and contentions, worthwhile or frivolous, that may be evident in the litigation, must act with a sense of total responsibility, in the first instance, by deciding as to whether at all the litigation is worthy of being entertained at all, continued and, if so, the consequences of any order passed. There are very important and far-reaching overtones in litigation of the present type and a court must, therefore, be doubly careful by assessing as to what would happen to the company, to those who manage it, to those whose livelihood depends on it, to those who have invested in it and, in other words, to the overall public interest and, to my mind, should be slow in granting reliefs where the consequences will inevitably be disastrous. Equally, it is necessary to sift the material placed before the court, read between the lines wherever necessary and in an instance where the litigation is obviously motivated, to desist from permitting such mala fide objectives to be carried forward. I think in the present context it is equally necessary for a court at the initial juncture to guard against permitting unworthy litigation to be commenced, for as has here happened, some three dozen proceedings followed the present one. It is of equal responsibility that litigation of this character be snuffed out at the inception. The learned trial judge would have been fully justified in not only refusing any reliefs, but in dismissing the suit itself.

Having summarised, in detail, the complexities of the case, the learned judge formulated the following points which completely and totally bypassed everything that is in contention before the court and it is, therefore, useful to reproduce the points in question :

Points

Findings

        "(i)            Can it be said that this court has Yes. jurisdiction to entertain the civil suit and decide this interim application ?

Yes.

        (ii)            Do plaintiffs prove that there is a Proved. . legal injury and do they further prove that there is a strong prima facie case for grant of ad interim injunction pending disposal of the suit to protect their interest and interest of the Shaw Wallace group and the interest of others who are interested in this litigation, but are absent ?

Proved.

        (iii)           In whose favour does the balance of convenience lie and to whom will irreparable injury not compensated in terms of money and comparative hardships and mischief be caused ?

In favour of plaintiff irreparable injury and comparative hardship will be caused to plaintiffs,

        (iv)           What order?

As per final order".

The first issue regarding jurisdiction is hardly of any consequence and the learned judge disposed of it by holding that since the factory is located within the territorial jurisdiction of the court that jurisdiction can be exercised. This issue was not even argued before me and, to my mind, rightly so and does not require any further consideration. While deciding issues Nos. 2 and 3, the learned judge first deals with the contentions which were very forcefully projected on behalf of the defendants that no. case has been made out on the facts in respect of the grave allegations concerning clandestine transfer of shares, etc., and learned counsel had relied on certain English and Indian authorities in support of the elementary proposition that the law of pleadings requires a definite and specific case, both on facts and in law, to be spelt out. It is unfortunate that this substantial plea, which virtually proceeds on the basis of the first principles, was brushed aside due to a misreading of the ratio of the decision in the case of Ram Sarup Gupta v. Bishun Narain Inter College, AIR 1987 SC 1242, wherein the Supreme Court had observed that the law of pleadings is to be applied with some degree of liberty. That does not, however, justify a plaint which is vague, devoid of particulars where even the requisite prayer clauses are absent and the party seeks to cover it all up by advancing detailed submissions at a later point of time without having made out any case in the first instance.

The learned judge thereafter takes up for discussion the issue regarding the hotly contested issue with regard to the circumstances under which BDA ceased to be a subsidiary of Shaw Wallace. He records the fact that the defendants have pointed out that contrary to the allegations of the plaintiffs that it was defendant No. 3 in his capacity as a managing director of Shaw Wallace who it is alleged manipulated the transfer of BDA shares so that the ownership of the same vests outside the Shaw Wallace group ; that in actual fact it was a well-considered decision of the parent company which action was decided upon for very cogent reasons. Strong reliance was placed on the minutes of the meeting of the group executive council of Shaw Wallace where the issue was discussed. The note in question is prepared by Shri J. Bhargav and it was only addressed to the third defendant in his capacity as managing director. In the office-note dated March 24, 1989, and the subsequent office-note dated March 26, 1990, of K. Srini-vasan, whereby the delinking of BDA from Shaw Wallace is recommended, reasons have been set out from the business and tax strategy angle as to why this ought to be done and it is significant that a perusal of the documents will indicate that it was a collective corporate decision and not something underhand or an action that was clandestinely manipulated or pushed through by defendant No. 3. Apart from the various technicalities that were involved in this operation, which are referred to by the learned judge, there is a specific reference to the minutes of the second meeting of the group management committee of Shaw Wallace which was presided over by the chairman of the company, M.R. Chhabria, wherein the aspect of desubsidiarisation of BDA was virtually finalised. The plaintiffs had contended before the learned judge that in the case of another company, namely, Nagarjuna Fertilizers, which was a public limited company in which Shaw Wallace held merely some shares, the decision was to dispose of that investment, but, as far as BDA was concerned, that the mechanics was to make it a tie-up unit. Undoubtedly, the learned trial judge was taken in by the contentions advanced on behalf of the plaintiffs that even if the shares were transferred, the links continued under the so-called "tie-up arrangement", but I fail to see how in a court of law such a position could either be pleaded or for that matter be upheld.

Support was sought to be drawn by the plaintiffs by attacking the validity of the transaction from various angles, the first one being that the permission of the Government of India, Ministry of Industries, which approval was necessary, was obtained by suppressing material facts. Though the learned judge has not recorded any conclusions with regard to this charge, I fail to see how and under what circumstances, in the light of a transaction that has been concluded and that has become final and, in any event, that has not been specifically challenged before the court at an interim stage, the plaintiffs can be permitted to question and go behind the transactions that have assumed finality two years back. The whole approach of the learned judge is downright faulty.

The learned judge then come to the crucial meeting dated May 4, 1990, which is the meeting of the board of Arunava Investments Ltd., wherein the resolution regarding transfer of 25,000 equity shares of BDA at face value was passed. The defendants have pointed out that S. Roy and T.K. Sen were the two directors present in the meeting and that the resolution is perfectly valid. S. Roy incidentally who was throughout in the plaintiff's camp and is the signatory to the plaint and he has filed an affidavit stating that the minutes are false and that he was not present in Calcutta on that day. He has produced his air tickets, accounts, etc., to show that he was in Delhi. The defendants contended, and obviously with complete justification, that there is a presumption with regard to the correctness of the minutes until the contrary is proved and that having regard to the provisions of section 195 of the Companies Act that the presumption extends to the extent that the meeting shall be deemed to have been duly called and held and all proceedings having taken place. The learned judge, on the basis of "various documents" produced by Roy, the fact that the minutes do not indicate to whom the shares are to be sold and in so far as they provide for the acceptance of the resignation of Roy, has harboured certain apprehensions, which are reproduced verbatim, namely, "It creates doubt whether really such meeting happened or not... moreover about the name of Mr. Roy there is no mention……Therefore, it is a suspicious document." Once again, I am required to repeat, as earlier, that no such case with regard to non-holding of the meeting, fabrication of minutes, non-attendance of Mr. Roy, etc., had been originally pleaded by the plaintiffs before the court and all these pleas which have been introduced for the first time at a subsequent stage are sought to be used as justification for confirming the original injunction order. While deciding this head, the learned judge has referred to an allegation from the plaintiffs' learned counsel that the shares were transferred at a price of Rs. 10 per share, that this constitutes gross undervaluation as the book value of the shares at that time was more than Rs. 50. This, again, was never the case of the plaintiffs when they first applied for the injunction and has once again been put forward as one of the several grounds to justify its continuance.

The learned judge thereafter deals with the circumstances under which defendant No. 3 came to be elected as chairman of BDA in the board meeting held on April 9, 1992. The plaintiffs placed reliance on the affidavit of one Shri Ramani, who states that he was a director of BDA and that he never received notice of the meeting of the board dated April 9, 1992. In view of this position, the defendants produced a copy of the minutes of the board meeting which the learned judge has viewed with suspicion and held that there is doubt whether it is a reliable document or whether it is fabricated in order to mislead the court. As regards this last aspect of the matter, the entire controversy over which much heat has been generated is virtually trifling and is wholly insignificant. I did examine the respective contentions carefully in order to ascertain as to whether there was anything of significance, but I found virtually nothing worthy of mention nor are the suspicions expressed of any basis. Normally, the learned judge should have refused to go into the unnecessary details. The reason for it is because this entire controversy again has germinated at a subsequent point of time and was never pleaded when the plaint was originally presented to the court. It is necessary for me to record that the status of defendant No. 3, who had acted in his capacity as chairman of the company, had not been questioned, nor is there even the remotest suggestion that he had not assumed office lawfully and that, therefore, his actions are required to be struck down. It is a matter of regret that with the passage of time this case has grown in dimensions in all sorts of unwieldy directions and the points of fact and law that were never part of the original proceedings have been pleaded, seriously argued and adjudicated upon. Since, all this material has, in fact, formed the basis of the order under appeal, learned counsel for the appellants was required to seriously deal with it. Shri Venugopal, learned counsel appearing on behalf of the respondents, i.e., the original plaintiffs, has sought to justify it and it is, therefore, inevitable that I am required to assess it at this stage. I do not propose to enter into any detailed analysis in respect of the manifold issues that were canvassed, but it is necessary to record as to whether the points were valid and whether the order is sustainable on that basis.

This controversy was, however, completely and conclusively set at rest because the original minutes of the meeting dated April 9, 1992, have been produced before me. I have scrutinised them and, to my mind, I find nothing suspicious with regard to the documents, nor is there any ground on which they can be called into question. Before parting with this head, however, I need to deal with two aspects of the matter concerning this crucial meeting which has been dealt with by the learned trial judge. The first of them is the contention put forward by Mr. Ramani that neither he nor Mr. A.K. Jain nor for that matter Mr. R.L. Jain, three of the directors of BDA whose resignations were accepted in the board meeting, received notice of the meeting. It is quite amazing as to how Mr. Ramani can depose about the non-receipt of the notice by the two Jains. A weak excuse has been made that the gentleman concerned were "far away" and that, therefore, their affidavit could not be filed. The implications of Mr. Ramani's charge are far-reaching in so far as it is contended that even if the meeting is supposed to have been held it is not a valid meeting as notice of the same was n6t served on three of the directors. The defendants have pointed out that these three persons had expressed their desire to leave the board and their resignations were only to be formally accepted in the meeting and that in these circumstances since they ceased to be directors that there is no obligation in law to serve notice on them. Learned counsel for the respondents has refuted this position and contended that the meeting can never be saved and that everything that is alleged to have taken place at that meeting is of no consequence. The law on the point is very clear that it is perfectly permissible for a resignation to be expressed orally. There is no bar to this and as I shall subsequently illustrate from the conduct of the three venerable gentleman, this is what actually transpired.

There is not even a whisper in the plaint with regard to any of these facts and a curious procedure is followed in this proceeding of grafting on all sorts of contentions and that too at a stage when the injunction is sought to be defended, but apart from that serious infirmity, what is of greater consequence is the fact that at this important meeting three persons, namely, Mr. Ramani, Mr. R.L. Jain and Mr. A.K. Jain, ceased to be the directors of the company. If it is the plaintiffs' contention as is sought to be made out before the court that these persons had never resigned, I cannot conceive of a situation whereby they would have remained quiet if the removal was against their wishes. There is no letter of protest from any of them and, more importantly, the trio has not taken any legal steps with regard to such a serious matter. I need to take cognizance of one crucial fact, namely, that the board meeting in question is not challenged either by any director or shareholder of the company. The plaintiffs, in any event, have no locus standi to challenge this meeting. I have no doubt whatsoever that the meeting was validly held and that the entire plea put forward before the court is not only an afterthought at the instigation of the plaintiffs, but that it is downright false.

The learned judge, while dealing with this meeting, refers to one other aspect which he considers to be of great importance. He has held that the meeting could not have taken place because a resolution was passed with regard to change of the registered office and that necessary steps for getting permission from the Registrar of Companies should be taken. The learned judge notes that no such document is forthcoming and he relies on the affidavit of Mr. S.S. Sanyal, defendant No. 5, who points out that after January 27, 1992, the registered office of the company is at Bombay. Shri Manohar, learned counsel appearing on behalf of the appellants, has pointed out that this is a total misreading of the record. He has relied on the minutes of the board meeting dated March 9, 1992, of BDA wherein the decision to shift the registered office has been incorporated and it is only an intimation and no permission that is required to be sent to the Registrar of Companies. The conclusions arrived at by the learned trial judge in this regard are not only baseless, but they are too far-fetched and sweeping in so far as there is no justification for the. conclusion that the meeting dated April 9, 1992, had never taken place.

Coming to the most crucial aspect of the judgment, namely, the justification for the grant of reliefs, the order of the learned judge proceeds on the basis of weird reasoning that I find it not only impossible to sustain but even difficult to comprehend the line of thought even after repeated reading. To start with, the entire approach is wrong. The learned judge proceeds to state that the meetings referred to above had not taken place and if this be so, the defendants cannot justify their stand and in these circumstances the plaintiffs are entitled to the reliefs asked for by them. Through this process of reasoning, the learned judge holds that regardless of the transfer of shares and regardless of the assignment of the three brands, the status quo ante continues in so far as those transactions will have to be ignored and BDA will have to be treated as continuing to be a subsidiary of Shaw Wallace. The basic flaw in this process of reasoning is that the aforesaid two transactions have admittedly reached a stage of finality such as for instance the Central Government having accorded its approval for the transfer of BDA shares and the assignment of the three brands having vested the virtual right, title and interest in BDA; which means that, to put it simply, unless these transactions are declared to be void by a competent court and set aside, it could be wholly impermissible to attempt to overcome them. The defendants had made out an unanswerable case and it is queer and perverted logic to argue that because their defence is unacceptable the reliefs asked for by the other side be granted wholly overlooking the fact that it is the plaintiffs who have made out no case.

Digressing here a little, I have had to repeat ad nauseam that the plaintiffs had virtually pleaded nothing and that the cause of action which has been made out for the first time in the affidavit-in-rejoinder ought not to have been considered by the trial court. It is quite elementary that no party is permitted to drastically alter its case or for that matter to make out an entirely new case. The law is well-settled even with regard to the principles applicable in cases of amendments, that it is impermissible to make any substantial departures from the original cause of action. I find in this case that after the defendants filed their reply, the plaintiffs have come out with everything that has been used by the learned trial judge as signifying the case of the plaintiffs. This is an approach which the law does not permit. It would be impossible to deal with a litigation if fluidity of this type were to be permitted, where a plaintiff approaches the court with a zero case, thereafter gets wise to various contentions, files an affidavit along with annexures running into over 150 pages and then seeks to sustain a relief that was obtained on the basis of non-existent material, it is almost a situation of all accepted canons of law being thrown to the winds, The trend of this litigation, and in particular the plaintiffs' case, reminds me of the troublesome tapeworm that is said to have no head or tail and still keeps multiplying from the smallest bit.

The main thrust of the attack of the plaintiffs is directed against defendant No. 3, who is the younger brother of the chairman of Shaw Wallace and as appears from the record has thereafter parted company. The learned judge, in passing , observes that it was contended before him that defendant No. 3 has misused his position as managing director of Shaw Wallace, that he has been guilty of misconduct in his official and fiduciary capacity, that he has acted in furtherance of his personal benefit. The learned trial judge suddenly flies off at a tangent and disapproves of the conduct and behaviour of Mr. Raju Dharmani, company secretary of Shaw Wallace, who is alleged to have locked his office room, never handed over the record and tendered the resignation and who is alleged to have come over to the defendants' side. This gentleman is not a party to the litigation, but the learned judge holds that the court will have to take note of the conduct of the parties. The frame of thought in paragraph (15) is unfortunately very confused. There is no direction to it, there is no justification for the observations made which take on the complexion of findings and what is most distressing is that a host of issues have been virtually picked up at random and decided in an off-the-cuff manner. The process of decision making is illustrated by the fact that the learned judge records the argument that the attempt of the defendants was to capture BDA shares at a cost of Rs. 2,50,000 only, meaning thereby that the consideration was inadequate. On behalf of the defendants, the affidavit has been filed by Shri Sanyal, who has comprehensively dealt with the case and produced all the relevant records, but the learned judge holds that it was necessary for the "star fellow", i.e., defendant No. 3, to have sworn the affidavit and satisfied the court that the actions in question were legal and that defendant No. 3 had never committed breach of trust in his position as managing director of the Shaw Wallace group. It is unfortunate that this inverted reasoning is consistently the approach right through the order.

The learned judge in the same paragraph suddenly adverts to the case made out by the plaintiffs that they have provided all the technical know-how and personnel to BDA and that they have provided a corporate guarantee to the UCO Bank for over Rs. 5,00,00,000.1 shall deal with these aspects of the matter subsequently because the defendants have pointed out that this charge is factually incorrect. The defendants have also contended that there is no basis for the contention advanced by the plaintiffs that they have invested large amounts of their money either in BDA or, for that matter, in the three brands that are in dispute. The merits and the facts apart, assuming that this is the case of the plaintiffs as far as the bank guarantee is concerned, it is always open to them to have the guarantee revoked or to take such other steps for purposes of securing their financial interest. Assuming that they are right about their financial stake in BDA, it is at the highest a monetary claim which, to my mind, may be enforceable through a suit, but this could never justify an application of the present type to the court that on these grounds the management and control of an independent limited company be handed over to the plaintiffs on; a platter. The position is far worse in law as far as the three brands are concerned because even if everything pleaded by the plaintiffs is true, it will have to be held that the plaintiffs have quantified their investments in the brands and on the basis of this assessment the consideration of Rs. 15,00,000 was paid to plaintiff No. 1 at the time of the agreement. The payment having been accepted, and the transaction having assumed all aspects of finality, the plaintiffs just cannot be heard and that too so late in the day, on a vague complaint that they had invested crores of rupees in these brands and that, therefore, they should be permitted to retain control of the manufacturing unit. Such a conclusion would be downright perverse. I must, at this stage, mention the submission canvassed by Shri Manohar on behalf of the appellants who pointed out that the policy of the plaintiffs was to get the products manufactured by BDA at the lowest possible cost and to thereafter market these products and swallow the cream of the whole transaction which, in monetary terms, runs into crores of rupees. He advanced a powerful contention that BDA has been exploited and bled, that the attempt is to continue that process and not to permit it to stand on its own feet and enjoy the profits which it is entitled to receive from its own products. This aspect is more with regard to the business economics, but that issue is not at all foreign to a court while adjudicating a case of the present type.

In the concluding part of the order, which is repetitive and again, though the process weaves its way from transaction to transaction, the learned judge holds that BDA, which was originally a subsidiary of Shaw Wallace and which according to him was being completely looked after by the plaintiffs, ought to continue to be administered and controlled in that manner. The time-frame appears to have been totally overlooked. Years have passed since the shares have been transferred and the three brands were assigned and the defendants have seriously contested the position that BDA was under the dominion and control of the plaintiffs when the dispute came to court in April, 1992. In this view of the matter, therefore, it is not the circular dated April 9, 1992, which the plaintiffs have styled as a declaration of independence, i.e., the material date, but the position in law and in fact, as it obtained when the aforesaid developments had taken the garb of finality. It may be that defendant No. 3 in his capacity as chairman of BDA found it necessary to assert in April, 1992, that the company would invest the overall control of the day-to-day management in the hands of persons who were not under the sway of the plaintiffs or of Shaw Wallace, but this cannot justify the sweeping conclusion arrived at by the learned judge to the effect that BDA is still a subsidiary of Shaw Wallace and that it is being effectively managed and controlled by the plaintiffs on the date of the filing of the suit. Not only is the record to the contrary, but there is documentary evidence to completely shatter this conclusion, BDA was an independent entity in fact and on paper on that day. It was the lawful and legal owner of the three brands in respect of which there was not even a challenge to their right and title and in these circumstances his premise that BDA was a subsidiary, that it is being looked after by the plaintiffs and that there is no harm if the arrangements were to continue was totally and completely unjustified. The learned judge concludes his order with the statement that the balance of convenience is in favour of the plaintiffs and that no prejudice would be caused to the defendants if the relief prayed for were to be granted. Accordingly, the learned judge passed the following order :

        "1.    Exhibits is allowed.

2.     Defendants Nos. 3 to 7 are hereby restrained from interfering with the existing working and day to day affairs of defendants Nos. 1 and 2 which are managed by plaintiffs Nos. 1 and 2 as regards manufacturing, distribution, sale, marketing, working arrangements and operations of the bank accounts by any manner either by themselves or with any person acting under them in any manner except due process of law till further orders of the court. Even they1 are restrained from giving effect to the alleged circular issued by defendant No. 3 styling as a chairman, dated April 9, 1992, till further orders of the court.

        3.     Costs of this petition will be costs in the cause."

I need to only record at this stage that regardless of whether the contentions canvassed before the learned judge had been pleaded before the court in the original plaint or not, irrespective of the stage at which the plaintiffs had come out with this case and regardless of the fact that they would be disqualified in arguing on the basis of this material, since it formed the basis of the order of the learned judge, I heard learned counsel at length on all the points dealt with in the order under appeal, both on facts and in law. After a protracted hearing, which continued day to day for over three weeks and a re-reading of all the material placed before me and a threadbare consideration of the matter, the only conclusion that was permissible was that the interim order was completely and thoroughly unjustified. The damage done to the defendants since May 5, 1992, for almost one year during which this order was in force, to my mind, could not be allowed to continue for a single minute longer and it was for this reason that in my earlier order dated April 27, 1993, I had briefly recorded the grounds on which the appeal was allowed and the interim orders vacated. I had rejected the application from the respondents, i.e., the original plaintiffs for stay of the order dated April 27, 1993, principally, because the court had already recorded the fact that the interim relief ought never to have been granted and it would have, therefore, been a miscarriage of justice in the face of that finding to grant stay and to permit the earlier order to run for several weeks or months until the detailed judgment was ready.

It is essential that the reasons be recorded for the conclusions set down in the earlier order dated April 27, 1993. A curious situation has arisen because I have already recorded that the three principal heads in respect of which effective reliefs have been sought, namely, the transfer of BDA shares, the assignment of the three brands of liquor and the status of BDA after desubsidiarisation was completed, not having been specifically challenged in the main suit, the plaintiffs would be disqualified from either asking for or claiming any reliefs under these heads. Shri Venugopal on behalf of the respondents before me, in the course of his arguments, indicated that a composite suit has been filed before the Calcutta High Court in which there is a specific challenge to the validity and consequent legal effect of the aforesaid actions. He stated that certain ad interim orders and interim orders have been passed in that matter and that subsequently the same has been 'argued in detail and that the judgment is awaited. The fact that a challenge has been presented in some other proceeding is of limited relevance except to the extent that if a court of competent jurisdiction had passed orders in the matter on the merits, it would be an order of which this court would have to take cognizance since it is a decision on the merits on the same issues and between the same parties. The position that now emerges would be the reverse in so far as this court is called upon to decide the issues in question on the merits in the first instance which may inevitably have a bearing on the other proceedings.

I categorise the situation as being curious because the plaintiffs in their affidavit-in-rejoinder have made out and built up a detailed case which they had never done in the first instance. The effect of doing this at a subsequent point of time on the question of bona fides and credibility apart, since it goes to the very root of the matter, the defendants, in turn, have met their case in defence squarely, both in the pleadings on facts and in law. Effectively, therefore, the respective parties have produced all the material that they could possibly have wanted to rely on and the learned trial judge has proceeded to evaluate this record and based his order on all of it. In appeal, while reviewing that order, it is, therefore, inevitable that the same procedure will have to be followed of having to evaluate everything that is before the court and adjudicate on it. I am conscious of the fact that the order in question is at an interim stage and that the decision will only hold good till the hearing of the suit. The reliefs granted by the trial court, however, are so sweeping that, to my mind, nothing would virtually survive in the suit thereafter. It was for this reason that the parties have produced all their evidence before the court while applying for the vacation of that order and it is in these premises that this court will have to adjudicate on the basis of that record. That such, an exercise may have the effect of virtually disposing of the suit is possible, but that, to my mind, can be no ground on which the bulk of the record before me can be disregarded.

The order having been passed against the defendants, it is the appellants' learned counsel who has addressed this court at considerable length. He started by submitting that the order in question is not only wrong, that it is downright perverse and that, consequently, the injunction should be vacated forthwith. The principal purpose for my following the very unusual practice of burdening the judgment with a summary of the plaint, prayers, pleadings, etc., was in order to illustrate how totally and completely unjustified the passing of the ad interim order was and even if one were to assume that the trial court was misled while passing the initial order, once the defendants had appeared and agitated the matter in the manner in which they have done, the ad interim order could and should never have been confirmed. It is true that Shri Venugopal on behalf of the respondents has contended that this court must take a broad and an overall view of the case and should not strictly circumscribe itself to the matter of the record, that the court should appreciate the fact that the plaintiffs had pointed out that one of the most valuable companies from the Shaw Wallace group was virtually being "stolen away" and that emergency measures were required to stop this from happening. He also contended that the problem was an unusual one in so far as it had never been expected that defendant No. 3, who is the real brother of the chairman of Shaw Wallace and who was holding the position of managing director of the group, would suddenly decide to declare war on Shaw Wallace and to spirit away its valuable assets. These arguments may be relevant to some extent while going into the question of the charge against defendant No. 3 with regard to breach of trust or breach of fiduciary obligations. They still do not answer the question as to how in this proceeding on the present record a composite relief of virtually handing over the administration and control of BDA could have been granted. To my mind, the irresistible conclusion is that the question is unanswerable and indefensible. Shri Manohar, learned counsel appearing on behalf of the appellants, alleged that the passing of the orders constituted a fraud on the court because the learned judge was led to believe that such orders were essential for a variety of reasons, including the welfare of the company, but that, more importantly, the plaintiffs owed a fundamental duty to the court to place all the relevant material in respect of the transactions concerned before the court and not to project half-truths and suppress all the remaining material. Everything that has been subsequently disclosed either by the defendants or by the plaintiffs in respect of transactions that are in dispute are matters of record. Most of them are documents. These were available to the plaintiffs and were within their knowledge and to my mind the suppression of this material from the trial court at the initial stages was not accidental.

Having dealt with the case of the plaintiffs rather extensively and the shortcomings or infirmities that abound therein for a valid decision on merits which, to my mind, is essential in order to curtail further and unnecessary litigation at different levels and in different parts of the country, since learned counsel informed me that there are something like three dozen proceedings which are an offshoot to the present main dispute; it is equally worthwhile that I summarise the case of the defendants. The pleadings in this case and the documents are literally voluminous, but I shall record the salient features of what the defendants have sought to establish. This is because the defendants have not chosen to merely deny the allegations made against them or the averments in the pleadings, but they have proceeded very responsibly in their task by contending that the action of defendant No. 3 on April 9, 1992, in exercising his powers as chairman of BDA was an act that is valid and justified, that the independent status that has been claimed by BDA is, in fact, a correct one and that the rights in respect of the three brands have vested completely in the company, which is entitled to exploit them without interference from any third parties. There is no dispute about the fact that the plaintiffs are a limited company belonging to the Shaw Wallace group or, for that matter, that BDA occupied a similar status prior to the year 1990. What is emphasised by Shri Manohar, and this argument is not merely in the air but is substantiated from the records before me, is that Shaw Wallace is a composite and relatively large commercial organisation with full time directors and senior executives like president, vice-president and as a group executive council to take and finalise policy decisions. He emphasised this last aspect of the matter because he contends that in this unfortunate dispute, defendant No. 3 is the main target with the charge being levelled against him that he single-handedly manipulated the transfer of the shares of BDA. Shri Manohar pointed out that one needs to look to the status of persons who formed the board of directors, the group executive council, etc., for purposes of establishing as to whether it is at all possible for one individual, even if he so desired, to have subjugated the collective intellects and to have got all these senior experienced knowledgeable people to act in a fraudulent and dishonest fashion. The second argument proceeds on the footing that there is a chain of actions spread over a period of time, all of which are documented and from which it unmistakably emerges that there is no justification for the charge against defendant No. 3. Towards this end, he points out from the record that a meeting of the group executive council of Shaw Wallace was held on August 27, 1989, which was about a year after BDA was acquired by Arunava Investments Ltd. This meeting was attended by 15 senior executives of Shaw Wallace, some of whom were A.S. Malik, T.S. Venkateswaran, J. Bhargava, K. Srinivasan, S.G. Mazumdar (company secretary), the first four who are at present directors of Shaw Wallace. It was in this meeting that the move was initiated to desubsidiarise the first defendant-company and T.S. Venkateswaran was directed to examine and record the pros and cons of the decision which was sought to be taken fora specified purpose which I have referred to earlier. Neither the resolution nor for that matter the plaint so much as ascribes any role to the third defendant. Thereafter, there were meetings of the group executive council in September and November, 1989, and we have on record a note dated March 21, 1990, addressed by J. Bhargava recommending the initiation of steps to desubsidiarise BDA. What is significant is that there is no reference in this note that BDA was to continue within the group after it was delinked or even that it was to continue as a tie-up unit. The third defendant put an endorsement on this note that K. Srinivasan and T.S. Venkateswaran should comment on it. On March 26, 1990, K. Srinivasan addressed a note to the third defendant in which he stated that Shaw Wallace did not achieve any positive advantage as a result of BDA being a subsidiary, but, on the contrary, that Shaw Wallace had a number of negative factors and that, therefore, there was a strong case for the unit to be outside the Shaw Wallace group and that it should be done fairly soon. Next we have on record the minutes of the meeting of the group managing committee dated April 3, 1990, and the most significant aspect of the matter is that the meeting was presided over by M.R. Chhabria, chairman of Shaw Wallace. The third defendant was present at the meeting, but the aforesaid five persons had also attended. It was in this crucial meeting that the final decision was taken to desubsidiarise BDA and Mr. J. Bhargava was authorised to initiate proper action and implement the decision by the end of June, 1990.

On the basis of this material, Shri Manohar contended that it was absolutely false to allege that the decision was clandestine or sudden because it is shown to have been taken in the normal course of business, that the reasons for the decision are set out in the notes and documents and that it is equally wrong to allege the second charge, namely, that it was put through at the instance of defendant No. 3. He stressed the fact that the final meeting on April 3, 1990, was presided over by M.R. Chhabria and not defendant No. 3 and concluded by submitting that the learned trial judge has unfortunately mixed up the reference of Nagarjuna Fertilizers with the present transaction.

To my mind, the sequence of events clearly discloses that for business economic and tax reasons, a collective decision was taken to sell out the interests that the Shaw Wallace group had in BDA. I would have thought it more appropriate to consciously use the word "sever" because nothing in the resolutions, minutes or notes would justify the conclusion that this was a "paper transaction" in order to overcome the Central excise difficulties and to get the liquor manufactured at a unit where the production costs' were very low or for that matter that it was decided to retain the umbilical cord of control and communication between the two. Had this intention been there, nothing would have prevented the records from indicating it. The omission is not an act of negligence but, on the other hand, is eloquent of the true complexion of the transaction, namely, that BDA, which was a small unit and in any event not doing well, was to be amputated completely. No other conclusion is permissible on this record. The transaction is completely documented and, to my mind, neither affidavits nor oral evidence to the contrary can, at any time, get away from what is there in black and white.

The defendants have then pointed out that the plaintiff-company for commercial reasons in the meeting of its board of directors dated April 24, 1990, resolved to assign the three brands in favour of BDA for a total consideration of Rs. 15,00,000, at Rs. 5,00,000 per brand. The minutes of this meeting amplify one important point, namely, that even though defendant No. 3 was a member of the board he was not a party to this resolution. This meeting was chaired by A.S. Malik who was present in all the meetings of the group managing committee of Shaw Wallace.

There is another development that took place even before the aforesaid resolution was acted upon in so far as the board of directors of Arunava Investments Co. Ltd. met on May 4, 1990, and resolved to transfer the 25,000 equity shares of Rs. 10 each of BDA at their face value and that an application be made to the Central Government in terms of section 30(c) of the Monopolies and Restrictive Trade Practices Act, 1969. It is a matter of record that Arunava Investments Co. Ltd. still continues to be a subsidiary of the plaintiff-company and Shaw Wallace who not only have control and access to its records but who are required to annex the audited balance-sheet to the annual balance-sheet of Shaw Wallace, under the provisions of the Companies Act. One of the directors present at this meeting is S. Roy, who happens to be the individual who has declared and affirmed the plaint. There is neither any reference to the resolution in the plaint nor even an averment that the resolution be declared illegal or void, whereas at a subsequent point of time, the contention is put forward that S. Roy was not present at the meeting. The minutes indicate that he was very much present and it is for this reason that the plaintiffs have questioned the genuineness of these minutes, the presumption of correctness under section 195 of the Companies Act notwithstanding, and they have sought to contend that, no such meeting was held nor was such a resolution passed. These events pertain to May, 1990. The record indicates that the transfers had, in fact, taken place and if there was any truth in the plaintiffs' case, one would have expected an immediate and a strong re-action, the absence of which would establish that at this late stage, finding no other means of attacking the transfer, a virtually false ground is made out that Roy had not attended the meeting and that, therefore, the minutes and the resolutions are both bad. S. Roy of all people is not a stranger to this litigation and even if he had not done so earlier in April, 1992, when this very issue was challenged and was the central pivot of the litigation, he could never have omitted mentioning his absence at the meeting unless, as is more than evident, this story is pure concoction.

There is another angle from which the defendants' case may be tested and which ultimately lends credibility to it. Pursuant to the resolution dated May 4, 1990, of Arunava Investments Co. Ltd. an application dated May 8, 1990, was drawn up addressed to the Central Government seeking permission for the transfer of the 25,000 equity shares of the first defendant-company and this application is signed by one Sadashivan, who admittedly was a director of Arunava Investments Co. Ltd. and was present in the meeting of May 4, 1990. It is too much to assume that Sadashivan would sign such an application unless the meeting was, in fact, held and the resolution authorised him to do so. The application was actually presented on May 24, 1990, and the proposed transferee is one Intrust Securities and Investments Pvt. Ltd., the shareholders and directors of which are one Mr. and Mrs. Khairulla. One needs to take stock of the fact that Arunava was an investment company and the board had decided to disinvest the aforesaid shareholding in order to release the liquidity for reinvestment with a prospect for faster return of investments. Much has been said with regard to the value of the share, the sale price of which was of the face value of Rs. 10 each. To the application, an explanatory statement was attached determining the break-up value of the share on the basis of the latest balance-sheet of defendant No. 1-company as on March 31, 1989, and which lists the value of the shares at Rs.3. This valuation was done by Arunava's chartered accountants and one has every reason to presume that they were not only qualified and experienced professionals but that they went about their job correctly. This was obvious from the fact that as a corporate unit, BDA was not doing at all well, nor did it possess any appreciable assets and it is, therefore, not surprising that similar to the decision of the appellant-company Shaw Wallace which had decided to sever it from the group Arunava, in its turn, had decided to get rid of the shares. I do not need to consider this matter in any depth because the validity of the transaction has not been disputed in the plaint nor is a declaration asked for striking it down. It would be of some significance, however, because Shri Venugopal on behalf of the respondents argued at considerable length that BDA is a virtual gold mine, that a simple arithmetical calculation would indicate that the value of the share cannot be less than Rs. 90 and that, in these circumstances, if it was sold for a ridiculously low price, it is liable to be looked upon with suspicion by the court and, in any event, the transfer cannot be approved. The principal hurdle in Mr. Venugopal's way is the fact that it is not the subsequent appraisal of BDA by virtue of its performance and improved conditions that matters but the fact that Shaw Wallace on its own calculations and records have listed the share price as Rs. 3. The plaintiffs at least would be totally estopped from contending anything to the contrary and in the background of that record, the price of Rs. 10 per share can, under no circumstances, be regarded either as inadequate or improper.

In relation to this transfer, apart from the charge that defendant No. 3 is alleged to have been instrumental, which conclusion does not emerge from the record, it needs to be pointed out that he was in no way concerned with the management and affairs of Arunava Investments Co. Ltd. except that it was on paper a subsidiary of Shaw Wallace. The record does not indicate that defendant No. 3 was a party to the important resolution dated May 4, 1990, nor is there anything on record to connect him with the application moved to the Central Government under section 30(c) of the Monopolies and Restrictive Trade Practices Act, 1969. Admittedly, he is not a director of this company. A vague allegation has been levelled against defendant No. 3, which was one of the principal planks of Shri Venugopal's argument, that at all stages he has acted in breach of his fiduciary responsibilities as he was at the relevant time managing director of Shaw Wallace. On this record, I need to point out that the plaintiffs appear to have overlooked the fact that defendant No. 3 was not a director of Arunava Investments Co. Ltd. and that in his capacity as director of the principal company, it is well-settled law that he holds no fiduciary relationship vis-a-vis its subsidiary. This last aspect is condition precedent. The charge must be supported by positive averments and specific evidence in support thereof, and it is only in these circumstances that the burden of proof may shift to the director against whom such charges have been levelled. I see no justification in this allegation, even after examining the case from every angle adduced by Shri Venugopal.

The defendants have placed reliance on the fact that the Central Government upon receipt of the application and after examining the particulars therein by its communication dated July18, 1990, accorded approval to the transfer of the shares of BDA and it is only upon this approval that further steps for the transfer of the shares came to be taken. Certain consequences flow from this action in so far as the Central Government is presumed to have examined the contents of the application and the accord of approval is virtually the imprimatur of the designated authority to the transfer. This is not to be treated as routine because, to my mind, where the transfer is challenged in a court of law, it would be the duty of the court to examine every facet of the matter and where it is demonstrated that the transfer has been approved by no less an authority than the Central Government, it would be virtually impossible to question that transfer on the basis of some belated allegations that are virtually floating in the air.

On behalf of the defendants, Shri Manohar has relied heavily on a note dated July23, 1990, signed by the company secretary of Shaw Wallace, Shri S.C. Majumdar, which unfortunately has been completely overlooked by the learned trial judge. Whereas it is the case of the plaintiffs that the transfer was clandestine and that the plaintiffs and Shaw Wallace were unaware of it, this note states that unless a demand draft of Rs. 2,50,000 was obtained from Intrust Securities and Investments Pvt. Ltd. the share certificates and the transfer deeds must not be handed over to them. The note states that the matter is urgent and it further goes on to state that upon completion of the transaction, the necessary application would be made to the Department of Company Affairs for its deregistration under the Monopolies and Restrictive Trade Practices Act, and, more importantly, that BDA will cease to be a subsidiary of the group effective from the date of payment of the aforesaid shares is received by Arunava Investments Co. Ltd. This last recital demolishes the plaintiffs' case that the transfer regardless, BDA was to continue for all times within the Shaw Wallace group. The record indicates that the share money was received by Arunava on August 3, 1990, the date on which the shares were transferred to Intrust Securities and Investments Pvt. Ltd. and the legal effect of this transaction would be that on and from August 3, 1990, BDA stood desubsidiarised from Shaw Wallace. Unusual as it may seem, normally one expects the plaintiffs to establish their case in support of the relief claimed. Ironically, we have a situation whereby the plaintiffs have established nothing, the defendants have established their defence to the hilt and the tragedy of the situation is that the plaintiffs leave the court with almost a decree against the defendants. Obviously, something was seriously wrong somewhere.

As far as the chronology goes, the next major head of dispute centres around the right, title and interest that is claimed by BDA in respect of the three brands of liquors. The record as far as this transaction is concerned starts with the document dated August30, 1990, which is an agreement between the plaintiff-company and BDA for assigning the three brand names for a consideration of Rs. 15,00,000 in terms of the board resolution of the plaintiff-company dated April 24, 1990. It is of some significance to note that the agreement was preceded by a regular board resolution, and I refer to this at the initial stage because Shri Venugopal had occasion to contend that this was a virtual paper transaction of no significance, but only for purposes of the bare record and, more importantly, that there was a complete understanding on both the sides that the assignment was not to be acted upon. Shri Venugopal's client, namely, Shaw Wallace, happens to be a large corporate outfit and a very old and established one. Under these circumstances, it is a little disturbing when a body of this stature puts forward a plea before a court of law that board meetings, minutes of such meetings, validly drawn-up and executed agreements, deeds of assignments and such other legal documents executed for lawful consideration must all be brushed aside under the cover of an agreement that this was an arrangement of convenience for economic reasons and that, therefore, a court should ignore all of them. I shall presently examine the question as to whether at all, with this mass of unimpeachable and conclusive evidence, any legal forum would be justified in taking such a view and, more importantly, whether at all it is permissible.

Pursuant to the agreement between the two companies dated April 24, 1990, a deed of assignment in respect of the three brand names came to be executed and was duly registered with the Sub-registrar on February 26, 1991. The consideration of Rs. 15,00,000 that was agreed upon was paid by a bank draft duly acknowledged by the plaintiff-company which factor is one of consequence because the argument canvassed on behalf of the plaintiffs was that it was an internal and a sham arrangement arrived at in order to throw dust in the eyes of the excise authorities and something very domestic within the members of the corporate group. If that were so, and if it were a mere paper transaction or a camouflage for a working arrangement within the group, there would not have been the physical transfer of Rs. 15,00,000, which is a relatively large amount of money. What really clinches the issue is something else, namely, the wording of clause (7) of the deed of assignment, which contains a negative covenant to the effect that as and from that date the plaintiffs shall not use the trade marks in question. Quite apart from the time factor, namely, that the transaction was completed a good two years prior to the plaintiffs' raising the issue challenging the assignment for the first time before the court, one needs to necessarily examine the question as I shall presently do from a slightly different angle. The documentary evidence before me fully, completely and conclusively establishes that the assignment had taken place in February, 1991, that it was accompanied by the requisite sanctions such as board resolutions, etc., that it was duly registered and that it was for a lawful consideration and in these circumstances, there can be no going back from the finality of that transfer.

The real clue to the dispute can be gauged from the elaborate arguments advanced by Shri Venugopal in respect of these brands, which started with the contention that the brands in question had been propagated and built up in the market by the plaintiffs-company essentially with the backing reputation and marketing expertise and status of the Shaw Wallace group and that the investments under these heads as far as the brands in question are concerned was nothing less than Rs. 10,00,00,000 to Rs. 11,00,00,000. Shri Venugopal drew my attention to various figures in the annual report and the balance-sheet of the Shaw Wallace group of companies as also to some other material on record to indicate that this amount of money had, in fact, been spent. The defendants have seriously contested this position. On the contrary, it was their case that BDA itself was not doing well which was why it was axed and that it was not more than a gesture of charity to let it go with the three brands which at that point of time were also anything but market leaders. With regard to this last aspect of the matter, I do not find on record any reliable material on the basis of which it can be concluded that the three brands were, in fact, at the top of the market or that they could be equated with a veritable gold mine as Shri Venugopal described them. The few figures which I had occasion to look at for the earlier period prior to the assignment, such as the year 1989, do not support the view that these three brands were, in fact, real money-spinners. On the contrary, they appeared to be just another set of run of the mill products and it was for this reason that the consideration for the assignment was fixed at Rs. 15,00,000 which, to my mind, having regard to the 1989 situation, was not at all a modest figure. In fact, it was quite fair and reasonable. The position did alter to a considerable extent in the next two years during which period these brands which belong to BDA did, in fact, do very well in the market and that was obviously the point of time at which the plaintiffs obviously regretted having parted with these brands and resorted to the present litigation in a desperate attempt to get hold of them again. This, in fact, throws up the case of the plaintiffs in very poor light and lends the real key to the present dispute. Whereas an effort was made all through to argue that the defendants have grabbed a company and the best of the brands that belonged to the Shaw Wallace group, I find that what has been attempted is exactly the opposite. Defendant No. 3, who has been attacked by the plaintiffs as being the villain of the piece, does not appear to have figured prominently anywhere in these transactions, nor do I find anything devious or improper that can be attributed to him. The complexion of these transactions unmistakably indicates that they are pure, simple, commercial transaction and that one cannot read in anything underhand in these matters. What literally sets the matter at rest, apart from the conduct of the plaintiffs who accepted the transaction for two long years before they woke up from their slumber is that there is unimpeachable, conclusive documentary evidence which establishes the correctness of the defendants' case on the one hand against an unsustainable, inconsistent and wholly oral challenge on the other. Obviously, the former will have to be upheld.

We then come to the next set of transactions entered into between the plaintiffs and the first defendant which are dated April 1, 1991, the first being a marketing agreement between the plaintiffs and defendant No. 1 and the second is an agreement under which the plaintiffs agreed to make available the personnel and facilities for effectively implementing the marketing agreement. Shri Manohar has advanced the submission that BDA had just about been launched on its own and that, under these circumstances, it necessarily welcomed whatever assistance was forthcoming at that point of time from the plaintiffs who were hitherto almost in the position of a parent company. The plaintiffs, however, had their own interest to secure and it was not out of any sense of goodness or helpfulness that they entered into this agreement. Shri Manohar contended that in the initial stages, it is true that BDA welcomed the assistance by way of personnel from the plaintiff-company, but that it is absolutely wrong on their part to create the impression that through such an arrangement that the management and control of BDA was with the plaintiffs. Shri Manohar submits that BDA was essentially a manufacturing unit and that some persons well-versed in the day-to-day operations were undisputedly provided by the plaintiffs, but that the court must take serious note of the fact that all these persons, namely, the entire staff deputed by the plaintiff-company was officially taken on the pay-rolls of defendant No.1-company from April 1, 1991, itself and that their salaries and expenses were to the account of BDA as per the provisions in the agreement dated April 1, 1991. Shri Manohar emphasised that this last aspect of the matter would mean that these employees were virtually transferred to BDA because the payment of their salaries and all other benefits by BDA would create the relationship of master and servant between the company and these employees. The argument that they were the plaintiffs' employees is, therefore, according to him, factually incorrect. To my mind, this entire controversy is inconsequential and of no significance—it is not unusual for persons to be deputed from one concern to another for specific reasons, but that would in no way affect the status or management of the recipient.

Interlinked with this argument, Shri Manohar points out that taking advantage of the infancy of BDA, the plaintiffs entered into a marketing agreement whereby the entire production of BDA was sold by the plaintiffs and, in other words, the virtual cream out of all the efforts put in by BDA went to the plaintiffs apart from the fact that they took all the liquor on credit which BDA just could not afford. The plaintiffs for their own convenience, therefore, offered the bank guarantee so that BDA could draw against it; whereas, in fact, the plaintiffs were the real beneficiaries and that the plaintiffs are attempting to make capital of the fact that they had provided the bank guarantee to the extent of Rs. 5,50,00,000 to the Central Bank of India for the loan facilities to be availed of by defendant No.1-company. This bank guarantee was furnished by virtue of resolution of the plaintiff-company dated April 26, 1991, which was subsequent to the entering into for the marketing agreement. Shri Manohar was quick to illustrate that there was no risk or liability whatsoever to the plaintiffs because they were fully secured by virtue of the huge liquidity, namely, the recoveries from the sale proceeds of everything manufactured by BDA and, more importantly, by the fact that the bank guarantee was only a reassurance to the Central Bank of India, but did not involve any risk to the plaintiffs because BDA was a running unit, the company possessed its own assets and the subsequent events do illustrate that the bank guarantee was never invoked nor were the plaintiffs required at any time to pay any money on this account. It is quite evident, in these circumstances, that the plaintiffs have presented half-truths to the trial court. The bank guarantee issue does not assist the case of the plaintiffs one single bit.

Shri Manohar then demonstrated to me that the plaintiffs had contended that they had incurred expenses in marketing the brands, that they have conveniently suppressed the fact that this was not to their own account. On the contrary, under the terms of the marketing agreement, which are rather one-sided, the plaintiffs were to hand over the sale proceeds to BDA after taking their expenses and commission—the latter being rather hefty. As far as this head was concerned, Shri Manohar was quick to insist on pointing out that there is nothing on record to indicate that defendant No.3 was instrumental in either passing the resolution in question or that he had a hand in any of these arrangements.

Dealing with the last aspect of the matter first, it is true that the plaintiffs have contended, though without much substance, that defendant No.3 had carefully and systematically planned all these moves. I do not need to dwell on this aspect of the matter because they were simple incorporate agreements and one must take cognizance of the fact that BDA had just about separated from the Shaw Wallace group, it had virtually worked in association with the plaintiffs up to that point of time and that, therefore, there was nothing unnatural and improper about these reciprocal arrangements. Shri Venugopal has devoted considerable time towards several references from the record to indicate that BDA on its own was neither independent nor could it have functioned that way for a single minute and that it was virtually, even after the transfer of the shares, wholly and completely dependent on the plaintiffs. He stated that the strongest indication in support of the plaintiffs' case that the management and control of BDA was with the plaintiffs is completely established from the fact that pursuant to the agreement, the requisite personnel were made available by the plaintiffs. Shri Venugopal elaborated on this and he submitted that even as far as the technical know-how was concerned, in other words, the making of the three brands of liquors, it was not only the expertise and the professional experience but the techniques and, more importantly, the various other inputs that went into the production of the quality control and every stage of production came from the plaintiffs. This last aspect was objected to by learned counsel on behalf of the defendants, who contended that the plaintiffs are not and never were a manufacturing unit and that, therefore, even if they sent some of their administrative staff it was impermissible to contend that every single input came from the plaintiffs. Shri Venugopal also contended that BDA has wrongly created the impression that the employees concerned had become the employees of defendant No.1-company and that it was wrong to contend that they were functioning as employees of the plaintiffs. The argument is a novel one in so far as Shri Venugopal submitted that, admittedly, they were employees of the plaintiffs prior to April1, 1991, and that they were not reappointed after their services were terminated by the plaintiffs. In substance, Shri Venugopal contends that these employees were only on deputation and that, therefore, since they were working physically for BDA, it was only natural that BDA had to pay their salaries during that period of time.

The short point that arises for determination from this state of affairs centres around the question as to whether, in these circumstances, the conclusion arrived at by the trial court that BDA was effectively under the management and control of the plaintiffs as on the date of the filing of the suit is justified. The marketing agreement cannot lead to any such conclusion because it was a plain and simple commercial arrangement whereby the plaintiffs were to sell the products of BDA, retain a certain amount of money and hand over the rest to BDA. This would not give BDA the status of a subsidiary or an interlinked company. On the contrary, the reverse position would be evident in so far as if BDA was effectively still part of the group as in the old set-up prior to the transfer of the shares and if it was effectively managed and controlled by the plaintiffs, no such formal agreement would have been necessary because they would have worked on the basis of a domestic understanding. Again, I do not see any special significance in the plaintiffs furnishing a bank guarantee of the Central Bank of India because that transaction was a sequel to the marketing arrangement. The value of BDA's production was relatively high, the earnings to the plaintiffs were of very generous proportions and under normal circumstances, as in the commercial world, the plaintiffs would have had to furnish substantial deposits against the entire production handed over to them and, to my mind, they got away lightly by furnishing a bank guarantee at minimum expense and virtually no risk. In the commercial world, bank guarantees are even provided for a prescribed payment and, therefore, I am unable to accept Shri Venu-gopal's submission that the plaintiffs would never have given the bank guarantee to BDA had it been independent, but did so only because it was effectively still part of the group. Similarly, as far as the staff were concerned, there was nothing unusual about the arrangement. The plaintiffs, who earned huge amounts out of the sales, were naturally desirous of getting the best out of BDA and for this purpose, to start with, if they made the requisite personnel available this action was in their own interest because it paid them rich dividends on the sales of the products. The real aspect of significance is that had the old status of BDA continued, the staff and officers would have easily moved within the group and if they had been deputed from one company to the other, their salaries would have continued with the plaintiff-company as their status cannot be changed. But in this instance the payment of their salaries by PDA is the strongest evidence to support the view that since BDA was no longer a part of the Shaw Wallace group but had assumed the status of an outsider that it was specifically provided that they would have to take over the staff which they, in fact, did. To my mind, before a conclusion can be reached that the management and the control of BDA effectively vested in the plaintiffs, it will have to be demonstrated that all matters of administration, policy and decision making and the day-to-day working were under the supervision and control of the plaintiffs. We are in the present instance concerned with two corporate entities and there is nothing from the record before me to indicate that BDA did not have a board of its own and, furthermore, that the board of the plaintiffs was, in fact, administering BDA. Unless this can be demonstrated, which has not been done in spite of voluminous material being placed on record by the plaintiffs, it is completely and totally impossible for the plaintiffs to support a conclusion that BDA was still interlinked to the plaintiffs or the Shaw Wallace group of that the management and control of defendant No. 1-company was still under either of those bodies. Unfortunately, the learned trial judge failed to analyse the material placed before him and appears to have acted on statements that are far from true, in the pleadings, that BDA which was admittedly once part of the Shaw Wallace group and functioning under the umbrella of the plaintiffs was still in the very same position at the point of time when the plaintiffs moved the court in April, 1992.

That brings us closer to the circumstances that are alleged against the defendants as being the immediate provocation for the present litigation. I have, in some detail, dealt with the developments that took place in the year 1990-91 whereby the status of BDA had changed from being one of the associate concerns of the Shaw Wallace group to that of an individual corporate entity and that it was also the fulfledged owner of the three brands that had been remnants of the old set-up or rather the shackles of some sort had not been completely divested in so far as the constitution of the board had not appreciably changed and Shri Manohar points out on behalf of the defendants that for its own administrative reasons, it became necessary to undertake a change so that the company could manage its own affairs through a board of its choice. For purposes of reorganising the board, a meeting of the board of directors of BDA was held on March 9, 1992, in which resignations of three directors, Shri A.K. Jain, Shri R.L. Jain and Shri R. Ramani, were accepted and new directors of the choice of defendant No. 1 came to be appointed as additional directors, one of whom was the third defendant. In a subsequent extraordinary general meeting of the company held on April 9, 1992, the board was invested with the authority of electing a chairman. In a meeting of the board of the company held on the same evening, defendant No. 3 was appointed as chairman of the board and, acting in this capacity, he appointed the fourth defendant as managing director and issued the circular dated April 9/10, 1992, the validity of which is contested in the present suit.

The trial court has unfortunately glossed over what according to me was the real background for the institution of the present suit. The plaintiffs have adopted a sanctimonious approach whereby they have made out that defendant No. 3, through his actions on April 9, 1992, virtually left the plaintiffs with no option except to 6eek legal redress and in this context what is, in fact, pleaded is that this was an attempt to upset the existing arrangement that then existed. Having regard to the volume of material suppressed from the trial court at that stage, it was not difficult for the plaintiffs to project the image that they were the aggrieved parties, taking maximum advantage of the fact that BDA originally was one of the Shaw Wallace companies and the trial court was made to believe that the old situation, in fact, prevailed and was sought to be unjustifiably disturbed. Undoubtedly, if this was true, the defendants would be put in the wrong box and it was on the basis of such a projection that the ad interim orders were obtained. An interesting document, and a very important one, is the letter of resignation submitted by BDA's officers dated April 1, 1992. I shall have occasion to deal with this document subsequently, but suffice it to say that it clearly exposes the true state of affairs and what made it virtually necessary for defendant No. 3 to take an urgent and immediate decision to stabilise the management and functions of BDA regardless of what had happened. It is inconceivable to accept that the en masse resignations on April 1, 1992, were voluntary or that they were not inspired and there is no doubt in my mind, after a thorough investigation, that this action was instigated by the plaintiffs and that it was a virtual plot in order to create an internal revolt and virtually hijack the company. This, unfortunately, is the true complexion of the sequence of events that immediately preceded the filing of the suit and it was this action that was to be used as justification for the invocation of the court assistance. Viewed at in this light, the action taken by defendant No, 3 assumes an entirely different complexion and is, in fact, not only explained but rendered fully justified.

I need to refer to one aspect of some significance that has taken place during this period only because it concerns Mr. S. Roy, an employee of the plaintiff-company and the person who has incidentally affirmed the present plaint. He held a power of attorney of the first defendant-company which came to be revoked on April 9, 1992, notice of which was published in the leading newspapers on April 19, 1992. The record indicates that it was only after the meeting of the first defendant-company on April 9, 1992, that steps were taken by Shaw Wallace from April 11, 1992, which is of some significance, when the powers of defendant No. 3 as the managing director of Shaw Wallace were withdrawn even though there is a furious challenge in this litigation to the earlier set of actions concerning BDA which, as I have illustrated, were protracted over a period of time where collective decisions, all of which are documented and in respect of which considerably large sums of money have passed, but none of these transactions were at that time questioned. At this stage, I need to also deal with a vital part of the record which has been completely overlooked by the trial court while considering the status of BDA. We have on record a document, namely, the annual report and the balance-sheet of Shaw Wallace as well as Arunava Investments Co. Ltd. for the year 1990-91 ending on March 31, 1991, which as per requirements of law had to be tendered as at the annual general meeting of Shaw Wallace in keeping with the provisions of the Companies Act, appending therewith the balance-sheet of its subsidiaries. Shri Manohar made capital out of the fact that the name of defendant No. 1-company had been removed from the list of subsidiaries of Shaw Wallace in this balance-sheet and in the balance-sheet of Arunava Investments Co. Ltd., the shareholding of BDA Ltd. as well as one more company, Vinedale Ltd., which are to be found as on March 31, 1990, have been deleted as on March 31, 1991. These balance-sheets have been signed by the chairman of the group, Shri M.R. Chhabria, and the same applies to the report. Under the statutory provisions of the Companies Act, the balance-sheet has to be signed at least by two directors and has to be approved at the annual general meeting. In this case, these requirements have been fulfilled. The inevitable consequence that emerges from this record is that the general body of the shareholders of both, Arunava Investments Co. Ltd. as well as Shaw Wallace, had the knowledge of desubsidiarisation of defendant No. 1-company from Shaw Wallace. Short of the present challenge, it is quite significant that neither the plaintiff-company nor Shaw Wallace nor Arunava Investments Co. Ltd. took any action or any steps if, as is now contended by them, the process of desubsidiarisation was clandestine and fraudulent. I have principally referred to this document because it happens to be the most reliable and official record of the plaintiffs and the Shaw Wallace group prepared, verified, signed and published, by them and, in these circumstances, nothing could bind them more than their own evidence. It is this very material, unfortunately, that fully and completely establishes not the plaintiffs' case but the case of the defendants. That brings me to the forceful allegations made by Shri Manohar at the Bar that these facts were within the special knowledge of the plaintiff-company as well as Shaw Wallace and were kept back from the trial court when the ad interim ex parte injunction was obtained on April 16, 1992. This was one of the' strongest grounds on which Shri Manohar contended and quite judiciously that the plaint must be. construed as a fraud on the trial court.

Shri Venugopal reacted equally sharply and he contended that the basic pleadings are there, that all this material is a matter of evidence, that, in fact, his clients were completely taken aback by the unprecedented "revolt and declaration of independence by defendant No. 3" and that as the plaint itself indicates, it had to be hurriedly drafted and filed. Shri Venugopal objected to the charge that there was deliberate suppression of facts and he maintained that the mass of material that was subsequently produced before the court could never have been placed before the trial court at the earliest point of time and in particular in the circumstances in which his clients were placed. I shall deal with the main plank of Shri Venugopal's arguments whereby he contended that defendant No. 3 who held the post of managing director of the Shaw Wallace group right through the period turned out to be a traitor in their camp and that he was systematically planning, plotting and working towards snatching away some of the companies, such as BDA. According to Shri Venugopal, nobody had ever suspected that defendant No. 3, who is the real brother of Shri M.R. Chhabria, would, at any time, turn a traitor. In these circumstances, he contends that if at all references of the aforesaid type did appear in the records that it was not surprising and that it was only on April 9, 1992, with a sense of sudden shock, that the plaintiffs and everybody else in Shaw Wallace realised what the implications were.

I find it impossible to even take a charitable view of what has happened in this case because there is no manner of doubt that it is not a few stray facts or documents that have been kept back from the trial court, but I find after the three-week hearing of this proceeding from day to day that virtually everything that mattered and everything that was of necessity was absent from the plaint. I refuse to accept that this was because of exigencies of time or that it happened accidentally. These are facts that Stare one in the face, and if any of this material was placed before the trial court at the earliest point of time, it would have been impossible for the plaintiffs to have obtained the ad interim order. In these circumstances, the one and only conclusion is that the material was deliberately suppressed. I need to add that it was not the ethical consideration of being fair with the court which is on a higher plane that I am concerned with, but I need to take a serious view of what has happened in so far as it was incumbent on the plaintiffs to at least comply with legal obligations. Though Shri Manohar appeared to be harsh when he insisted that a fraud had been played on the trial court, after a very mature consideration of the case, I am inclined to agree with that observation. It is in this background that the question arises as to whether at all, devoid of every other consideration, the plaintiffs are entitled to a discretionary relief in the, form of an injunction. A lot of case-law was cited on both sides with regard to the principles that need to be observed in respect of the pleadings. I do concede that some degree of allowance needs to be allowed and that laxity of approach is sometimes required, but there can never be justification in a case where there has been wholesale suppression. Even in a case where reasonably good material is relied on, a court would refuse a relief to a party with tainted hands. This last finding alone is sufficient to completely disqualify the plaintiffs from any reliefs in this proceeding.

I have had occasion to observe from time to time that the main attack in this proceeding is directed against defendant No. 3. Much was said at the Bar on both sides, which I would prefer to avoid dealing with in this judgment because it concerns a furious family dispute, resulting in hostile relationships and the inevitable sniping at each other. What I am, however, required, as of necessity, to deal with is the legal head which has been repeated at some length, namely, the accusation that there is a breach of a fiduciary capacity on the part of defendant No. 3 in so far as he was the managing director of Shaw Wallace right through the period 1990-91 and up to 1992 when everything that is the subject-matter of this dispute had taken place. I shall deal with this aspect under two brief heads. In the first instance, Shri Manohar pointed out to me from the record that there are virtually no pleadings to justify this charge. A stray reference here or there would not answer the definition of even general allegations. The law on the point is more than well-crystallised and this is probably the only field in which the principles of civil law and criminal law have merged completely. One does not need to cite elaborate case law, but ever since the decision of the Privy Council in the case of A.L.L. Narayan Chetiyar v. Official Assignee, AIR 1944 PC 93 (sic), the position .has been quite unambiguous, namely, that where a fraud or breach of trust are alleged as in a criminal trial, the charge will have to set out full, complete and specific particulars in the form of facts, dates, incidents and allegations and that there can be no compromise with regard to this requirement. Shri Manohar submitted that even in the case of an allegation of fraud or misconduct relating to a director, the party making the charge and who is in possession of the particulars of the fraud is obliged under Order 6, rule 4 of the Code of Civil Procedure, 1908, to set out the full particulars of such objective facts. It is impermissible to get away with, mere vague allegations in the plaint. It is true that Shri Venugopal accepted that there is no quarrel with regard to the requirements of law, but he maintains that in a case of the present type where the broad particulars have been averred, that the details were a question of subsequent evidence and substantiation and he contended that the plaintiffs have placed on record voluminous records from which the plaintiffs are in a position to completely bring home the original accusation. This is virtually begging the question.

The requirements of law in a case where fraud and breach of trust are pleaded do not have to be restated and every judicial decision on the point lays down that a party approaching the court with such a charge simply has to fully substantiate it with full facts. For good reason, the law does not permit the procedure which Shri Venugopal's clients have tried to adopt, that you level an accusation and in common parlance state that you will prove it later on. This puts the defendants to an impossible handicap and makes the task of the court even worse because in the absence of the requisite material, the court cannot act on the charge and as the plaintiffs begin to disclose their cards, the defendant who in the first instance did not know what case he has to meet is taken by surprise the inevitable result is the type of situation that we are faced with in the present litigation, namely, that the plaintiffs come to court with no case and thereafter burden the record with masses of material and the defendant cannot be precluded from countering it in the same manner. This is precisely how the record in the present case has grown in volume, out of all proportion from time to time and today almost resembles the traditional octopus. The legal position being quite unambiguous, it is most unfortunate that the learned trial judge overlooked these basics and went to the extent of recording that the charges under these heads were established. Even on an evaluation of the material which I have done, since it was all placed before the court, such a conclusion is unwarranted, but that exercise, to my mind, could have been saved had the trial court adopted the correct position in law in having refused to permit any material under this head to be produced by the plaintiffs at a later point of time and to have recorded the conclusion that they are precluded in law from agitating this head. I am required to repeat once again that even though that was the correct course to follow, I have been required to do otherwise by re-examining all the material under this head in so far as the learned judge having recorded an adverse finding, it was necessary for me at the appellate stage to decide as to whether that material justifies any such conclusion. Though not strictly material, Shri Manohar stated at the Bar that defendants Nos. 1 and 3 are being subjected to litigation in different forums on the same record that is before this court and that, therefore, in order that judicial time be saved, this court should apply its mind, hear both the parties and decide the issue once and for all. That briefly is why this lengthy exercise became necessary. That the plaintiffs have miserably failed to substantiate the charge against defendant No. 3 would be putting it mildly.

It is now necessary for me to deal with another unusual aspect of this case which concerns the exercise on the part of the plaintiffs in disputing the minutes of the meeting of its subsidiary Arunava Investments Co. Ltd. dated May 4, 1990, as also disputing the minutes of the board meeting of BDA dated March 9, 1992, and April 9, 1992. At the very outset, I found it rather unusual that a challenge of considerable seriousness was levelled on these Counts even though there were no pleadings in the plaint to that effect. What was really surprising was that as far as the minutes dated May 4, 1990, relating to Arunava Investments Co. Ltd. are concerned, not only had a period of two years elapsed but, more importantly, the various steps that have been discussed by me earlier had all been implemented as a follow-up of those minutes in spite of which the very validity of the minutes has been called into question. Unfortunately, there does not appear to be any consistency or direction when it comes to challenges and accusations as far as the plaintiffs are concerned, but, again, the trial court permitted this and adjudicated on it which entitled learned counsel at the hearing of the appeal to argue at considerable length under these heads, the inevitable consequence being that the issues in question have to be decided. I have had occasion to refer to the provisions of section 195 of the Companies Act, which attaches a presumption as to the validity of the minutes of the meeting of the company and the settled law is that the minutes in the books are received, though not as conclusive yet as evidence of resolution of the proceedings. At an interlocutory stage, this can be the only correct approach. If a controversy is raised, evidence of a conclusive nature would be a must, but on the present record and that too at an interlocutory stage merely because the validity or genuineness of the minutes are called into question, the trial court was not justified in expressing doubts or discarding the minutes in question. The ground of challenge themselves have been looked at by me and they are so weak and hollow that it is unnecessary to burden this judgment with them since in law those records are sacrosanct. If the heads of challenge were very substantial or if they had been supported by conclusive material, then alone would there have been justification to express doubts. The allegations in the present case are frivolous, virtually hanging in the air and are devoid of substance and no cognizance can be taken of them.

As regards the challenge to the meetings of BDA dated March 9, 1992, and April 9, 1992, it is imperative for me to record that the plaintiffs are outsiders or, in other words, strangers to the company and it is amazing that they have taken up the challenge when neither the shareholders nor the directors of that company have disputed those minutes. To my mind, the plaintiffs have no right to raise any such plea nor do they have a locus standi to do so. During the hearing before me, however, Shri Manohar produced the original minutes book, which was shown not only to the court but to the plaintiffs' learned counsel. A careful examination of this book completely satisfied me that there was no justification for the adverse findings recorded by the learned trial judge in respect of these minutes. The appellants' learned counsel pointed out to me that the learned trial judge seems to have been swayed by trivialities and in the process has overlooked the basic substance. The original minutes book resolves the controversy completely, it inspires complete confidence and, therefore, does not require detailed re-examination of that aspect of the case.

Two aspects to which I have made a brief reference earlier require to be disposed of at this stage, the first of them being the case of the defendants that the three persons who ceased to be directors of BDA had orally expressed their desire to resign. Shri Venugopal contended that this is unthinkable in a corporate set-up and that not only was the plea a false one but that it justified the charge of the plaintiffs that it was a clever ploy to get over the absence of the three directors when defendant No. 3 took several crucial decisions. Shri Manohar countered the arguments by pointing out that there is no prohibition in the Companies Act against oral resignations and that such a resignation is perfectly legal and valid. He further contended that the removal of a director from the board of a company is an issue which concerns that very individual and that, consequently, the plaintiffs cannot, under any circumstances, espouse the cause of these three persons who have not taken any legal action and for that matter not even recorded a protest through a letter.

As regards the first aspect of the matter, Shri Manohar may be technically right when he states that an oral resignation is permissible and if it is permissible that it is also legal. Under normal circumstances, I would have looked upon the transaction with some degree of hesitation. What unfortunately lends total credibility to the whole action is the fact that not one but three persons, and that too company directors who ceased to be on the board by virtue of what transpired at that meeting, have neither protested nor have they taken action to challenge that decision. In such a situation, the irresistible conclusion is that the defendants are right when they point out that these directors had expressed their desire to resign and that this was why the minutes have recorded this fact and they were removed from the board. In any event, where the individuals concerned have, through their conduct, ratified the decision, it is not for a third party, namely, the plaintiffs to question it.

Dealing now with a slightly different head, I need to consider the legal implications of admissions as far as the present record is concerned. There is one document to which I have made repeated reference earlier, namely, the annual accounts and the balance-sheet of Shaw Wallace and Arunava Investments Co. Ltd. for the year 1990-91 ending on March 31, 1991. The learned trial judge has unfortunately lost sight of this crucial document and in the process has overlooked and ignored it. The annual accounts and the balance-sheet being a statutory document passed by the general body of the shareholders of Arunava Investments Co. Ltd. and Shaw Wallace, which records the deletion of the shareholding of defendant No. 1, BDA, in the balance-sheet of Arunava Investments Co. Ltd. and the deletion of the name of defendant No. 1, BDA, from the list of subsidiaries of Shaw Wallace is a clear and conclusive admission that binds those companies. The balance-sheet has the signatures of the chairman of Shaw Wallace and its directors and the same is the position as far as Arunava Investments Co. Ltd. is concerned. The legal implication that flows from such a situation is that a presumption arises on the basis of the material that all concerned, including the shareholders to whom the balance-sheet was despatched, were in the knowledge of the fact of desubsidiarisation of defendant No. 1-company. I do not need -to deal with the judicial decisions cited by learned counsel at length because the legal position is unambiguous, but as regards this aspect of the matter, Shri Venugopal met the argument from an entirely different angle. He reiterated that the transactions did, in fact, take place, but that in the background pointed out by him, it must be accepted by the court that the act of severance was for business and tax reasons with the full understanding of all the parties that it was only for record purposes and not intended to be given effect to or acted upon. Shri Venugopal's argument, therefore, proceeds on the lines that these facts cannot be construed as admissions, but only reflect the transactions which were not of any consequence. In this context, what he further points out is that the arrangement did, in fact, work perfectly for virtually two years until defendant No. 3 decided to "hijack" the company. Shri Venugopal contends that there was no question of anybody challenging the validity of those transactions as everyone understood them in the spirit in which Shaw Wallace intended and that regardless of those transactions, BDA continued to function in exactly the same manner as it did prior to the transfer of the shares and the assignment. He states that it was only after Shaw Wallace and the plaintiffs realised that defendant No. 3 was trying to capitalise on that position and to appropriate the company that the plaintiffs were left with no option except to present a challenge to the transactions. In this background, he maintains that nothing contained in the balance-sheet and accounts constitute admissions. It appears to me that the plaintiffs are virtually switching their stand from time to time and from subject to subject. In respect of the transfer of shares and the delinking of BDA as also the assignment of the three brands, they have presented a comprehensive challenge from virtually every angle and have sought to overcome every aspect of delay by stating that it was only after April 9, 1992, that their eyes were opened. When confronted with their own statutory documents, which contain irrefutable evidence and that too emanating from the plaintiffs' camp, there is a complete shift of stand and an attempt is made to convince the court through an involved process of logic that these are no admissions.

This is a judicial proceeding and one cannot, in the face of unimpeachable documentary evidence, accept belated and involved explanations which run counter to the plain letter of the material before me and that too statutory records originating from the plaintiffs themselves. There is no way in which the plaintiffs can get out of these admissions which not only bind them, but establish to the hilt that the transfer of shares, desubsidiarisation and assignment were official transactions with the full knowledge and consent of the board of directors, shareholders, and all others concerned with Shaw Wallace and the plaintiffs and that these transactions, which have become final, cannot be called into question. Conversely, this material is very damaging to the case of the plaintiffs in so far as it establishes the falsity of the contentions put forward by them.

I need to observe that in the rather involved and furious battle that this litigation has created, a large number of documents have come on record. The learned trial judge has been critical with regard to many of the documents produced by the defendants, the ostensible reason being that these documents are either documents of the plaintiffs or of the Shaw Wallace group to which they are parties and thus have conscious knowledge. As I have had occasion to indicate earlier, these documents ought to have been produced by the plaintiffs themselves along with the plaint if they were serious about a full, candid, faithful and fair disclosure to the court. What is surprising is that the authenticity, probity and genuineness of these documents is not disputed by the plaintiffs, nor for that matter is the question of their relevance. The learned trial judge has been unjustifiably critical of the conduct of the company secretary, Rajiv Dharmani, which, to my mind, was unnecessary in so far as it would virtually amount to putting a premium on deliberate suppression of documents from the court. The position in law is illustrated in the case of Pushpadevi M. Jatia v. M.L Wadhavan [1987] 3 SCC 367 ; [1988] 64 Comp Cas 228 (SC).

It is true that Shri Venugopal was very vehement on this aspect while dealing with this issue and he did spend considerable time pointing out to me that one of the virtual acts of breach of faith on the part of defendant No. 3 was that he had decoyed several of the responsible officers at various levels from Shaw Wallace and the plaintiff-company to switch their loyalties and come over to him and it was through these sources that the documents and records have virtually been "pilfered". The point made by Shri Venugopal was that this set of documents produced has not come out of lawful custody of the defendants in so far as the defendants could never have got them except through some devious means and in so far as they constitute official records relating to the working and business of his clients that the learned trial judge ought to have totally excluded them from consideration. Shri Venugopal was severe on the manner in which these documents have been obtained and he made an issue of the fact that where it is clear as day light that these documents have come only through a process of inducement to officers to shift their loyalty, that this court should refuse to look at them.

I do not need to adjudicate on this issue except to observe that it is the nature of documents that is significant. If several of the officers have shifted over from one camp to the other, those are individual decisions and senior executives always have the freedom of choosing for whom they would like to work and this, court cannot question such shifts. Had the documents been secret, confidential or of such a character that their removal from lawful custody would constitute an offence, perhaps, this court would have taken a different view of Shri Venugopal's objections. Where the documents which are virtually run of the mill records, where they are neither secret nor valuable and where the defendants have essentially produced them because the plaintiffs have suppressed them from the court, I do not see any justification in the plaintiffs' objections. In passing, I need to record that one of the grounds on which the transfer of BDA shares by Arunava was challenged by the plaintiffs related to the provisions of section 293(1)(a) of the Companies Act in so far as it amounted to a sale of undertaking without a resolution of the general body of Arunava. When Shri Manohar on behalf of the appellants took up this point, Shri Venugopal, learned counsel on behalf of the plaintiffs, stated that the contention and challenge under this head was not being pressed by the plaintiffs. I, therefore, do not need to consider it.

The next major head of controversy centres around the question as to whether at all BDA as a company could have been severed from the Shaw Wallace group since a petition under section 391/394 of the Companies Act for the amalgamation of Arunava Investments Co. Ltd. with Shaw Wallace was proposed and the scheme was pending approval of the court. The factual position is that the scheme of amalgamation of 14 companies, including Arunava Investments Co. Ltd. with Shaw Wallace, is set out at page 32 of the paper-book, and the scheme provides for the appointed date, namely, July 1, 1988, and the effective date, meaning the date on which the scheme becomes effective in accordance with clause (1) of the scheme. Clause 1 in terms provides that the scheme is subject to the conditions and upon the five conditions provided in clause 1(a) being fulfilled, one of them being the sanction of the High Courts of Calcutta, Madras and Bombay under section 391 of the Companies Act to the scheme and the necessary order or orders under section 394 of the Act being obtained. Clause (d) provides that with effect from the appointed day and up to the effective date, each of the transferor companies shall be deemed to carry on all business activities and they stand possessed of all their properties for and on account of and in trust for the transferee-company and any profits accruing to the transferee-company or losses arising or incurred by them shall, for all purposes, be treated as profits or losses of the transferee-company. It needs to be stated that the scheme does not prescribe any impediment or embargo as far as the dealing with the properties of the transferor-company by them only with the prior approval of the transferee-company and they are entitled to carry on their business, including dealing with their properties, till the time and scheme is finalised and approved. There is nothing on record to show that the requirements of clause (1) have been satisfied and a statement was made at the Bar before me that the High Court of Calcutta has not even till date sanctioned the scheme. It is also significant to record that even after July 1, 1988, the shares of BDA were acquired by Arunava Investments Co. Ltd. in September, 1988, and it is not the case of the plaintiffs that for acquiring these shares the approval or permission of Shaw Wallace was obtained. Likewise, on the same basis, there appears no impediment for Arunava Investments Co. Ltd. as an investment company to dispose of the shareholding of BDA, particularly when as stated in the application to the Central Government made by Arunava Investments Co. Ltd., the object of disposing of the shareholding was in order to invest it in due course of business for earning better income.

Shri Manohar placed reliance on the case in Brooke Bond (India) Ltd. v. Dinkar Landge [1984] 56 Comp Cas 1 (Bom), in support of his submission that the scheme for becoming effective requires the sanction of the court and even thereafter it does not become immediately operative as there are certain approvals that are needed. He also sought reliance on another case in Marshall Sons and Co. (India) Ltd. v. ITO [1992] 74 Comp Cas 236 (Mad), in support of his argument that if the court refuses to set its seal to the scheme of amalgamation, the arrangement would fall to the ground and it is, therefore, the sanction of the court which gives life to it. Learned counsel also pointed out to me that even an order of the court does not have retrospective operation to enable a claim that the scheme has been in operation from the date anterior to the date of the scheme. Also, in support of his contention that this head of challenge is groundless, Shri Manohar pointed out to me that as against the shareholding worth Rs. 2,50,000 of BDA, that Arunava Investments Co. Ltd. had transferred a shareholding of an amount of Rs. 55,50,000 held by it in Vinedale Distilleries Ltd. and no grievance had been made by Shaw Wallace in respect of transfer of this holding. A scrutiny of the present record does indicate that there is no material produced in support of any such challenge.

Shri Venugopal, learned counsel representing the respondents, did seriously urge that the pendency of the scheme of amalgamation would prescribe a complete bar to any form of alienation while the scheme is pending, the principal reason being that according to learned counsel where it is proposed that a group of companies amalgamate, the process virtually becomes final on the decision being arrived at and the scheme being placed before the court for its approval. Referring to the provisions of the present scheme, Shri Venugopal stated that the companies along with their assets and liabilities had effectively merged with Shaw Wallace once the scheme had been lodged in court as specifically provided therein and that, consequently, any transfer of the present type is void in law. Answering Shri Manohar's submission with regard to Vinedale, Shri Venugopal stated that the transaction relating to that effect has also been challenged before the appropriate forum. As far as the present transfer is concerned, Shri Venugopal contended that it was wholly impermissible and that it would, therefore, have to be struck down. He further contended that there is always a time-lag between the finalisation and presentation of a scheme and the completion of the requisite judicial process and it is precisely for this reason that specific prohibition is in-built for preventing any transfers. This, according to Shri Venugopal, is an essential requirement because the scheme is required to be kept intact until the legal process is completed as otherwise the complexion of the holdings will have drastically altered and the scheme itself would require modification.

As far as this head of challenge is concerned, it is undisputed that the scheme is pending approval and that, at least, one out of the three High Courts has so far not approved of it. What I find difficult to accept is the plaintiffs' argument that the court is bound to accord its approval to the scheme which, to my mind, is contrary to the position in law. In a given instance, for commercial reasons or with the best of intentions, a scheme of amalgamation may be presented to the court, but, as often happens, some of the shareholders, creditors, etc., may oppose the sanction of the scheme or, on the other hand, the court itself may find that it is not in the interest of the company or in the public interest, in which case the approval will be refused. The sanction of the court, therefore, is not something that is certain, nor can it be presumed. In these circumstances, the scheme is no more than a proposal or declaration of intent or, in other words, it cannot be invested with a garb of finality. If this is its legal status, then it necessarily follows that the proposals contained therein are not of a binding character, but are essentially fluid and flexible. Apart from other aspects of the issue which I have referred to earlier, in the ultimate analysis, before the transfer can be questioned on grounds of legality or permissibility, a specific legal prohibition will have to be pointed out. The terms of the present scheme of amalgamation viewed at from any angle do not provide any such prohibition and, therefore, the transfer in question cannot be struck down on this ground.

Having held that the transfer does not suffer from any infirmity, one needs to devote some time to the examination of the next argument canvassed by Shri Venugopal, which is to the effect that it was only an ostensible transfer or, in other words, that it was a sham transaction. To summarise, it was supposed to have been done in order to get out of and avoid the provisions of the Monopolies and Restrictive Trade Practices Act to avail of taking facilities which were otherwise not available or, to put it very candidly, to jump over various legal provisions. I have earlier pointed out that it was also argued that certain excise difficulties were experienced for which the transfer was pleaded as the solution. In the first instance, it is rather amazing that such an argument is at all canvassed by a party who has approached a court for the grant of a discretionary relief of injunction. If the contention advanced were to be accepted, it would mean a candid admission that the plaintiffs had entered into a transaction to defeat the provisions of law and regardless of that fact, the court should still turn a Nelson's eye to their conduct and grant them the relief prayed for.

Shri Manohar has seriously contested this position. He draws my attention to the value of the internal memo signed by S.C. Mazumdar, the company secretary, dated July 23, 1990, which categorically states that upon receipt of the bank draft of Rs. 2,50,000 from Intrust Securities and Investments Ltd., necessary steps to deregister BDA Ltd. under the Monopolies and Restrictive Trade Practices Act would be taken and that it shall cease to be the subsidiary of Shaw Wallace. The application made by Arunava Investments Co. Ltd. to the Central Government, particularly clause 4(d), states about the composition of the board of directors of the company whose shares are proposed to be transferred by indicating that there is no nominee director of Arunava Investments Co. Ltd. in the board of BDA. Shri Manohar also points out that the various agreements entered into by the plaintiffs' company with BDA, including the marketing and service personnel agreements, totally belie the correctness of the submission that the transaction was an illusory one. One also needs to take cognizance of the fact that under the provisions of the Benami Transactions Act, the transfer cannot be claimed to be either nominal or ostensible.

I have had occasion to comment about this aspect of the matter in the earlier part of the judgment, but it did require a further consideration in so far as this issue is very basic to the litigation. The case has been extensively argued, every conceivable angle has been debated by both sides and it was, therefore, necessary to record a conclusive finding on this crucial aspect of the matter.

Shri Manohar was extremely critical of the type of relief granted by the trial court and there were even flashes of anger in his argument when he severely attacked the validity of what had been done. He advanced before me an argument which is one of considerable substance and requires to be upheld. I had occasion to observe earlier that in sum and substance, the learned trial judge had handed over the management and control of BDA to the plaintiffs. Shri Manohar pointed out to me that this would virtually invest the plaintiffs with the status of a managing agent as defined in section 2(25) of the Companies Act. Section 324A of the Companies Act abolishes the concept of managing agency and under section 294, the appointment of sole selling agents has been prohibited. The relief granted, therefore, would be tantamount to appointing the plaintiffs as the managing agents of BDA and would be in complete violation of law. Admittedly, defendant No. 1-company has only one manufacturing unit at Aurangabad and the order of the trial court would, therefore, comprehensively mean that the entire company is under the total dominion and control of the plaintiffs. It is very unfortunate that the effect and consequences of such orders are not taken into account and that such an order came to be passed. The situation becomes all the worse when one finds that in spite of everything pointed out to the trial court, the order was confirmed and I must record with a degree of distress that it is such orders which are responsible for bringing a bad name to the courts.

The gravity of this last aspect of the matter needs to be further highlighted. I have had occasion to refer earlier to the need of a sense of complete caution and responsibility on the part of a court dealing with a case of this type because, inter alia, there are the lives and careers of the employees and officers, of the directors and the shareholders, the interest of financial institutions and banks, of dealers and a host of other angles which need to be responsibly taken cognizance of. In the present instance, there is the aspect of compliance with obligations, contracts and, above all, legal responsibility under the numerous laws and regulations, a breach of which would entail not only serious civil consequences but also criminal liabilities. Where the record has demonstrated that the parties are virtually at war, it was a reckless act, to my mind, to have permitted the management and control of defendant No. 1-company to vest in the ' hands of persons, admittedly, hostile and belonging to the opposite group and, above all, having adverse interests. That irreparable injury to the defendants was most likely to result is something which the trial court could not have overlooked. Shri Manohar pointed out to me that in spite of the defendants' best efforts, the injunction order has continued for a year in the course of which staggering losses have accrued to the defendants and that the company itself would find it extremely difficult to get going from this stage onwards. I have carefully applied my mind to this aspect of the matter and, as indicated by me in the order dated April 27, 1993, I have held that the injunction order should not be permitted to continue for even a single minute and even if the paper-work in relation to the judgment takes time the interim orders should be vacated forthwith.

On April 12, 1993, when me arguments of the appellants were almost, completed, a civil application under Order 41, rule 27 of the Code of Civil Procedure, 1908, was filed by Shri Venugopal on behalf of the respondents and the appellants have filed their reply to that civil application. I have passed a separate order whereby the application has been rejected, but it is necessary for a brief reference to be made in this judgment to the contents of that civil application. The effort of the respondents was to admit additional evidence and annexed to the application were extracts of affidavits of defendant No. 3, K.R. Chhabria, in a litigation pending at Calcutta and before the Supreme Court and annexure No. 3 consisted of a list of documents without setting out any copies thereof. As far as the application itself is concerned, for the reasons set out by me in the order separately passed, I have held that, in the first instance, this application is an obvious afterthought filed with the sole purpose of delaying the disposal of the present appeal, that the copies of affidavits sought to be relied upon have been reduced to extracts and none of the so-called documents, which are supposed to be additional evidence, are even certified copies. The technicalities apart, in the overall interest of justice and particularly in a litigation of the present type, where several issues are being decided, I would have overlooked technicalities if the application were bona fide, if it was justified and if it would assist the fair disposal of this appeal. Where it was as clear as daylight that the respondents having held on to the benefit of the interim order for one year desire to put a spanner in the works virtually at the last stage when the appeal was being disposed of and that too by attempting to introduce the material which, even if considered, would not make any difference whatsoever to the final decision, there was no question of allowing that application.

The two principal contentions repeatedly advanced by the respondents as also emphasised in their written submissions centred around the charge that the managing director of Shaw Wallace, who at the relevant time was the third defendant, derived personal advantage in transferring the shareholding of BDA as well as the three brands of I.M.F.L. products to himself and his family members for his private and personal benefit at an extremely inadequate consideration which constitutes the breach of his fiduciary duty. Once again, it is my bounden duty to record that even though learned counsel appearing on behalf of the respondents has devoted the greater part of his energies and arguments towards these two heads, on a strict consideration the respondents would be precluded from arguing these points. The only three grounds on which the transfer of shareholding of BDA was challenged were (a) violation of section 291(1)(a) of the Companies Act, (b) the transfer being in violation of the scheme of amalgamation, (c) the third defendant acting in breach of his fiduciary capacity and I need to clarify here that beyond these bald statements, the supportive data is conspicuously absent in the entire pleadings; and (d) the transfer being contrary to the provisions of law and the regulations of the company.

The ground that the transfer was invalid or illegal because of the inadequacy of price of the shares is not even averred in the plaint and as far as the transfer of the trade marks are concerned, the only reference is to an agreement to assign the brands, there is not even a pleading as regards the actual agreement, the consideration or for that matter its inadequacy. In this background, therefore, I would have been justified in refusing to consider this head of challenge. However, as indicated at the commencement of this judgment, since this litigation is virtually the forerunner of numerous other ones, it would only prolong the agony of the parties and utilise the judicial time of another court if the angles canvassed are to be left undecided. It is true that certain limited references have been made in the affidavit of Shri S. Roy, which came to be filed as late as on April 28, 1992, when the matter was being heard, but what needs to be noted is that the statements made therein are not supported by what was later contended before me at the Bar during the oral arguments.

In order to test the validity or otherwise of the charge levelled against defendant No. 3, which would have a bearing on the larger issue, I have scrutinised everything that has come before this court which has been done in spite of the absence of the pleadings in order to look at the material, if any, that even if it had gone by default, when the suit was originally filed, could be of assistance to the plaintiffs. Admittedly, the shareholding of BDA was transferred in favour of Intrust Securities and Investments Co. Ltd., but I also find that the third defendant and his family members had no concern with this company. It is not alleged in the plaint nor is there any document on record to show that Intrust was a nominee devised or designed by defendant No. 3. This is the obvious reason why the transfer in favour of Intrust cannot be and, in fact, is not challenged or impugned in this suit. In any event, Intrust is not even a party to this proceeding and, therefore, nothing concerning the transfer to that company can be examined in their absence. What is relevant to note is that the defendant was not responsible for, nor did he play any role' in the resolutioa of Arunava Investments Co. Ltd. dated May 4, 1990, the application preferred by Arunava Investments Co. Ltd. to the Central Government under section 30C of the Monopolies and Restrictive Trade Practices Act dated May 8/24, 1990, nor did he play any role in determining the price of the shares or at any time instruct anyone to take any of these steps. Though it is easy to hurl accusations, either in writing or orally, it is necessary before a court of law to establish that the nexus was real and that the mala fides are not imaginary. Merely being the director of the plaintiffs or the managing director of Shaw Wallace, defendant No. 3 held no fiduciary capacity qua Arunava Investments Co. Ltd. and the question of breach of the fiduciary capacity cannot be examined in a vacuum in the absence of any specific allegation against defendant No. 3 in the pleadings. We, therefore, come back to the position that the transaction was one determined by the business prudence of Arunava Investments Co. Ltd. not objected to by the plaintiffs or Shaw Wallace till the issuance of the circular by defendant No. 3 on April 9, 1992. Another aspect of the matter which is crucial is that defendant No. 3 had no interest whatsoever even as a shareholder in either Intrust or even in BDA.

Coming to the price factor, the record indicates that in September, 1988, when Arunava Investments Co. Ltd. acquired the shareholdings of BDA, it did so at a face value of Rs. 2,50,000 and it is conspicuous to note that the total liabilities of the company at that time was around Rs. 55,00,000. The final decision to desubsidiarise BDA was taken in the minutes of the meeting of the group management committee of Shaw Wallace dated January 3, 1990, which, significantly enough, was chaired by Mr. M.R. Chhabria and in terms of these decisions, the board of directors of Arunava Investments Co. Ltd. on May 4, 1990, resolved to dispose of the shareholding at a face value of Rs. 10 each. I find that it is virtually admitted even from the affidavit of Mr. S. Roy that even on August 2, 1990, when the shareholding was actually transferred, the current liabilities of BDA were Rs. 3,31,00,000 as is clear from page 130 of the paper-book. In practical terms, therefore, the company which was acquired in September, 1988, with current liabilities of Rs. 55,00,000 was being sold on August 2, 1990, when the liabilities had mounted to Rs. 3,31,00,000. It is in this background that Shri Venugopal's charge that the company has been "hijacked" for an amount of Rs. 2,50,000 will have to be not only examined but straightaway discarded. The valuation of the shares, which is normally worked out on the basis of the assets and liabilities, was done so by the board of Arunava Investments Co. Ltd. on the basis of the balance-sheet, which was available to them for the year 1988-89 ending March 31, 1989. If one traces the relevant date for purposes of the price as May 4, 1990, when it was resolved to dispose of the shareholding at face value, the balance-sheet of BDA for the year 1989-90 was not available. In terms of the decision reported in 100 CLR 447, at page 456, the directors would be acting diligently and correctly if they were to go by the immediately last available balance-sheet for purposes of determining the value of the shares. I have taken the trouble to cull out a few relevant figures, particularly because Shri Venugopal did repeatedly advance the argument that the figure of Rs. 2,50,000 was so ridiculously absurd that the plaintiffs were entitled to succeed on this solitary argument.

As on March 31, 1989, the liabilities of BDA, as per the balance-sheet (page 262 of the record) were Rs. 1,10,34,000 whereas the liabilities as already stated on August 2, 1990 (record page 236) were Rs. 3,31,40,016. Even on March 31, 1990, the balance-sheet discloses that the liabilities were Rs. 2,22,48,143 (record page 240). The other important factor which needs to be seen is that as per the balance-sheet of BDA as on August 2, 1990, the secured and the unsecured loan amounted to Rs. 55,95,085 (record page 236) and this unsecured loan comprised an amount of Rs. 37,50,000 of Arunava Investments Co. Ltd., which has been repaid by BDA after the transfer was effected, a gesture which is relevant even for examining the claim of the ostensible nature of the transfer. Another aspect of significance is that the application made to the Central Government on May 8/ 24, 1990, clearly states that no revaluation of the assets has been made ; whereas as per the balance-sheet of August 2, 1990 of BDA, the balance in the profit and loss account gives a figure of Rs. 12,82,922 and to. it is added the capital reserves by devaluation of the fixed assets to the extent of Rs. 7,54,818 (record page 238). The revaluation assumes significance if it is a consistent feature, but, if done for the first time, could equally be an exercise to project as bright a picture to the shareholders as possible which is the normal window dressing in order to avail of bank facilities. I have had occasion to mention earlier that not much of all this is of any consequence because the application made to the Central Government was a serious matter and Arunava Investments Co. Ltd. itself had worked out the value of shares at Rs. 3 on the basis of the last available balance-sheet ending March 30, 1989, and the Central Government, on a perusal of the records, has accorded the approval for the transaction. This last aspect virtually put a full stop to the controversy. It is binding, conclusive and beyond question.

I have dealt, in passing, with certain references and features pertaining to the Companies Act, but it is necessary to deal specially with the provisions relating to subsidiaries because that is one of the main planks of challenge in this litigation. Under section 212 of the Companies Act, particulars of the subsidiaries are required to be furnished and attached to the balance-sheet of the holding company and such particulars are to be signed by the persons by whom the balance-sheet of the holding company is to be signed. Under section 215 of the Companies Act, every balance-sheet is to be signed by not less than two directors and the manager and the secretary. It does not require to be emphasised that these are responsible officers and persons holding positions of some status. It is also a requirement that the balance-sheet in question is required to be approved by the board of directors before filing. Section 220 of the Companies Act requires laying of the accounts before the general body and in pursuance of these provisions, the balance-sheet of Arunava Investments Co. Ltd. for the year ended March 31, 1991, was approved by the general body on June 24, 1991, which revealed the disposal of the shareholding of BDA at the face value of Rs. 10. Similarly, the balance-sheet of Shaw Wallace to which was appended the balance-sheet of Arunava Investments Co. Ltd. was approved by the board of directors of that company on June 26, 1991, and was approved by the annual general meeting of the shareholders on September 27, 1991. These balance-sheets, which clearly convey to the shareholders the disposal of the shareholding of BDA at the face value of Rs. 10, cannot be lightly ignored and the contents of the balance-sheet are, in law, an admission made by the board of directors and proved against them under section 21 of the Evidence Act. The legal position is amply illustrated in the case of Official Liquidator v. Krishnaprasad Singh [1969] 1 Comp LJ 327, at page 339. This, in substance, was the submission canvassed by Shri Manohar in support of his contention that it is nothing short of absurdity to allege that the entire transaction relating to the disposal of BDA shares Was clandestine or that it was without the knowledge of the persons in the management or shareholders of the respective companies or that it was a one-man manipulation attributable to defendant No. 3 when it has gone through all these proceedings.

Shri Venugopal counters the argument by contending that, undoubtedly, the requisite procedures were followed and a prima facie view of the relevant records would indicate that it was a collective, well-considered and correctly executed operation, which is now being questioned. Shri Venugopal submitted in detail that in order to appreciate his argument, it would be necessary to take stock of two factors, the first being that defendant No. 3 is no other person than the younger brother of Shri M.R. Chhabria, the chairman of Shaw Wallace, and, secondly, that he was holding the most powerful position in Shaw Wallace, namely, that of managing director. Shri Venugopal contended that the managing director of the group is virtually the person in complete charge and control and that the chairman, as always happens, is only a titular figure-head. It is his case that in these circumstances, when defendant No. 3 decided to execute his scheme of breaking away from the group and taking with him some of the most valuable assets, that he went about his job very carefully, very systematically and very intelligently. It is Shri Venugopal's case that defendant No. 3 only by virtue of the position which he occupied fully and completely dominated everything that was happening in Shaw Wallace and, frankly, that there was never any opportunity for Mr. M.R. Chhabria to so much as worry about, leave alone suspect, what he was up to. In these circumstances, Shri Venugopal contends that defendant No. 3 was instrumental in getting the decision to alienate BDA passed through the requisite channels without personally involving himself because the various executives were virtually all under his control. Shri Venugopal also contended that the court will have to take cognizance of the fact that even if many of these persons had smelt a rat and did not like what they were being asked to do, they had virtually no option and dared not go against the managing director of the group, who happened to be the chairman's own brother. He, therefore, submitted that this court would have to adopt the unusual approach of disregarding the fact that all procedures right up to the Government approval are apparently beyond question and would have to review the entire transaction in this background.

Shri Venugopal thereafter proceeded to enumerate before me at con siderable length various facts and figures on the basis of which he justified a paper calculation that the value of the share could not have been less than Rs. 90. He contended that it is, therefore, a matter of examining the evidence that the entire transaction is vulnerable and that it would have to be set aside.

In the first instance, where the requirements of law have been complied with and where the challenge has been presented for the first time something like two years after the transaction has been completed, a court would be fully justified in refusing to even entertain a challenge, howsoever ingenious it might be. In the present instance, the basis on which it is argued that the shares were undervalued is merely another way of juggling around with figures. I did seriously examine the correctness of this exercise and, to my mind, it is highly speculative approach. I did even consider the last argument advanced by Shri Venugopal as to whether the line projected by him is capable of being substantiated by evidence through the witness-box and, to my mind, after a careful consideration of that material, I am sorry to conclude that it is so much of wishful thinking.

The added reason for this conclusion is obvious in so far as the other limb of the argument proceeded on the footing that defendant No. 3 was exercising the powers synonymous with a military dictator, and, secondly, that highly placed executives at different points of time would carry out whatever he asked them to do regardless of the consequences. A perusal of the record of this case, and particularly the notes and minutes, will indicate that this could never have been the state of affairs. What really clinches the whole issue is the fact that even though there has been a clear division at least after April 9, 1992, when the present litigation started, none of the persons involved in the transactions who are even today working with the Shaw Wallace group and holding top positions have come forward with a complaint or an affidavit or otherwise that defendant No. 3 had coerced them into fabricating notes, minutes and being parties to decisions. It is easy to level accusations, particularly in the course of a litigation, but it is equally necessary to sustain those accusations and it is in the latter exercise that the plaintiffs have miserably failed. It is my considered view, on a very complete and thorough appraisal of the record, that the charges levelled, in particular those directed against defendant No. 3, are not only unjustified but are false.

The parallel allegations relate to the adequacy of consideration in respect of the three brands of IMFL products and that the entire transaction is liable to be struck down. Once again, it is my painful task to record that there are no pleadings in the entire plaint except a reference to an agreement of assignment and even that is so hopelessly inadequate that it does not even mention the deed for the assignment thereof. In the course of arguments before me, capital was made of the total consideration being only Rs. 15,00,000, and Shri Venugopal devoted considerable time towards supporting this charge. He demonstrated to me, through various references, that the three brands were virtually market leaders and that the turnover in respect of these three brands ran into not only lakhs but into crores of rupees. Even though there is no pleading to that effect, Shri Venugopal contended that these brands were virtually conceived, promoted and propagated until they reached the top of the ladder on which exercise alone, about Rs. 11,00,00,000 have been spent. As far as the pleadings go, the solitary reference is in the affidavit of Shri S. Roy dated April 28, 1992, wherein at page 153 of the paper-book in paragraph 3(g), we find a bald statement "the plaintiff has incurred since 1988, substantial amounts running into several crores on the promotion and development of the brands". Shri Venugopal proceeded to substantiate his argument that the assignment which, admittedly, has taken place and is recorded and in respect of which the consideration has passed was never intended to be acted upon, the reason being that it was to tide over certain excise and business difficulties. He did explain to me at the Bar as to what exactly the whole arrangement was, which I have had occasion to deal with and need not repeat once more and, therefore, contended that the consideration, if hopelessly inadequate, would be destructive of the legality of the entire transaction. Shri Venugopal spent considerable time in showing to me the figures particularly in respect of the turnover, sales, etc., relating to these transactions which are undoubtedly substantial and he concluded by stating that where it is demonstrated that these three brands are virtually money-spinners, virtually at the top of the market and worth crores of rupees to the owner nothing more needs to be illustrated in support of the argument that the consideration of Rs. 15,00,000 is not even a small fraction of what a court of law would regard as either adequate or lawful.

Shri Manohar in response, firstly, contended that the plaintiffs are disqualified on a simple rule of legal procedure from spending the precious time of the court in advancing arguments that are not supported by pleadings, but he essentially maintained that unless the deed of assignment was challenged and a declaration is claimed for declaring the assignment as invalid or illegal that the plaintiffs cannot argue anything in respect of the transfer being bad in law. He, however, stated that he did not want to run away from what was argued on the merits as the defendants had to face those contentions some time and would, therefore, like to set the matter at rest. He pointed out to me that as far as the time-frame was concerned that the brands were conceived sometime in the year 1988 and came to be manufactured for the first time in October, 1988, that they were introduced in the market a couple of months later around December, 1988. It was on April 24, 1990, which was within hardly a year, that the plaintiffs had resolved to assign the labels to BDA for a consideration fixed at Rs. 15,00,000. Shri Manohar has objected' very strongly to the manner in which the plaintiffs have glossed over one very important fact, namely, that the figures themselves would indicate that these brands did not catch on like wild fire, that the turnover was relatively small to start with and that it took considerable amount of effort before they received public acceptance and began to do well. Shri Manohar illustrates this by pointing out that one would have to draw the line at about March/April, 1990, and that it is true that in the subsequent period, these brands not only did well, but that the sales virtually galloped. In retrospect, by April, 1992, when the present dispute arose, undoubtedly, the plaintiffs or Shaw Wallace must have regretted having disposed of them because they were doing extremely well. What we are concerned here is with the status and performance of these brands in the pre-April, 1990, period during which time there was absolutely no indication that they would turn into market leaders. In relation to the position as it obtained at that point of time, the consideration of Rs. 15,00,000 was a very fair and correct evaluation. Shri Manohar also presented before me certain calculations in support of the defendants' contention that it is really one of the three brands, namely, Officer's Choice that was reasonably well-received and the performance of the other two was, in fact, relatively poor. It was this one which really anchored the other two and, therefore, the price of Rs. 5,00,000 each cannot be faulted.

As far as this head of challenge is concerned, I have had occasion to observe earlier that the record does not support the contention that it was a mere arrangement in order to get over certain excise or business difficulties. This is a claim made in the air unsupported by material and directly contrary to what the documents and records indicate and will, therefore, have to be rejected in its entirety. As regards the question of consideration, the defendants are right in pointing out that the pre-April, 1990, position is what was, in fact, material. I am considering these aspects of the case even though there is no prayer in the plaint challenging the transaction or for a declaration that it should be struck down only because, as indicated by me in the beginning of this judgment, the issue has been agitated threadbare, considerable amount of judicial time spent and, therefore,, it does not have to be shifted to some other court or forum for a re-examination. There was nothing at the beginning of 1990, from which the plaintiffs themselves could have assumed that the three brands would skyrocket. The documents indicate that it was the plaintiffs who fixed the price and not the defendants, that they accepted the consideration and, if at all, it was improper or inadequate, one would have expected a composite challenge and that too at an earlier point of time. The utter inconsistency of approach is well-illustrated from the fact that the plaintiffs are totally and completely confused even in their contentions before the court because on the one hand they contend that the transaction is perfectly in order, but was intended not to be given effect to. I fail to understand how a legally-concluded transaction can either be put into cold storage or be ignored, particularly at an intercorporate level. If this was so, the plaintiffs would never have put in a negative covenant extinguishing any right on their part in the brands. In the same breath, a composite attack is levelled against the main transaction where the plaintiffs have virtually gone for the jugular, which incidentally is quite inconsistent with their earlier plea, contending in the alternate that the transaction itself should be struck down. On the figures placed before me, at the point of time when the evaluation was done and having regard to the totality of circumstances, it is crystal-clear that the plaintiffs willingly and voluntarily disposed of the three brands for a price which they themselves fixed and which they obviously considered to be adequate. The challenge, technicalities apart, is, therefore, wholly and completely devoid of any merit.

I need to mention, in passing, that Shri Manohar pointed out to the court that the plaintiffs have not done any act of charity to the defendants because the plea with regard to the expenses spent on promotion is utterly false and hollow. He stated that the expenses mentioned by the plaintiffs had been incurred on account of BDA from out of the sale proceeds of its products which were marketed by the plaintiffs. He pointed out to me that the entire sale proceeds in respect of all the production of BDA have been received by the plaintiffs and that even though on paper they were required after deducting the expenditure, including that for promotion of the brands, marketing charges and commission, to pay over the remaining amount to BDA, this has not been done. Shri Manohar contended that the interim order of the court was so wrong and unfair that it enabled the plaintiffs to bleed defendant No. 1 by physically taking charge of all its production and putting back nothing. I refrain from commenting about this last part of the argument, but have recorded it for the limited reason that I do see justification in the charge made by the defendants' learned counsel that the interim order was an atrocious one because it enabled the plaintiffs from the date on which that order was passed to not only run the unit but to appropriate the entire production. To think that such an illegality has taken place, as a result of court orders, is something very-very disturbing, to put it mildly.

The maximum amount of heat that was generated in the course of the very protracted arguments centred around the allegations levelled against defendant No. 3 personally under the head of breach of fiduciary duty. A lot of the court's time was spent citing case-law on both sides, but as is apparent from the pattern followed by me in this judgment, it is the legal principles that are culled out from the cases cited that have, in fact, to be applied to the facts. I do not, for a moment, dispute the proposition canvassed by Shri Venugopal that respondent No. 3, who through the entire period of time that we are concerned with, namely, from 1990 up to April, 1992, was the managing director of Shaw Wallace. Shri Venugopal insisted that the court must be equally conscious of the fact that he was the younger brother of the chairman of the company because he maintained that the relationship between the two brothers has much to do in this case in so far as it was for the latter reason that defendant No. 3 was never questioned about anything he did and was implicitly obeyed by officers of the companies and even directors up to the highest level. That defendant No. 3 was required by virtue of the office which he held to act in consonance with law and to uphold at all times the interests, particularly financial, of the concerned companies is accepted. I, however, consider it wholly irrelevant to take cognizance of the relationship between the two brothers because, to my mind, that has little to do with legal responsibilities. If defendant No. 3 has misused his position or if he has been guilty of breach of fiduciary duty, merely because he is the chairman's younger brother would not in the least bit come to his assistance before a court of law. Also, the argument that senior executives and directors would join hands with him in sabotaging the interest of the company of the magnitude of Shaw Wallace is to my mind, far-fetched and in any event this charge is unjustified on an examination of the present record. The plaintiffs contend that it was defendant No. 3 who was responsible for the alienation of BDA shares by Arunava Investments Co. Ltd. I have discussed the transactions in some detail and have recorded the finding that this was not so. The plaintiffs further allege that defendant No. 3 was responsible for the price at which the shares were transferred, the material in support of this charge has been examined by me and I have recorded a conclusive finding that this allegation is baseless. It is also contended that part of his manipulations included the assignment of the three brands by the plaintiffs to BDA for what is termed as an absurdly low price of Rs. 15,00,000 and Shri Venugopal contended that the court will have to view all these developments in retrospect when the whole plan clearly falls into place even though it may not have appeared so at an earlier point of time. I have devoted considerable time towards considering the evidence in support of this charge and I find that the defendant No. 3 had no hand in the decision to assign the three brands to BDA nor for that matter was he responsible for the price fixation. The last allegation and one which subsequently emerged in the course mainly of the arguments at the Bar was that the transfer of the shares to Intrust Securities Ltd. was planned out by defendant No. 3 and that this was the final step in the operation to snatch away this company. This allegation again is impossible to sustain because the directors of that company, namely, Khairullas, are persons with whom no connection whatsoever of defendant No. 3 has been established. It has not even been alleged that these persons who were the directors and shareholders of the company were the nominees of defendant No. 3.

While dealing with this aspect of the matter, I need to record that Shri Manohar pointed out to me that neither Intrust nor the Khairullas are parties to this litigation and in their absence, a transfer in their favour cannot even be discussed, leave alone adjudicated upon in the present litigation. He also pointed out to me that the only party entitled to complain, if at all that was permissible, is Arunava Investments Co. Ltd., who held the shareholding of BDA and this party is also not before the court and one other significant aspect of the matter is that the plaintiffs project this challenge as though they were the mouthpiece of Shaw Wallace without Shaw Wallace itself being a party to this litigation. Shri Manohar is justified in contending that on these technical pleas, the court should refuse to spend any time examining this argument. I have repeatedly said through this judgment from time to time that under normal circumstances, I would have straightaway adopted a strict cut and dried approach and pointed out to the plaintiffs that everything that is outside the original set of pleadings will be ignored. I have been virtually prevented from adopting that procedure because the trial court permitted the scope of the dispute to be enlarged and magnified and based its decision on that material. Also, it has been pointed out to me repeatedly that there is a host of litigations between the same parties effectively where all these issues have, in fact, been canvassed and that, therefore, this court must not refuse to give its decision on all points. The interest of justice would require that a total adjudication of the entire matter is the right and correct course rather than a piecemeal one and it is certainly not in the interest of judicial time that there should be multiple hearings before different courts. This is precisely the reason why in spite of strong pleas from Shri Manohar who did of course also deal with the merits of each point since he had to contend with the judgment of the lower court, that I have to give my findings on the merits in respect of each issue.

As indicated earlier, in the circumstances of this case, I refuse to avoid deciding the issue or bypassing it on to another forum. The examination of what is placed before me indicates that one test alone would be sufficient to completely nullify the plaintiffs' case and that is the time factor. We are concerned with a two-year time span which encompassed the period April, 1990, to April, 1992. Each of the transactions was official. They involved several persons. They have been reflected in all the records right up to the balance-sheets and annual report of Shaw Wallace, etc., and, therefore, it would be downright wrong to argue that these transactions were clandestine. There is not even the remotest of evidence to support the plea that defendant No. 3 had misused his position or that he had coerced any of the executives or directors to assist him in such activities. For this long period of 24 months, not only was there no challenge to the transactions in question, but they were not questioned and nobody so much as pointed a finger at defendant No. 3. This, to my mind, is very-very significant. The timing of the allegation, namely, after defendant No. 3 assumed charge of BDA, indicates that the whole charge is an afterthought and that it is a weak but vain attempt to malign him at a point of time when the real game is to somehow get control of BDA by means that have been demonstrated to be more foul than fair.

I now need to deal, in passing, with the general contentions that have found favour with the trial court. The first of these is the general statement that as on the date of passing of the ad interim orders, BDA was de facto being managed by a board of directors who were under the control of Shaw Wallace. This statement has unfortunately found favour with the learned trial judge while effectively passing the impugned orders which are justified by him as they are on the lines of continuing what according to him was the existing arrangement. This position was factually and legally incorrect because, in the first instance, after the transfer of shares, the status of BDA had changed and, consequently, after that point of time, its character had changed in so far as the management was that of an independent entity and not a satellite or subservient or subsidiary company. The contention that the management of BDA was in the hands of the plaintiffs or of Shaw Wallaee is also not correct in view of the specific prohibition under section 324 of the Companies Act. This important aspect of the matter has been lost sight of by the learned judge who was possibly misled by the fact that after BDA ceased to be a subsidiary in view of the past association, there was no immediate sudden change in the management structure, but the important difference in law was that they were no longer nominees of Shaw Wallace. This is more than adequately established from the affidavit of Shri S. Roy dated April 28, 1992, where, in paragraph (15), he states that since the desubsidiarisation, the share capital of BDA increased and this had to be done by a resolution of the board of directors who took the decision in question regarding the allocation. It is significant that no additional shares were issued and allotted either to Shaw Wallace or to any of its allied companies, but the allotment was made to different persons with which Shaw Wallace had no concern.

Shri Venugopal did advance the argument before me that regardless of the transactions concerning the shares and assignment of the brands, de facto BDA was managed and controlled by Shaw Wallace personnel and that this was the principal reason why the ad interim and interim orders came to be passed. It is his argument that the validity of the other transactions having been challenged, as far as the day-to-day continuity of the working was concerned, it was very necessary for the court to maintain the status quo ante pending an adjudication of the illegalities in question. This, Shri Venugopal contended, was necessary in the interest of continuity of production and avoidance of any dislocation to the unit. Shri Venugopal's argument proceeds on the footing that several employees who were, in fact, working with BDA had, admittedly, been deputed from the plaintiff-company. I have dealt with that aspect of the matter earlier and pointed out that the affidavit of Shri S.S. Sanyal at page 66, in sub-paragraph (4) specifically points out that all these persons were on the pay-roll of BDA and that the entire administrative expenditure was looked after by that company. Significantly, this has not been denied "by Shri S. Roy, who has filed a detailed affidavit on behalf of the plaintiffs, It is true that he has made a general statement that directions for the running of the day-to-day affairs of BDA used to come from the corporate office of the company at Delhi. If he expects a court to act on a statement of this type since we are concerned with the working of a company and not an individual, I would have expected him to substantiate this statement, but there is nothing that has been produced in support thereof. The plaintiffs were interested in the entire production of BDA and there was obviously commercial communication which is entirely different to controlling and managing the company. Shri Manohar has pointed out to me that such capital has been made with regard to the power of attorney dated December 26, 1990, in favour of Shri S. Roy and he has clarified the position that the defendants do not at all dispute that in the early stages, they had availed of the technical personnel from the plaintiffs and their expertise, but that they have paid for all of this. On the other hand, he points out that this document supports the case of the defendants that BDA has become a separate entity and it was precisely for this reason that Shri S. Roy required a formal power of attorney on the basis of which he could act on behalf of BDA. This power of attorney was subsequently revoked. The plaintiffs had also contended that the factory manager had been employed by them. This claim does not appear to be justified because the document at page 375 wherein the signature of the factory manager, who incidentally is plaintiff No. 2, appears at serial No. 1 shows that he is resigning from the service of BDA. I do not need to emphasise that he could resign from service only if he was an employee of BDA. Shri Manohar went on to state that this document would indicate something else of importance, namely, the fact that in the course of this unfortunate dispute, the loyalties of many of the employees have shifted and that was the principal reason why the third defendant was required to take the steps which he did on April 9, 1992, which were necessary for the proper administration of BDA since some of the employees had crossed the floor.

Another head that was relied upon by the plaintiffs and which Shri Venugopal did emphasise was that there is considerable amount of equipment in the possession of BDA, which has been provided for by Shaw Wallace. He stated that this is conclusive proof of the fact that the character of BDA was that of being one of the group companies which had never been challenged and that was the reason why Shaw Wallace had provided it with such assistance. He also stated that this equipment remained with BDA long after the events of 1990 and that it, therefore, supported his contention that at least the day to day management and control continued with Shaw Wallace or, for that matter, with the plaintiffs. In response to this, Shri Manohar has drawn my attention to page 20/21 of the record which clearly shows that Shaw Wallace was recovering lease rent on everything that was supplied, that the assistance was not gratis and that it was on payment of regular lease money and, therefore, a simple commercial arrangement between the two companies.

One more angle that was referred to by Shri Venugopal was with regard to the annual report of Shaw Wallace ending on March 31, 1991, which mentions Officer's Choice as a premium brand and this, according to Shri Venugopal, supports his argument that irrespective of the paper arrangements, the understanding between the parties even thereafter was that the old situation would still continue, namely, that the plaintiffs would for all intents and purposes be regarded as the owners of the brand. Shri Manohar has explained this reference by pointing out that right up to February 26, 1991, the plaintiffs were, in fact, the owners of the brands which covers almost eleven months of this financial year, which explains the reference to this brand. This, in fact, is a complete answer.

I do not need to dilate at any great length with regard to this last group or heads, but I have referred to them as they have influenced the decision of the trial court. To my mind, one has to get down to basics and the real guts of the matter without being sidelined by trivialities, and after a very thorough examination of the record, I am more than satisfied that there is nothing to stop the conclusive finding that after the transfer of the shares, BDA assumed the status of an independent corporate entity. The fact that some of the old employees of the Shaw Wallace group may continue at different levels is irrelevant because on and from that date their status in law automatically changed. Again, merely because BDA did not, for good reason, sever its business links or working arrangements from the Shaw Wallace group cannot, under any circumstances, lead to the conclusion that it was legally interlinked or subservient or that it was being managed and controlled by the Shaw Wallace group. Out of the voluminous record running into thousands of pages, there is not one scrap of paper that can support this view.

Shri Manohar advanced a strong plea at the conclusion of his arguments, as he had done in the beginning, that immediate interference by the appellate court is essential in the present case. He submitted that after three weeks of day-to-day hearings and of a threadbare examination of the record, it will be more than evident to this court that the trial court has ignored the three basic requirements, namely, the existence of a prima facie case, the balance of convenience and the aspect of irreparable injury which governs the grounds for the grant of a discretionary order. Shri Manohar contended that this has been done in blatant disregard and violation of the basic norms and that the trial court has acted unreasonably and capriciously that it has ignored material and facts on record and has arrived at perverse and unsustainable findings. He stated that painful as it may seem, the two orders whereby the total management and control of the company has been handed over to the plaintiffs and the lawfully empowered authorities of the company have been bound hand and foot are even worse than a final decree and that in the interest of the survival of his clients, the orders must be vacated forthwith.

On behalf of the plaintiffs, Shri Venugopal submitted that it is unfair to make such strong charges against the learned trial judge who has directed that once the unit was being run and looked after by his clients he has only continued that arrangement. He stated that this was merely an interim order and that it is only after a final adjudication of the evidence that a composite decision can follow ; that the plaintiffs are running the unit as well as it was being done earlier and as that his clients were perfectly ready for the suit to be heard immediately.

I do not need to repeat what I have said more than once; that the manner in which the and interim and interim orders were passed, and that too in the face of a record of the present type, are sufficient for me to hold that all existing norms and canons of jurisprudence have been flouted. The type of damage that has occurred is almost unthinkable and it was for this reason, after reading and re-reading the record and checking and re-checking the law on each and every point, that was canvassed in this case, I found that it was virtually a matter which shocked the conscience of this court and required immediate corrective steps. I had, therefore, observed in my order dated April 27, 1993, that the interim orders cannot be allowed to continue for even a single minute and that was the ground on which I had held that there was no justification whatsoever, for the grant of any stay of that order, even if the plaintiffs desired to carry the matter higher.

Shri Venugopal on behalf of the respondents listed a series of circumstances, which I shall summarise, in support of his argument that the plaintiffs were justified in factually contending that the management and control of BDA was with the Shaw Wallace group as on April 16, 1992, when the suit was filed and they are as follows :

(i)             BDA was a 100 per cent. subsidiary of Shaw Wallace until August 1, 1990, through the plaintiffs.

(ii)            Being a part of the group of companies, the plaintiff-company as well as Shaw Wallace made huge investments by way of capital expenditure, manpower, adoption, utilisation and promotion of trademarks, labels, brands, making available expert advice, know-how, marketing and distribution facilities, incurring liabilities and obligations, making available office premises, giving bank guarantees, etc. In fact, the bank guarantee was given on April 29, 1991 (at page 247).

(iii)           In March, 1989 (see exhibit 10, at page 261, volume 1), the board of directors of Arunava approved a scheme of amalgamation of Arunava with Shaw Wallace with the purpose that "the business of Arunava could become integrated with that of Shaw Wallace and the company's investment would be rationalised by their being held by a single company, namely, Shaw Wallace." Under the scheme, the business of Arunava was to vest in with effect from July 1, 1988, i.e., the appointed date.

(iv)           In March, 1989 (see exhibit 10, at page 259, volume 1), the board of directors of Shaw Wallace approved such a scheme.

(v)            On March 29, 1989, applications filed by Arunava and Shaw Wallace in the High Court at Calcutta for directions regarding holding of meeting of the shareholders to consider the scheme of amalgamation. The High Court directed the holding of the meeting (pages 282 to 328, volume 1).

(vi)           In May, 1989 (see exhibit 10, at pages 262-263 of volume 1), the shareholders of Arunava and Shaw Wallace approved the scheme of amalgamation as required by law.

(vii)          Thereafter, in June, 1989, the petitions were filed in the High Court at Calcutta for sanction of the scheme proposed and approved by the shareholders of Arunava and Shaw Wallace (pages 138 and 139 of volume 1).

(viii)          On June 12, 1989, an application was made on behalf of -Shaw Wallace under section 23(2) of the Monopolies and Restrictive Trade Practices Act, 1969, seeking approval of the Central Government to the scheme of amalgamation (exhibit 10, at page 256 of volume 1).

(ix)           On March 22, 1991, order passed by the Central Government under section 23(2) of the Monopolies and Restrictive Trade Practices Act, 1969, approving the scheme of amalgamation (see exhibit 10, at pages 255 and 256).

(x)            Between August, 1989, and August, 1990, the GEC (Group Executive Committee) and the GMC (Group Management Committee) of Shaw Wallace decided to desubsidiarise BDA and convert it into a "tie-up unit" for three reasons :

        (a)    to bring down, the cost of labour,

        (b)    easier access to finance from banks, and

(c)    to prevent the stifling of growth on account of restrictions contained in the Companies Act, 1956, and the Monopolies and Restrictive Trade Practices Act, 1969, due to "interconnection" (see documents at pages 431, 393, 396, 397 and 441 to 445 of volume 2).

It was not the intention of the GEC or the GMC that there should be an outright sale of the shares or to convert BDA into a competitor of the Shaw Wallace group. Nor was the intention of the GEC and GMC that the plaintiff or Shaw Wallace would cease to exercise any control over this "tie-up unit".

(xi)           In April, 1990, the board of directors of the plaintiff-company decided to assign three trademarks/labels to BDA on account of problems faced from certain State Excise Departments (see minutes of the meeting of the board of directors dated April 24, 1990, exhibit 1, at page 450).

(xii)          Pursuant to the above, an agreement of assignment was executed on August 30, 1990, under which the plaintiff agreed to assign the three valuable trademarks for a nominal sum of Rs. 5,00,000 for each brand (see pages 79-81, page 450 of volume 1).

(xiii)          Pursuant to the above, on February 26, 1991, a deed of assignment was executed between the plaintiff and BDA (see exhibit 6, at page 86 of volume 1).

(xiv)         Even after BDA was desubsidiarised and the aforesaid three trademarks assigned, the existing arrangements with regard to the management and control of the affairs of defendant No. 2 continued to subsist.

(xv)          In fact, a general power of attorney was given to Mr. Shovan Roy as far back as in December, 1990, by BDA, was not terminated or revoked, on the contrary Shri Shovan Roy continued to exercise the powers conferred thereby ( pages 131 and 132 of the plaintiff's affidavit-in-rejoinder).

(xvi)         In April/May, 1991, further liabilities were incurred by the plaintiff by giving a corporate guarantee for Rs. 5.50 lakhs (see pages 260-261 and pages 244-251 of volume 1).

(xvii)         Even subsequent to the desubsidiarisation, the board of directors of BDA consisted of nominees appointed by Shaw Wallace and/ or the plaintiff (see page 127 of volume 1).

(xviii)        Defendant No. 3 continued to be a managing director of Shaw Wallace as well as director of the plaintiff-company. At the same time, defendant No. 3 has illegally claimed the control of the affairs of BDA (see para 15 at page 135 of volume 1 and para 16, pages 553-554 of the judgment) and wants to engage in business in competition with the Shaw Wallace group.

(xix)         For the first time on April 9/10, 1392, an attempt was made by defendant No. 3 to disturb the existing arrangement and assert his rights over BDA (see page 19, volume 1 and pages 13 and 14 of volume 1 plaint).

(xx)          On April 11, 1992, and April 25, 1992, the board of directors of Shaw Wallace curtailed the powers of defendant No. 3 as a managing director of Shaw Wallace on account of his subversive activities (see pages 165-167 of volume 1). The board of Shaw Wallace consisted amongst others of independent professionals and a nominee of financial institutions.

One can almost carry on the debate endlessly and in this long judgment, I have had occasion to glean the more substantial issues and to evaluate the main areas that govern the overall decision of the case without losing sight of the relevant facts and the law, This sequence as presented by Shri Venugopal does at first blush look both impressive and convincing, but have already dealt with every one of these factors, the answers presented by Shri Manohar piecemeal and on an overall basis and my findings, stage by stage and collectively to establish that both in law and on the facts, the trial court was in error in holding that the management and the control of BDA as on the date of the filing of the suit continued with the plaintiffs or with the Shaw Wallace group.

The subsequent contentions raised by Shri Venugopal are in relation to what he categorised as subsequent conduct which is highly supportive of his contentions and he lists out the following set of circumstances in support of his plea that even after August 2, 1990, there was no change of situation. Shri Venugopal contends that despite the transfer of BDA Breweries and Distilleries Ltd. by Arunava to Intrust of August 2, 1990, BDA Breweries continued to be managed and controlled as a part of the Shaw Wallace group without any interference by any third person. The facts relevant in this regard are as under :

(i)             The directors of BDA Breweries and Distilleries Ltd. continued to be the nominees of the Shaw Wallace group, namely, the executives and employees of the group companies. Neither the Kheyroolas nor any of the Chhabrias or their nominees became the directors.

(ii)            The day-to-day affairs of BDA Breweries and Distilleries Ltd. were looked after and controlled by Cruickshank and Co. Ltd. All directions were given by Cruickshank's corporate office at Delhi. Mr. Sankar Sanyal, the chief executive and Mr. S.K. Sinha, the factory manager, and others were reporting to the Delhi office of Cruickshank where Mr. S. Roy, the vice-president of the Shaw Wallace group, was functioning. All sanctions were being taken from Mr. S. Roy.

(iii)           A general power of attorney dated December 26, 1990, was executed by BDA Breweries and Distilleries Ltd. in favour of S. Roy which continued to remain in force until April, 1992, without any interference whatsoever (cancelled on April 19, 1992).

(iv)           Cruickshank provided a corporate guarantee in the sum of Rs. 5,50,00,000 for credit facilities sanctioned to BDA Breweries by the Central Bank of India. This guarantee was given in April-May, 1991, i.e., after the desubsidiarisatiori.

(v)            The principal employees working at the factory of BDA Breweries and Distilleries Ltd. were those deputed/assigned/seconded by Shaw Wallace group. These include technical people, such as the factory manager, the blender, etc.

(vi)           The essences, specification, the blending formula developed by Shaw Wallace group continued to be used by BDA.

(vii)          The registered office of BDA Breweries has been at all relevant times situated within the premises taken by Shaw Wallace on lease.

(viii)          At the time of acquisition of BDA shares by Arunava in 1988, BDA Breweries had a liability of Rs. 55,00,000. The acquisition cost was, therefore, Rs. 57,50,000 (Rs. 55 lakhs plus Rs. 2.50 lakhs). The sale price was only Rs. 2,50,000, particularly when the book value of the shares at the time of transfer of shares was itself Rs. 90. After transfer of the shares, the Shaw Wallace group arranged for finances and other facilities to BDA Breweries and Distilleries, including the following :

(a)    Deferment of amount due from BDA to Cruickshank amounting to Rs. 2,25,00,000 at the time of transfer on August 2, 1990.

        (b)    Lease of machines and equipment.

        (c)    Arrangement for procuring raw materials and packing materials.

        (d)    Corporate guarantee of Rs. 5,50,00,000.

        (e)    Arrangement for deputing technical personnel.

(ix)           The annual report of Shaw Wallace for the year ended March 31, 1991, specifically mentions Officer's Choice as one of the premium brands of the group with large market potential. The director's report of Cruickshank mentions Officer's Choice becomes a million case brand and additional sources of supply identified.

(x)            Even after August 2, 1990, BDA continued to manufacture the three brands as before, without any document incorporating any agreement for such manufacture after the desubsidiarisation. If the letter dated April 24, 1989 (at page 20) is ignored, there is no other document on record regarding any agreement, particularly concerning the period after August 2, 1990. Admittedly, BDA continued to manufacture the said three brands after August 2, 1990.

Here, again, Shri Manohar has, in the course of his submissions, dealt with these contentions and, in order of sequence, I have examined each one of them. I am conscious of the fact that it is not one or two stray circumstances or for that matter a point here or a document there that has to be picked out, but that the approach of the court has to be to uphold at all times the position in law regardless of what may be pleaded otherwise. As far as this area of controversy is concerned, it is probably the weakest area of the plaintiffs' tottering case and it is, indeed, with a degree of courage that they solemnly contend before a law court that legally concluded transactions be ignored on the ground that these were a camouflage for getting over various legal provisions or contributions by way of taxes to the State and its exchequer. One can scarcely look for a more absurd argument.

As regards the question of breach of fiduciary duties by defendant No. 3, Shri Vehugopal summarised the position under the following heads :

(a)            It is obvious from the facts stated above that defendant No. 3 has abused his powers as a managing director of Shaw Wallace and as a director of the plaintiff-company and has committed the gravest breach of his fiduciary duties as a trustee of the shareholders of Shaw Wallace and the plaintiffs by acquiring the control of the company which was a substantial asset and/or one of the undertakings of the Shaw Wallace group at a throw-away price and that too without disclosing his interest therein.

(b)            The breach of fiduciary duties on the part of defendant No. 3 is two-fold, namely, (i) by acquiring control over BDA on the erroneous footing that there was an intended outright sale of shares of the under taking of BDA, and (ii) by converting BDA into a competitor of Shaw Wallace and the plaintiff whilst holding charge as a managing director of Shaw Wallace and a director of plaintiff No. 1. The argument that the real value of the shares held by Arunava in BDA as on March 31, 1990, or August 2, 1990, was not known or available is an eyewash. The real question is whether the same could not have been ascertained. Defendant No. 3 being a managing director of Shaw Wallace in any event cannot be heard to say that he was not aware or could not have ascertained the real value of the shares. The argument that the application to the monopolies and restrictive trade practices authorities required the valuation to be ascertained on the basis of "latest audited balance-sheet" is fallacious. Neither the provisions of the Monopolies and Restrictive Trade Practices Act, 1969, nor the requisite form states so (see clause 16(a) of Form 6(a) at page 406).

(c)            The contention that the sale of shares of BDA was in favour of the Kheyroolas is only a red-herring and/or a smoke screen. This can be demonstrated by the following :

        (i)     Kheyroolas are not the defendants ;

(ii)    Kheyroolas never objected to the control and management of BDA being with the plaintiff and Shaw Wallace and Kheyroolas never insisted that the control of BDA should vest in them;

(iii)   No material has been placed by defendant No. 3 as to how, when and for what consideration the share capital of defendant No. 2 came to be transferred to the companies under the control of defendant No. 3 and/or to his family members.

(iv)   The fact that the interest of BDA was never intended to be inimical to the interest of the plaintiff and Shaw Wallace was never in doubt.

(v)    Equally, it was never intended that the ultimate beneficiary of all the shares of BDA should be defendant No. 3.

(vi)   On the contrary, if defendant No. 3 were the intended beneficiary of the shares of BDA, defendant No. 3 has clearly placed himself in a position where there is a clear conflict of duty and interest which the company law as well as the law of trust abhors.

(d)            Defendant No. 3 has, however, asserted that the intended beneficiary of the shares of BDA were the members of his family and companies under his control pursuant to a family arrangement. This is clearly borne out by the assertions made by defendant No. 3 in an affidavit filed by him in the Calcutta High Court wherein it is clearly alleged that BDA came to their share as part of a "family arrangement" (see para 4(b) pages 5-11 of the affidavit dated May 10, 1992, of defendant No. 3 filed in the Calcutta High Court) and also (see arguments advanced on behalf of the defendants before the trial judge listed at para 16 of the judgment dated May 5, 1992, pages 553 and 554).

(e)            In this connection, the allegations made in the plaint filed by BDA Limited, declared on June 7, 1992, in the Bombay City Civil Court, to the effect that BDA limited along with the various other companies forms part of "Kishore Chhabria Group of Companies" is also extremely relevant (see para 6 of the plaint filed in B.C.C. Suit No. 4421 of 1992).

I am firmly of the view, after hearing learned counsel for both sides, that there is more of a personality clash than substance in this head of charge and that is the reason why voluminous case-law was cited in support of the contention that the conduct of defendant No. 3 is unpardonable. It is unnecessary for me to repeat the findings that I have recorded earlier except to observe that my approach to the matter has been totally dispassionate and to decide the controversy strictly in keeping with the accepted principles of law that a court has to observe. That defendant No. 3 has been relentlessly attacked is an understatement, but none of the grounds of attack are capable of being sustained or upheld.

Shri Venugopal then adverted to his main defence as far as the order is concerned, by pointing out that regardless of the plea canvassed by BDA that it is entitled to be maintained by its own shareholders and to enjoy an independent corporate existence apart from the Shaw Wallace group, the contention itself is unsound both as far as the facts are concerned, but, more importantly, that there was a complete legal justification for the grant of the reliefs. I have, therefore, summarised his contentions under this important head, which are as follows :

(a)            In support of the aforesaid submissions, the defendants have placed reliance upon three decisions, two of which are of the Calcutta High Court and one of which is of the Madras High Court, namely, (i) ILR 1976 (2) Cal 286 ; (ii) Turner Morrison and Co. Ltd. v. Hungerford Investment Trust Ltd., AIR 1969 Cal 238 ; and (iii) Spencer and Co. Ltd. v. CWT [1969] 39 Comp Cas 212 ; [1969] 72 ITR 33 (Mad) ; AIR 1969 Mad 359. As far as the decisions reported in AIR 1969 Cal 238 and AIR 1969 Mad 359 are concerned, the same have been expressly overruled by a decision of the Supreme Court in State of U.P. v. Renusagar Power Co. [1991] 70 Comp Cas 127, at page 158. As regards the other decision which is to the same effect, the same is also deemed to be impliedly overruled by the law as laid down by the Supreme Court in the aforesaid Renusagar's case [1991] 70 Comp Cas 127. The law as recently laid down by the Hon'ble Supreme Court in the case of Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 ; AIR 1986 SC 1370, at page 1418, para 90 ; end in the case of State of U.P. v. Renusagar Power Co. [1991] 70 Comp Cas 127 clearly carves out an exception to the law enunciated in A. Salomon v. A. Saloman and Co. Ltd. [1897] AC 22 (HL) to the effect that the veil of corporate personality ought not, and cannot, be easily lifted. In fact, since Saloman's case [1897] AC 22 (HL), which was decided in the year 1897, the law has undergone a sea-change, which is clear from the following observations made by the Hon'ble Supreme Court in Renusagar's case [1991] 70 Comp Cas 127, 159 :

                "The ghost of Saloman's case [1897] AC 22 (HL), still visits frequently the hounds of company law but the veil has been pierced in many cases."

            The law with regard to the lifting of the corporate veil as laid down by the Hon'ble Supreme Court is expressly applicable and has been applied in the case of holding and subsidiary companies, particularly where the facts requires the court to assess "the business realities" and where the facts would disclose that the subsidiary company was in substance though not in law of partnership between the holding company and its subsidiaries.

(b)            Similar is the position in England which would be revealed by the statement of the law as set out in Palmer's Company Law, 24th edition, para. 18-23, sub-paras 12, 14 and 16 at pages 218 to 220.

(c)            In this behalf, it would not be out of place to refer to the law with regard to the role of a managing director/director, the duties cast upon him and the position enjoyed by him qua the shareholders of the company of which he is a director/managing director.

(d)            The law in this behalf is found eloquently stated in paragraph 63-13 at page 943 of Palmer's Company Law as also in the ratio of the case decided by the House of Lords in the case of Regal (Hastings) Ltd. v. Gulliver [1942] 1 All ER 378, at pages 389, 391 and 392 ; and in the case of Cranleigh Precision Engineering Ltd. v. Bryant [1964] 3 All ER 289 (QB) (referred to by the trial judge). See Pennington's Company Law, 6th edition, pages 606 and 607. Also see Buckley, 14th edition, pages 988-989. Also see the judgment delivered by a Division Bench at the Delhi High Court in the case of Globe Motors Ltd. v. Mehta Teja Singh and Co. (Agencies) [1984] 55 Comp Cas 445.

(e)            In view of the fact that the law permits the courts to lift the corporate veil in order to ascertain the "business realities" and in order to ascertain as to where the real control and beneficial ownership of the company's undertaking lay, the arguments advanced on behalf of the respondents that section 293(1) does not apply to the facts of the present case, inasmuch as in the present case what was transferred was only the "shareholding" of Arunava in BDA and not the "undertaking" itself is nothing short of an attempt to make the court shut its eyes to the "business realities". As per the law laid down by the Supreme Court in Renusagar's case [1991] 70 Comp Cas 127, the court is empowered by lifting the corporate veil to ascertain as to who is the equitable owner of the properties or undertaking of the company (see [1991] 70 Comp Cas 127, at page 155).

(f)             The contention that the corporate veil can only be lifted in exceptional cases, such as fraud, is no longer the law as applicable to companies in India in view of the expanding horizons of "modern company jurisprudence" as per the law as laid down by the Hon'ble Supreme Court. On the other hand, in cases where there has been a breach of fiduciary duty on the part of directors, it has been held that the right of the company to recover the property so transferred is unlimited and the director's knowledge of such a transaction does not preclude the company from having the transaction set aside :

            See–

        (i)     AIR 1983 Bom 539 (sic),

(ii)    Selangor United Rubber Estates Ltd. v. Cradoc (No. 3) [1969] 39 Comp Cas 485 at page 589,

(iii)   The aforesaid passages from the commentaries of Company Law referred to on page 10 of the submission.

(iv)   Commentary by Ramaiya, 12th edition, at page 1427 relying upon the decision of the House of Lords in the case of Guinness plc. v. Sounders [1990] 1 All ER 652 (HL).

My short comment with regard to all these legal niceties is that this case and at the present stage requires to be decided exclusively on the facts, which is why I have consciously avoided extensive references to case law. I see no camouflage or ambiguity nor do I need to go into any involved research for purposes of deciding on the status of BDA, which originally was a subsidiary of Shaw Wallace and thereafter ceased to be one, both factually and legally, which is why it needs to be treated as a wholly-independent corporate entity.

Apart from what has been pointed out by me earlier, Shri Venugopal advanced certain contentions with regard to the board meetings dated May 4, 1990, March 9, 1992, and April 9, 1992, which I am recounting :

(1)            In order to support the allegation that the meeting of the board of directors of Arunava was purportedly held on May 4, 1990, and that the meeting of the board of directors of BDA was purportedly held on March 9, 1992, reliance was placed by the appellants upon the provisions of section 195 of the Companies Act as also upon the ratio of the judgments of the Bombay High court in (i) F.A.C. Rebello v. Co-operative Navigation and Trading Co. Ltd., AIR 1925 Bom 105 at page 109, and (ii) Killich Nixon Ltd. v. Dhanraj Mills Pvt. Ltd., [1983] 54 Comp Cas 432 at page 451 and 452.

(2)            The provisions of section 195 only give rise to prima facie evidence, which is rebuttable (see paras 58-03 footnotes 3 and 4 and at page 864 of Palmer's Company Law, 24th edition and at para 58-05 foot note 20 at page 865, Palmer's Company Law 24th edition). The same is the position as found in the decision of the Division Bench of the Bombay High Court in Killick Nixon Ltd. v. Dhanraj Mills Pvt. Ltd. [1983] 54 Comp Cas 432. It is submitted that the prima facie presumption has been rebutted in the case of the purported meetings of Arunava held on May 4, 1990, by the affidavit filed by Shri Shovan Roy dated April 28, 1992. Since the plaintiffs' contention was that in the absence of Shri Shovan Roy, a meeting of the board of directors of Arunava could not have taken place and the purported minutes are invalid the question of challenging the same in the plaint as was sought to be alleged could not and did not arise.

(3)            Even in the case of the purported meeting of BDA held on March 9, 1992, the presumption has been rebutted in the affidavit filed by Mr. Ramani dated April 28, 1992, and the other dated May 16, 1992, filed by Mr. R. Ramani and the affidavit of Mr. R.L. Jain dated May 14, 1992, both filed in the proceedings at Calcutta and Bombay.

(4)   It is significant to note that, on the other hand, the defendants save and except for relying upon the purported minutes have not produced any other evidence whatsoever to establish that the purported board meetings were held. In any event, the purported board meeting dated May 4, 1990, is invalid and illegal inasmuch as :

        (i)     there was admittedly no quorum for the said meeting ;

(ii)    Mr. Sadashivan, as would be clear from the purported minutes, came to be co-opted after the purported resolution for transfer of shares had already been passed ;

(iii)   Mr. Shovan Roy had already tendered his resignation as far back as on April 19, 1990. It is well-settled that the resignation by a director does not have to be accepted by the company in order to become effective, see—

        (a)        T. Murari v. State [1976] 46 Comp Cas 613 (Mad),

(b)        Lakshmana Pillai (S.S.) v. Registrar of Companies [1977] 47 Comp Cas 652 (Mad),

        (c)        Glossop v. Glossop [1907] 2 Ch 370.

As would be clear from a plain reading of section 195 of the Companies Act, the presumption contained therein would be applicable only where the minutes of the proceedings of the "meeting of the board of directors have been kept in accordance with the provisions of section 193." The burden of proving that the minutes of the meeting have been kept in accordance with the provisions of section 199(3) rests upon the party which is seeking to place reliance upon such minutes. It is only when this burden is discharged that the burden of proving "to the contrary" is shifted to the other party. Section 193 sets out the manner in which the mitiutes of the proceedings of board and other meetings are required to be kept.

(5)   As regards the purported resignations of Mr. R.L. Jain, Mr. A.K. Jain and Mr. R. Ramani from the board of BDA, it is pertinent to note that the same is alleged to be oral. No particulars of the day, date, time and place and to whom and by whom the purported oral request was made are forthcoming. Furthermore, Mr. P.R. Pandya, who acted as the chairman of the purported meeting, reportedly held on March 9, 1992, has not filed any affidavit in these proceedings. The purported minutes merely seek to record the alleged request of the aforesaid three directors to resign. The law as is clear from the passage relied upon by the appellants themselves as found reflected in Ramaiya's Commentary on the Companies Act (Ref. page 1300, 12th edition), requires that the oral request to resign must be made by the director only "at the general meeting" and ought to be accepted at that meeting of the shareholders. In fact, in Palmer's Company Law, 24th edition, at page 898, para 60-31 the law is set out as under :

                "A verbal resignation accepted at a general meeting is effective even though the articles provide that a director shall vacate office if by notice in writing he resigns his office. A verbal resignation would not, however, be effective in the light of such an article if made to and accepted by the board, since the board would have no authority to accept, and the resigning director would be unable to end his contract with the company, except in accordance with its terms, express or implied, or with the company's agreement."

This is admittedly not the case and the arguments of the defendants in this regard are untenable.

(6)    The futile attempt made to fabricate the minutes of the pur ported meeting held on March 9, 1992, is amply demonstrated by the observation made in the judgment of the trial court in paragraph 14 at page 546, volume 2.

(7)    The argument that Mr. Ramani has not impugned the meeting purportedly held on March 9, 1992, is deliberately misleading. The purported minutes of the meeting purportedly held on March 9, 1992, have not been referred to in any earlier affidavit filed by the defendants. The same were furnished for the first time with the affidavit dated May 2, 1992, which was filed on the last date of the hearing before the trial court (i.e., on May 2, 1992), giving no opportunity to the plaintiffs to rebut the same. Mr. Ramani declared his affidavit on April .28, 1992. However, Mr. Ramani has, in a subsequent affidavit dated May 16, 1992, filed in the proceedings in the Calcutta and Bombay High Courts, challenged the impugned minutes.

(8)    If the purported meeting dated March 9, 1992, was never held, as is now abundantly clear, the extraordinary general meeting purportedly held on April 9, 1992, as well as the purported meeting of the board of directors held on April 9, 1992, of BDA would be equally null and void.

(9)    In the circumstances, defendant No. 3 would also have no authority to issue the purported circular dated April 9/10, 1992 (see page 19, volume 1).

Shri Venugopal also advanced a contention in law that the sale of shares of BDA was illegal under section 30B of the Monopolies and Restrictive Trade Practices Act and what he contended was as follows :

(i)     The purported transfer of shares held by Arunava in BDA is also in violation of section 30B of the Monopolies and Restrictive Trade Practices Act. The argument that by reason of a letter addressed by Shri Sadashivam (page 421, volume 2), in which it is alleged that section 30B is not applicable, the said section is inapplicable is an untenable contention. The provisions of section 30B are mandatory. There can be no estoppel against a provision contained in a statute. If the provision of section 30B are attracted, the same cannot be nullified by any letter addressed by Arunava to the contrary.

(ii)    The argument that section 30B is applicable only to cases where the shares of a private company, which is subsidiary of public company, are acquired by a company "under the same management" is a clear misreading of the provisions contained in section 30B. The words "under the same management" appearing in section 30B govern only the words immediately preceding thereto, namely, the words "bodies corporate". In other words, the provisions of section 30B would be attracted to an individual firm group, constituent of a group, as well as to any body corporate as well as to two or more "bodies corporate under the same management" if they are acquiring shares in a private company, which is a subsidiary of a public company which, exceeds 25 per cent, of the paid-up equity share capital of such company.

(iii)   As is clear from section 30A(b) read with section 30B, section 30B would apply in acquiring shares in a company which was the owner of an undertaking to which part a of Chapter III applied. Admittedly, BDA at the time of the purported transfer of shares was owning an undertaking registered under Part A of Chapter III. In fact, Part A of Chapter III continues to apply to such undertaking till it is deregistered under section 26(3). In this behalf, the pleadings on behalf of the respondents/plaintiffs set out at para (g) at pages 143-144, volume 1 of the compilation may also be taken into consideration.

It is rather late in the day for the plaintiffs to come out with this "profound" challenge, which in any event has been examined by me, since it was argued. Each stage of the process of transfer has been scrutinised and I have upheld it right up to the final extent. These arguments virtually amount to legal hair-splitting and do not assist the plaintiffs' case one bit.

Shri Venugopal concluded by defending the order passed by the trial court on the following grounds :

(i)         In the light of the above, it is submitted that the injunction as granted by the trial judge has been granted after due and careful consideration of the facts, material and evidence on record and in proper exercise of the discretionary jurisdiction vested in him. It is submitted that since the exercise of discretion by the learned trial judge is in accordance with the well-known principles of law and based on sound exercise of judicial discretion, the appellate court is not empowered to interfere with the same. See the law as laid down by the Hon'ble Supreme Court in the case of Wander v. Antox India Pvt. Ltd. [1990] Suppl. SCC 727. All that I need to observe is that the basic premise on which the argument is founded is absolutely wrong—the learned trial judge, if he had gone through the exercise required of him, could never have passed the orders in question.

(ii)        The trial court in granting the injunction had also acted within the four-corners of law inasmuch as the present case being a clear case of breach of trust and fiduciary duties by directors who are constructive trustees is a case where compensation in monetary terms cannot afford adequate relief and would clearly be governed by the exception contained in section 41(h) of the Specific Relief Act. The reply to this is that sadly enough, the court has not assessed the more important aspect, namely, the havoc caused by the passing of the order. I have had occasion to deal with this at the end of the judgment.

I have had occasion to refer more than once to the charge levelled against defendant No. 3, which alleges that he has been guilty of impropriety which is defined as breach of fiduciary duties during the period when he was managing director/director and Shri Venugopal has repeatedly adverted to this aspect of the matter because, according to him, the entire case hinges on this. I have summarised the sequence of his arguments very briefly as follows :

That admittedly :

(i)         BDA was a subsidiary and part of the Shaw Wallace group until August 2, 1990, and;

(ii)        K.R. Chhabria is presently claiming that BDA is now owned and controlled by himself, his father and uncle ;

(iii)   K.R. Chhabria was the managing director of Shaw Wallace and a director of Cruickshank and Company Ltd. (the plaintiff) at all material times, namely :—

(i)     At the time when BDA became a subsidiary of Shaw Wallace group in 1988 ;

(ii)    At the time when the plaintiff and Shaw Wallace invested substantial amounts in BDA and promoted it as one of the principal manufacturing unit ;

(iii)   At the time when the proposals for desubsidiarisation of BDA were mooted and decisions taken during 1989-90 ;

(iv)   At the time when the shares held by Arunava in BDA were transferred in July-August, 1990, to Intrust Securities and Investments Ltd. (a company with negligible share capital of Rs. 2,000 and with no activity and the shares purported to be held by Mr. and Mrs. Kheyroolas) and ;

(v)    At the time when the impugned circular was issued around April 9/10, 1992.

(iv)   K.R. Chhabria is presently claiming that Intrust and through Intrust BDA belongs to his group of companies.

Consequently, Shri Venugopal submits that everything pleaded by the defendants, namely, the transfer of shares, the change of status of BDA and the assignment of the three brands would all come into the category of illegal and fraudulent transactions which have to be struck down. I have examined each of these heads earlier and I have also examined the present arguments of Shri Venugopal, the basic premise of which is unfortunately unacceptable. I have recorded a conclusive finding that the transaction in question cannot be attributable personally to the third defendant. The only limited aspect that survives for consideration is the question of the timing and Shri Venugopal's charge that the third defendant, while he held the aforesaid positions with the Shaw Wallace group, ought never to have assumed control of BDA. It is not merely a matter of ethics that we are concerned with because even in the field of corporate management, there are certain requirements of law. The situation that we are faced with, however, to my mind, cannot be of any assistance to the plaintiffs because it is their case that the transactions right up to the process of delinking were done on the grounds of business and trade and financial considerations alone. Shri Venugopal's argument completely overlooks the fact that it is the plaintiffs' own case that the entire production of. BDA was being marketed by them, that they had no manufacturing unit of their own and that, consequently, they were heavily dependent on BDA as far as the sales were concerned and, according to them, the I.M.F.L. was one of the main products of the Shaw Wallace group ; though I found it a little difficult to comprehend, all these involved business intentions. Shri Venugopal repeatedly told me that there was also the intention of generating "internal competition between various brands, etc." This kind of shadow-boxing was apparently the name of the game. If I were to, therefore, proceed on the basis of this logic and thought process of Shri Venugopal's clients, I would assume that it would be beneficial rather than detrimental for the plaintiffs and the Shaw Wallace group if, even after it had become an independent entity, a person connected with the Shaw Wallace group were to head the management and control of that company also. As developments took place, this situation was short-lived because Shaw Wallace stripped defendant No. 3 of all these powers, but even assuming that this did not happen, I do not see the plaintiffs being able to justify their charge on the basis of the present record even on the admitted set of facts. Defendant No. 3 having parted company with Shaw Wallace really renders all this purely academic.

Learned counsel on both sides have, in the course of their arguments, advanced a large number of decisions. In a furious tug of war centred around the question as to whether this is a case in which the corporate veil ought to be lifted or not. I cannot afford to burden this judgment any more with much reference to case-law, but I shall recount as briefly as possible Shri Venugopal's contentions in this regard which are as follows :

(i)            In order to demonstrate that though a holding company owns the entire share capital of a subsidiary company, both the companies are distinct and separate entities and that to explain the concept of a holding company and a subsidiary company reference was made to Spencer and Co. Ltd. v. CWT [1969] 39 Comp Cas 212 ; AIR 1969 Mad 359 and Turner Morrison and Co. Ltd. v..Hungerford Investment Trust Ltd., AIR 1969 Cal 238. The question of lifting the corporate veil does not arise in the present case at all.

(ii)            In A. Saloman v. A. Saloman and Co. Ltd. [1897] AC 22 (HL), it has been laid down that the corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders ; it bears its own name and has a seal of its own. Its assets are separate and distinct from those of its members ; it can sue and be sued exclusively for its own purpose. This doctrine has been subjected to certain exceptions in special circumstances. For example, the court will pierce the corporate veil in cases of fraud and tax evasion and other cases of circumventing the taxation laws. These are the broad categories and the court may lift the corporate veil facade.

(iii)           Tata Engineering and Locomotive Co. Ltd. v. State of Bihar [1964] 34 Comp Cas 458 ; AIR 1965 SC 40, decision by the Constitution Bench of five judges.

Certain sales tax recovery was challenged as invalid on various grounds and one of the grounds was violation of article 19. The protection of article 19 is available only to a citizen. The Supreme Court earlier held in State Trading Corporation of India Ltd. v. CTO [1963] 33 Comp Cas 1057 ; AIR 1963 S.C 1811, that a company and corporate body is not a citizen. In order to overcome the decision of the Supreme Court, a petition came to be filed by the company and some of the shareholders. It was argued that the shareholders are the real beneficial owners and, therefore, they are entitled to complain in a case of violation of article 19 (paragraphs 6, 23 to 27).

The Supreme Court reiterated the principles of a company being equal to a natural person and having a legal entity of its own following the judgment in A Saloman v. A Saloman and Co. Ltd. [1897] AC 22 (HL). The Supreme Court after categorising the cases where the doctrine of lifting the veil applied, overruled and rejected the arguments of the shareholders for lifting the corporate veil.

(iv)           Heavy Engineering Mazdoor Union v. State of Bihar [1969] 39 Comp Cas 905 ; AIR 1970 SC 82.

The question was whether the company is carried on under the authority of the Central Government within the meaning of section 2(a), 2(g) and section 10 of the Industrial Disputes Act (paras 1 and 4).

The Supreme Court again, after referring to the cases of Saloman [1897] AC 22 (HL) and also Kuenigl v. Donnersmarck [1955] 1 QB 515, held that the company incorporated under the Companies Act derives powers and functions from and by virtue of its memorandum of association and its articles of association and, therefore, the mere fact that the entire share capital of the company was contributed by the Central Government and the fact that all its shares are held by the president and certain officers of the Central Government does not make any difference.

(v)            Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 ; AIR 1986 SC 1370. In view of certain schemes introduced by the Union of India, 13 NRI companies purchased shares. The argument was that all the 13 companies are a facade and Mr. Swaraj Paul was the real investor. The Supreme Court refused to investigate into this question by observing that when the Legislature requires lifting of the corporate veil for a particular purpose the court will lift the corporate veil only to that extent and no more. Basically, the question of lifting the corporate veil arises while considering various legislations, (paragraphs 90, 91).

(vi)           Juggilal Kamlapat v. CIT [1969] 73 ITR 702; AIR 1969 SC 932 and Chandulal Harjiwandas v. CIT [1967] 63 ITR 627; AIR 1967 SC 816, respectively are the examples where the court has lifted the corporate veil as the conception of corporate veil was used for tax evasion or to circumvent the tax obligation.

(vii)          Turner Morrison and Co. Ltd. v. Hungerford Investment Trust Ltd., AIR 1969 Cal 238,

The holding company and a subsidiary company are two different and distinct entities. In a suit between the subsidiary companies, the holding company has no locus standi. The High Court pointed out that the holding company and subsidiaries are incorporated companies and each is a separate legal entity. Each has a separate corporate veil except to the extent that the statute indicates the nature of the holding company and the subsidiary company, the corporate veil still remains (para 21).

(viii)          Spencer and Co. Ltd. v. CWT [1969] 39 Comp Cas 212 ; [1969] 72 ITR 33 ; AIR 1969 Mad 359.

On the construction of the Wealth-tax Act, the court held that it was not a case of tax evasion and, therefore, it was not necessary to lift the corporate veil (paras. 6 and 7).

        (ix)           CIT v. Associated Clothiers Ltd., AIR 1963 Cal 629.

There were two companies, A and B, having identical set of directors. The entire shareholding, of company, B, was owned by company, A. Company B's property was transferred to company, A. It was contended that the transfer was self to self and, therefore, there was no liability to pay tax. The company's claim was that they are actually one and the same person and, therefore, the corporate veil should be lifted and, Therefore, they are not liable to pay tax. The court refused to lift the corporate veil.

The High Court, after laying down the broad category of cases for lifting the corporate veil, observed that this is generally permitted when the statute gives a lead in that respect and not otherwise (paragraphs 9, 10, 11, 16, 17, 21 and 22).

(x)            State of U.P. v. Renusagar Power Co. [1991] 70 Comp Cas 127 (SC).

Hindustan Aluminium Corporation (Hindalco) is a statutory corporation having its factory in U.P. Renusagar Power Company is a wholly-owned 100 per cent. subsidiary of Hindalco. Renusagar Power Company is producing electricity solely for consumption for Hindalco. The judgment refers to several facts and various amendments in the Electricity (Duty) Act of U.P. Only the last amendment is relevant (pages 134-136). The question was whether the case of Hindalco would be covered by clause (c) which contemplated a person who is consuming electricity from his "own source of generation". The question was one of interpretation of the words "own source of generation" (page 141, second paragraph).

From pages 143-147, the Supreme Court has narrated various facts and circumstances which, firstly, show that Renusagar was a captive unit of Hindalco, generating power only for Hindalco. Secondly, under the Indian Electricity Act, Renusagar was held to be Hindalco's own source of generation.

Thirdly, all along the Government of India and the State of U.P. proceeded on the basis and treated that Hindalco had its "own source of generation" in Renusagar. In fact, the Government took advantage of the fact that Renusagar was its "own source of generation" of Hindalco in various ways and aspects.

Fourthly, in State of U.P. v. Hindustan Aluminium Corporation Ltd., AIR 1979 SC 1459, the Supreme Court proceeded on the basis that Renusagar was its own source of generation of Hindalco (page 146).

In the escapable conclusion that Renusagar was its own source of generation for Hindalco, the State of U.P. argued that such conclusion would be violative of article 14 (page 150). In order to meet this contention, the Supreme Court considered the concept of lifting the corporate veil.

After making reference to the Supreme Court judgments, the Supreme Court proceeded to consider the English cases and thereafter the relevant discussion is at page 158, where the Supreme Court has made a reference to the judgments of the Calcutta High Court and the Madras High Court and also Escorts' case [1986] 59 Comp Cas 548 (SC). All that the Supreme Court said was that the three tests laid down by the various judgments are not conclusive by themselves and, in the facts and circumstances of the case, the Supreme Court held that there are special circumstances to hold that the corporate veil should be lifted. These principles are laid down in the context of a fiscal statute. The Supreme Court has not laid down that the corporate veil needs to be lifted as and when demanded by the parties. The English decisions referred to by the Supreme Court cannot be read out of context. In all the cases the court was considering the effect of cases of fully-owned subsidiaries. The respondents are simply picking up some sentences from these observations and saying that the facts of the present case are on par with the facts of those cases and, therefore, the corporate veil should be lifted. This is only an attempt to mislead this court and nothing else.

The entire discussion in Renusagar's case [1991] 70 Comp Cas 127 (SC) is about lifting of the corporate veil between a holding company and a subsidiary company It is an undisputed fact that BDA has been desubsidiarised and is no longer a subsidiary of Arunava Investments Ltd. and, consequently, there does not exist any "holding company-subsidiary company" relationship between the plaintiff company and the defendant-company. In each and every case, there existed a "holding company-subsidiary company" relationship between the two companies.

(xi)           Further, in this case, the party which was involved and concerned in the desubsidiarisation and has taken advantage of desubsidiarisation, now comes before the court and submits to the court to ignore the desubsidiarisation and urges that the corporate veil should be lifted for this purpose. It is submitted that this should not be allowed. Further, it is the case of the plaintiffs that desubsidiarisation took place to come out of the clutches of the Monopolies and Restrictive Trade Practices Act and to get around the excise problem. Thus, according to the plaintiffs, they used this method of desubsidiarisation to get out of certain legislation and statutes and have as such derived certain benefits and the court should not aid such a party and lift the corporate veil because it would amount to assisting a party which has on its own showing tried to avoid certain legislation by the method of desubsidiarisation and is now using the concept of lifting the corporate veil to set aside the effect of desubsidiarisation.

It is necessary for me to reiterate that this entire and rather profound debate is hardly relevant on the present facts. I have considered and decided this issue already, bearing in mind the principles applicable to the present facts.

This brings me to the final summation of the case. The plaintiffs had approached the trial court on April 14, 1992, on the false plea that BDA was still under their management and control and that this situation was sought to be disturbed by defendant No. 3 who, in actual terms, had taken certain steps towards independent management. The subsidiary pleas apart, the plaintiffs had essentially contended that BDA's status had not changed regardless of the shares having been transferred by Arunava and regardless of the legal assignment of the three brands. The trial court, as indicated earlier, upheld the plea of the plaintiffs and passed an ad interim order which had the effect of permitting BDA to be managed and controlled by the plaintiffs without any interference from the remaining defendants and as indicated earlier, the ad interim order was confirmed in even wider terms. I have pointed out that almost the entire case pleaded by the plaintiffs is justification for their action has seen the light of day long after the plaint was presented to the court and the plaintiffs have successfully managed to hold on to the initial orders right up to April, 1993, when this appeal was heard. After a day-to-day hearing lasting over three weeks, I indicated on April 27, 1993, through my order of that date, that the appeal is allowed and that the orders of the trial court are set aside. I have set out in this judgment the salient and the material areas that fall for determination with reference to the relevant parts of the record and that which is of crucial importance. Undoubtedly, this is a hotly contested litigation and quite apart from the documents and pleadings the written submissions and compilations of cases run into several thousand pages. The conclusions that emerge ultimately are as follows :

(a)            That the record establishes that the BDA shares were trans ferred to Intrust and that this constituted the entire holding of Arunava as far as BDA was concerned, which was done for a valuable consideration. The entire transaction right from the requisite procedure up to the Government approval is a valid and binding transaction, which has assumed finality. The legal implications and the immediate fall-out of this situation is that BDA as a company has assumed independent status and it, there fore, cannot be subjugated or managed or controlled by any outside agency other than its own board of directors and the power of taking all decisions in respect of its working also vested in the general body and the board of directors.

(b)            That the grounds on which the transfer of shares has been called into question are not only stale, but are totally devoid of substance. There is no merit in the challenge. The time-factor regardless, even on a consideration of the merits, this is the position.

(c)            The lengthy debate with regard to the contention that this court must, in the light of what has been pointed out by the plaintiffs, examine the de facto status of the company BDA brushing aside what may apparently appear is not a doctrine that needs to be applied in the present case where there is no ambiguity whatsoever about the status of PDA either before or after the transfer.

(d)            As far as the assignment of the three brands is concerned, the position that emerges is that this was an action instituted by the plaintiffs, that the consideration has passed and that the transaction has assumed a binding character in so far as it is lawful, duly executed and for valid consideration. I would categorise this transaction as having become irrevocable. The grounds on which the court has been asked to ignore it or water it down are wholly and totally unacceptable. These brands are undisputedly the property of BDA. There is no subsisting right, title or interest in them as far as the plaintiffs are concerned and BDA is, there fore, entitled to treat these brands as its very own.

(e)            As regards the main charge, which is to the effect that defendant No. 3 is guilty of breach of fiduciary responsibilities, the allegation proceeds on a personal basis, but the material on record does not support any adverse finding against him.

(f)         As regards the general charge levelled by the plaintiffs against the defendants, which concerns the allegation that the minutes of the meetings have been fabricated because the meetings were never held, after a careful consideration and, in fact, a repeated consideration of everything placed before me, the only permissible finding is that the allegation is completely groundless. There is ample supportive evidence to indicate that the meetings were held, they were valid and that the decisions taken therein are legally sustainable and binding.

I am constrained to observe at this stage that the record before me justifies the defendants' charge that the plaintiffs had suppressed almost all relevant material from the trial court at the stage when the ad-interim order was obtained and that this was highly improper. The word "improper" is, in fact, a gross understatement, the conduct of the plaintiffs bristles with mala fides. Regardless of the plaintiffs' conduct, the record before the court at that time could never justify an ex parte injunction order let alone the type of order that was passed. That order is atrocious and the plaintiffs cannot be permitted to get away with the damage that has resulted, more so considering the fact that they have ensured at all stages that the order continued for as long as possible, which was a matter to their benefit and to the detriment of the defendants. A party who obtains interim relief from a court in these circumstances cannot be absolved of the responsibility and would, therefore, be liable to compensate the plaintiffs for the entire loss that has occurred. Shri Manohar, in the course of the hearings, demonstrated in actual terms how staggering these figures are, but it will still be essential for the heads to be quantified. The defendants may, if they so desire, quantify the loss/damage and apply to this court separately for the award of such compensation.

Having examined virtually every letter of the record, sifted through it carefully and discreetly and assessed whatever is most relevant, I find a very devious plan which has been the real basis for this litigation. At page 375 of the record, there is a very shabbily drafted-out letter dated April 1, 1992, a xerox copy of which is on record. In view of its importance, I am reproducing it verbatim :

"Dear Sir,

We respectably wish to mention that we, the undersigned, were appointed in Cruickshank and Co. Ltd. and were working at the factory at BDA Breweries and Distilleries Ltd., Aurangabad, for over two years. We had agreed to join Cruickshank and Co. since it was a part of the Shaw Wallace group and we were looking apart from prospects job security and status.

Subsequently, we joined BDA Breweries and Distilleries Ltd. on April 1, 1991, after technically resigning from Cruickshank and Co. as it was conveyed to us that it may be better in the long run as indirectly we would still be part of the Shaw Wallace/Cruickshank as BDA was still within the group.

We now feel that this information was not correct and from what we hear, attempts are now to take this unit away from the group and hence would prefer it to back to Cruickshank and Co., i.e., reverse of what was done last year.

Yours faithfully,

(Sd.)………………."

This strange document, which does not indicate to whom it is addressed and in respect of which even the English and the contents leave much to be desired, is supposed to have been signed by 13 persons, including plaintiff No. 2, though there appear to be all sorts of overwriting, etc. I refer to this document because the justification for the entire litigation has emanated from the charge that it was defendant No. 3 who fired the first short by virtue of the circular dated April 9, 1992, etc., which according to the plaintiffs, was responsible for upsetting the apple cart. In actual fact, there is no doubt in my mind, whatsoever, that it was the letter dated April 1, 1992, which was virtually an en masse resignation of the officers of BDA that was instigated by the plaintiffs in order to bring about a virtual coup and swing the company back into the hands of the Shaw Wallace group through such devious and unfair means. Put very simply, the game was directed towards paralysing the working of BDA on the one hand and then using the court machinery for purposes of taking over the company. This was the real reason for instituting the proceedings in Aurangabad and, to my mind, when at the beginning of April 1992, BDA was faced with a plot of this type, there was no option left except to take immediate corrective steps. It was the virtual conspiracy between the executives of BDA who were ex-Cruickshank/Shaw Wallace to enact the drama of resigning en bloc and to collectively sign the letter dated April 1, 1992, that made it absolutely necessary for defendant No. 3 to issue the 9th April circular. It was inevitable when a situation of this type emerged for defendant No. 3 to take necessary measures for the survival of the company and to keep it running and to offset the act of treachery that had been instigated. A mere reading of the letter dated April 1, 1992, leaves no doubt in my mind that this was the carefully-planned step which was the forerunner to the court proceedings and it was used in order to hijack the unit and achieve a coup in conspiracy with the executives. That the so-called resignations were not only inspired but were part of a plot is as clear as daylight and the action that followed from the plaintiffs in misusing the court machinery to achieve their objective clearly puts the plaintiffs very much in the wrong box.

The appeal succeeds and is allowed. The interim orders passed by the trial court that are the subject-matter of this appeal are vacated. It shall be necessary for me to further direct, since those orders were of an exceptional nature whereby they divested the entire management and control of BDA from the persons in lawful authority of that company and virtually handed over the same to the plaintiffs, that the trial court shall take all necessary and immediate steps to ensure that the effect of the orders that have been set aside is completely eliminated. The defendants shall be entitled to function in their independent capacity and after removal of all fetters that have been put on them as a result of the ad interim and interim orders and the trial court shall ensure that this is done forthwith.

I need to also record here that the defendants have been subjected to this harrowing litigation since April, 1992, which is thoroughly and completely unjustified and to this extent, therefore, this court will have to take stock of the volume of the litigation, which has gone into as many as five vigorous rounds, the nature of the litigation, the length of the hearings and a realistic view of the actual legal expenses that the defendants have been subjected to, and having regard to all of these, the appeal is allowed with costs that are quantified at Rs. 5,00,000.

Before parting with this judgment, I need to record my deep appreciation and indebtedness for the valuable assistance from not only the two senior counsel, Shri Manohar and Shri Venugopal, but to the teams assisting them.

(The aforesaid orders and directions shall, undoubtedly, be subject to such orders as the Supreme Court may pass in this case. The office records placed before me indicate that even though a special leave petition was filed before the Supreme Court against the order dated April 27, 1993, the apex court has so far not granted any reliefs staying the operation of the judgment of this court. The office shall furnish to the parties a copy of this judgment immediately and the respondents shall, if they so desire, apply for appropriate orders from the Supreme Court within an outer limit of three weeks, failing which the orders of this court shall be implemented.)

[1938] 8 COMP. CAS. 78 (CAL.)

HIGH COURT OF CALCUTTA

Rameswar Lal Lath

v.

Calcutta Wheat and Seed Association, Ltd.

REMFRY, J.

ORIGINAL SUIT NO. 704 OF 1936.

MAY 31, 1937

 

P.N. Chatterjee and Arun Sen for the Plaintiffs.

S.N. Banerjee and K.P. Khaitan for the Defendants.

JUDGMENT

Remfry, J.—In this suit the plaintiffs seek an injunction "to restrain the defendant Association from preventing the plaintiffs from having access at all reasonable times to the proceedings books for the purpose of perusal and inspection and from preventing the plaintiffs from making extracts from these books," and if necessary for a declaration to the same effect. "All that is stated in the plaint is, that the plaintiffs demanded inspection of these books for 1935 and to be allowed to make copies of them, and that the Committee of the defendant Association agreed to give inspection, but refused to allow the plaintiffs to take copies. The plaintiffs are members of the defendant Association and under Art. 34 of the Articles of Association, are entitled to inspect the records of the proceedings of the Committee" "subject to such regulations as the  Committee may from time to time deem expedient." The plaintiffs give reasons for their demand to be allowed to take copies of the proceedings in their letter of 5th March, 1936, before they filed this suit. The first demand was made on 2nd November 1935 on which day a clerk dismissed by the Association started criminal; proceedings for defamation against the Honorary Secretary of the Association. The Committee then refused inspection, giving no reasons, but obviously because they thought that the plaintiffs were trying to assist the dismissed clerk in the criminal proceedings, for, money which was in the charge of this clerk had disappeared and pages had been torn from the book of the Association and the alleged defamation was that the clerk was implicated. These criminal proceedings were settled in December 1935 and the plaintiffs again made demands for inspection and that they should be allowed to take copies in February 1936. The Committee allowed inspection, but refused to allow the plaintiffs to take any copies. The plaintiffs threatened legal proceedings and the Committee on 26th April passed certain rules under Art. 34, by which the right of inspection was much a matter for the discretion of the Committee and no copies were allowed.

On 30th April this suit was filed. The plaintiffs allege that they had no notice of the new rules, but it is clear that they were affixed to the notice board of the Association on 20th April and as the dispute was known to many members of the Association as appears from the letter of the 23rd April 1936, it is highly improbable that the plaintiffs had not heard of the new rules before 30th April. In Court, the plaintiffs alleged that their object was to find out who was responsible for the embezzlement or theft of the Rs. 3,000 which had disappeared, and that they suspected that a member of the Committee was the culprit and that the rest of the Committee desired to shield him, and they asserted that they had no interest in the dismissed clerk and had not assisted him. Counsel for the plaintiffs added a suggestion that the books might disappear. But in my opinion, suspicions, which the plaintiffs did not venture to suggest are immaterial, and to argue that the Committee would regard anything material on the point and then destroy the record in order to enable one member of the Committee to rob the other members is not convincing. The plaintiffs have had inspection and it is not suggested that any particular passage in the minutes in any way lends the slightest support to their alleged suspicions or how it would assist them to take copies of all or any part of the minutes, or if counsel's suspicions are relevant, that there is anything in the minutes which anyone would be likely to destroy. In my opinion, as is only too usual, there is nothing to justify the mutual recriminations of the parties, for both sides were but asserting their supposed rights in the supposed interests of the Association.

The first point is whether the rules made on 26th April ate valid, for if they are, the plaintiffs have no right to take any copies. In my opinion, it is immaterial whether the plaintiffs had actual notice of these rules before they filed their suit, for the method adopted for giving notice of these was reasonable and there are no rules on the point. The material part of Art. 34 is: "the record of their (the Committee's) proceedings shall be open to the inspection of the members, subject to such regulations as the committee may from time to time deem expedient."

The rules passed on 26th April were: "If any member wants to inspect the minute book of the Committee, then his applications should have to be placed before the Committee. The application must contain the following particulars: (1) The minutes of which date are to be inspected, (2) For what purpose, (3) If any firm has more than one partner, then the application must contain the signatures of all the partners. (4) It must be agreed upon to deposit Re. 1 in the office for every page."

"As soon as the application reaches the Secretary, it will be placed before the Committee. And the Committee will fix up how and when the minute book will be shown. No member will be allowed to copy or take notes of the minute book. If any member in the opinion of the Committee intends doing harm to the Association or its office-bearers in the case the Committee shall be authorised to refuse inspection of the proceedings book."

It was argued that these rules, in so far as they left the matter of inspection to the discretion of the Committee and prevented a member from taking copies or notes, were ultra vires. The law is clear, and a power to regulate a right cannot be used to abrogate it. The plaintiffs as members had under the Article a contractual right of inspection, and that could not be reduced by the power given to make rules into a mere right to claim inspection subject to the Committee's approval. No matter how limited the grounds for refusing inspection might be, making the right of inspection a matter of the Committee fundamentlaly altered the Article, for, a contractual right of inspection just as a statutory right of inspection can be exercised whatever the motive or interest of the member may be.

As regards the rule that members are not entitled to take copies of the minutes, for reasons which are given hereafter, in my opinion, although a contractual right of inspection does not of itself carry with it any right to take copies the plaintiffs had certain rights on this point, and the Committee could not by rules made under this Article deprive the plaintiffs of such rights. Therefore in my opinion the rules on those two points are ultra vires and invalid. The plaintiffs have asked for a declaration of their right to inspect and take copies. But having regard to the decision in Bank of Bombay v. Suleman Somji (35 I.A. 130) I very much doubt if in a suit of this description any declaration could be obtained and in my opinion the decision clearly shows that a declaration if at all possible could only be obtained if a case for an injunction had been established. Therefore as the plaintiffs have had inspection, and could not obtain a mandatory injunction on this point, they cannot obtain a declaration in respect of their right to inspect.

As regards the claim for a declaration that they are entitled to take copies, that depends on whether they have established a right to any injunction on that point. As regards the claim of a right to take copies of the minutes, apparently there is no decision exactly in point; but there are two decisions in which the rights of members of corporations have been decided, and from those decisions the position of the plaintiffs appears to be clear. In 35 I.A. 130, the Judicial Committee considered the position of a member of a corporation who had no statutory rights of inspection and no express contractual rights. His rights depended on the Common Law. The plaintiffs claimed a right to inspect and to take copies. Their Lordships approved of a passage from Taylor on Evidence in which it is stated that:

"The privilege of inspection is now confined to cases where a member of a corporation has in view some definite right or object of his own and to those documents which would tend to illustrate such right or object.

The judgment then cites the case in Rex v. Merchant Taylors & Co. with approval, as authority for the proposition that if none of the plaintiffs had any special interest different from that of his fellow members or any definite purpose or object in obtaining the inspection asked for other than to see if by possibility company's affairs may be better administered than at they are present, their suit failed. One of the grounds held to be insufficient in that case was that they (the plaintiffs) had heard and believed that the revenues of the corporation were misapplied through malpractices of those who managed the corporation's affairs."

The plaintiff in the suit before the Judicial Committee failed because his interest was the same as that of his fellow members. Their Lordships did not express an opinion as to the extent of the right to take copies beyond quoting from Taylor on Evidence, but obviously at most a member could only take copies of the documents which he was entitled to inspect, and Lindley, L.J., said, in the next cited case, "the extent of the right to take copies under the Common Law depended on the interest of the applicant". In an earlier case Mutter v. Eastern and Midlands Railway Co. it appears that the Court distinguished the matter before them from an application for a prerogative writ of mandamus, whereas the Judicial Committee held that similar principles applied. But that was a case in which the plaintiffs based their claim on a statute, whereas in that case before the Judicial Committee, the claim was based on the Common Law, by which an incident was implied in their contract, or strictly speaking which was part of their contract. The plaintiffs placed great reliance on certain passages in the decision of LINDLEY, L.J. One point is clear, the Court on Appeal did not accept the view of CHITTY, J., that:—

"When a man is inspecting he may make bona fide use of his inspection and it follows from his right to inspect that he can take copies".

LINDLEY L.J., said:

"The result of my own researches is negative rather than positive. I have not been able to find a case in which the Court has ever held that a person having a right to inspect a document had not also a right to take copy of it or of so much of it as he requires for a legitimate purpose. The right to take copy is treated as incidental to the right to inspect."

He then adds to qualify this "generally speaking". Then he adds that this may not always apply and that the right to inspect may extend to "more than he has a right to take a copy of". He called this a principle apparently that the right to take copies was generally incidental to a right of inspection, but he did not act on it, for he finally based his decision on the construction of the statute:

"Parliament having conferred the right to inspect, the Court ought not to construe the statute as to render the right conferred illusory and of no avail."

And he expressly gives the ground of his decision:

"Upon the ground therefore that in this case the right to take copy cannot be denied without rendering the right to inspect practically useless, I am of opinion that the order appealed from was correct."

The plaintiff wanted to take copies of the register of debenture stockholders and was entitled by statute to inspect the register. For the plaintiffs, it was argued that a right of inspection carried with it a right to take copies. This was the view taken by NORTH, J., in Boold v. African Consolidated Land and Trading Co., but his decision was overruled in In re Bala-Ghat Gold Mining Co., when the Master of the Rolls said that he could not bring himself to agree with that proposition, and the Court held that the statute which gave the applicant a right of inspection gave him a right to have copies on payment, and there was no ground therefore for implying any other right. The case was cited with approval by VAUGHAN WILLIAMS, L.J., in Ormerod Grierson and Co. v. St. George's Iron Works Ltd. It is clear therefore that a contractual right of inspection does not of itself imply a right to take copies, any more than a statutory right would do. In the case of a statutory right of inspection, the Court Will not imply a right to take copies unless the statutory right would otherwise be of no avail, or practically useless. The question is whether in this case, the Court should imply such a term in this contract. There are only four cases in which a court can add a term to a written contract, and they are where the words are elliptical or by custom or trade usage or as a necessary incident of the Common Law (See Biddell Brothers v. Clemens Horst & Co.) or by necessary implication. Only the last two have any application to this case.

A Court will not imply a term unless it is driven to the conclusion that it must be implied: Douglas v. Baynes; nor will it imply in wider term than is necessary: Attorney-General v. City of Dublin Steam Packet Co., where the House of Lords considered the terms implied by the Court on Appeal as unnecessarily wide. All the circumstances must be considered before any term is implied. In this case the plaintiffs were given by the Article a right to inspect the minutes, which was a right of considerable value in itself. They also had a common law right of inspection and to take copies, for Common law rights are not affected by a contract or by a statute, unless they are mutually inconsistent: O'Flaherty v. M'Dowell. The question is whether the Court is driven to the conclusion that because the Articles give a wider right than the Common law as far as inspection is concerned it is necessary to imply a wider right of taking copies. As it is settled law that a right of inspection does not carry with it a right to take copies, there must be some other circumstance to make it necessary to imply such a term. Lord Selborne in Attorney-General v. G.E. Ry. Co. said that it is contrary to sound principle to imply a condition not expressed in the clause, if the words as they stand would be sensible and operative.

In my opinion in this case, unless it can ,be held that the Common Law right is inadequate, no addition to it can be implied. The Judicial Committee in the case of The Bank of Bombay pointed out that the Common Law right had become more restricted in modern times, and it would therefore be difficult to regard it as an insufficient safeguard, especially as the Judicial Committee has held that the Common Law is generally a safe guide for deciding what is according to justice, equity and good conscience. And if the Common Law rights of the plaintiffs in the case of The Bank of Bombay had not been sufficient to effectuate their contract, the Judicial Committee would have implied a more adequate right, had that been necessary or proper. The question whether the Common Law right of the applicant would have been sufficient was not raised in any of the cases cited on the construction of various statutes, but in none of them would the Common Law right have sufficed to make the statute of any practical use. And in any case I am bound to follow the decision of the House of Lords in Attorney-General v. City of Dublin Steam Packet Co., and to consider whether the claim of the plaintiffs is wider than the circumstances demand. Had this been a case in which the Common Law did not apply, it seems to me that before implying any other term in this contract, the Court would have been bound to consider whether the Common Law right would not be sufficient. And in my opinion the cases cited show that the Court is bound by a stricter rule when a question of implying term in a contract arises than in the case of a statute.

In my opinion the plaintiffs' interests were sufficiently protected by the Common Law and there is therefore no necessity for implying any greater rights in their contract. The words of the Article as they stand are sensible and operative, and there is nothing to show that the intention was to give a right to take copies of the minutes, or that the right given would be practically useless without the right claimed. And in this case, assuming that the Common Law was known to the persons responsible for drafting the Articles, there seems to be nothing to indicate that their intention was to alter or add to it. In my opinion therefore the contract in this case—for Sec. 21 Companies Act merely converts the Articles into a contract between the Company and its members—must be construed to mean that the plaintiffs though given a right to inspect the minutes could only take copies of them if that were permissible under their Common Law rights, and it is not necessary to imply any term in this contract. Or in the alternative if the Common Law does not apply, no term giving wider rights than the Common Law is necessary to effectuate the contract between the parties.

As the plaintiffs have ho stronger case than the applicants in Rex v. Merchant Taylors Co., or in the case of The Bank of Bombay they are not entitled under the Common Law rights to take copies of the minutes, for their interest is not different from that of their fellow members, nor have they any special object of their own. Further as the plaintiffs have inspected the minutes, to support their claim for what is in effect a mandatory injunction, in my opinion they should have indicated the passages which they desired to copy. As it is, there is no suggestion that they found anything in the minutes which lent the slighest foundation for their alleged suspicions or a copy of which would further their interest or objects. As regard the claim for a declaration of a right to take copies, in my opinion it fails, as the right claimed by the plaintiffs did not exist and the limited right which exists was not claimed at any time; the suit is therefore dismissed with costs on scale No. 2 including reserved costs.

 

 

 

Section 198

 

Managerial remuneration

[1957] 27 COMP. CAS. 105 (BOM.)

HIGH COURT OF BOMBAY

Ramaben A. Thanawala

V.

Jyoti Limited.

CHAGLA, C.J.

AND DESAI, J.

O.C.J. Suit No. 201 of 1965

OCTOBER 10,1956

 

 

CHAGLA, C.J. - This is a special case submitted to us under section 90 of the Civil Procedure Code and it raises questions of construction of certain sections of the new Companies Act, 1956. Counsel have drawn our attention to the extremely unsatisfactorily drafting of this Act and we must confess that many of its provisions do not suffer from lucidity. We have been told that the new Act has raised many problem for those who have anything to do with the management or running of companies, and the problems brought before us are only a few of those which have arise in practice. It seems to us unfortunate that a law which is intended to held in the development of companies in our country and also to put down abuses which were noticed in the working of companies and especially in the institution of the managing agency which is peculiar to our country, should not have been couched in clear and more precise language. That, however, is a matter for Parliament. Our concern is to take the law as we find it and do the best we can.

The plaintiff in this case is a shareholder of defendant No. 1 company and defendants No. 2 are the managing agents. They were appointed managing agents by an agreement dated April 10, 1951. Defendant No. 3 is a partner of defendant No. 2 firm, the other partner being one Dinubhai Amin. Defendant No. 3 is also a director of defendant No. 1 company and he was also appointed a technical advisor, he being qualified as an electrical and mechanical engineer, on a salary of Rs. 3,000 on January 1, 1944. His appointment as director came subsequently, he being appointed in April, 1944, and the questions which call for a construction at our hands relate to the remuneration to be paid to the managing agents and the remuneration also to be paid to a defendant No. 3. Under the agreement the managing agents were to receive 10 per cent. of the annual net profits and under certain circumstances. also a further one-third share in the balance of net profits after making certain deductions as provided in the managing agency agreement.

The first relevant section that we have to consider in this connection is section 309. That section deals with the remuneration of directors and sub-section (1) provides :

"(1) The remuneration payable to the directors of a company including any managing or whole-time director, shall be determined in accordance with and subject to the provisions of section 198 and this section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting."

Therefore, section 309 and 198 are overriding sections notwithstanding the articles or any resolution with regard to the remuneration to be paid to a director. Sub-section (2) provides for a director receiving remuneration either by way of a monthly payment, or by way of a fee for each meeting attended, or partly by the one way and partly by the other. It is clear that as far as this remuneration is concerned, the remuneration is paid to a director as a director managing the affairs of the company. Then sub-sections (3) provides :

"(3) In lieu of or in addition to the remuneration specified in sub- section (2), remuneration may be paid to a director who is either in the whole-time employment of the company or a managing director, at a specified percentage of the net profits of the company :

Provided that such percentage shall not exceed five for any one such director, or where there is more than one such director, ten for all of them together."

The controversy centres round this question as to whether the remuneration referred to in this sub-section is confined to the remuneration paid to the director in his capacity as a director, or whether the sub-section extends to the remuneration paid to a director in any capacity whatsoever. In other words, when Rs. 3,000 are being paid to defendant No. 3 as a technical adviser, is that amount to be considered in deciding whether the amount paid to him exceeds the 5 per cent. of net profits referred to in the proviso ? In the first place, it will be noticed that sub-section (3) refers to remuneration in lieu of or in addition to the remuneration mentioned in sub-section (2), and as we have just pointed out, the remuneration referred to in sub-section (2) is clearly the remuneration paid to the director in his capacity as a director and in no other capacity. Further, sub-section (3) speaks of a director in the whole-time employment of the company, and that expression is put in juxtaposition to the alternative case of a managing director. If the remuneration was with reference to the managing director, then it is clear that the remuneration of a managing director is with reference to the work done by the director as a director for the purpose of managing the company. The expression "whole-time director" also occurs in section 310 and section 311. Under section 310 in order to increase the remuneration the sanction of Government is required, and section 311 also deals with increase in remuneration of a managing director or a whole-time director appointed after the Act and such increase require the sanction of Government, In the context it seems to us that the expression "whole-time director" must refer to a director who spends his whole time in the management of the company in the same sense as a managing director does. It will also be noticed that if it was intended by the Legislature that the remuneration referred to in sub- section (3) should include not only the remuneration paid to the director as a director but also remuneration paid to him in any capacity whatsoever, appropriate language could have been used for that purpose, and, as we shall presently point out, in other sections where the Legislature wanted to convey that meaning proper language has been used. For instance, in section 318 which deals with compensation for loss of office of a director or a whole-time director, sub-section (5) provides :

"(5) Nothing in this section shall be deemed to prohibit the payment to a managing director, or a director holding the office of manager, of any remuneration for services rendered by him to the company in any other capacity."

Therefore, the Legislature clearly indicated that a director may receive remuneration as a director and he may also get it in a capacity other than that of director. But the position is made even clearer when we come to section 348 which deals with the remuneration of a managing agent, and that section clearly provides that the remuneration to be paid to the managing agent must not exceed the remuneration laid down in that section, whether the remuneration is in the respect of the managing agent's services as managing agent or in any other capacity. We will deal with that section at greater length when we deal with the question of the remuneration of managing agents, but the contrast between the language of sub-section (3) of section 309 and section 348 is apparent. The other sub-sections of this section to which reference might be made is sub-section (8) and that provides :

"(8) The provisions of this section shall come into force immediately on the commencement of this Act or, where such commencement does not coincide with the end of a financial year of the company with effect from the expiry of the financial year immediately succeeding such commencement."

The financial year of this company is the calendar year and therefore by reason of the provisions of this sub-section, this section would apply to this company only from January 1, 1957, the new Act having come into force on April, 1956.

Now, section 309(1) also refers to section 198 and the remuneration payable to a director is not only subject to section 309 but also to section 198, and when we turn to that section it deals with, as the head note indicates, managerial remuneration, and sub-section (1) provides :

"(I) Save as otherwise expressly provided in this Act, in the case of a public company or a private company which is a subsidiary of a public company, the total remuneration payable by the company to its director, its managing agent or secretaries and treasurers, if any, its manager, if any, shall not exceed eleven per cent of the net profits of the company, computed in the manner laid down in sections 349,350 and 351, except that the remuneration of the directors shall not be deducted from the gross profits."

The question that is raised is whether the amount of Rs. 3,000 paid to defendant No. 3 as a technical adviser and not as a director is included in the limit of 11 per cent. fixed by section 198. One possible view of section 198 is that we must calculate the total amount which the company pays to its directors, managing agent or secretaries and treasurers and the manager and such total amount must not exceed 11 per cent. of the net profits of the company, and it may be suggested that what the Legislature intended was that there should be some limit put upon the company paying out sums to the various authorities mentioned in this section, and from that point of view it may be said that inasmuch as Rs.3,000 a month is being paid to the director, defendant No. 3, that sum should be included for the purpose of computing the 11 per cent. mentioned in section 198. But, in our opinion, although the heading of a section or a marginal note cannot control the clear language of the section, in this case we must consider the heading and the marginal note for the purpose of arriving at a conclusion as to what according to the Legislature was the purpose of enacting this section, and in our opinion the marginal note correctly indicates what the Legislature aimed at in enacting this section. What was sought to be controlled was the cost of management, and if what was sought to be controlled was the cost of management, then what had to be considered was managerial remuneration and not remuneration paid for any other purpose. Even on principle this seems to be the correct view because it is difficult to understand why a company could employ a technical expert and pay him whatever amount it thinks proper and there should be no control with regard to it, and yet the company should be prohibited from making use of the technical knowledge of a director and pay him a proper remuneration. It may be said that if this view were to be accepted, large amounts may be paid to a director in the guise of these amounts being remuneration for the technical or expert knowledge of the director. Now, the Legislature has provided a safeguard and that safeguard is to be found in section 314 and that section debars a director from holding any office or place of profit except with the previous consent of the company accorded by a special resolution and in the case of defendant No. 3 a special resolution was necessary in order to enable him to hold this place of profit. In the absence of any such resolution a director would have vacated his office as a director.

The other interesting question that arises with regard to the construction of section 198 is as to when that section comes into force. As in section 309 there is no indication as to when the Legislature intended that this particular section would become operative, and therefore it was urged that the section must come into force when the Act came into force and the managerial remuneration paid by a company should be considered for the purpose of section 198 from April1, 1956, and therefore, it is said that this section would apply to this company with regard to the net profits made by it and the amount expended by it for management for the financial year 1956. Now, that contention cannot be accepted because section 198 provides that the net profit have to be computed in the manner laid down in sections 349, 350 and 351, and when we turn to section 349, the net profits of the company have to be computed in any financial year. It is truism well known to taxing law that net profits of a business cannot be ascertained till the end of the year of account or a financial year of the business, and therefore, in the case of defendant No. 1 company the net profits could not be ascertained till December 31, 1956. But in ascertaining those profits the period from January 1, 1956, to March 31, 1956, would have to be taken into consideration because what has to be ascertained is the net profits of the whole financial year, and if that were done, then a period antecedent to the coming into force of the Act would have to be taken into consideration. That, as was rightly pointed out, would be giving to the section a retrospective effect and that would require the working of the company to be considered before the Act came into force. Now, section 198 does not purport to be retrospective, and, therefore, the better view with regard to the operation of section 198 seems to be that as far as this company is concerned it would come into operation from January 1, 1957.

Turning to section 348, which deals with the remuneration of management agents, it is not open to a managing agent after the Act comes into force to receive by way of remuneration, whether in respect of his services as managing agent or in any other capacity, any sum in excess of 10 per cent. of the net profits of the company for the financial year, and Mr. Desai appearing for the defendants concedes that as far as defendants No. 2 are concerned they cannot receive as remuneration anything more than 10 per cent. of the net profits, but he strongly contests the position that the amount of Rs. 3,000 paid to defendant No. 3 as a technical adviser should be included in the computation of 10 per cent. What is argued is that the managing agent is the firm and defendant No. 3 is a separate entity from the firm, and when Rs. 3,000 are paid to the defendant No.3, they are not paid to the managing agent but they are paid to the defendant No.3 who may be a director but certainly not the managing agent. The argument when analysed has a curious ring because what is seriously urged is that although the company cannot pay to the firm of managing agents more than a certain amount it could pay one of the partners of that firm an amount exceeding that certain sum. Now, a firm has no legal existence ; it is not a legal entity : it is merely a compendious manner of describing partners carrying on a business. Therefore, the argument of Mr. Desai comes to this that although the company in law could not pay A and B jointly, it could pay A and B separately and individually. In our opinion, full effect must be given to the clear and emphatic language used by the Legislature in section 348 that a managing agent cannot receive more than 10 per cent. of the net profits either in his capacity as managing agent or in any other capacity. The whole object of the Legislature would be defeated and the mischief aimed at would not be overcome if we were to take the view that although the company had paid up to 10 per cent. of the net profits to the managing agents, it could further pay extra amounts to each one of the partners of the managing agents if the managing agency happened to be a firm. That would put a firm in an infinitely more advantageous position than an individual. If the managing agent was an individual, he would have to content himself with the remuneration fixed under section 348, but if he showed the wisdom and the foresight of having a partner and starting a partnership firm, then he and his partner individually could get out of the limitation placed in section 348 and each seperately and individually could receive from the company any amount without any limit whatsoever. It is said by Mr. Desai that although in the managing agency commission which defendant No.2 firm receives defendant No.3 has a share and interest, the firm has no share or interest in the sum of Rs. 3,000 paid to defendant No. 3 as a director. In our opinion, that is not correct way to look at the matter. The correct way is that defendant No.3 not only receives a share in the managing agency commission as a partner in defendant No. 2 firm, but over and above the commission he receives a sum of Rs. 3,000, and the law says that he cannot receive in any capacity a sum exceeding the sum mentioned in section 348.

It is then said that if the intention of the Legislature was to prohibit not only the managing agency firm as such but every partner of that firm from receiving anything more than the remuneration fixed under section 348, the Legislature could have used appropriate language as it has done in sections 356, 357, 359 and 360. Now, in those sections the prohibition contained in those sections not only apply to a managing agent but also to an associate of a managing agent, and undoubtedly an associate as defined includes a partner. But what is overlooked in advancing this argument is that 'associate" covers many more relationships according to the definition than the mere relationship of a partner, and the intention of the Legislature was to make the prohibition in these sections much more stringent then the prohibition in section 348. Therefore, the expression "associate" could not have been used in section 348 because it would have covered not merely a partner, as just said, but persons holding other relationships according to the definition of the expression "associate" in the Act. It is, therefore, not a valid argument to suggest that the absence of the expression "associate" in section 348 should lead the court to the inference that a partner of a managing agent was permitted to receive a remuneration exceeding the remuneration mentioned in section 348.

Therefore, in our opinion, although defendant No. 3 is permitted to receive Rs. 3,000 as a technical expert and although that amount may not fall within the mischief of section 309 and even though that amount may not be taken into consideration for the purpose of section 198, that amount must be taken into consideration for the purpose of limiting the remuneration of the managing agents defendants No. 2 to the 10 per cent. mentioned in section 348. Section 348, as section 309, lays down the time when the section should come into operation and that is in respect of any financial year beginning at or after the commencement of the Act, and therefore as far as this company is concerned the section would come into force from January 1, 1957.

Mr. Rege has drawn our attention to a rather curious anomaly in the Act by pointing out section 331 which says :

"All provisions of this Act, other than those relating to the term for which the office can be held, shall apply to every managing agent holding office at the commencement of this Act, with effect from such commencement."

Me. Rege says that there seems to be a clear inconsistency between sections 331 and 348 as to when the provisions of section 348 should come into operation. Section 331 applies the various provisions of the Act with effect from the commencement of the Act, but we have to turn to the provisions themselves to find out what they are, and although section 348 may apply to the managing agent from the commencement of the Act, the provisions of the section make it clear in respect of what remuneration and from when the limitation is to apply. It may be that the Legislature overlooked section 331 when it enacted section 348 or it overlooked the fact when it enacted section 331 that it was going to enact section 348. But the language of section 348 is clear and that language cannot be controlled by the language of section 331.

Therefore we answer the question as follows :

The following questions were submitted for the opinion of the High Court :

"(1) Whether section 309 of the Companies Act, 1956, covers remuneration paid or payable to a director of the company in his capacity as a technical employee of the company or in any other capacity ?

(2)Whether the said section 309 applies to the remuneration referred to in question No. 1 for the calendar year 1956 ?

(3) Whether in any event the said section 309 applies for the period 1st January, 1956, to 31st March, 1956, in so far as remuneration referred to in question No. 1 is concerned ?

(4) Whether sections 348, 349 and 350 of the said Act or any, if so which, of these applies to the remuneration of the second defendants as managing agents for the year 1956 to be received from the first defendants ?

(5) Whether in any event the said sections 348, 349 and 350 or any of these applies to the remuneration of the second defendants to be received from the first defendants for the period 1st January, 1956, to 31st March, 1956 ?

(6) Whether the monthly salary paid to the third defendant as a technical employees who is also a director of the first defendants is to be included in the overall managerial remuneration of 11 per cent. of the net profits referred to in section 198(1) of the said Act and whether in any event the said overall limit applies for the year 1956 or any part thereof and if so which ?

(1) In the negative.

(2) Does not arise.

(3) Does not arise.

(4) In the negative, after deleting sections 349 and 350.

(5) Unnecessary.

(6) In the negative. The question to stop at the words "....... referred to in section 198(1) of the said Act." The further question "whether in any event the said overall limit applies for the year 1956 or any part thereof and if so which ?" - does not apply to the year 1956.

(7) In the negative.

We will frame another question in the light of the judgment, viz.,

"(8) Whether the remuneration of Rs. 3,000 paid to the third defendant as technical adviser is to be included in the limit of 10 per cent. laid down in section 348 ?"

and answer it in the affirmative. To the further question "If so from when?", the answers is "From and after the 1st of January, 1957." No order as to costs.

[1972] 42 COMP. CAS. 610(CAL.)

HIGH COURT OF CALCUTTA

Hind Ceramics Ltd.

v.

Company Law Board

K. L. ROY, J.

C.R. NO. 7924(W) OF 1969

AUGUST 4, 1970

 

A.C. Mitter D. Gupta and Mrs. Deb Barman for the Petitioner.

S. Roy Choudhury with D. Das for the Respondents.

JUDGMENT

K.L. Roy, J.—The petitioner-company has a paid up share capital of Rs. 6,25,000 consisting of 6,250 shares of Rs. 100 each. The company is a director controlled company) Some time in 1965, M/s. Dalmia Cement (Bharat) Ltd. acquired 99.97 per cent, of the issued shares of the company and the petitioner became a 100 per cent, subsidiary of the Dalmia company. There was a consequent change in the petitioner’s board of directors and the following directors, as nominated by the Dalmia company, were appointed to the board of the petitioner: (1) Shri M.H. Dalmia, (2) Shri R. S. Lodha, (3) Shri P.K. Khaitan and (4) Shri A.K. Jalan. These directors are paid Rs. 100 as sitting fee for each meeting of the board attended by them and no other remuneration. It is claimed that prior to the present board of directors taking over the management, the Company incurred very heavy losses as stated below:

Year

Amount of loss

1962

1.62 lakhs

1963

2.75 lakhs

1964

5.77 lakhs

1965

5.71 lakhs

It is further claimed that under the management of the present board of directors, the company made trading profits of Rs. 1.70 lakhs and Rs 2.42 lakhs for the years 1966 and 1967 respectively and it is stated that the company is expected to earn even higher profits in the subsequent years and to be put on a sound financial position. In these circumstances it was felt that the directors should be allowed some reasonable remuneration in addition to the sitting fee and accordingly the board of directors recommended that they be paid a commission of 3 per cent, on the net profits as determined under the Companies Act and further that in view of the accumulated losses of the past years as there would be no net profits of the company in the next few years, the directors be jointly paid a minimum remuneration of Rs. 10,000 per annum for a period of five years. This recommendation was placed before the annual general meeting of the petitioner held on the 5th April, 1968, and the following resolution was passed namely:—

“Resolved that pursuant to section 309 of the Companies Act, 1956, and other applicable provisions a commission of 3 per cent, of net profits be payable to the board of directors for a period of 5 years with effect from 1st January, 1968, to be shared by the directors in such manner as the board may from time to time determine, provided that in the event of absence or inadequacy of profits in any year a sum of Rs. 10,000 per annum be payable to the board of directors as minimum remuneration.”

On the 17th May, 1968, the petitioner forwarded two applications in Form No. 26 and in Form No. 25C in the Appendix to the Companies Act respectively to the respondent, Company Law Board, asking for its sanction to the proposal for payment of commission at 3 per cent, of the net profits as aforesaid and in the absence of or inadequacy of profits a minimum remuneration of Rs. 10.000 per annum to be shared by the directors in addition to the sitting fee of Rs. 100 per meeting with effect from 1st January, 1968. Along with the applications all the relevant documents were enclosed including a statement of the past history of the trading of the company, the improvements effected by the present directors and the fact of the absence of any managing agents, manager or whole-time director. It was also pointed out that of the four directors one was industrialist and a qualified chemical engineer, one a chartered accountant one a solicitor and the fourth also an industrialist and an economics graduate. By its letter dated the 20th July, 1968, the Company Law Board informed the petitioner that it had carefully considered the said applications but having regard to all the facts and circumstances of the case the Board regretted its inability to approve the same and the applications were rejected. But said letter went on to give, what appears to me, some gratuitous advice to the petitioner, viz., that if it chose to appoint a managing director or a whole-time director to look after its business, the Board would be favourably inclined to consider such appointment and the payment of some reasonable minimum remuneration to the proposed managing director or whole-time director.

It is to be mentioned that there is no dispute that at the time of the application for approval by the Board the petitioner’s total accumulated losses brought forward amounted to Rs. 11,41,362 and this fact together with the other liabilities were fully stated in the two applications.

This rule was issued on the 18th July, 1969, calling on the respondents, the Company Law Board, the Union of India and the Registrar, Joint Stock Companies, West Bengal, to show cause why appropriate writs and/or directions should not issue for quashing the decision contained in the aforesaid letter dated the 20th July, 1968, and for directing the respondents not to give effect to the said decision and further to show cause why the respondents should not be directed to approve the aforesaid applications by the petitioner.

Though practically no reasons were given in the letter dated the 20th July 1968, for refusing sanction to the petitioner’s proposal to remunerate its directors, in the affidavit-in-opposition filed on behalf of the respondent Company Law Board, in showing cause reasons have been given for the refusal and both the learned counsel, Mr. A. C. Mitter and Mr. Roy Choudhury, agreed to treat the statements in the said affidavit as the reasons for such refusal. Such reasons are stated in paragraph 11(c) of the said affidavit and may be summarised thus:

(i)         That on December 31. 1967, the company had a total accumulated loss of Rs 11,41,362 and these losses had completely wiped out the paid up capital and the reserves amounting to Rs. 6,25,000 and Rs. 3,63,700, respectively. The company was carrying on with loan capital amounting to Rs. 22,15,242 and in the year 1966 alone it had to pay interest on this loan of Rs. 75,752. Even though the company had earned profits of Rs. 1,69,750 and Rs. 2,42,457 in the years 1966 and 1967, respectively, the fact remained that it would take a minimum of five more years to wipe out the previous loss before the company would be in a position to earn profits as defined in section 198(1) of the Companies Act (hereinafter referred to as “the Act”). No dividends had been declared by the company since 1962.

(ii)        That the guiding principle of section 309(4) of the Act is to link up the remuneration of the part-time directors with the profitability of the company A part-time director is different from a whole time director or a managing director who devotes his full working hours to the affairs of the company. The sitting fee is by and large adequate compensation for whatever services a part-time director renders and any remuneration in excess of the sitting fees should be linked up with the profitability of the company. No case has been made out by the petitioner for relaxation by the Board of the above principle and to grant approval for payment of extra remuneration to its directors for five years which would further impede the recovery of the company as it would increase its total expenditure by another Rs. 50,000 for these years.

Though in the petition several grounds have been raised challenging the validity of sections 309, 310 and 311 of the Act, Mr. Mitter, without abandoning the petitioner’s objection to the vires of the aforesaid sections and reserving its right to argue the same on a proper occasion in future, confined his arguments to the other grounds challenging the validity of the impugned order and the decision of the Company Law Board.

It would be convenient at this stage to consider the provisions of the Act and the rules framed thereunder dealing with the managerial remuneration of companies.

Sections 2(13) and 2(26) define a “director” and a “managing director” respectively and by “managing director” is meant a director who is entrusted with substantial power of management. The sections dealing with managerial remuneration are sections 198, 309, 310 and 311. Section 198(1) provides that the total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company to its directors and its managing agent, secretaries and treasurers or manager in respect of any financial year shall not exceed eleven per cent, of the net profits of that company for that financial year computed in the manner laid down in sections 349, 350 and 351. Section 198(2) lays down that such percentage shall be exclusive of any fees payable to directors under section 309(2). Sub-section (3) of that section provides for payment of monthly remuneration within the limits prescribed above to a managing or a whole-time director or to the manager. Section 198(4) is material for the purpose of this application and is set out in full below:

“(4) Notwithstanding anything contained in sub-sections (1) to (3), if in any financial year, a company has no profits or its profits are inadequate, the company may, subject to the approval of the Central Government, unless such approval has been obtained under any other provision of this Act, pay to its directors (including any managing or whole-time director), its managing agent, secretaries and treasurers, or manager or if there are two or more of them holding office in the company, to all of them together by way of minimum remuneration, such sum not exceeding fifty thousand rupees per annum (exclusive of any fees payable to directors under sub-section (2) of section 309), as it considers reasonable :”.

There is a proviso which permits the Central Government to sanction an increase in the minimum monthly payment made to any managing or whole-time director or the manager in excess of the minimum remuneration of fifty thousand rupees for such period and subject to such conditions as may be prescribed.

There is also an Explanation to this section which provides that for the purposes of this section and sections 309, 310, 311, 348, 352, 381 and 387, “remuneration” shall include certain perquisites, i.e., expenditure incurred by the company in providing certain services for the directors.

It is to be mentioned that in computing the net profits of a company in the manner laid down in section 349 all past losses, in the shape of excess of expenditure over the income in any year in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained, are to be deducted. Accordingly, it is clear that in the present case in respect of the financial years for which the application has been made the petitioner-company did not have any net profit as its outstanding accumulated losses had not been wiped out.

Section 309 provides that the remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined in accordance with and subject to the provisions of section 198 and the present section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting. Sub-section (2) provides for the sitting fee of the directors as already mentioned. Sub-section (4) provides that a director who is neither a whole-time director of the company nor a managing director may be paid remuneration by way of a monthly, quarterly or annual payment with the approval of the Central Government or, by way of commission, if the company by special resolution authorises such payment, provided that such remuneration shall not exceed one per cent, of the net profits of the company, if the company has a managing or whole-time director, a managing agent or secretaries and treasurers or a manager, and three per cent, of the net profits of the company, in any other case. There is a further proviso that the company in general meeting may, with the approval of the Central Government, authorise the payment of such remuneration at a rate exceeding one per cent, or, as the case may be, three per cent, of its net profits. Sub-section (5) provides that the net profits referred to in the above sub-section shall be computed in the manner referred to in section 198(1). There is a provision in sub-section (5A) that if any director who draws or receives any remuneration in excess of the limit prescribed above, he shall refund the excess to the company and until such sum is refunded, hold it in trust for the company and the company is not entitled to waive the recovery of any sum so refundable. Sub-section (7) provides that the special resolution referred to in sub-section (4) shall not remain in force for a period of more than five years but may be renewed, from time to time, by special resolution for further periods of not more than five years at a time. Section 310 provides for the increase in remuneration of directors and requires that any provision relating to the remuneration of any director including a managing or whole-time director which purports to increase the amount thereof shall not have any effect unless approved by the Central Government provided that no such approval would be necessary for increasing the sitting fee of the directors up to Rs. 250. Section 311 deals with the remuneration of a managing director on appointment and is not material for this application.

Mr. A.C. Mitter, the learned counsel for the petitioner, contended that the reasons given for the impugned order in the affidavit-in-opposition show a lack of appreciation of the provisions of the Companies Act. The petitioner is entitled as of right to fix the remuneration of its directors at three per cent, of the net profits under the proviso to section 309(4)(b). Sanction is only required where remuneration over 3 per cent, of the net profits is intended to be given. Section 310 comes into operation only when the remuneration fixed for the directors under an existing agreement is sought to be increased beyond the limits prescribed in section 309. In this case as there is no agreement for payment of remuneration to the directors of the petititioner, section 310 has no application. Undoubtedly section 309 cannot be applied until and unless a company has net profits as defined in section 198 in the relevant financial year. As in the present case the petitioner-company had no net profits in any of the financial years for which the sanction has been asked for, Mr. Mitter conceded that section 309 also did not come to his aid. The learned counsel contended that the reasons given for rejecting the petitioner’s application as set out in paragraph 11 of the affidavit-in-opposition are not in accordance with the provisions of the Companies Act, The first objection is that the directors are only part-time directors and so the sitting fee is sufficient remuneration for the services rendered by them. As a corollary if a whole-time director or manager was appointed the application would have been favourably considered. The second objection is that there can be no remuneration where there is no net profit. The necessary corollary is that until the past losses are wiped out no application for remuneration to directors would be maintainable. Mr. Mitter pointed out that in the Act no distinction has been made anywhere between the so-called part-time directors and the whole-time directors. The applicant is a director managed company and as there are no managing directors or managers or secretaries, the board of directors conduct the management and the affairs of the company. Mr. Mitter pointed out that in rejecting the petitioner’s application the respondent-Board has completely overlooked the provisions of section 198(4) that even in any year in which there are no net profits the company is entitled to pay its directors minimum remuneration not exceeding fifty thousand rupees subject to the sanction by the Central Government. The learned counsel argued that the non obstante clause in section 198(4) “notwithstanding anything in sub-sections (1) to (3)” would exclude the operation of sub-section (1) in any event. Mr. Mitter referred me to an extract from Standard Board Practice on the importance of the functions of the board of directors of a company and pointed out that the Board could appoint a part-time director in addition to the ordinary directors. Thus a part-time director is not an ordinary director of the company and the Company Law Board has confused the issue by treating the ordinary directors as part-time directors. The learned counsel submitted that though no reasons have been given in the impugned order so as to make it a speaking order, as such reasons have been disclosed in the affidavit-in-opposition, the reasons can be scrutinised by this court so as to be satisfied that the order made is not perverse. He pointed out that the principle laid down by the House of Lords in Edwards v. Bairstow has been approved by the Supreme Court in Provincial Transport Services v. State Industrial Court, Nagpur, where it has been observed that:

“It has often been pointed out by eminent judges that when it appears to an appellate court that no person properly instructed in law and acting judicially could have reached the particular decision the court may proceed on the assumption that misconception of law has been responsible for the wrong decision ........The Industrial Court erred in thinking that it was bound by this decision of the Labour Commissioner and this error on its part was, in our opinion, an error so apparent on the face of the record that it was proper and reasonable for the High Court to correct that error.”

Mr. Mitter pointed out that any distinction between a so-called administrative order and a quasi-judicial order so far as the writ of certiorari is concerned has been removed by the recent decision of the Supreme Court in Kraipak’s case and no protection could be sought against an attack on the validity of an order on the ground that it is wholly an administrative order.

According to Mr. Mitter the impugned order is vitiated by reason of the failure of the Board to appreciate that one of the applications was in Form 25C in Appendix I to the Act which is a form prescribed for an application under section 198(4) and section 398(3)/387. The Board has failed altogether to consider the provisions of section 198(4) and has based its refusal on the provisions of sections 309 and 310 on the ground of absence of net profits. It has also referred to section 198(1) without considering the non obstante clause in section 198(4).

Lastly, Mr. Mitter submitted that if this court was satisfied that the impugned order was bad then it would direct the respondent-Board, to give approval to the petitioner’s application for payment of minimum remuneration of Rs. 10,000 per annum to its directors instead of sending it back to the Board for reconsideration. He pointed out that the practice of sending matters back to the authority concerned arose from the procedure prescribed in section 45 of the Specific Relief Act. Under article 226, a High Court is empowered to give such orders and directions as it thinks fit. He referred to the decision of the Supreme Court in P. Bhooma Reddy v. State of Mysore, where in an appeal from an order dismissing an application under article 226, the Supreme Court declared the impugned order of cancellation to be invalid and set aside the order. It further issued a writ of mandamus for the grant of licences to the appellant and observed that in order to give effect to the order for the issue of licences in favour of the appellant it is necessary to give the further direction that the licences already issued to respondent No. 4 should be cancelled. Mr. Mitter submitted that in this case the court should also direct the Board to grant the approval to the petitioner’s application to remunerate its directors.

Mr. Roy Choudhury, the learned counsel for the respondents, raised a point of demurrer that the petition is not maintainable as it does not show that any legal right has been infringed or that any legal duty has not been performed. He contended that in law there is no right in an ordinary director to get any remuneration apart from sitting fees irrespective of the company having any net profits and as the directors have no such legal right there could be no recourse to article 226 for the vindication of any such right. He relied on the decision of the Supreme Court in Shivendra Bahadur’s case, that there must be a legal right to be enforced by a writ. He referred to a decision of the English Court of Appeal in In re George Newman & Co., where it has been held that the directors have no right to pay themselves for their services out of the company’s assets unless authorised so to do by the instrument which regulates the company or by the shareholders at a properly convened meeting. I do not see the application of the last case to the facts in the present case. Here the petitioner is the company itself and the remuneration has been sanctioned by the company at its annual general meeting. The point of demurrer raised by Mr. Roy Choudhury seems to be based on a misapprehension. The directors are not the petitioners in this application. It is the company, which is asking the court to hold that the Company Law Board has failed to decide in a judicial manner its application for payment of remuneration to its directors made under the provisions of the Companies Act. The company has a right under the provisions of the Act to make such an application and there is a corresponding duty on the Board to consider such application judiciously. If the reasons given in the affidavit-in-opposition for the refusal to grant the approval are not sustainable or are such that no reasonable man acting judicially could have reached that determination, this court would have certainly jurisdiction to quash or rectify the impugned order and to give such further directions to the Board as it thought fit. The preliminary objection of Mr. Roy Choudhury must be rejected.

Mr. Roy Choudhury quoted extensively from the book Law and Practice Relating to Company Directors by Powell-Smith for the proposition that apart from the working or executive directors, that is persons who are full-time executives, it is sometimes desirable to take in “outside” directors who have no association with the company other than as a director. The learned author expresses the opinion that in the competitive work of commerce and industry there should not be room for directors who are merely decorative. But one of the observations therein relied on by Mr. Roy Choudhury seems to me to belie the proposition assumed both by the Board and by Mr. Roy Choudhury that part-time directors are the ordinary directors of a company. The learned author observes that a decision to appoint part-time or outside directors may be made for a wide variety of reasons. So a part-time director is an outsider who is taken into a Board not for the purpose of the management of the company but to add prestige to the board of directors or other extraneous reasons. In a director-managed company, which has neither a managing director nor a manager, the board of directors cannot be described as part-time directors. The board of directors is responsible for the entire management of the company.

Mr. Roy Choudhury next referred to the report of the joint committee of the Company Law Committee and particularly to the following observations contained in the report:

“On principle, we are not in favour of payment of commission to a director who is not also a full-time employee of the company. Having regard, however, to the desirability of keeping the position flexible, we do not recommend any rigid scale of payment for directors or indeed any rigid method of remuneration. We would leave it to the company to decide how its directors should be remunerated, but would suggest that if any commission on profits is to be paid to the ordinary directors, the aggregate amount of the profits thus disbursed to them should not exceed 1 per cent, of the ‘net profits’ as denned in the Act in the case of companies managed by managing agents; in other cases this percentage may extend to 3 per cent, of the net profits as defined in the Act.....The commission, when paid, should come out of the net profits, on which the remuneration of managing agents is based, and, therefore, such commission, if any, as is paid to directors should be treated as part of the working expenses of a company.”

Mr. Roy Choudhury submitted that this is the principle which has guided the Board in rejecting the petitioner’s application on the ground of absence of net profits in the relevant years. Mr. Roy Choudhury analysed the provisions of the relevant sections of the Act and according to him the scheme of the Act is broadly as follows :

(i)         No remuneration can be paid to directors under section 309 unless the company has made profits as computed under section 198(1). The only exception is the sitting fee of the directors which would be increased to a limit of Rs. 250 per sitting.

(ii)        The exceptional circumstances prescribed in section 198(4) contemplate loss in a particular year and the sanction of remuneration to the directors up to the limit of Rs. 50,000 for that year only. The subsection does not contemplate a blanket sanction for five years irrespective of the position of profits. As, admittedly, in this case there were no net profits as computed under section 198 in the relevant years no remuneration could be sanctioned to its directors by the petitioner or approved by the Board under section 198(1), 309 or 310. So the only provision under which remuneration could be paid to the directors is section 198(4). What is contemplated in that sub-section is payment of minimum remuneration to the directors by the company in a year in which there are no profits. The sub-section cannot apply to a case of remuneration being paid for a period exceeding that year. If at the end of a particular year the company finds that it has earned no profits but that some minimum remuneration should be paid to its directors it can apply for sanction under section 198(4). As such an application would depend on the company suffering a loss of profit in any year it can only be made for a particular year depending on the trading results of the company for that year. If, for instance, in the year 1965 when there was a loss of Rs. 5.71 lakhs the company had applied under section 198(4) for payment of minimum remuneration to its directors the application would be within the subsection. Similarly, such an application for 1967 when there was a loss would also be maintainable for that year. If section 198(4) is not attracted there are no other provisions of the Companies Act which would enable the petitioner to pay any remuneration to its directors when the company has not earned any net profits as contemplated in section 198.

I am unable to accept the contention of Mr. Roy Choudhury that section 198(4) would apply to an application for payment of remuneration to the directors only for any particular year in which the company has suffered a loss. The proviso to that very sub-section shows that in the case of the manager or a whole-time director the sanction for minimum remuneration in excess of Rs. 50,000 may be granted for such period as may be specified in the order granting the sanction. So, the contention that such sanction must be confined to a particular year for which the application is to be made under that sub-section cannot be accepted. Further, section 309, which also deals with the remuneration of directors, by sub-section (4) authorises the Government to sanction payment of remuneration in excess of the limits prescribed therein if the company has in general meeting authorised the payment of such remuneration. By sub-section (7) it limits the operation of such resolution to a period of five years but permits renewal of the resolution from time to time for a further period of five years. It would, therefore, seem that the scheme of the Act, so far as the sanction to the proposal for remuneration of the directors is concerned, is to confine such sanction to a period of five years at the first instance. In this case the company by its resolution recommended payment of remuneration to its directors for a period of five years commencing from the 1st January, 1966.

There is more substance in Mr. Roy Choudhury’s contention that the Board is under no obligation to grant such sanction if it considers the financial position of the company to be such that the granting of the sanction would put an additional financial burden on the company and that would delay its recovery. Undoubtedly, at the date of the application there was a carried forward loss of over Rs. 11 lakhs. In the affidavit-in-opposition it has been pointed out that the paid up capital and reserves have been wiped out and the company is operating on its loan capital. Even if the company continues to make progress as it has done in the past two years, it would take at least another five years to recoup its past losses. In the affidavit-in-reply the petitioner has stated that the trading profits for the years 1968 and 1969 were rupees two lakhs each and that in the balance-sheet and the profit and loss account for the year 1969, the balance of the loss carried over at the end of that year is shown as Rs. 4,96,836. This statement has been verified by me as the said balance-sheet and the profit and loss account was produced for my inspection.

While I am of opinion that the Company Law Board has erred in treating both the petitioner’s applications in Form No. 25-C and Form No. 26 as applications under the provisions of sections 198(1) and 309 and 310 and in failing to take into consideration the provision of section 198(4), I am unable to accede to the suggestion of Mr. Mitter that I should direct the Board to grant approval to the proposal of the petitioner to allow remuneration to its directors at the rate of Rs. 10,000 per annum for a period of five years as claimed in the petition.

Apart from the facts considered by the Board, the further facts disclosed in the affidavit-in-reply of further trading profits being earned in the subsequent years and of the accumulated losses being reduced considerably, should also be taken into consideration in dealing with the application for payment of remuneration to its directors by the petitioner. But, it is for the Company Law Board to take into consideration all the relevant facts and decide whether approval should or should not be granted to the proposal for the payment of remuneration to the directors. The facts here are not so cut and dry as in the case before the Supreme Court in P. Bhooma Reddy v. State of Mysore. In that case a licence was granted to the petitioner which was subsequently cancelled and an offer was made to him to grant fresh licence on his making certain payments. Though the petitioner deposited Rs. 40 lakhs in accordance with the proposal no licence was ultimately issued to him. It was in these circumstances that the Supreme Court directed the respondent to issue the licence to the petitioner. In the present case the facts are not so overwhelmingly compelling to induce me to direct the Company Law Board to grant the approval asked for. It would be for the Board to consider the matter in , the light of the provisions of section 198(4) of the Act and the financial position of the company and then to approve or refuse approval to the 1 petitioner’s application. I, therefore, set aside the impugned order and direct the respondent. Company Law Board, to consider the petitioner’s application in Form No. 25-C in the light of the provisions of section 198(4) of the Companies Act. The rule is made absolute to the extent indicated above. All interim orders are vacated. There would be no order as to costs.