Section 203
Prevention
of management by undesirable persons
ORISSA HIGH COURT
COMPANIES ACT
[2005] 63 SCL 35 (ORI.)
HIGH COURT OF ORISSA
K.K. Roller Flour Mills (P.) Ltd.
v.
Utkal Flour Mills (P.) Ltd.
A.K. PATNAIK, J.
COMPANY PETITION NO. 56 OF 2003
NOVEMBER 5, 2004
Section 203 of the Companies Act, 1956 - Managerial
personnel - Power to restrain fraudulent persons from managing companies -
Whether Court has jurisdiction to pass an order under section 203(1)(b) when
winding up petitions in respect of company are pending before Court but order
for winding up of company has not been passed - Held, yes - Whether a petition
under section 203 can be dismissed for non-compliance of provisions of
sub-section (3) of section 203 - Held, no - Articles of association of company
provided that when company would decide to increase share capital of company,
such shares would be offered to members and such offers would be made by
notices specifying number of shares to which members were entitled - However,
opposite parties, who were directors of company, increased share capital and
allotted increased shares in their names and their relatives without giving any
offer by notice to other members of company - Whether opposite parties were
guilty of breach of their duties to company and, therefore, it was to be
ordered that they disqualify themselves to be directors of company - Held, yes
FACTS
Opposite party No. 2 was the managing director and opposite party No. 3 was the director of the company. The petitioners, who were shareholders of the company, filed application under section 203 alleging that article 9 of the Articles of association of the company provided that when the company would decide to increase the capital of the company by issue of further shares, such shares would be offered to members and such offer would be made by a notice specifying the number of shares to which the member was entitled, but in violation of the said article 9 of the articles of association of the company, the opposite parties 2 and 3 had dishonestly and fraudulently allotted the increased authorised share capital of the company to themselves and to their relatives and associates and by such manipulative action, reduced the majority shareholders of the company to a minority and enhanced their position from minority shareholders to majority shareholders of the company. According to the petitioner, such action of the opposite parties 2 and 3, who were directors of the company, amounted to breach of fiduciary duty of opposite parties 2 and 3 to the company and the Court should, under section 203, order that the opposite party Nos. 2 and 3 had disqualified themselves to be directors of the company.
The opposite parties contended that winding up petition had been filed against the company and the Court did not have jurisdiction under section 203(1)(b) to pass an order under section 203 until a winding up order was passed; that in the absence of valid service of notice on the opposite parties 2 and 3 as provided in sub-section (3) of section 203, the petition under section 203 filed by the petitioner was not maintainable; and that the increase in the authorised share capital of the company and the allotment of such increased share capital of the company in favour of opposite parties 2 and 3 and their relatives and friends was not done with any dishonest and fraudulent intention but was done because of a family settlement under which ‘S’ and his associates were to transfer their shares in the company in favour of the opposite party Nos. 2 and 3.
HELD
A bare
reading of section 203(1)(b)
would show that where in course of winding up of a company, it appears that a
person has been guilty of an offence for which he is punishable under section
542 or where he has otherwise been guilty, while being an officer of the
company, of any fraud or misfeasance in relation the company or of any breach
of his duty to the company, the Court may make an order that such person shall
not, without the leave of the Court, be a director of a company for such period
as may be specified in the order. Hence, an order may be passed by the Court to
prevent such a person from acting as a director or from participating in the
management of the company in respect of which a petition for winding up has
been presented in the Court. In respect of such a company, once a winding up
order is passed, the Official Liquidator by virtue of his office becomes the
liquidator of the company under section 449 and the need to pass an order under
section 203(1)(b) in respect of
a person, who is a director of such company or who is associated with the
management of such company, would not at all arise. On the other hand, to say
that the Court would have no jurisdiction to pass an order under section 203
before the order of winding up of the company is passed is to denude the Court,
before whom a winding up petition is pending, of the power to prevent a
director or person, who is guilty of the conduct described in section 203(1)(b), from continuing to be associated with the
management of the company. This certainly cannot be the intention of the
Legislature. [Para 13]
Moreover,
sub-section (2)(b) of section
203 makes it clear that the ‘Court having jurisdiction to wind up the company’
is the Court which can pass an order under section 203(1)(b) and sub-sections (3) and (4) of section
203 also make it clear that it is ‘the Court having jurisdiction to wind up the
company’ and not which has passed the winding up order, before which the
application under section 203(1)(b)
is to be filed. A plain reading of section 441(2) would show that in case of a
winding up by the Court, such winding up shall be deemed to commence at the
time of presentation of the petition for winding up. Hence, even though it may
be commonly understood that winding up of a company normally commences when the
order for winding up is passed by the Court, by virtue of the statutory fiction
in sub-section (2) of section 441, winding up in respect of a company by a
Court commences at the time of presentation of the petition for winding up.
This statutory fiction has been created with a view to ensure that as soon as a
winding up petition is presented to the Court and the Court is seisin of the matter, the Court should be able to
pass orders in respect of such company as contemplated under the different
provisions of the Act and the Companies (Court) Rules, 1959 even before the
winding up order is passed by the Court. Therefore, the Court, having
jurisdiction to wind up a company, can at any time after presentation of the
winding up petition pass an order under section 203(1)(b). [Para 14]
The petition
under section 203 cannot be dismissed for non-compliance of the provisions of
sub-section (3) of section 203 as such a consequence of dismissal of the
petition for non-compliance of sub-section (3) of section 203 has not been
expressly provided for in section 203. The purport of sub-section (3) of
section 203 is to ensure that no ex parte orders are passed against the person against whom an order is sought
under section 203 and in the instant case, the opposite party Nos. 2 and 3,
against whom orders under section 203 had been sought, had appeared, filed
their counter-affidavits and documents and had been heard. In the
circumstances, the question of dismissing the petition for non-compliance of
the provisions of sub-section (3) of section 203 did not arise. [Para 17]
On merits, it
was clear from article 9 of the articles of association of the company that
where the company would decide to increase the capital of the company by issue
of further shares, such shares would have to be offered to the members and such
offers would have to be made by notices specifying the number of shares to
which the members were entitled. Opposite party Nos. 2 and 3 as the managing
director and director of the company, therefore, were under a duty to offer to
the members by notices specifying number of shares out of the authorised
increased share capital of the company but no such offers had been made by
notices to the members of the company including the petitioner. Instead, opposite
party Nos. 2 and 3 had ensured that the increased authorised share capital of
the company was allotted to themselves, their relatives and their associates so
as to enhance their position as majority shareholders and reduce the majority
shareholders of the company to a minority. [Para 18]
The plea of
family settlement taken by the opposite party Nos. 1 to 3 in the additional
counter-affidavit could not be a good defence for the opposite party Nos. 2 and
3 for increasing the authorised share capital and for allotting the shares out
of the authorised increased share capital to themselves, their relatives and
associates and not offering the said shares in terms of article 9 of the
articles of association to the other members of the company including the petitioner.
If as was alleged in the additional counter-affidavit of the opposite party
Nos. 1 to 3, there was a family settlement under which ‘S’ was to transfer the
shares under his control in the company to opposite party Nos. 2 and 3, such
family settlement could have been given effect to only by complying with the
requirements of the Act and the articles of association of the company relating
to transfer of shares and if ‘S’ and his associates refused to abide by the
said family settlement, the remedy of opposite party Nos. 2 and 3 was not to
increase the share capital and allot the increased authorized share capital to
themselves and to their relatives and associates and not offer the same to the
other members of the company in accordance with article 9 of the articles of
association but to move the appropriate Civil Court for relief against ‘S’ and
his associates. The primary motive and object of the opposite party Nos. 2 and
3 in increasing the authorised share capital of the company and in allotting the
shares out of such increased authorised share capital to themselves, their
relatives and associates was to be gain control over the company and to reduce
the majority shareholders of the company to a minority. [Para 20]
Therefore, opposite
party Nos. 2 and 3 were guilty, as the managing director and director of the
company, of breach of their duties to the company by substantially increasing
the authorised share capital of the company and by allotting shares out of such
increased share capital to themselves, their relatives and associates for the
purpose of gaining control over the affairs of the company and accordingly, it
was ordered that the opposite party Nos. 2 and 3 should not be directors of the
company for a period of two years. [Para 23]
CASES REFERRED TO
In re, Looe Fish Ltd. [1993] CLC 1160 (Ch. Division) (para 7), Dale & Carrington Invt. (P.) Ltd. v. P.K. Prathapan [2004] 7 Supreme 209 (SC) (para 7), Pankaj Mehra v. State of Maharashtra AIR 2000 SC 1953 (para 9), Official Liquidator, Security & Finance (P.) Ltd. v. Pushpa Wati Puri [1978] 48 Comp. Cas. 385 (Delhi) (para 9), Salaam M. Bavazier v. Mohd. Azgaruddin [1998] 93 Comp. Cas. 609 (AP) (para 11), Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77 (para 21), Fraser v. Whalley [1864] 2 H&M 10 (para 21) and Punt v. Symons & Co. [1903] 2 Ch. 506 (para 21).
Bijay Anand Mohanty, S.K. Sanganeria, and A.C.
Swain for the Petitioner. S.S.
Das, B.R. Das, K. Behera, S. Modi and B. Mohanty for the Respondent.
ORDER
1. This is petition under section 203 of the Companies Act, 1956 with a prayer to issue orders/directions for restraining the opposite party Nos. 2 and 3 from acting as the Directors of opposite party No. 1 company (for short "the company").
2. The case of the petitioner is that the company had an authorised share capital of Rupees 2.5 crores comprising of 2,50,000 number of shares and the nominal value of each share is Rs. 100. Out of the said 2,50,000 shares, the petitioner held 20,000 shares and opposite parties 2 and 3 held 6,200 and 1,700 shares respectively in the company. Opposite party No. 2 is the Managing Director of the Company and opposite party No. 3 is the wife of opposite party No. 2 and is a Director of the company.
3. Certain disputes arose between Shri Sachikanta Routray who held 1,64,560 shares in the company and his other brothers including the opposite party No. 2 relating to various businesses, namely, Rourkela Roller Flour Mills, Utkal Flour Mills (Rourkela) Pvt. Ltd., petrol pump, two foreign liquor outlets along with bonded warehouse at Rourkela, Lingaraj Roller Flour Mills, Gauri Shankar Food Processing, A.B. Tea wholeselling for Orissa. Utkal Motors Pvt. Ltd., Kiln bricks manufacturing, Potato cold storage industry, S.K. Exports Pvt. Ltd., Utkal Udyog (Export Unit), Paradip Ice Factory, Hindustan Marine Industries etc.
4. Because of these disputes, the authorised representative of the petitioner inspected the records of the company in the office of the Registrar of Companies, Orissa, Cuttack and found that opposite parties 2 and 3 have increased the authorised share capital of the company and have allotted the increased share capital to themselves and their relatives and associates from time-to-time as stated hereunder :
(i) An EGM of the company is alleged to have been held on 14-8-2003 and Form Nos. 5 and 23 have been filed on 12-9-2003 with the Registrar of Companies, Orissa, Cuttack. At the said EGM the opposite parties 2 and 3 have increased the authorised share capital of the company from 2.5 crores to 3 crores and have allotted the increased share capital to themselves and their associates as indicated in the Return of Allotments as follows :
|
Sl. No. |
Name |
Number of shares |
|
1. |
Nirmal Chandra Routray (opp. party No. 2) |
29,800 |
|
2. |
Gourimohan Routray |
100 |
|
3. |
Prasant Kumar Routray |
100 |
|
4. |
Pyari Mohan Routray |
100 |
|
5. |
Khusboo Routray |
300 |
|
6. |
Pratap Chandra Routray |
100 |
(ii) On 19-9-2003 opposite parties 2 and 3 have allotted 25,000 shares in the company to each of themselves as per the Return of Allotments.
(iii) On 29-9-2003, another EGM of the company is alleged to have been held where the authorised share capital of the company was further enhanced from Rupees 3 crores to Rupees 3.70 crores and Forms 5 and 23 have been filed on 30-9-2003 with the Registrar of Companies, Orissa, Cuttack.
(iv) On 1-10-2003, opposite parties 2 and 3 have allotted shares to themselves and to their associates including their children and their H.U.F. as per the Return of Allotments as follows :
|
Sl. No. |
Name |
Number of shares |
|
1. |
Nirmal Chandra Routray (opp. party No. 2) |
39,000 |
|
2. |
Rashmita Routray (opp. party No. 3) |
20,000 |
|
3. |
Khusboo Routray |
3,000 |
|
4. |
Sivanada Routray |
5,000 |
|
5. |
Nirmal Chandra Routray (HUF) |
3,000 |
(v) On 15-10-2003, an EGM is alleged to have been held enhancing authorised share capital from Rupees 3.70 crores to Rupees 4.25 crores and Forms 5 and 23 have been filed on 11-11-2003 with the Registrar of Companies, Orissa, Cuttack.
(vi) On 4-11-2003, opposite parties 2 and 3 have allotted further shares to themselves and their relatives and associates out of such increased share capital as per the Return of allotments as follows :
|
Sl. No. |
Name |
Number of shares |
|
1. |
Nirmal Chandra Routray (HUF) |
27,000 |
|
2. |
Rashmita Routray (opp. party No. 3) |
14,700 |
|
3. |
Pyari Mohan Routray |
100 |
|
4. |
Pratap Ch. Routray |
100 |
|
5. |
Prasant Ku. Routray |
100 |
|
6. |
Sivanada Routray |
3,000 |
|
7. |
Nirmal Chandra Routray (Ind.) (opp. party No. 2) |
10,000 |
5. The petitioner has alleged that increases of share capital and allotments have not been reflected in the annual return of the company filed with the Registrar of Companies, Orissa, Cuttack on 1-12-2003 and the allotments have been subsequently made and clandestinely and dishonestly introduced into the records of the company. The petitioner has further alleged that no notice of the aforesaid EGMs were even served and the EGMs were not actually held. The petitioner has further stated that Article 9 of the Articles of Association of the company provides that where the company decides to increase the capital of the company by issue of further shares, such shares shall be offered to members and such offer shall be made by a notice specifying the number of shares to which the member is entitled, but in violation of the said Article 9 of the Articles of Association of the Company the opposite parties 2 and 3 have dishonestly and fraudulently allotted the increased authorised share capital of the company to themselves and to their relatives and associates and by the such manipulative action reduced the majority shareholders of the company to a minority and enhanced their position from minority shareholders to majority shareholders of the company. According to the petitioner, such action of the opposite parties 2 and 3 who were Directors of the company amount to breach of fiduciary duty of opposite parties 2 and 3 to the company and the Court should under section 203 of the Companies Act, 1956 (for short, "the Act") order that the opposite parties 2 and 3 have disqualified themselves to be Directors of the company.
6. Mr. Bijay Anand Mohanty, learned counsel for the petitioner, submitted that the aforesaid facts stated in the petition would show that within a period of two months from 14-8-2003 to 4-11-2003 opposite parties 2 and 3 have increased the authorised share capital of the company and allotted the shares out of such increased share capital to themselves, their relatives and associates so as to reduce the majority shareholders to a minority and enhance their position as majority shareholders. He submitted that flour mills business do not require this kind of immediate expansion of capital and the sole object of the opposite parties 2 and 3 in ensuring this increase in authorised share capital and allotment of shares was to reduce the majority shareholders to a minority and gain control over the company. He submitted that this action of opposite party No. 3 was contrary to the mandate of Article 9 of the Articles of Association of the company inasmuch as no specific notice has been issued to the petitioner and to other members of the company offering the allotment of shares to them and the allotments have been made clandestinely to the opposite parties 2 and 3 and their relatives and associates behind the back of the petitioner and other members of the company.
7. Mr. Mohanty cited the decision of the Chancery Division In re, Looe Fish Ltd. [1993] Butterworths Company Law cases 1160, in which it has been held that allotment of shares by a Director to himself and his supporters in order to maintain his control over the company constitutes evidence of unfitness and constitutes good grounds for making a disqualification order under section 8 of the Company Directors Disqualification Act, 1986. He also relied on the decision of the Supreme Court in Dale & Carrington Invt. (P.) Ltd. v. P.K. Prathapan [2004] 7 Supreme 209, wherein allotment of additional equity shares of a company in favour of its Managing Director without a meeting of the Board of Directors has been held to be wholly unauthorised and invalid.
8. He submitted that the language of section 203(1) of the Act would show that an order under Clause (b)(ii) can be passed by the Court if "in course of winding up a company" it appears to the Court that a person has been guilty while an officer of the company, of any fraud or misfeasance in relation to the company or of any breach of his duty to the company. He argued that the expression "in course of winding up" would mean at any time after presentation of the petition for winding up before the Court and not at any time after the winding up order is passed. He referred to the provisions of section 441(2) of the Act which states that in case of winding up of a company by the Court, such winding up shall be deemed to have commenced at the time of presentation of the petition for winding up. He submitted that whenever the Legislature intended that a particular consequence will follow only after the winding up order is passed, it has expressly stated so in the specific provision of the Act. In this context, he referred to the provisions of section 446(1) of the Act which provides that "when a winding up order has been made" or the Official Liquidator has been appointed as Provisional Liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose. He submitted that the language of section 203(1)(b) is different from the language of section 446 and once a winding up petition in respect of a company is presented before the Court, the Court will have jurisdiction to pass orders under section 203(1)(b). He submitted that petitions for winding up of the company have already been presented by S.K. Exports Private Limited on 4-12-2003 (COPET No. 51 of 2003) and by K.K. Roller Flours Private Limited on 7-1-2004 (COPET No. 1 of 2004) and, therefore, the Court has jurisdiction to pass orders under section 203 of the Act against the directors of the company.
9. Mr. S.S. Das, learned counsel appearing for the opposite parties 1, 2 and 3, on the other hand, submitted that the Court does not have jurisdiction under section 203(1)(b) of the Act to pass an order under section 203 until a winding up order is passed as the expression "in course of winding up of a company" would mean "at any time after the winding up order is passed". He cited the decision of the Supreme Court in Pankaj Mehra v. State of Maharashtra AIR 2000 SC 1953 and the decision of the Delhi High Court in Official Liquidator, Security & Finance (P.) Ltd. v. Pushpa Wati Puri [1978] 48 Comp. Cas. 385 and submitted that section 441(2) of the Act will apply only after the winding up order in respect of a company is passed and not before such winding up order in respect of a company is passed.
10. Mr. Das next submitted that sub-section (3) of section 203 of the Act further provides that a person intending to apply for making of an order under section 203 by the Court shall give not less than 10 days’ notice of his intention to the person against whom the order is sought, but in this case no such notice under section 203(3) of the Act has been served on the opposite parties 2 and 3 and instead, another notice served under section 434 of the Act is sought to be shown as the notice served under section 203(3) of the Act. He submitted that the averment in para 12 of the petition that such notice has been served and all the annexures including the copy of the notice dated 12-12-2003 in Annexure-P/4 have been inserted on 27-11-2004 after the petition was filed in Court on 26-11-2004. He vehemently argued that in the absence of valid service of notice on the opposite parties 2 and 3 as provided in sub-section (3) of section 203 of the Act, the petition under section 203 of the Act filed by the petitioner is not maintainable.
11. Mr. Das relied on the averments in the counter-affidavit and additional counter-affidavit filed on behalf of the opposite parties 1, 2 and 3 and submitted that the increase in the authorised share capital of the company and the allotment of such increased share capital of the company in favour of opposite parties 2 and 3 and their relatives and friends were not done with any dishonest and fraudulent intention but were done because of a family settlement under which Shri Sachikanta Routray and his associates were to transfer their shares in the company in favour of the opposite parties 2 and 3. He submitted that the increase of share capital and the allotment of the shares were not in any way detrimental to the interests of the company because fresh capital was required for expansion and diversification of the business of the company. He submitted that the decision of the Chancery Division In re, Looe Fish Ltd.’s case (supra) does not apply to the facts of the present case. He cited the decision of the Andhra Pradesh High Court in Salaam M. Bavazier v. Mohd. Azgaruddin [1998] 93 Comp. Cas. 609 in which it has been held that a restraint order should not be passed by the Court where there is no element of fraud in the conduct of a director.
12. The first issue to be decided in this case is whether the Court would have jurisdiction to pass an order under section 203(1)(b) of the Act in this case when two winding up petitions in respect of the company are pending before the Court but the order for winding up of the company has not been passed. For answering this issue, a reference to the bare provisions of sections 203 and 441 of the Act has to be made and the said sections are accordingly quoted hereinbelow :
"203. Power to restrain fraudulent persons from managing companies.-(1) Where-
(a) a person is convicted of any offence in connection with the promotion, formation or management of a company; or
(b) in the course of winding up a company it appears that a person-
(i) has been guilty of any offence for which he is punishable (whether he has been convicted or not) under section 542; or
(ii) has otherwise been guilty, while an officer of the company, of any fraud or misfeasance in relation to the company or of any breach of his duty to the company;
the Court or the Tribunal, as the case may be, may make an order that, that person shall not, without the leave of the Court or the Tribunal, as the case may be, be a director of, or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for such period not exceeding five years as may be specified in the order.
(2) In sub-section (1), the expression "the Court",-
(a) in relation to the making of an order against any person by virtue of clause (a) thereof, includes the Court or the Tribunal by which he is convicted, as well as any Court or the Tribunal having jurisdiction to wind up the company as respects which the offence was committed; and
(b) in relation to the granting of leave, means any Court or the Tribunal having jurisdiction to wind up the company as respects which leave is sought.
(3) A person intending to apply for the making of an order under this section by the Court or the Tribunal having jurisdiction to wind up a company shall give not less than ten days’ notice of his intention to the person against whom the order is sought, and at the hearing of the application, the last mentioned person may appear and himself give evidence or call witnesses.
(4) An application for the making of an order under this section by the Court or the Tribunal having jurisdiction to wind up a company may be made by the Official Liquidator, or by the liquidator of the company, or by any person who is or has been a member or creditor of the company.
(5) On the hearing of any application for an order under this section by the Official Liquidator or the Liquidator, or of any application for leave under this section by a person against whom an order has been made on the application of the Official Liquidator or Liquidator, the Official Liquidator or Liquidator shall appear and call the attention of the Court or the Tribunal, as the case may be to any matters which seem to him to be relevant, and may himself give evidence or call witnesses.
(6) An order may be made by virtue of sub-clause (ii) of clause (b) of sub-section (1), notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the order is to be made.
(7) If any person acts in contravention of an order made under this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.
(8) The provisions of this section shall be in addition to, and without prejudice to the operation of, any other provision contained in this Act.
441. Commencement of winding up by Tribunal.-(1) Where, before the presentation of a petition for the winding up of a company by the Tribunal, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and unless the Tribunal, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.
(2) In any other case, the winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up."
13. A bare reading of section 203(1)(b) would show that where in course of winding up of a company it appears that a person has been guilty of an offence for which he is punishable under section 542 or where he has otherwise been guilty while an officer of the company, of any fraud or misfeasance in relation to the company or of any breach of his duty to the company, the Court may make an order that such person shall not without the leave of the Court, be a Director of a company for such period as may be specified in the order. Hence, an order may be passed by the Court to prevent such a person from acting as a Director or from participating in the management of even the company in respect of which a petition for winding up has been presented in Court. In respect of such a company, once a winding up order is passed, the Official Liquidator by virtue of his office becomes the Liquidator of the company under section 449 of the Act and the need to pass an order under section 203(1)(b) of the Act in respect of a person who is a Director of such company or who is associated with the management of such company would not at all arise. On the other hand, to say that the Court would have no jurisdiction to pass an order under section 203 before the order for winding up of the company is passed is to denude the Court before whom a winding up petition is pending of the power to prevent a Director or person who is guilty of the conduct described in section 203(1)(b) from continuing to be associated with the management of the company. This certainly cannot be the intention of the Legislature.
14. Moreover, sub-section (2)(b) of section 203 makes it clear that "the Court having jurisdiction to wind up the company" is the Court which can pass an order under section 203(1)(b) of the Act and sub-sections (3) and (4) of section 203 also make it clear that it is "the Court having jurisdiction to wind up the company" and not which has passed the winding up order before which the application under section 203(1)(b) is to be filed. A plain reading of section 441(2) would show that in case of a winding up by the Court, such winding up shall be deemed to commence at the time of presentation of the petition for winding up. Hence, even though it may be commonly understood that winding up of a company normally commences when the order for winding up is passed by the Court by virtue of the statutory fiction in sub-section (2) of section 441 of the Act, winding up in respect of a company by a Court commence at the time of presentation of the petition for winding up. This statutory fiction has been created with a view to ensure that as soon as a winding up petition is presented to the Court and the Court is seisin of the matter, the Court should be able to pass orders in respect of such company as contemplated under the different provisions of the Act and the Companies (Court) Rules, 1959 even before the winding up order is passed by the Court. Therefore, the Court having jurisdiction to wind up a company can at any time after presentation of the winding up petition pass an order under section 203(1)(b) of the Act.
15. In Pankaj Mehra’s case (supra) cited by Mr. Das, the Supreme Court after referring to the provisions of the Act and in particular sections 441 and 536 thereof, held in para 20 of the judgment at page 1958 as reported in the AIR that it is difficult to lay down that all dispositions of property made by a company during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be null and void because if such a view is taken, the business of the company would be paralysed and the company will not be able to carry on its day-to-day transactions, make payment of salary to the staff and other employees and meet urgent contingencies once a petition for winding up is presented to the Court. These practical consequences will not follow if an order under section 203(1)(b) of the Act is passed in relation to a Director or any other person of a company preventing him from participating in the management of the company whenever he is found by the Court to be guilty of any offence under section 542 of the Act or of any fraud or misfeasance in relation to the company or any breach of his duty to the company because other persons or Directors in the management of the company can continue the day-to-day business of the company even after such an order is passed by the Court under section 203(1)(b) of the Act. Rather, if such a person who is guilty of any offence under section 542 of the Act or of any fraud or misfeasance in relation to the company or any breach of his duty to the company is allowed to continue during the interregnum from the date of presentation of the petition for winding up till the winding up order is passed, the company and its members and creditors are likely to suffer serious prejudice and loss. In Pushpa Wati Puri’s case (supra) cited by Mr. Das, the issue was as to when would the ‘right to apply’ under sections 446(2)(b) and 542 of the Act be said to accrue for the purpose of Article 137 of the Schedule to the Limitation Act, 1963 and the Delhi High Court held on an interpretation of the provisions of the Act and in particular sections 446 and 542 that the right to apply will arise only when the winding up order is passed and not before. The Delhi High Court was not considering in the said case as to what would be the meaning of ‘in course of winding up of a company’ in section 203(1)(b) of the Act.
16. The next issue to be decided in this case is whether the petition under section 203 is liable to be dismissed for non-compliance of the provisions of sub-section (3) of section 203 of the Act. Sub-section (3) of section 203 of the Act provides that a person intending to apply for the making of an order under section 203 shall give not less than ten days’ notice of his intention to the person against whom the order is sought, and at the hearing of the application, such person against whom the order is sought may appear and himself give evidence or call witnesses. The object of this sub-section is to give an opportunity to the person against whom an order is sought under section 203 of the Act to appear, give evidence or call witnesses and no order is passed against such person ex parte. In paragraph 12 of the petition, it is stated that a notice under section 203 of the Act intending action against opposite parties 2 and 3 has been sent on 12-12-2003 by speed post/courier and a copy of the said notice has been annexed as Annexure-P/4. A reading of Annexure-P/4 would show that it is a notice dated 12-12-2003 sent by speed post/courier addressed to opposite parties 2 and 3. In the said notice, the grounds which have been narrated in the petition under section 203 of the Act relating to the increase of authorised share capital and allotment of such increased shares by opposite parties 2 and 3 have been detailed. Xerox copies of the receipts dated 12-12-2003 given by the Department of Post of India and Dolphin Courier showing that notices dated 12-12-2003 have been sent to opposite party No. 2 at their address at Utkal Flour Mills (Rourkela) Pvt. Ltd., Industrial Area, Civil Township, Rourkela, have also been filed along with the rejoinder of the petitioner as Annexure-P/6.
17. In the counter-affidavit and additional counter-affidavit, however, the opposite parties 1, 2 and 3 have disputed the receipt of such notices dated 12-12-2003. According to Mr. Das, the story of dispatch of such notice has been introduced in paragraph 12 of the petition on 27-11-2003 after the petition was filed on 26-10-2003. I need not go into this controversy as to whether or not the notices dated 12-12-2003 have in fact been received by opposite parties 2 and 3 because I am of the view that the petition under section 203 of the Act is not liable to be dismissed for non-compliance of the provisions of sub-section (3) of section 203 of the Act as such a consequence of dismissal of the petition for non-compliance of sub-section (3) of section 203 has not been expressly provided for in section 203 of the Act. As I have held above, the purport of sub-section (3) of section 203 of the Act is to ensure that no ex parte orders are passed against the person against whom an order is sought under section 203 of the Act and in this case, the opposite parties 2 and 3 against whom orders under section 203 of the Act have been sought have appeared in this case, filed their counter-affidavits and documents and had been heard. In the circumstances, the question of dismissing the petition for non-compliance of the provisions of sub-section (3) of section 203 of the Act does not arise.
18. Coming now to the main issue in this case, Article 9 of the Articles of Association of the company is quoted hereinbelow :
"9. In case where the Company decides to increase the capital of the Company by the issue of further shares or by further issue of shares out of unissued authorised capital such shares shall be offered to the members (irrespective of class) and such offer shall be made by notice specifying the number of shares to which the member is entitled and limiting at time within which the offer, if not accepted, will be deemed to be declined and after the expiration of such time or on receipt of an intimation from the member to whom such notice is given that he declines to accept the shares offered, the Directors may dispose of the same in such manner as they think most beneficial to the company."
It is clear from Article 9 of the Articles of Association of the company that where the company decides to increase the capital of the company by issue of further shares, such shares have to be offered to the members and such offers have to be made by notices specifying the number of shares to which the members are entitled. Opposite parties 2 and 3 as the Managing Director and Director of the company, therefore, were under a duty to offer to the members by notices specified number of shares out of the authorised increase share capital of the company but no such offers have been made by notice to the members of the company including the petitioner. Instead, opposite parties 2 and 3 have ensured that the increased authorised share capital of the company have been allotted to themselves, their relatives and their associates so as to enhance their position as majority shareholders and reduce the majority shareholders of the company to a minority.
19. The stand taken by opposite parties 1, 2 and 3 for such increase of share capital of the company and for such allotment of shares to themselves, their relatives and associates is that a dispute arose between the family members in relation to their businesses in early 2000 after which a family settlement was arrived at in the presence of the elders in the family and as per this settlement Shri Sachikanta Routray was required to transfer his shares in the company to opposite party No. 2 and opposite party No. 2 was required to transfer the shares held by him in companies under the control of Shri Sachikanta Routray in favour of Shri Sachikanta Routray and Shri Sachikanta Routray was required to resign from the company and the opposite party No. 2 was required similarly to resign from the companies under the control of Shri Sachikanta Routray. The opposite party No. 2 also agreed to pay a sum of Rs. 45,00,000 (rupees forty-five lakhs) in consideration for such transfer of shares in the company held by Shri Sachikanta Routray as a special gesture as Shri Sachikanta Routray was in need of funds for his company S.K. Exports Pvt. Ltd. In fact, the opposite party No. 2 paid the sum of Rs. 45,00,000 (rupees forty-five lakhs) by way of demand drafts to Shri Sachikanta Routray and Shri Sachikanta Routray and his wife resigned from the Board of Directors of the company. Some blank documents including blank returns were signed by the opposite parties 2 and 3 and handed over to Shri Sachikanta Routray for completing the transfer and filing of necessary returns and transfer of the shares held by Shri Sachikanta Routray in the company to opposite parties 2 and 3, therefore, was just a formality. It is also pleaded in the additional counter-affidavit filed on behalf of the opposite parties 1, 2 and 3 that when there was need to increase the share capital of the company, opposite party No. 2 had meetings with Shri Sachikanta Routray who informed the opposite party No. 2 that as he has severed his interest in the said business, he was not going to contribute to the said business either by equity or in any other manner and the opposite party No. 2 could bring in his own funds in whichever manner he deemed appropriate. Accordingly, the authorised share capital of the company was increased and such increased shares were allotted from time-to-time and no allotment was made in favour of Shri Sachikanta Routray.
20. I am afraid that this plea of family settlement taken by the opposite parties 1 to 3 in the additional counter-affidavit cannot be a good defence for the opposite parties 2 and 3 increasing the authorised share capital and for allotting the shares out of the authorised increased share capital to themselves, their relatives and associates and for not offering the said shares in terms of Article 9 of the Articles of Association to the other members of the company including the petitioner. If, as is alleged in the additional counter-affidavit of the opposite parties 1 to 3, there was a family settlement under which Shri Sachikanta Routray was to transfer the shares under his control in the company to opposite parties 2 and 3, such family settlement could have been given effect to only by complying with the requirements of the Act and the Articles of Association of the company relating to transfer of shares and if Shri Sachikanta Routray and his associates refused to abide by the said family settlement, the remedy of opposite parties 2 and 3 was not to increase the share capitals and allot the increased authorized share capital to themselves and to their relatives and associates and not offer the same to the other members of the company in accordance with Article 9 of the Articles of Association but to move the appropriate Civil Court for relief against Shri Sachikanta Routray and his associates. Though it is mentioned in the additional counter-affidavit that sometimes in August, 2003 the company required further increase of funds for expansion/diversification of its business, no details of such expansion/diversification of the business of the company have been given in the counter-affidavit or the additional counter-affidavit. In the absence of any such details, the Court cannot accept the plea of opposite parties 2 and 3 that there was urgent need to substantially increase the authorised share capital of the company during August, 2003 to November, 2003 from 2.5 crores to 4.25 crores. The substantial increase of the authorised share capital of the company appears to have been made for the purpose of allotting shares to opposite parties 2 and 3 and their relatives and associates so that they could gain absolute control over the affairs of the company. Thus, the primary motive and object of the opposite parties 2 and 3 in increasing the authorised share capital of the company and in allotting the shares out of such increased authorised share capital to themselves, their relatives and associates is to gain control over the company and to reduce the majority shareholders of the company to a minority.
21. In Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77, Peterson, J. relying on the principles as laid down in Fraser v. Whalley [1864] 2 H. & M. 10, and Punt v. Symons & Co. [1903] 2 Ch. 506, held that the power to issue shares in a limited company given to Directors for the purpose of enabling them to raise capital when required for the purpose of company is a fiduciary power to be exercised by them bona fide for the general advantage of the company, and when the company is in no need of further capital, Directors are not entitled to use their power of issuing shares merely for the purpose of maintaining their control, or the control of themselves and their friends, over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders. Following the aforesaid decision in S. Mills & Co. Ltd.’s case (supra), Jonathan Parker, J. In re, Looe Fish Ltd.’s case (supra) held that the allotment of 24,000 shares by Mr. Soady in order to maintain his control of the company was in clear breach of his duty as Director to the company and for this reason, Mr. Soady was disqualified to act as the Director of the company. In the language of Jonathan Parker, J. :
"In my judgment there was a clear breach of duty by Mr. Soady in relation to each allotment;
As to unfitness, I find that in using the power to allot shares in the way he did, Mr. Soady displayed a clear lack of commercial probity. He allowed his concern to keep the Cairns group from obtaining control of the company to lead him to abuse his power as a director to allot shares in the company. It is not enough for him to say that he did what he did in the best interests of LFL as he saw them. A director who chooses deliberately to play fast and loose with his powers as Mr. Soady has done in this case, in order to remain in control of the company’s affairs, is in my judgment unfit to be concerned in the management of a company, and it is expedient in the public interest that a disqualification order be made against him.
I therefore, conclude, on the material before me, that Mr. Soady has been shown to be unfit to be concerned in the management of a company and I propose to make a disqualification order accordingly."
22. In the recent decision in Dale & Carrington Invt. (P.) Ltd.’s case (supra), the Supreme Court after considering the English and Indian decisions on the point has held :
"23. The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld."
23. I, therefore, hold that opposite parties 2 and 3 are guilty, while as the Managing Director and Director of the company, of breach of their duties to the company by substantially increasing the authorised share capital of the company between August, 2003 to November, 2003 from 2.5 crores to 4.25 crores and by allotting the shares out of such increased authorised share capital to themselves, their relatives and associates for the purpose of gaining control of the affairs of the company and I accordingly order that the opposite parties 2 and 3 shall not be Directors of the company for a period of two years.
24. It appears that opposite parties 2 and 3 were the only Directors of the company. This case will be listed for hearing on the point as to who will be in management of the company during these two years.
[1995] 5 SCL 229
(AP)
HIGH
COURT OF ANDHRA PRADESH
v.
Mohd. Azgaruddin
D. REDDEPPA REDDI,
J.
CRL. REVISION CASE
NOS. 660 AND 666 OF 1994
Section 203 of the Companies Act,
1956 - Restraining fraudulent persons from managing companies - Managing
director of a company was sentenced to fine for offences under Factories Act,
1948 - Whether mere conviction of a director or managing director of a company
of any offence in connection with promotion, formation or management is
insufficient to invoke provisions of section 203(1)(a) and same can be invoked
only when conviction is for offence involving fraud - Held, yes - Whether
referring to heading and marginal note to section 203, it could be said that
legislative intent is not to apply provisions against persons convicted of any
offence regardless of its nature and conviction - Held, yes - Whether an act of
fraud is a sine qua non to invoke section 203 -Held, yes
Interpretation of Statutes -
Whether heading and marginal note to a section in a statute can be taken into
account for understanding object and purpose of that section.
FACTS
The
petitioner, managing director of a company, was prosecuted for offences under
the Factories Act and was convicted and sentenced to pay a fine of Rs. 300 on each
count totalling Rs. 1,500 or, in default, to suffer rigorous imprisonment for
one month on each count. Subsequently, a shareholder of the company filed a
petition before a Magistrate under sections 203(1)(a) and 203(2)(a), for
restraining the petitioner from acting as the managing director of the company.
The Magistrate passed an order restraining the petitioner from acting as the
managing director of or taking part in any way either directly or indirectly in
promotion, formation or management of the company for a period of five years.
The petitioner filed a criminal revision petition before the High Court
contending that, in view of the marginal note to section 203, conviction for an
act of fraud is a sine qua non for
invoking the provisions of section 203(1)(a) and that there was no element of
fraud in the offences he was found guilty of
and, therefore, the impugned order was liable to be set aside. The respondent,
however, contended that as the provisions of section 203(1)(a) were clear and
unambiguous, reference to the marginal note of the section was unwarranted.
HELD
Section 203(1) has two clauses (a) and (b), with a
common marginal note reading as:
"Power to restrain fraudulent persons from
managing companies."
Section 542 referred to in clause (b)(i) of section
203(1) deals with the liability of a person for fraudulent conduct of business
in the course of winding up of a company. The first limb of clause (b)(ii) also
deals with a person who has been guilty of any fraud in the course of winding
up of a company. Therefore, there cannot be any dispute that commission of
fraud or conviction for any offence involving fraud is essential to attract the
provisions of clause (b)(i)
and first limb of clause (b)(ii)
of section 203(1). To this extent, the
marginal note and the provisions of the section go together. Thus, the
controversy whether the marginal note to the section can be referred to for the
purpose of construing the provisions of the section is confined to clause (a)
where a person is convicted of any offence in connection with the promotion,
formation or management of a company and the second limb of clause (b)(ii)
where a person has been guilty of any misfeasance in relation to the company or
any breach of his duty to the company in the course of its winding up.
The decision of the Supreme Court in K.P. Varghese v. ITO AIR 1981 SC 1922 makes it manifestly clear
that the marginal note can be relied upon to understand the object and purpose
of the section. Well recognised principles of interpretation of statutes also
reiterate that the object and purpose of a statutory provision should be given
due weight.
Again, Part VI deals with management and
administration of companies. It contains eight Chapters. Sections 202 and 203
fall in Chapter I of Part TV which deals with general provisions. The heading
to sections 202 and 203 reads :
"Prevention of management by undesirable
persons"
To a large extent, this heading provides the clue
to the purpose and object of these two sections. It is fairly well settled that
the headings and titles prefixed to sections can be referred to in construing
an Act of Legislature. It can not be denied that a director or managing
director of a company may have multifarious statutory obligations the breach of
which may render them liable for criminal prosecution. It may not be possible
for them to escape prosecution in one form or the other. Sometimes, it may result in their conviction for
some trivial offence. The questions to be considered are whether it can be a
ground for their disqualification by virtue of clause (a) of sub-section (1) of
section 203, and whether it is the intention of the Legislature to subject them
to such disqualification.
The
heading prefixed to the section and its marginal note provide ample guidance to
arrive at the right answer to these questions. As already noticed, there is no
bar to refer to the heading to the section and the marginal note of the section
for the purpose of construing its provisions. It is also not impermissible to
add words "where an alternative lies between either supplying by
implication words which appear to have been accidentally omitted, or adopting a
construction which deprives certain existing words of all meaning...
"(Craies: Statute Law, 7th Edition, p. 109)
Viewed
in the foregoing perspective, it is reasonable to construe that the legislative
intention could not have been to apply the subject provisions against persons
convicted of any offence, regardless of its nature. Any other interpretation
would land the administration and management of companies in jeopardy.
Therefore, mere conviction of a director or managing director of a company of
any offence in connection with the promotion, formation or management of a
company, is not sufficient to invoke the provisions of clause (a) of
sub-section (1) of section 203. In other words, the said clause can be invoked
only when the conviction is for an offence involving fraud.
There
was no dispute that the petitioner was found guilty of the offences under the
Factories Act. But it was not the case of the first respondent, nor was it
pleaded either before the Magistrate or before the High Court, that there was
any element of fraud in the offences the petitioner was found guilty of.
Therefore, the impugned orders were liable to be set aside.
Even
otherwise, assuming that mere conviction of a director or managing director of
a company of any offence, regardless of its nature, is sufficient to invoke the
provisions of clause (a) of sub-section (1) of section 203, it is not mandatory
that they should be restrained from taking part in the promotion, formation or
management of a company. The Court has the discretion, having regard to the
facts and circumstances of each case, to pass an appropriate order. It is open
to the Court to hold that it is not necessary to restrain them from taking part
in management of the company, or it may pass an order restraining them from
acting as such for such period, which it considered just and proper. But, in
the instant case, it was apparent that the Magistrate had proceeded as if he
had no option in the matter.
The
offences for which the petitioner was found guilty of were of a technical
nature, and conviction for such offences did not warrant an order restraining
the petitioner from taking part in the promotion, formation
or management of the company for any period, much less for a period of five
years. Thus, viewed from any angle, the impugned order could not be sustained.
For the foregoing reasons, the revision was allowed
and the impugned order was set aside.
CASES REFERRED TO
K.P. Varghese v. ITO AIR 1981 SC 1922, Directorate
of Enforcement v. Deepak
Mahajan AIR 1994 SC 1775 and Bhinka
v. Charan Singh AIR 1959
SC 960.
S.
Ravi for the Petitioner. C. Padmanabha Reddy and T. Anil Kumar for the Respondent.
ORDER
1
The principal
question of law which is of some general importance that arises for
consideration in these two revision cases is : Whether, the conviction of a
Director or Managing Director of a company, incorporated under the Companies
Act, 1956 ('the Act'), of any offence, regardless of its nature, in connection
with the promotion, formation or management of a company could form basis to
restrain him from taking part in the management of the company by virtue of
clause (a) of sub-section (1)
of section 203 of the Act. It arises thus: The petitioner herein is the
Managing Director of Kohinoor Cement Ltd. ('the company'). He was prosecuted on
a complaint filed by the Assistant Inspector of Factories, Nalgonda, in S.T.C.
No. 30 of 1994 for offences under section 7A read with sections 41 and 61,
21(1)(iv)(a) and 31 read with section 54 of the Factories Act, 1948 and S.T.C.
No. 31 of 1994 for offences under section 47 read with sections 72 and 41 of
the Factories Act on the file of the Judicial Magistrate of First Class,
Huzurnagar. On his plea of guilty, he was convicted and sentenced to pay a fine
of Rs. 300 in default to suffer rigorous imprisonment for one month on each
count (total fine Rs. 900) in STC No. 30 of 1994 and Rs. 300 in default to suffer
rigorous imprisonment for one month on each count (total fine Rs. 600) in
S.T.C. No. 31 of 1994 by separate orders dated 27-4-1994. Some time thereafter,
the first respondent herein, a shareholder of the company filed Crl. M.P. Nos.
1390 and 1391 of 1994 in S.T.C. Nos. 31 and 30 of 1994 respectively under
sections 203(1)(a) and 203(2)(a) for restraining the petitioner from acting as
the Managing Director of the company, etc. Thereupon, the learned Magistrate
passed the impugned orders restraining the petitioner from acting as the
managing director of, or taking part in any way either directly or indirectly
in promotion, formation or management of the company for a period of five
years.
2. On the applicability of the
provisions of section 203(1)(a) to
the cases on hand, the learned counsel appearing for the petitioner as well as
the first respondent reiterate the respective submissions made before the
learned Magistrate. It is contended on behalf of the petitioner that conviction
for an act of fraud is a sine qua non for
invoking the provisions of section 203(1)(a) in view of marginal note to the
section. There is no element of fraud in the offences the petitioner was found
guilty and, therefore, the impugned orders are liable to be set aside. In
opposition, it is contended for the first respondent that the marginal note
shall not be taken note of when the provisions of the section are clear and
unambiguous. His learned counsel maintains that the provisions of section 203(1)(a) are clear and unambiguous and,
therefore, reference to marginal note of the section is unwarranted.
To
have better appreciation of the above contentions, it is necessary to refer to
the provisions of section 203(1). It has two clauses, (a) and (b), with
a common marginal note reading as:
"Power
to restrain fraudulent persons from managing companies."—
Clauses
(a) and (b) read as under:
"(1)
Where—
(a) a person is convicted of any offence in
connection with the promotion, formation or management of a company; or
(b) in
the course of winding up a company it appears that a person—
(i) has been guilty of any offence
for which he is punishable (whether he has been convicted or not) under section
542; or
(ii) has otherwise been guilty, while
an officer of the company, of any fraud or misfeasance in relation to the
company or of any breach of his duty to the company;
the Court may make an order
that that person shall not, without the leave of the Court, be a director of,
or in any way, whether directly or indirectly, be concerned or take part in the
promotion, formation or management of a company, for such period not exceeding
five years as may be specified in the order."
Section
542 referred to in clause (b)(i) deals
with the liability of a person for fraudulent conduct of business in the course
of winding up of a company. The first limb of clause (b)(ii) also deals with a person who has been guilty of any
fraud in the course of winding up of a company. Therefore, there cannot be any
dispute that commission of fraud or conviction for any offence involving fraud
is essential to attract the provisions of clause (b)(i) and first limb of clause (b)(ii) of section 203(1). To this extent, the marginal note and
the provisions of the section go together. Thus, the controversy whether the
marginal note to the section can be referred to for the purpose of construing
the provisions of the section is confined to clause (a) where a person is convicted of any offence in connection
with the promotion, formation or management of a
company and second limb of clause (b)(ii)
where a person has been guilty of any misfeasance in relation to the
company or any breach of his duty to the company in the course of its winding
up.
Though the Act is nearly four
decades old, it is reported by the learned counsel on either side that despite
thorough investigation they could find no direct decision on the point at
issue. They also reported that they could not lay their hands on any useful
commentary or decisions by English Courts on section 188 of the Companies Act,
1948 (U.K.), which reads almost identical to section 203 of the Act. My
attempt, in this regard also proved futile. However, there is no dearth of
judgment law on the subject, which I shall, presently, refer to.
3. It is interesting
to note that both the learned counsels place strong reliance on different
observations found in paragraph 9 of the decision in K.P. Varghesev. ITO AIR 1981 SC 1922. While the learned
counsel for the first respondent lays emphasis on the observation:
"........It is
undoubtedly true that the marginal note to a section cannot be referred to for
the purpose of construing the section... It cannot control the interpretation
of the words of a section particularly when the language of the section is
clear and unambiguous....” (p. 1931)
to drive home his point
that marginal note cannot be referred to, the learned counsel for the
petitioner lays equal emphasis on the observation:
".........it [marginal
note] can certainly be relied upon as indicating the drift of the section or,
to use the words of Collins MR in Bushell
v. Hammond [1904] 2 KB 563, to show what the section is dealing with...
being part of the statute, it [marginal note] prima facie furnishes some clue as to the meaning and purpose of
the section...." (p. 1931)
to sustain his submission
that conviction for an act of fraud is a necessary condition for invoking the
provisions of section 203(1)(a).
4. It is not only
necessary but also desirable to understand the above observations with
reference to facts of that case and the context in which they have been made.
The facts of that case are: An income-tax assessee, who was the owner of house
situated in Ernakulam, which he had purchased in 1958 for a consideration of
Rs. 16,500 sold the same to his daughter-in-law and five of his children for
the same consideration of Rs. 16,500 on 25-12-1965. The question that arose for
consideration was whether the marginal note to section 52 of the Income-tax
Act, 1961, read as "Consideration for transfer in cases of
understatement," could be referred while construing the provisions of
section 52(2), which read as under:
"(2) Without prejudice
to the provisions of sub-section (1), if in the opinion of the Income-tax
Officer the fair market value of a capital asset transferred by an assessee as
on the date of the transfer exceeds the full value of the consideration
declared by the assessee in respect of the' transfer of such capital asset by
an amount of not less than fifteen per cent of the value so declared, the full
value of the consideration for such capital asset shall, with the previous
approval of the Inspecting Assistant Commissioner, be taken to be its fair
market value on the date of its transfer."
It is significant to note
that in the body of the section there was no reference to understatement of
consideration in respect of the transfer. On that basis, it was contended by
the revenue that the marginal note should not be read into the provisions of
the sub-section. Bhagwati J. (as he then was) speaking for the Court, after
elaborate discussion on various aspects, while rejecting the contention of the
revenue concluded as under:
"18. We must therefore
hold that sub-section (2) of section 52 can be invoked only where the
consideration for the transfer has been understated by the assessee or in other
words, the consideration actually received by the assessee is more than what is
declared or disclosed by him and the burden of proving such understatement or
concealment is on the revenue...." (p. 1936)
This conclusion makes it
manifestly clear that the marginal note can be relied upon to understand the
object and purpose of the section.
5. Well recognised
principles of interpretation of statutes also reiterate that the object and
purpose of a statutory provision should be given due weight. In this context,
it is worth-quoting the following illuminating observations of Bhagwati J., in K.P. Varghese's case (supra):
"..........The task of interpretation of a statutory enactment is not a
mechanical task. It is more than a mere reading of mathematical formulae
because few words possess the precision of mathematical symbols. It is an
attempt to discover the intent of the Legislature from the language used by it
and it must always be remembered that language is at best an imperfect
instrument for the expression of human thought and as pointed out by Lord
Denning, it would be idle to expect every statutory provision to be 'drafted
with divine prescience and perfect clarity'. We can do no better than repeat
the famous words of Judge Learned Hand when he said:
'……..it is true that the
words used, even in their literal sense, are the primary and ordinarily the
most reliable source of interpreting the meaning of any writing: be it a
statute, a contract or anything else. But it is one of the surest indexes of a
mature and developed jurisprudence not to make a fortress out of the
dictionary; but to remember that statutes always have some purpose or object to
accomplish, whose sympathetic and imaginative discovery is the surest guide to
their meaning'....
6. It is a well recognised
rule of construction that a statutory provision must be so construed, if
possible, that absurdity and mischief may be avoided. There are many situations
where the construction suggested on behalf of the revenue would lead to wholly unreasonable
result which would never have been intended by the Legislature...." (p.
1927)
6. Same is the view of the Supreme
Court in Directorate of Enforcement v.
Deepak Mahajan AIR 1994 SC
1775. Therein, Ratnavel Pandian, J., after an exhaustive survey of law on
interpretation of statutes observed:
"32.
True, normally Courts should be slow to pronounce the Legislature to have been
mistaken in its constantly manifested opinion upon a matter resting wholly
within its will and take its plain ordinary grammatical meaning of the words of
the enactment as affording the best guide, but to winch up the legislative
intent, it is permissible for Courts to take into account of the ostensible
purpose and object and the real legislative intent. Otherwise, a bare
mechanical interpretation of the words and application of the legislative
intent devoid of concept of purpose and object will render the Legislature
inane...." (p. 1785)
In
the light of the above principles, let us examine the point set for
consideration. Part VI of the Act deals with Management and Administration of
Companies. It contains eight Chapters. Sections 202 and 203 are in Chapter I,
which deals with general provisions. At this juncture, it would be appropriate
to refer to the heading to sections 202 and 203. It reads thus:
"Prevention
of management by undesirable persons"
To
a large extent, this heading provides clue to the purpose and object of these
two sections. It is fairly well settled that the "headings and titles
prefixed to sections can be referred to in construing the act of
Legislature". - Principles of
Statutory Interpretation by G.P. Singh, Second Edition at page 97. In Bhinka v. Charan Singh AIR 1959 SC 960, Subba Rao J., as he then was,
quoting with approval the following passage from Maxwell on Interpretation of Statutes, 10th Edition at page 50:
"..........The
headings prefixed to sections or sets of sections in some modern statutes are
regarded as preambles to those sections. They cannot control the plain words of
the statute but they may explain ambiguous words."
observed
as under :
"...
If there is any doubt in the interpretation of the words in the section, the
heading certainly helps us to resolve that doubt...."
7. It cannot be denied that a
Director or Managing Director of a company may have multifarious statutory
obligations the breach of which may render them liable for criminal
prosecution. It may not be possible for them to escape prosecution in one form
or the other. Sometimes, it may result in their conviction for some trivial
offence. Could it be a ground for their disqualification by virtue of clause (a) of sub-section (1) of section 203
Is it the intention of the Legislature to subject them to such disqualification
? The heading prefixed to the section and its marginal note provide ample
guidance to arrive at the right answer to these questions.
As already noticed, there is no bar to refer to the heading to the section and
the marginal note of the section for the purpose of construing its provisions.
It is also not impermissible to add words "where an alternative lies
between either supplying by implication words which appear to have been
accidentally omitted, or adopting a construction which deprives certain existing
words of all meaning…………." (Craies: Statute
Law, 7th Edition, p. 109).
Viewed from the above
perspective, it is reasonable to construe that the legislative intention could
not have been to apply the subject provisions against persons convicted of any
offence, regardless of its nature. Any other interpretation, I am sure, would
land the administration and management of companies in jeopardy. Therefore, I
hold that mere conviction of a Director or Managing Director of a company of
any offence in connection with the promotion, formation or management of a
company, is not sufficient to invoke the provisions of clause (a) of
sub-section (1) of section 203. In other words, the said clause could be
invoked only when the conviction is for an offence involving fraud.
8. There is no dispute
that the petitioner was found guilty of the offences under the Factories Act.
But, it is not the case of the first respondent nor was it pleaded either
before the learned Magistrate or before me that there is any element of fraud
in the offences the petitioner was found guilty. Therefore, the impugned orders
are liable to be set aside.
Even otherwise, that is,
assuming that mere conviction of a Director or Managing Director of a company
of any offence, regardless of its nature, is sufficient to invoke the
provisions of clause (a) of
sub-section (1) of section 203, it is not mandatory that they should be
restrained from taking part in the promotion, formation or management of a
company. The Court has the discretion, having regard to the facts and
circumstances of each case, to pass an appropriate order. It is open to the
Court to hold that it is not necessary to restrain them from taking part in the
management of the company. Or, it may pass an order restraining them from
acting as such for such period, which it considers just and proper. But, in the
present case, it is apparent that the learned Magistrate has proceeded as if he
had no opinion in the matter.
9. Shri Padmanabha
Reddy, the learned counsel for the first respondent strenuously contends that
the Court has no option but to disqualify the petitioner. He also contends that
the period of disqualification (five years) is just and proper on the facts and
circumstances of the case. I am unable to agree. The offences for which the petitioner
was found guilty are of technical nature. I am of the firm view that conviction
for such offences does not warrant an order restraining the petitioner from
taking part in the promotion, formation or management of the company, for any
period, much less for a period of five years. Thus, viewed from any angle, the
impugned orders cannot be sustained.
10. For the aforesaid
reasons, the impugned orders are set aside and the revisions are allowed.
[1998] 93 COMP. CAS. 609 (AP)
v.
Mohd. Azgaruddin
D.
REDDEPPA REDDI J.
CRIMINAL
REVISION CASE NOS. 660 AND 666 OF 1994 AND CRIMINAL REVISION PETITION NOS. 650
AND 665 OF 1994.
S. Ravi for the Petitioner.
C. Padmanabha Reddy and T. Anil Kumar for the respondent.
D.
Reddeppa Reddi, J.—The
principal question of law which is of some general importance that arises for
consideration in these two revision cases is: Whether the conviction of a
director or managing director of a company, incorporated under the Companies
Act, 1956 (for short "the Act"), of any offence, regardless of its
nature, in connection with the promotion, formation or management of a company
could form the basis to restrain him from taking part in the management of the
company by virtue of clause (a) of sub-section (1) of section 203 of the Act.
It arises thus: The petitioner herein is the managing director of Kohinoor
Cement Limited (for short "the company"). He was prosecuted on a
complaint filed by the Assistant Inspector of Factories, Nalgonda, in S.T.C.
No. 30 of 1994, for offences under section 7A read with sections 41 and 61,
21(1)(iv)(a) and 31 read with section 54 of the Factories Act, 1948, and S.T.C.
No. 31 of 1994, for offences under section 47 read with sections 72 and 41 of
the Factories Act, 1948, on the file of the Judicial Magistrate of the First
Class, Huzurnagar. On his plea of guilty, he was convicted and sentenced to pay
a fine of Rs. 300 in default to suffer rigorous imprisonment for one month on
each count (total fine Rs. 900) in S. T. C. No. 30 of 1994, and Rs. 300 in
default to suffer rigorous imprisonment for one month on each count (total fine
Rs. 600) in S.T.C. No. 31 of 1994, by separate orders dated April 27, 1994.
Some time thereafter, the first respondent herein, a shareholder of the
company, filed Crl. M.P. Nos. 1390 and 1391 of 1994, in S.T.C. Nos. 31 and 30
of 1994, respectively, under sections 203(1)(a) and 203(2)(a) of the Act for
restraining the petitioner from acting as the managing director of the company,
etc. Thereupon, the learned magistrate passed the impugned orders restraining
the petitioner from acting as the managing director of, or taking part in any
way either directly or indirectly in the promotion, formation or management of the
company for a period of five years.
On
the applicability of the provisions of section 203(1)(a) of the Act to the
cases on hand, learned counsel appearing for the petitioner as well as the
first respondent reiterate the respective submissions made before the learned
magistrate. It is contended on behalf of the petitioner that conviction for an
act of fraud is a sine qua non for invoking the provisions of section 203(1)(a)
in view of the marginal note to the section. There is no element of fraud in
the offences of which the petitioner was found guilty and, therefore, the
impugned orders are liable to be set aside. In opposition, it is contended for
the first respondent that the marginal note shall not be taken note of when the
provisions of the section are clear and unambiguous. His learned counsel
maintains that the provisions of section 203(1)(a) are clear and unambiguous
and, therefore, reference to the marginal note to the section is unwarranted.
To
have better appreciation of the above contentions, it is necessary to refer to
the provisions of section 203(1) of the Act. It has two clauses-(a) and (b),
with a common marginal note reading:
"Power to restrain fraudulent persons from
managing companies—".
Clauses
(a) and (b) read as under:
"(1)
Where-
(a) a
person is convicted of any offence in connection with the pro motion, formation
or management of a company; or
(b) in the course of winding up a company it
appears that a person—
(i) has been guilty of any offence for
which he is punishable (whether he has been convicted or not) under section
542; or
(ii) has otherwise been guilty, while an
officer of the company, of any fraud or misfeasance in relation to the company
or of any breach of his duty to the company;
the court may make an order that the
person shall not, without the leave of the court, be a director of, or in any
way, whether directly or indirectly, be concerned or take part in the
promotion, formation or management of a company, for such period not exceeding
five years as may be specified in the order."
Section
542 referred to in clause (b)(i) deals with the liability of a person for
fraudulent conduct of business in the course of winding up of a company. The
first limb of clause (b)(ii) also deals with a person who has been guilty of
any fraud in the course of winding up of a company. Therefore, there cannot be
any dispute that commission of fraud or conviction for any offence involving
fraud is essential to attract the provisions of clause (b)(i) and the first
limb of clause (b)(ii) of section 203(1) of the Act. To this extent, the
marginal note and the provisions of the section go together. Thus, the
controversy whether the marginal note to the section can be referred to for the
purpose of construing the provisions of the section is confined to clause (a)
where a person is convicted of any offence in connection with the promotion,
formation or management of a company and the second limb of clause (b)(ii)
where a person has been guilty of any misfeasance in relation to the company or
any breach of his duty to the company in the course of its winding up.
Though
the Act is nearly four decades old, it is reported by learned counsel on either
side that despite thorough investigation they could find no direct decision on
the point at issue. They also reported that they could not lay their hands on
any useful commentary or decisions by the English courts on section 188 of the
Companies Act, 1948 (U.K.), which reads almost identical to section 203 of the
Act. My attempt, in this regard also proved futile. However, there is no dearth
of judgment law on the subject, which I shall, presently, refer to.
It
is interesting to note that both learned counsel place strong reliance on
different observations found in paragraph 9 of the decision in K.P. Varghese v. ITO [1981] 131 ITR 597, 609; AIR 1981
SC 1922. While learned counsel for the first respondent lays emphasis on the
observation:
"It
is undoubtedly true that the marginal note to a section cannot be referred to
for the purpose of construing the section....It cannot control the
interpretation of the words of a section particularly when the language of the
section is clear and unambiguous..." (para. 9)
to
drive home his point that the marginal note cannot be referred to, learned
counsel for the petitioner lays equal emphasis on the observation....
"....it
(marginal note) can certainly be relied upon as indicating the drift of the
section or, to use the words of Collins MR in Bushell v. Hammond [1904]
2 KB 563 (CA), to show what the section is dealing with...being part of the
statute, it (marginal note) prima
facie furnishes some clue as to the meaning and purpose of the
section..."(para. 9)
to
sustain his submission that conviction for an act of fraud is a necessary
condition for invoking the provisions of section 203(1)(a).
It
is not only necessary but also desirable to understand the above observations
with reference to the facts of that case and the context in which they have
been made. The facts of that case are: An income-tax assessee, who was the
owner of a house situated in Ernakulam, which he had purchased in 1958 for a
consideration of Rs. 16,500 sold the same to his daughter-in-law and five of
his children for the same consideration of Rs. 16,500 on December 25, 1965. The
question that arose for consideration was whether the marginal note to section
52 of the Income-tax Act, 1961, read as "consideration for transfer in
cases of understatement", could be referred to while construing the
provisions of section 52(2), which read as under:
"(2)
Without prejudice to the provisions of sub-section (1), if in the opinion of
the Income-tax Officer the fair market value of a capital asset transferred by
an assessee as on the date of the transfer exceeds the full value of the
consideration declared by the assessee in respect of the transfer of such
capital asset by an amount of not less than fifteen per cent. of the value
declared, the full value of the consideration for such capital asset shall,
with the previous approval of the Inspecting Assistant Commissioner, be taken
to be its fair market value on the date of its transfer."
It
is significant to note that in the body of the section there was no reference
to understatement of consideration in respect of the transfer. On that basis, it
was contended by the Revenue that the marginal note should not be read into the
provisions of the sub-section. P.N. Bhagwati, J., (as he then was) speaking for
the court, after elaborate discussion on various aspects, while rejecting the
contention of the Revenue concluded as under (page 618 of 131 ITR):
"We
must therefore hold that sub-section (2) of section 52 can be invoked only
where the consideration for the transfer has been understated by the assessee
or, in other words, the consideration actually received by the assessee is more
than what is declared or disclosed by him and the burden of proving such an
understatement or concealment is on the Revenue..." (para. 18).
This
conclusion makes it manifestly clear that the marginal note can be relied upon
to understand the object and purpose of the section.
Well-recognised
principles of interpretation of statutes also reiterate that the object and
purpose of a statutory provision should be given due weight. In this context, it
is worth quoting the following illuminating observations of Bhagwati, J., in K.P. Varghese v. ITO [1981] 131 ITR 597, 604 (SC):
"The
task of interpretation of a statutory enactment is not a mechanical task. It is
more than a mere reading of mathematical formulae because few words possess the
precision of mathematical symbols. It is an attempt to discover the intent of
the Legislature from the language used by it and it must always be remembered
that language is at best an imperfect instrument for the expression of human
thought and, as pointed out by Lord Denning, it would be idle to expect every
statutory provision to be 'drafted with divine prescience and perfect clarity'.
We can do no better than repeat the famous words of Judge Learned Hand when he said:
'....it
is true that the words used, even in their literal sense, are the primary and
ordinarily the most reliable source of interpreting the meaning of any writing:
be it a statute, a contract or anything else. But it is one of the surest
indexes of a mature and developed jurisprudence not to make a fortress out of
the dictionary; but to remember that statutes always have some purpose or
object to accomplish, whose sympathetic and imaginative discovery is the surest
guide to their meaning'.
It
is a well-recognised rule of construction that a statutory provision must be so
construed, if possible, that absurdity and mischief may be avoided. There are
many situations where the construction suggested on behalf of the Revenue would
lead to a wholly unreasonable result which would never have been intended by
the Legislature..."
The
same is the view of the Supreme Court in Directorate
of Enforcement v. Deepak
Mahajan [1994] 82 Comp Cas 103, 117; AIR 1994 SC 1775. Therein, Ratnavel
Pandian J., after an exhaustive survey of the law on interpretation of
statutes, observed:
"True,
normally courts should be slow to pronounce the Legislature to have been
mistaken in its constantly manifested opinion upon a matter resting wholly
within its will and take its plain ordinary grammatical meaning of the words of
the enactment as affording the best guide, but to winch up the legislative
intent, it is permissible for courts to take into account the ostensible
purpose and object and the real legislative intent. Otherwise, a bare
mechanical interpretation of the words and application of the legislative
intent devoid of concept of purpose and object will render the Legislature
inane...."
In
the light of the above principles, let us examine the point set for
consideration. Part VI of the Act deals with management and administration of
companies. It contains eight chapters. Sections 202 and 203 are in Chapter I,
which deals with general provisions. At this juncture, it would be appropriate
to refer to the heading of sections 202 and 203 of the Act. It reads thus:
"Prevention of management by undesirable
persons."
To
a large extent, this heading provides a clue to the purpose and object of these
two sections. It is fairly well settled that the "headings and titles
prefixed to sections can be referred to in construing an Act of the
Legislature". (Principles of
Statutory Interpretation by G.P. Singh, 2nd Edition at page 97). In Bhinka v. Charan Singh, AIR 1959 SC 960, 966, Subba Rao J., as he then
was, quoting with approval the following passage from Maxwell on the Interpretation of Statutes, 10th Edition at page
50:
"The
headings prefixed to sections or sets of sections in some modern statutes are
regarded as preambles to those sections. They cannot control the plain words of
the statute but they may explain ambiguous words."
observed
as under:
"If
there is any doubt in the interpretation of the words in the section, the
heading certainly helps us to resolve that doubt...."
It
cannot be denied that a director or managing director of a company may have
multifarious statutory obligations the breach of which may render them liable
for criminal prosecution. It may not be possible for them to escape prosecution
in one form or the other. Sometimes, it may result in their conviction for some
trivial offence. Could it be a ground for their disqualification by virtue of
clause (a) of sub-section (1) of section 203? Is it the intention of the
Legislature to subject them to such disqualification? The heading prefixed to
the section and its marginal note provide ample guidance to arrive at the right
answer to these questions. As already noticed, there is no bar to refer to the
heading to the section and the marginal note of the section for the purpose of
construing its provisions. It is also not impermissible to add the words
"when an alternative lies between either supplying by implication words
which appear to have been accidentally omitted, or adopting a construction
which deprives certain existing words of all meaning..." (Craies: Statute Law, 7th Edition, page 109).
Viewed
from the above perspective, it is reasonable to construe that the legislative
intention could not have been to apply the subject provisions against persons
convicted of any offence, regardless of its nature. Any other interpretation, I
am sure, would land the administration and management of companies in jeopardy.
Therefore, I hold that mere conviction of a director or managing director of a
company of any offence in connection with the promotion, formation or
management of a company is not sufficient to invoke the provisions of clause
(a) of sub-section (1) of section 203 of the Act. In other words, the said
clause could be invoked only when the conviction is for an offence involving
fraud.
There
is no dispute that the petitioner was found guilty of the offences under the
Factories Act, 1948. But, it is not the case of the first respondent nor was it
pleaded either before the learned magistrate or before me that there is any
element of fraud in the offences of which the petitioner was found guilty.
Therefore, the impugned orders are liable to be set aside.
Even
otherwise, that is, assuming that mere conviction of a director or managing
director of a company of any offence, regardless of its nature, is sufficient
to invoke the provisions of clause (a) of sub-section (1) of section 203, it is
not mandatory that they should be restrained from taking part in the promotion,
formation or management of a company. The court has the discretion, having
regard to the facts and circumstances of each case, to pass an appropriate
order. It is open to the court to hold that it is not necessary to restrain
them from taking part in the management of the company. Or, it may pass an
order restraining them from acting as such for such period, which it considers
just and proper. But, in the present case, it is apparent that the learned
magistrate has proceeded as if he had no option in the matter.
Sri
Padmanabha Reddy, learned counsel for the first respondent, strenuously
contends that the court has no option but to disqualify the petitioner. He also
contends that the period of disqualification (five years) is just and proper in
the facts and circumstances of the case. I am unable to agree. The offences of
which the petitioner was found guilty are of technical nature. I am of the view
that conviction for such offences does not warrant an order restraining the
petitioner from taking part in the promotion, formation or management of the
company, for any period, much less for a period of five years. Thus, viewed from
any angle, the impugned orders cannot be sustained.
For the aforesaid reasons, the impugned orders are set aside and the revisions are allowed.
Sections 205 to 208
Dividends
[1956]
26 COMP. CAS. 357 (BOM.)
V.
Commissioner Of Income-tax,
Bombay North, Cutch And Surashtra
CHALA,
C.J.
TENDOLKAR,
J.
FEBRUARY
22, 1956
CHAGLA, C.J.-The facts giving rise to this reference are
rather unusual and because they are unusual the question that we have to answer
seems to be little difficult. The assessees were shareholders of the Navjivan
Mills and the Navjivan Mills had invested its profits in the purchase of 5,000
shares of the Bank of India. On 25th May, 1948, the Bank of India offered to
its shareholders one share for every three shares held, on payment of Rs. 100
per share, and the directors of the Navjivan Mills passed a resolution that
they would invest the funds of the company in the purchase of 66 shares out of
1,666 shares to which they were entitled and the right to the remaining 1,600
shares was distributed among the 800 shareholders of the company in the
proportion of right to two shares of the bank for one ordinary share held in
the company. The assessees between them held 570 shares of these mills and the
assessees requested the mills to renounce their right with regard to 1,140
shares to which they were entitled in favour of Jesingbhai Investment Co., and
the question that arose for decision by the Tribunal was whether the assessees
were liable to tax on the right acquired by them to the shares of the Bank of
India, on the basis that that right constituted dividend for the purpose of the
Indian Income-tax Act.
There are
certain important facts to which attention must be drawn. It is found as a fact
that this right which a shareholder of the Bank of India acquired to obtain one
share for three shares had a market value and that market value was Rs. 100 per
share. It was therefore open to the Navjivan Mills to sell this right and
obtain for it a cash consideration. Therefore, it is clear that what the
Navjivan Mills were disposing of was an asset of the mills, an asset which the
mills had acquired by reason of its holding 5,000 shares of the Bank of India,
an asset which was a valuable asset and had a cash equivalent value.
It may be
accepted as a general proposition that when a shareholder of a company, by
reason of his being a shareholder and by virtue of being a shareholder,
receives a part of the assets belonging to the company of which he is a
shareholder, or part of the funds of the company of which he is a shareholder,
he can only receive it in one of two capacities. He either receives it as
income, the asset or the fund coming to him from the company out of profits
made by the company, in which case the income in the hands of the shareholder
is dividend which he has received from the company. A shareholder may also
receive part of the asset or the funds in another capacity. The company of
which he is a shareholder may decide to increase the capital or it may decide
to capitalize its accumulated profits, and instead of distributing these
profits it may issue to its shareholders bonus shares or a right to receive
fresh shares for payment of a certain consideration. In that case the
shareholder does not receive a dividend from the company but he receives a
right to participate in the additional capital raised by the company. In this
case it cannot be disputed that the right which the mills acquired did not
constitute a part of its capital. Whether the right remained unrealised or was
realised, it could only constitute its income or its profits in contradiction
to the subscribed capital. A very important consequence follows from this that
it was open and competent to the mills to distribute either this right or the
proceeds of this right as dividend. In law there is prohibition against any
company distributing its capital as dividend, but the law permits a company to
distribute its income or its profits, which does not form part of this capital,
as dividend.
The question
that has been agitated at the bar and which we have to consider is whether the
receipt by a shareholder, by reason of the fact that he is a shareholder, of
part of the profits of the company distributed pro rata among all the
shareholders, can be considered to be dividend for the purpose of the taxing
law although the formalities required by the Companies Act for the distribution
of dividend has not been complied with. Mr. Palkhivala is perfectly right when
he says that from the point of view of company law the resolution of the
directors cannot possibly be looked upon as a declaration of dividend. It is
well established and the law is quite clear that a dividend can only be
declared by the shareholders of the company. The only right that the directors
have is to recommend a dividend to the meeting of the shareholders.
In this case
there is neither a formal recommendation by the directors that a dividend
should be paid, nor is there any acceptance, formal or otherwise, by the
company of that recommendation. But would it be true to say that because the
company has not complied with the procedure required for the declaration of
dividend under the Companies Act, it is competent to a shareholder who was
received a part of the profit from the company distributed among all the
shareholders to tell the taxing authorities that he is not liable to pay tax on
that income as dividend because his company has failed to carry out the
formalities and the procedure required by law? In our opinion, if the true
nature of the transaction which we must consider is the receipt by the
shareholder of dividend in the sense of his receiving a part of the profits of
the company, then he is liable to tax on that income as dividend,
notwithstanding the failure of the company to comply with the necessary
procedure. The failure of the company to comply with the procedure may entail
serious consequences as far as the company is concerned. It may render the
directors liable to misfeasance proceedings; it may even render the shareholder
liable to refund the income that he has received. But those are considerations
with which we are not concerned. The only question that we have to consider is
that when in the year of account of which he is a shareholder and that receipt
is not attributable to the capital of the company in the sense that the capital
is increased, then is or is not the shareholder liable to pay tax in that year
on that income as dividend. If we are right in the view that we take, apart
from authorities which we will presently consider, then there cannot be the
slightest doubt in this case as to the true nature of the transaction.
In this case
the directors could have gone to the market, cashed their rights, obtained the
money, and recommended to the general body of the shareholders that that
particular amount should be distributed among the shareholders as dividend and
the general body would have had the authority to sanction the recommendation
made by th directors.
What the
directors have done-and that is the shape that the transaction has taken-is
that instead of going through that formality they have passed a resolution
transferring this right to the shareholders and stopped at that. Can the mere
fact that a particular transaction takes a particular shape defeat the right of
the taxing authority to claim tax when according to the true nature of the
transaction the assessee is liable on the receipt obtained by him as a result
of that transaction? This is not a case where the directors would have been
prevented from recommending this particular amount to be distributed as
dividend, or the general meeting of the company would have been prevented from
doing so. Instead of going through that formality which the directors and the
general body could have gone through, the directors adopted a device by which
it could be said technically and formally that there was no declaration of
dividend. Can that technicality and that want of formality come in the way of
our considering the true nature of the transaction? In our opinion, if we
emphasised the real and true nature of the transaction and ignored the want of
formality, then it is clear that what the directors did was to give to the
shareholders a part of the assets of the company, and once it is established,
as it is clearly established in this case, that that part of the assets did not
constitute the capital of the company, then what the shareholders received was
income in the nature of dividend.
The Tribunal
addressed itself only to one aspect of the definition of dividend given in the Income-tax
Act. It will be remembered that the definition of dividend in the Income- tax
Act is an inclusive and not an exhaustive definition and the Tribunal took the
view that the case of the assessees fell under that definition. The definition
of dividend is contained in section 2 (6A) and the view of the Tribunal was
that this particular income received by the assessees was dividend within the
meaning of section 2(6A) (a). Clause (a) is to the following effect:
"(a) Any
distribution by a company of accumulated profits, whether capitalised or not,
if such distribution entails the release by the company to its shareholders of
all or any part of the assets of the company."
In our
opinion, there cannot be much doubt that there was in this case a release to
the shareholders by the company of part of its assets, but what Mr. Palkhivala
has urged and with some force is that the distribution was not of accumulated
profits. What is urged is that the right which was distributed by the company
was, if at all, current profits, and one cannot speak of accumulated profits
till after the profits of the year have been ascertained and it is only in the
following year after necessary distribution and allocation some profits are
left which can be called accumulated profits. In the view that we take it is
unnecessary to consider this aspect of the case and to decide whether Mr.
Palkhivala is right in the contention he has put forward. If the definition of
dividend is inclusive and not exhaustive, there is nothing to prevent us from
considering whether the present case does not fall within the ordinary
definition of dividend and not the extended definition given by the Legislature
in section 2(6A)(a). The real question that we have to consider is not which
section of the Income-tax Act is applicable or which particular part of the
section 2(6A) applies, but whether there is a liability upon the assessees to
tax on the ground that their income is dividend within the meaning of the
Income-tax Act. The ordinary meaning of dividend is, as we have already
suggested earlier in the judgment, the receipt by the shareholder by reason of
his being a shareholder of part of the profits of the company of which he is a
shareholder. The formalities and technicalities attached to the declaration of
a dividend cannot detract from the ordinary and normal meaning to be attached
to that expression. It may be said in a particular case that the dividend
received by the shareholder was not properly declared or that the necessary
procedure was not followed, but in its plain natural meaning the receipt by the
shareholder under the circumstances just referred to must be described as
dividend and must have the characteristics of a dividend. Therefore, in our
opinion, whether the extended definition under section 2(6A)(a) is or is not
attracted, this is a clear case where the case falls under the ordinary meaning
of dividend which is not excluded by the definition given by the Legislature in
section 2(6A).
Turning to the
authorities relied upon by Mr. Palkhivala, he has relied first on an English
case, Commissioners of Inland Revenue v. Fisher's Executors. That case
logically followed from the earlier English case reported in Commissioners of
Inland Revenue v. John Blott, and the facts show that what the company did was
that it capitalised its undivided profits and in respect of those profits which
were capitalised it created an issue of 5 per cent. debenture stock to its
ordinary shareholders, and the question that arose for the decision of the
House of Lord was whether the issue of this debenture stock was a distribution
of profits and the House of Lords held that it was not and did not constitute
income in the hands of the shareholders for the purposes of tax. Lord
Chancellor Viscount Cave at page 333 says:
"My
Lords, if the tests which are to be found in these judgments are applied to the
transactions now in question, I think that it will be found impossible to
escape from the conclusion that the issue of debenture stock in the present
case falls within the same category as the issue of shares in Blott's case.
Here, as in that case, the fund representing reserves and accumulated profits
was at the disposal of the company, which could determine as against the whole
world whether that fund should be distributed to the shareholders as income or
should be retained and applied to capital purposes."
What the
company did in that case was that it did not distribute to the shareholders the
profits as income, but applied that income to capital purposes and issued debenture
stock. Mr. Palkhivala relied on certain observations of Lord Sumner appearing
at page 339, and Lord Sumner as a general proposition lays down:
"The
proposition, that the substance of a transaction must be looked to and not
merely the form, is generally invoked against those who have carried it out. I
think it is unusual, where the form of a transaction is against those whose
transaction it is, to invoke the substance in their favour, in order to take
out what they have left defective in form?
The conflict
before us is not between the substance and the form of any resolution passed by
the company. The form is clear and nobody suggests that that form should be
ignored. But what we have looked at is the real nature of the transaction which
is something very different from ignoring the form and trying to go behind the
form to find out what the intention of the company or the shareholders or the
directors was. But the real ratio of the judgment of Lord Sumner is to be found
at page 340 and this is what the learned law Lord says:
"The fact
is that money's worth is not a material circumstance until the bonus
distribution has been shown, when still in the company's hands and at the time
of distribution, to be impressed with the character of income of the
company."
Therefore,
whether the right had money's worth or not and what money's worth it had, the
relevant and material question to consider is what was the nature of the right
which the company had acquired at the time when it decided to transfer it to
the shareholders. If the right was impressed with the character of income of
the company then it would be dividend; otherwise it will not be dividend. Mr.
Palkhivala's contention was that as far as the company was concerned, this
particular right which it acquired would constitute a capital gain and it would
not be income and the company would not be liable to tax in respect of this
right. We are not concerned in this reference with the liability of the company
to tax with regard to the right which it acquired from the Bank of India, and
Lord Sumner does not use the expression "income of the company" in
contradistinction to its capital and what Lord Sumner is emphasising is that if
at the date of the distribution the asset of the company is an asset which could
be distributed as dividend and which did not constitute the capital of the
company which could not be distributed, then the distribution to the
shareholders in law would be dividend.
Mr. Palkhivala
also relied on a judgment of the Madras High Court in Commissioner of
Income-tax v. M.P. Viswanatha Rao. In that case the Tata Iron and Steel
Company, instead of paying dividend to the shareholder in cash, issued bearer
deposit certificates which were payable on or before a certain date with
interest, and the question that Madras High Court had to consider was whether
the sum represented by the deposit certificates could be considered dividend
and the High Court held that there had not been a release of assets of the
company and that the deposit certificate was something like a post dated cheque
or a promissory note or a promise in the form of a negotiable instrument and
that the sum represented by the deposit certificates was therefore not liable
to be taxed as dividend. It will be noticed that the Madras High Court was only
considering the general definition which we have considered in this case, and
the reason why the Madras High Court came to this conclusion was that there was
no release of assets by the company because it had paid nothing to the shareholder
but merely issued a deposit certificate and all the funds and the assets of the
company continued to remain with the company. The learned Judges make it clear
at page 71 when they say:
"Looking
at the matter from the point of view of the company itself, no portion of the
sum of Rs. 5,750 (that was the sum in question in that reference) left the
coffers of the company and no portion of this sum reached the pocket of the
shareholder. The money remains where it was in the hands of the company and
there has been no release of the assets of the company so far as this sum is
concerned."
The position
here is entirely different. The coffers of the company have been depleted by a
large amount by reason of the transfer of its right to the shareholders. Therefore,
there has undoubtedly been, as we already pointed out, a release of the assets
of the company and so the ratio of this decision cannot help Mr. Palkhivala.
Mr. Palkhivala
also relied on a decision of this Court in Mrs. Bacha F. Guzdar v. Commissioner
of Income-tax, Bombay City, where we have considered what the technical meaning
of declaration of dividend is. As we have already said Mr. Palkhivala is right
in his contention that there is no technical declaration of dividend in this
case. If that point is conclusive of the matter, undoubtedly Mr. Palkhivala is
entitled to succeed.
There is only
one final aspect of the matter that we might consider. Authorities have laid
down that a dividend need not be declared in cash, it may be in specie, and
therefore the fact that the company decided to transfer the right which it had
acquired from the Bank of India to its shareholders need not necessarily
militate against the contention that the transfer of such right in specie was
the payment of dividend to the shareholders. In law there is no difference
whatever between the company cashing this right and declaring a dividend in
respect of the amount received by the company, and the company transferring
this right itself which had a money value and which could have been cashed by
the shareholders.
The question
that has been submitted to us does not really bring out the real controversy
between the parties. As we have all the facts before us we propose to re-frame
the question which will read as follows:
"Whether
on the facts and circumstances of the case the distribution of the right to
apply for the shares of the Bank of India by Navjivan Mills Ltd., in favour of
the assessee amounted to a distribution of `dividend'?"
To the
question so re-framed our answer will be in the affirmative. No order as to
costs.
[1932] 2 COMP CAS 23 (PC)
PRIVY COUNCIL
v.
VISCOUNT
DUNEDIN, LORD BLANESBURGH, LORD ATKIN, LORD THANKERTON AND LORD RUSSELL OF
KILLOWEN
W.N. Tilley, K.C, and C.F.H. Carson,
for the Appellants.
R.S. Robertson, K.C. and Frank Gahan, for
the Respondents.
Viscount
Dunedin.—The
Steel Co. of Canada are a company incorporated by letters patent under the
Companies Act of Canada. The capital of the company consisted of 250,000
shares, of which, to quote textually the letters patent: "Two hundred and
fifty thousand shares, one hundred thousand shares of one hundred dollars each,
that is to say, ten million dollars, be created and issued as preference stock
and the same when so issued shall have preference and priority as follows :
(a) In case of liquidation, dissolution
or winding up of the company, the holders of such shares shall be entitled to repayment
in preference to ordinary shareholders of the amount of the par value of the
said shares and any arrears of dividends thereon, and also the net profits of
the company which it shall from time to time be determined to distribute are to
be applicable first to the payment of a fixed cumulative preferential dividend
at the rate of seven per cent, per annum on the capital paid up on the said
preference shares, and the holders of such shares shall participate rateably
with the holders of the issued ordinary shares in the distribution of net
profits after the holders of the ordinary shares shall have received dividends
equal to those paid on the preferred shares ;
(b) No dividends shall be paid on the
ordinary shares until after the company shall have created and have to the
credit of a reserve fund a sum equal at least to one year's dividend on the then issued preference shares." The shares were
afterwards by supplementary letters patent sub-divided into smaller amounts,
but it was provided that the rights of the shares inter se should remain as before.
The company started in
1910. Up to 1912 it distributed dividends at the rate of 7 per cent, on the
preferred shares, but declared no dividend on the ordinary. In 1914, the
preference dividend fell to 3˝ per cent., but in 1915 it was again 7 per cent.,
the ordinary shares still receiving nothing. In 1916 the preferred received 10˝ per cent, which made up the
deficiency in 1914 and the ordinary received 7 per cent. From that time up to
1927 inclusive, both preferred and ordinary received 7 per cent. In 1928 there
were surplus profits available after paying 7 per cent, to each class of
shareholder, and the directors proposed to pay 8 per cent, to each class. The
ordinary shareholders then raised the question which is involved in this
action. The action is at their instance against the company and the directors,
and asks for an injunction against the directors paying anything more than 7
per cent, to the preferred shareholders until the ordinary share holders shall
have received dividends which will give them on their shares during the whole
life of the company the same percentage, namely, 7 per cent., as the preferred
shareholders have received.
The question all turns on
the proper interpretation of the words "dividends equal to those paid on
the preferred shares." Do they mean as set forth above, or do they mean
the sum paid to the preferred shareholders in that actual distribution, namely,
7 per cent ? The share certificates issued did not exactly echo the words used
in the letters patent, but it is unnecessary to set forth their terms, as it is
beyond controversy that the rights of the parties depend on the terms of the
letters patent. A certificate which professed to give other rights would be
simply ultra vires of the
directors who issued it. The learned trial Judge decided in favour of the
contention of the ordinary shareholders, and on appeal his judgment was
affirmed by a majority of the Court of Appeal. Appeal has now been taken to His
Majesty in Council.
Their Lordships are of
opinion that the decision of the trial Judge affirmed by the Court of Appeal
was right. The considerations which lead them to that conclusion are as
follows: The article (a) is
only dealing with the rights of preferred shares. The right to declare a
dividend does not rest on this article, but on a by-law duly passed in terms of
the Companies Act. Now the declaration of a dividened need not be only once a
year. It may be at any time the directors choose, and there may be several
declarations—as, indeed, was done—in the course of one year. Accordingly, the
preferential dividend is directed to be not "at 7 per cent, per
annum" but "at the rate of 7 per cent, per annum." The rate to
be applied only speaks when there are profits which the directors determine to
distribute, and that distribution is one operation complete in itself. There is
only one dividend, whether paid to the preferred shareholder or to the ordinary
shareholder. When, therefore, to describe the dividends paid to the preferred
shareholders, equality of payment to which is made the condition precedent to
further participation on the part of the preferred shareholders, the expression
used is " those dividends " in the plural, that shows that more than
the single dividend of the moment is referred to; and it is only after the
condition is fulfilled that equality of participation is an additional
privilege. Ordinarily speaking, when a peferred shareholder receives his
preferred dividend, he can ask no more—Will
v. United Lankat Plantations Co.. The fulfilment of the condition alone opens the door for a further participation
in profits. The moment that it is realised that "those dividends
paid" refer to dividends other than the dividend immediately being dealt
with, it is obvious that the whole history of the past is opened.
There is another
consideration which strongly points the same way. The rule as laid down is
obviously meant to act as a fixed rule on all occasions when distribution occurs, and it would
be natural that it should act in a uniform manner as between the respective
classes of shareholders. It will do so if the judgment appealed against is
right. But if the opposite conclusion were reached, if "dividends paid on
the preferred shares" were the dividend paid at that distribution, then
the ratio of participation as between the two classes of shareholders in the
whole profits distributed will vary according to the action of the directors.
Suppose that in a year when there were profits sufficient to warrant a
distribution of 7 per cent, to each class, the directors thought it more
prudent to declare no dividend on the ordinary—and they could not be forced to
declare it—and that next year the flourishing state of affairs continued, and
the directors decided to divide all their profits, the preferred shareholders
would get beside their 7 per cent, for the year, half of the money which would
have gone to the ordinary shareholders if there had been a distribution the
year before. For, be it observed that the directors could not give the ordinary
shareholders 14 per cent.; for, on the assumption that the argument of the
appellants prevails, as soon as the ordinary shareholders had got 7 per cent.,
the participation of the preferred shareholders in anything left over became
obligatory.
The
learned Judges in the minority in the Court of Appeal were impressed with the
idea that the trial Judge's judgment gave the ordinary shareholders a
cumulative dividend. It does no such thing. Arithmetically, it may be the case
that the amount eventually received by the ordinary shareholders may be the
same as if they had had a cumulative dividend. But equally it may not be so.
And in any view they are not getting what they do get as a cumulative dividend;
they are getting it because they are entitled to have the condition fulfilled
before the preferred shareholders can call for participation.
Their
Lordships will humbly advise His Majesty to dismiss the appeal with costs.
FINANCE ACT
[1998] 15 SCL 340 (SC)
SUPREME
COURT OF INDIA
v.
Express News
Papers Ltd.
B.N. KIRPAL AND S.P. KURDUKAR,
JJ.
CIVIL APPEAL NOS. 2941-42 OF
1985
JANUARY 21, 1998
Section 205, read with clauses 85 and 86 to Table
A of the First Schedule, of the Companies Act, 1956 - Dividend - Whether it is
a company which in general meeting is empowered to declare dividend - Held, yes
- Whether clause 86 gives board of directors power to declare any dividend -
Held, no - Whether, therefore, resolution passed by board of directors to give
interim dividend cannot be regarded as declaration of dividend by company -
Held, yes - Whether nature of interim dividend is such that it gives no right
to shareholders to receive it merely on passing of resolution by board of
directors whereas on a dividend being declared by company in general meeting a
vested right accrues to shareholders - Held, yes
Second proviso to clause (i)(c) to the First Schedule
of the Finance Act, 1964, read with clauses 85 and 86 to Table A of the First
Schedule of the Companies Act, 1956 - Rebate on super tax - Reduction of -
Assessment year 1964-65 -Whether rebate, as far as Explanation 3 is concerned,
can be reduced only if declaration and distribution is in same previous year -
Held, yes - Assessee-company's board of directors decided to distribute interim
dividend by passing resolution in previous year relevant to assessment year but
distributed same to shareholders in previous year relevant to succeeding
assessment year -Whether, where board of directors resolve to pay dividend, it
would amount to declaration of dividend by company - Held, no - Whether since
resolution passed by board of directors did not amount to a declaration of
dividend by company and payment of dividend amounted to declaration and payment
in same previous year, provisions of sub-clause (c) of clause (i) of second
proviso was not attracted to case and Assessing Officer was right in reducing
rebate to extent of interim dividend paid, for assessment year in question -
Held, yes
FACTS
The assessee-company's board of directors on
6-12-1962 passed a resolution whereby it decided that interim dividend should
be distributed amongst the shareholders. In fact, the company paid dividend in
January 1963. The accounting year of the company was calendar year. In
determining the amount of tax for the assessment year 1964-65, the Assessing
Officer came to the conclusion that the rebate which was available to the assessee
under the Finance Act, 1964 had to be reduced to the extent of the interim
dividend paid to its shareholders in January 1963 and the Assessing Officer
rejected the assessee's contention that the company had declared dividend
before the start of the relevant previous year and the payment was made in the
subsequent previous year and, therefore, by virtue of Explanation 3, the rebate could not be reduced.
The High Court held that the assessee, acting through
its directors, had declared the interim dividend on behalf of the company and
when payment was made not in the same previous year but was made in the
subsequent year, Explanation 3 became
applicable and the rebate could not be reduced.
On appeal to the Supreme Court:
HELD
On a careful examination of the first and second proviso to clause 1(i)(c), it appears that the rebate given by the
first proviso can be reduced if dividend has been declared or distributed by
the company to its shareholders. Two expressions are used, namely, 'declared'
and 'distributed'. Explanation 3 means
that if the declaration of the dividend is in the year prior to the
commencement of the relevant previous year but the distribution is in the
relevant previous year, then no rebate would be reduced in the year in which
distribution takes place. In other words, the rebate, as far as Explanation
3 is concerned, can be reduced only if
the declaration and the distribution is in the same previous year.
The High Court committed an error in proceeding on the assumption that
the resolution passed by the board of directors on 6-12-1962 amounted to a
declaration of dividend Under section 205 of the Companies Act, dividend is
distributed on a resolution being passed by the company in general meeting. The
Companies Act, as such, does not specifically refer to the distribution of
interim dividend Table A, however, provides for payment of interim dividend
Unfortunately, the articles of association of the respondent-company were not
on record but normally, as was expected, the articles of association would be
in consonance with the provisions of Table A. A perusal of clauses 85 and 86
clearly brings out the distinction in the power of the company and the board of
directors. It is a company which in general meeting is empowered to declare
dividend Clause 86 does not give the board of directors power to declare any
dividend but only enables it to pay interim dividend to the members of the
company from time to time. It is because there is a difference in the power
which is exercised by the company in general meeting, vis-a-vis, the one exercised by the board of directors while deciding to pay an
interim dividend, that in sub-clause (c) of clause (i) of the
second proviso in the Finance Act, the expression used is 'declared or
distributed to its shareholders'. This clearly postulates a situation where
there may be distribution of dividend without its declaration. This can be
where the board of directors, and not the company in general meeting, decides
to pay interim dividend in which case, the rebate will be withdrawn in the year
of distribution of the interim dividend, there being no declaration by the
company for the payment thereof.
The nature of the interim dividend is such that it gives no right to
the shareholders to receive it merely on the passing of the resolution by the
board of directors whereas on a dividend being declared by the company in
general meeting a vested right accrues to the shareholders. This being so, if
the company in general meeting had declared a dividend on 6-12-1962 and the same
was distributed in January 1963, then the aforesaid Explanation 3 would have been applicable. But, in the instant case, the decision of
the board of directors on 6-12-1962 to pay interim dividend could not be
construed as meaning declaration of dividend by the company. This being so,
what would be relevant was the distribution of the dividend in January 1963,
thereby attracting the provisions of sub-clause (c) of clause (i) of the second proviso and the income-tax authorities were, therefore,
right in reducing the rebate in the manner in which they did for the assessment
year 1964-65.
For the aforesaid reason, the appeals were allowed The judgment of the
High Court was set aside.
CASE
REFERRED TO
J. Dalmia v. CIT[1964] 53 ITR 83 (SC).
S. Rajappa
and B.K. Prasad for the Appellant. Manoj Arora,
N.B. Joshi, P.H. Parekh and S. Bhartari for the Respondent.
ORDER
1. The respondent is a public limited company
which is running a well- known newspaper, the Indian Express and we are concerned
in this case with income-tax for the assessment year 1964-65.
2. On 6-12-1962, the board of directors of the
respondent-company passed a resolution whereby it decided that interim dividend
should be distributed amongst the shareholders. The resolution further provided
that this dividend would be payable on 16-1-1963. It may here be noticed that
the accounting year of the respondent-company is the calendar year. The
resolution which was passed on 6-12-1962, therefore, was in the previous year
relevant to the assessment year 1963-64 whereby the payment was made to the
shareholders in the following year relevant to the assessment year 1964-65.
In
determining the amount of tax which was payable by the company for the
assessment year 1964-65, the ITO came to the conclusion that the rebate which
was available to the company under the Finance Act, 1964 had to be reduced to
the extent of the interim dividend paid to its shareholders in January 1963.
The claim of the respondent, in the appeal filed by it, was that the board of
directors had declared the dividend on 6-12-1962, i.e., before the start of the relevant previous year and the
payment was made in the subsequent previous year and, therefore, by virtue of Explanation 3, paragraph D, Part II
of the First Schedule of the Finance Act, 1964, the rebate could not be
reduced. Having failed to get any relief from the appellate authorities, a
question of law with regard to this aspect was referred to the High Court by
the Tribunal. Two other questions were also referred but we are not concerned
with those in the present case and answer to them stands concluded by the
judgment of the High Court.
3. The High Court reframed the relevant question
of law as follows :
"Whether, on the facts and in
the circumstances of the case, the sum of Rs. 3,39,000 declared as dividends on
6th December, 1962, by the board of directors, but payable only on 16th
January, 1963, could be taken into account in withdrawing the rebate admissible
under the first proviso to the Finance Act of 1964 by reference to sub-clause (c) of clause (i) of the second proviso to the same Act read with Explanation 3 to the same Act ?"
The High
Court came to the conclusion that the company, acting through its Directors,
had declared the interim dividend on behalf of the company and when the payment
was made not in the same previous year but was made in the subsequent year, Explanation 3 became applicable and
the rebate could not be reduced. In this appeal, it has been contended by the learned
counsel for the appellant that the High Court erred in coming to the conclusion
that there was any declaration of any dividend, as understood under the
Companies Act, 1956, by the company. According to the learned counsel, the
resolution of the board of directors dated 6-12-1962 cannot be regarded as a
declaration of dividend by the company and, therefore, what was relevant is to
see the date when the interim dividend was distributed and as the distribution
took place in the previous year relevant to the assessment year 1964-65,
therefore, the rebate to that extent was rightly withdrawn. On behalf of the
respondent, however, it was submitted that the judgment of the High Court
called for no interference as the distribution of the dividend took place pursuant
to the declaration by the board of directors.
4. In order to appreciate the point in issue, it
will be appropriate to refer to the relevant provision. The Finance Act, 1964,
like all other Finance Acts, inter
alia, provides for the rate at which income-tax and super tax are
levied. According to this Act, the rate of super tax of the whole of the total
income was 55 per cent, as per paragraph D of Part II of the Finance Act. The
first proviso to this contains the rebate which is allowed in computation of
the tax. This rebate is, however, reduced wherever the provisions of the second
proviso become applicable. In the present case, second proviso clause (i)(c), inter alia, provides
that the amount of rebate shall be reduced where the company has "declared
or distributed to its shareholders during the previous year any
dividend…..." The rate of reduction, as per this sub-clause is 7.5 per
cent on the whole of the amount of dividend which is declared. Explanation 3, on which reliance is
placed by the respondent, to this provision reads as follows :
"Explanation 3 - For the removal of doubts it is hereby declared
that where any dividends were declared by the company before the commencement of
the previous year and are distributed by it during that year, no reduction in
the rebate shall be made under sub-clause (c) of clause (i)
of the second proviso in respect of such dividends."
On a careful examination of the aforesaid provision,
it appears to us that the rebate given by the first proviso can be reduced if
dividend has been declared or distributed by the company to its shareholders.
Two expressions are used, namely, 'declared' and 'distributed'. The learned
counsel for the respondent is right in construing Explanation 3 to mean that if the declaration of the dividend is
in the year prior to the commencement of the relevant previous year but the
distribution is in the relevant previous year, then no rebate would be reduced
in the year in which distribution takes place. In other words, the rebate, as
far as Explanation 3 is
concerned, can be reduced only if the declaration and the distribution is in
the same previous year.
5. In our opinion, the High Court committed an
error in proceeding on the assumption that the resolution passed by the board
of directors on 6-12-1962 amounted to a declaration of dividend. Under section
205 of the Companies Act, dividend is distributed on a resolution being passed
by the company in general meeting. The Companies Act, as such, does not
specifically refer to the distribution of interim dividend. Table A, however,
provides for payment of interim dividend. Two clauses of Table A of the First
Schedule to the Companies Act, namely, clauses 85 and 86 read as follows:
"85. The company in general meeting may declare dividends, but no dividend
shall exceed the amount recommended by the Board.
86. The Board may from time to time pay to the members such interim
dividends as appear to it to be justified by the profits of the company."
6. Unfortunately, the articles of association
of the respondent-company are not on record but normally, as is expected, the
articles of association would be in consonance with the provisions of Table A.
The perusal of aforesaid clauses 85 and 86 clearly brings out the distinction
in the power of the company and the board of directors. It is a company which
in general meeting is empowered to declare dividend. Clause 86 does not give
the board of directors power to declare any dividend but only enables it to pay
interim dividend to the members of the company from time to time. It is because
there is a difference in the power which is exercised by the company in general
meeting, vis-a-vis, the one
exercised by the board of directors while deciding to pay an interim dividend,
that in clause (i)(c) of the second proviso in the Finance Act, the expression used
is "declared or distributed to its shareholders". This clearly
postulates a situation where there may
be distribution of dividend without its declaration. This can be where the
board of directors, and not the company in general meeting, decides to pay
interim dividend in which case the rebate will be withdrawn in the year of
distribution of the interim dividend, there being no declaration by the company
for the payment thereof.
7. The difference in the nature of interim
dividend and the dividend declared by the company in general meeting is clearly
brought out in a decision of this Court in the case of J. Dalmia v. CIT[1964]
53 ITR 83. In that case, the board of directors had declared an interim
dividend in its meeting held on 30-8-1950 and payment was made to the
shareholders by dividend warrants issued on 28-12-1950. The accounting year of
the assessee ended on 30-9-1950, relevant to the assessment year 1951 -52. The
question arose whether the interim dividend declared by the board of directors
in the previous year relevant to the assessment year 1951 -52 was to be taxed
in that year or was the interim dividend liable to be taxed in the assessment
year 1952-53 because the payment was made in that previous year ? Dealing with
the nature of the interim dividend, this Court observed as follows :
"There is no doubt that a
declaration of dividend by a company in general meeting gives rise to a debt.
'When a company declares a dividend on its shares, a debt immediately becomes
payable to each shareholder in respect of his dividend for which he can sue at
law, and the statute of limitation immediately begins to run': In re, Severn and Wye and Severn Bridge
Railway Company [1896] 1 Ch. 589. But this rule applies only in case of
dividend declared by the company in general meeting. A final dividend in
general may be sanctioned at an annual meeting when the accounts are presented
to the members. But power to pay interim dividend is usually vested by the
articles of association in the directors. For paying interim dividend, a
resolution of the company is not required: if the directors are authorised by
the articles of association, they may pay such amount as they think proper,
having regard to their estimate of the profits made by the company. Interim
dividend is, therefore, paid pursuant to the resolution of the directors on
some day between the ordinary general meetings of the company. On payment,
undoubtedly interim dividend becomes the property of the shareholder. But a
mere resolution of the directors resolving to pay a certain amount as interim
dividend does not create a debt enforceable against the company, for it is
always open to the directors to rescind the resolution before payment of the
dividend. In Lagunas Nitrate Co. Ltd. v.
Henry Schroeder & Co. [1901]
17 TLR 625, the directors of a company passed a resolution declaring interim
dividend payable on a future date, and requested the company's bankers to set apart,
out of the money of the company in their hands, into a special account entitled
'Interim Dividend Account', a sum sufficient to cover the dividend, pending the
company's instructions. But before the date fixed for payment, the directors
resolved that pending certain litigation to which the company was a party
payment of dividend be postponed. It was held by the Court that the directors
had the right even after resolving to pay interim dividend to rescind the
resolution and no enforceable right arose in favour of the members of the
company by the declaration of interim dividend.
Therefore, a declaration by a
company in general meeting gives rise to an enforceable obligation, but a
resolution of the board of directors resolving to pay interim dividend or even
resolving to declare interim dividend pursuant to the authority conferred upon
them by the articles of association gives rise to no enforceable obligation
against the company, because the resolution is always capable of being
rescinded. Therefore, departure in the text of article 74 of the articles of
association of Govan Bros, from the statutory version under Table A of the
power in respect of interim dividend, dividend which may be entrusted to the
directors, makes no real difference in the true character of the right arising
in favour of the members of the company on the execution of the power. The
directors, by the articles of association, are entrusted with the
administration of the affairs of a company; it is open to them if so authorised
to declare interim dividend. They may, but are not bound to, pay interim
dividend even if the finances of the company justify such payment. Even if the
directors have resolved to pay interim dividend, they may before payment
rescind the resolution." (p. 87)
The aforesaid
observation clearly supports the view which we have taken, namely, that the
nature of the interim dividend is such that it gives no right to the
shareholders to receive it merely on the passing of the resolution by the board
of directors whereas on a dividend being declared by the company in general
meeting a vested right accrues to the shareholders. This being so, if the
company in general meeting had declared a dividend on 6-12-1962 and the same
was distributed in January 1963, then the aforesaid Explanation 3 would have been applicable. But in the present
case, the decision of the board of directors on 6-12-1962 to pay interim
dividend cannot be construed as meaning declaration of dividend by the company.
This being so what would be relevant is the distribution of the dividend in
January 1963, thereby attracting the provisions of clause (i)(c) of the second
proviso and the income-tax authorities were, therefore, right in
reducing the rebate in the manner in which they did for the assessment year
1964-65.
8. For the aforesaid reason, the appeals are
allowed. The judgment of the High Court is set aside. The question of law, as
reframed by the High Court, is answered in the affirmative and in favour of the
revenue. There will be no order as to costs.
[1998] 18 SCL 55 (AP)
v.
A.S. BHATE, J.
COMPANY PETITION NO. 60 OF 1998
JULY 22, 1998
Section 207,
read with section 206A, of the Companies Act, 1956 - Dividends - Failure to
distribute dividends within time prescribed - Whether where shares are lodged
for registration of transfer as long as shares are not transferred and
registered transferee could not make a claim to dividend amount and therefor
for non-payment of dividends, complaint could be lodged by transferor and not
by transferee - Held, yes
Section
633, read with section 207, of the Companies Act, 1956 - Reliefs -Power of
Court to grant relief in certain cases - Company refused to register transfer -
Transfer was registered only after order of CLB -Company did not pay dividends
from 1990 to 1998 either to transferor or transferee - Transferees respondents
issued notice demanding 2 per cent interest for delay in payment of dividend
and contemplated prosecution under section 207 on failure to meet demand -
Joint notice to all petitioners who were directors and secretary was issued -
Anticipating prosecution joint petition was filed by all petitioners for relief
from liability - Whether there was no necessity to file separate petitions or
separate affidavits by each of petitioners and joint petition filed was
maintainable - Held, yes -Whether steps taken by company to obtain advice
before refusing registration of shares prima facie showed lack of mala fides on
part of petitioners though legal advice on basis of which transfer was refused
was found to be not tenable by Court - Held, yes - Whether petitioner could be
relieved of liability under section 207 on condition that they would pay
interest at rate of 12 per cent per annum to respondents on their respective
dividends as respondents had been for no fault of their deprived of amount of
dividend for all those years due to non-registration of transfer - Held, yes
Section 206A of the Companies Act,
1956 - Dividend - Payments to be held in abeyance pending registration of
transfer of shares - Whether it is possible to take view that section 206A
applies in all cases where instrument of transfer of shares has been delivered
to a company but transfer has not been registered by company for any reason
whatsoever - Held, yes -Whether if Court finds that company mala fide or
lacking bona fides, did not transfer shares in name of transferee then such act
of non-registration will not be covered by provisions of section 206A - Held,
yes
FACTS
The
respondents 2 to 5 had applied to the company 'H' in March, 1990 for transfer
of certain shares of the company in their name. According to respondents the
said shares were transferred in their name by company D. The petitioners who
were the directors of company 'H' refused the transfer after getting an advice
from their Advocate. The respondents again lodged the shares with the company
as interim administrator of 'D' accepted the fact of transfer of shares to the
respondents. The petitioners approached a solicitor firm, who advised them not
to register the transfer. However, the company registered the transfer only on
24-2-1998 after the order of the CLB which was upheld by the High Court. Since
the company had not paid the dividend payable between March, 1990 to February,
1998, the respondents sent notice to the petitioners demanding 2 per cent
interest, threatening that if the interest claimed was not paid within seven days
each of the director would be prosecuted under section 207. On application
under section 633 the petitioners sought a direction that they - may be
relieved wholly from any liability alleged by the respondents as there was
neither negligence, misfeasance or any similar act and that they had all along
acted reasonably and honestly in the matter. According to the petitioners the
said unpaid dividend amount was during all these years kept in abeyance,
pending registration of transfer and was transferred to the special dividend
account as required by section 205A. On the other hand the respondents
contended that (i) a common petition was not
maintainable, (ii) the brother of respondent No. 2
along with petitioner No. 2 had devised a plan to harass them, (iii) opinion given by the advocate as well as the solicitor's firm
had no credibility, (iv) withholding of dividend was not at
all for genuine reasons and (v)
the petitioners could not take shelter under section 206A because it was the
act of the company to refuse the registration.
HELD
As the notice issued by the respondents was admittedly to all the
petitioners jointly without attributingany different role to any of the
petitioners, filing of the joint petition by all of them could not be faulted The
petition had been filed in consequence of the notice sent by the respondents.
After all the prosecution threatened was under section 207. The prosecution
would be
based on the allegations made in the notice. The petition had set out necessary
material for seeking relief under section 633. There was, in the circumstances,
no necessity to file separate petitions or separate affidavits by each of the
petitioners. Hence the hyper-technical objection did not have much merit and
was to be rejected.
According to the respondents the brother of the respondent No. 2 had
instigated and alligned with petitioner No. 2 todeprive the respondent Nos. 2
to 5 of their legitimate claim. But such a plea could be entertained in the
petition. Whatever may be the personal disputes between the respondent No. 2
and his brother or, between the respondent Nos. 2 to 5 and the petitioner No.
2, they had to be sorted out-elsewhere and not in the petition. The Court is
concerned with bona fides as can be found from factual and undisputable
material available in the whole episode. It was unfortunate that the respondent
Nos. 2 to 5 thought it fair and fit to make certain allegations against a
Senior Counsel of Calcutta High Court, who had given opinion to the petitioners
and also against a Firm of Solicitors of Calcutta. They had no opportunity to
meet such allegations. Making such allegations in collateral proceedings may
not be appropriate. It could not be disputed that the Senior Advocate, of
Calcutta High Court, was consulted by the petitioner-company in the matter and
he had given his opinion advising the petitioners to take certain steps before
effecting the transfer. The material also showed that the Solicitors firm was
consulted in the matter and legal opinion was obtained from them. It may be,
that the opinion given was not in accordance with the correct legal position.
It was not so, as it was established by the decision of the CLB which was
affirmed by the decision of the High Court. Fact remained that steps taken by
the company for not registering the claim of the respondent Nos. 2 to 5 were on
advice obtained by them from competent persons. The fact that steps were taken
to obtain advice before refusing registration of the shares, prima facie
showed the lack of mala fides on part of the petitioners.
It is possible to take the view that section 206A applies in all cases
where the instrument of transfer of shares has been delivered to a company but
the transfer has not been registered by the company for any reason whatsoever.
In any event, in view of advice obtained by petitioner-company from a Senior
Advocate and a Firm of Solicitors, the registration of transfer of shares was
not done, was the factual position. The advice and opinion obtained by the
petitioners was really with reference to section 108. In other words, the
advice or opinion was obtained as to whether shares should be transferred and
registered in the name of the respondent Nos. 2 to 5 or not. It was true that
the petitioners had obtained advise merely for registering the shares on a
transfer. But once the petitioners were advised not to register the shares in
the name of the respondent Nos. 2 to 5 till necessary compliance was done, it
followed naturally that the payment of dividend to the respondent Nos. 2 to 5
could not have been made. Nonpayment of dividend to transferor-shareholders by
the petitioner company was unjustified However, for such non-payment to
the transferor-shareholders, complaint could be lodged by the
transferor-shareholders and not by the respondent Nos. 2 to 5. As long as
shares were not transferred and registered in their name they could not have
made a claim to the dividend amount. As regards whether non-transferring and
non-registering shares in name of respondent Nos. 2 to 5 was a bona fide act or not, it was no doubt that if the court finds that the company mala
fide or, lacking bona fides, did not transfer the shares in the name of
the transferee then such act of non-registration will not be covered by
provisions of section 206A. In such case the company would be liable to pay the
dividend not to the transferor but to the transferee, due to the absence of
bona fides on its part No body
can take advantage of his own wrong. However, in the instant case the company
had taken care to obtain advice from a Senior Counsel as well as from a Firm of
Solicitors. Though the advice was proved to be incorrect, it could not be said
that the company lacked bona fides. Further more, it was not open now to attribute any ulterior motives to
the senior counsel who gave opinion or, to the firm of solicitors. The question
had to be agitated before the CLB as also in appeal before the High Court. As
per the judgments of the CLB as well as of the High Court neither the CLB nor
the High Court had anywhere commented adversely or, attributed any foul play in
respect of opinion obtained by the petitioner company. In those proceedings the
opinion obtained by the company was a point directly in issue. It did not
appear that any argument was advanced about the lack of credibility of
advice/opinions obtained by the company. Therefore, it would not be proper to
allow to agitate that question now in the instant proceeding. Hence, the
presumption had to be made about the honesty in matter of the opinions/advice
given by the senior counsel as well as the firm of solicitors, notwithstanding
the fact that the said opinion was found to be inaccurate and not accepted by
Court of Law. In this view of the matter, petitioners' action in not paying the
dividend to the respondent Nos. 2 to 5 from 1990 to 1998 could not be stamped
as mala fide. True it was that
non-payment of dividend to the transferor was not proper but that was another
issue and not required to be discussed at this juncture.
It was on record that the company had opened an account in the name
unpaid dividend account, of that company. It also appeared that the company had
soon as it declared dividend within the permitted period, transferred the whole
amount of dividend to this account and from that account payment of dividend to
the shareholders was made. The unpaid-dividend remained in the same account,
undisbursed. The petitioners were right in saying that if the company had done
more than what it was required to do to provide protection to the investing
public, they could not be faulted for such over-cautious attitude. Further,
initially when section 206A was about to be inserted by an amendment, in the
Act, the note circulated, for inserting the section at the time of presentation
of the bill, envisaged that
such an account should be opened in which company should transfer the declared
dividend It was probably by way of extra-caution that the company took the step
of transferring of the whole dividend to the account.
Having
regard to all the discussion above, the petitioners should be given relief.
However, the relief could not be given unconditionally in the facts and
circumstances of the case. The facts showed that the registration of the
transfer of shares in name of the respondent Nos. 2 to 5 was kept in abeyance
for no fault of the respondent Nos. 2 to 5. As pointed out already, the petitioners did not care to pay dividend to
the transferor also, during all the relevant period The effect of the judgment
of the High Court, in conforming the CLB's decision, was obviously that the
transfer of shares ought to have been done in favour of the respondent Nos. 2
to 5 when the shares were first lodged with company.
The
respondent Nos. 2 to 5 had been, for no fault of their, deprived of the amount
of dividend for all these years due to non-registration of transfer in their
favour. They were entitled to reasonable interest according to the current
market custom. It would be improper, inequitable and unjust to direct the
respondent Nos. 2 to 5 to file a suit for claiming relief of interest. In
fairness, the petitioners should have given reasonable interest to the
respondent Nos. 2 to 5, in the circumstances of the case. Further, the
respondent Nos. 2 to 5 were embroiled in various litigations for considerable
time.
In these
circumstances, the petitioners were relieved of liability under section 207 on
condition precedent that the petitioners, or the company, pay interest to the
respondent Nos. 2 to 5, on their respective dividends, at the rate of 12 per
cent per annum (simple) on the amount declared from 1990 till 1998
as and when the said amount became due for paymen t to the shareholders. The
respective interest shall start from the day when the Act required the despatch
of warrants to the shareholders. The petitioners shall also pay costs of Rs.
10,000 'in one set to the respondent Nos. 2 to 5. If the interest and costs so
ordered were paid within a period of one month, the petitioners shall stand
relieved of the liability of prosecution under section 207 on complaint of the
respondent Nos. 2 to 5 individually or jointly.
G.R. Desai, O.P. Jalan and Ravi S. for the Petitioners. B. Adinarayana
Rao and Y. Ratnakar for the
Respondent.
ORDER
1. The first petitioner is the Secretary of Hyderabad
Industries Ltd. which is a Public Ltd. Co. ('the Company'). The petitioner No.
2 is the President of the company and the petitioner No. 3 is the Chairman. The
petitioner Nos. 4 to 9 are the directors of the said company. The respondent
Nos. 2 to 5 had applied to the company for transfer of certain shares of the
company in their name. The respondent Nos. 2 to 5 claimed that the said shares
were transferred in their name by the company known as Deccan Enterprises
Private Limited (the 'Deccan Company'). The respondent Nos. 2 to 5 applied on
16-3-1990 to the company along with transfer deeds allegedly executed on behalf
of the Deccan company by the respondent No. 2. The shares of the company were
also handed over to the respondent Nos. 2 to 5 at the said time. When the said
application along with shares were submitted to the company, the first
petitioner, being the Secretary, wrote back on 26-4-1993 to the respondent Nos.
2 to 5 informing that the board resolution of the Deccan Company dated
15-3-1986 which was the basis for claim of respondent No. 2, had not authorised
respondent No. 2 to transfer the said shares. The original shares and the
transfer deeds were returned along with the letter dated 26-4-1990. Thereafter
on 7-5-1990, the respondent Nos. 2 to 5 again lodged the same shares along with
transfer deeds and once again claimed that the resolution dated 15-3-1986
passed by the Board of the Deccan Company properly authorised second respondent
to transfer the said shares. In the mean time on 11-5-1990 the company received
letter from Mrs., Satyabhama, who is one of the shareholders of the Deccan
Company, intimating about on undertaking dated 20-4-1988 given by Mr. O.P.
Jalan, who is second respondent here, to the Court in which Company Petition
No. 27 of 1987 was pending. The undertaking was to the effect that no assets of
the Deccan Company would be disposed of pending decision of Company Petition
No. 27 of 1987. In view of such position, the company sought advice of a Senior
Advocate from Calcutta as to the proper course in respect of transfer of
shares, held by the Deccan Company, in favour of the respondent Nos. 2 to 5.
The petitioners claim that the advice given was that unless there was a
specific resolution of the board of directors of the Deccan Company,
authorising sale of the shares, the transfer cannot be accepted. Armed with
this advice, the company on 14-6-1990 informed the respondent Nos. 2 to 5
accordingly and also brought to the notice of respondents the letter given by
Mrs. Satyabhama. On 16-7-1990 the respondents Nos. 2 to 5 re-lodged the shares
for purposes of transfer along with a resolution of the board of directors of
the Deccan Company allegedly passed on 5-5-1989. The petitioners contend that
this was not a proper authorisation as required by section 297 of the Companies
Act, 1956 ('the Act'). The company also felt that the transfer deeds had become
invalid under section 108(1A) of the Act. In the mean time interim
administrator was appointed for the Deccan Company, in Company Petition No. 27
of 1987. The said interim director did inform the company that the sale of
shares in favour of the respondent Nos. 2 to 5 was binding on the Deccan
Company and then the respondent Nos. 2 to 5 again lodged the shares with letter
dated 22-10-1990 and produced another resolution of the board of directors of
the Deccan Company which was allegedly passed on 16-10-1986. The company
contends that it then approached a Solicitor firm in Calcutta on 20-11-1990 in
view of the uncertainty felt by it. Opinion was sought from the said Firm of
Solicitors. In accordance with the opinion obtained from the Solicitors, the
Company wrote to the respondent Nos. 2 to 5 on 21-11-1990 asking for further
particulars. On 23-11-1990, the board of directors of the company resolved for
calling of such particulars. On 3-12-1990 the respondent No. 2 intimated the
first petitioner about the details and produced certain documents, in response
to letter of company dated 21-11-1990. The company again sought advice of the
Solicitors. Inspite of all the material submitted, the company as per advice
received from Solicitors' firm refused to register the transfer and return the
shares to the respondent Nos. 2 to 5 once more and called for opinion in full,
as detailed in letter dated 21-11-1990.
2. It is not disputed that the respondent Nos. 2 to 5 thereafter filed a company appeal before the CLB. The CLB after hearing both the sides directed the company to effect the registration of the shares in favour of the respondent Nos. 2 to 5 and, gave certain other directions. Against this decision of the CLB, an appeal was preferred, under section 10F of the Act by the company, in this Court. This Court confirmed the order of the CLB by its judgment dated 4-2-1998. It was after decision given by this Court and after receiving the certified copy of the order of this Court, that the company complied with all the directions contained in the CLB read with order of this Court. The Share certificates, duly transferred in favour of the respondent Nos. 2 to 5, were sent on 24-2-1998.
3. It is not disputed that during all this time between March, 1990 to February, 1998, the dividend payable on the shares in question was not paid. The company contends that the said unpaid dividend amount was during all these years kept in abeyance, pending registration of Transfer of Shares, and was transferred to the Special Dividend Account as required by section 205A of the Act. The said amount of dividend was paid to the respondent Nos. 2 to 5 immediately after registration of the shares in their favour was done.
4.
The respondent Nos. 2 to 5 sent a letter on 10-3-1998 to the company claiming
that company was liable for payment of interest at compound rate of 2 per cent
per month for deliberately withholding the dividend amount from the year 1990
onwards.
By the same communication, the respondent Nos. 2 to 5
gave notice to petitioners that if the amount so claimed was not paid within
seven days, each of the directors of the company would be prosecuted under
section 207 of the Act, apart from instituting civil claims against company as
well as its directors. The receipt of this notice has given petitioners reason
to apprehend that proceedings might be brought against them under section 207
by the respondent Nos. 2 to 5 and therefore, have approached this Court for
seeking a direction that petitioners may be relieved wholly from any such
liability, as there was neither negligence, misfeasance or any similar act and, that petitioners have all
along acted reasonably and honestly in the matter.
5. The respondent No. 1 did not file any
counter when served with notice. However, a representation, by the Department
has been sent to the learned standing counsel, in which the stand taken by the
respondent No. 1 is that it is a proforma party and the real dispute is between
petitioners on one hand and, respondent Nos. 2 to 5 on the other. The said
communication has been produced before the court. It is contended that the
respondent No. 1 would abide by whatever orders are passed in the matter.
6. The respondent Nos. 2 to 5 have filed a
joint counter. The first objection taken to the claim of the petitioners is
that a joint petition by all of them on common ground is not maintainable.
There is distinct role of each of the petitioners and therefore, a separate
case for each should have been made out along with appropriate affidavit by
each. A common petition of this type, it is stated, is not maintainable. Apart
from this technical objection, the respondents have alleged that there is some
personal animosity between the respondent No. 2 and his brothers. Due to this
animosity, the respondent No. 2's brother joined hands with petitioner No. 2,
who a influential person. The petitioner No. 2 also happens to be a share
holder of the Deccan Company. The brother of the respondent No. 2 with
co-operation of the petitioner No. 2 has devised a plan to harass the
respondent Nos. 2 to 5 herein. Several allegations are levelled in that respect
but we are not concerned with that. The sum and substance is that the
respondent Nos. 2 to 5 are victims of a plan hatched by the brother of the
respondent No. 2 with help of the petitioner No. 2. The reasons given are mere
ruse for not transferring shares in the names of respondents inspite of
lodgment of all the appropriate papers along with the shares of different
dates. The company purposely avoided to effect the transfer. Every time the
shares were returned back along with a letter. Dividends were not paid for all
the intervening period. Different reasons were given on every occasion for not
registering the transfer of shares. The legal opinion obtained from so called
senior advocate and the firm of solicitors has also been commented with certain
harsh allegations. It is alleged that the referred senior advocate was coerced
to give a particular opinion. The solicitors' firm gave a tailor made opinion
due to interest of the said Firm in the petitioners-company. It is alleged that
the opinions given by the senior advocate as well as the Firm of the Solicitors
have no credibility. It is further submitted that default in payment of annual
dividend from 1990 onwards was illegal and was inspite of the communication
sent by the interim administrator of the Deccan Company that the Deccan Company
acknowledged the transfer. The withholding of dividend was not at all for
genuine reasons. It is argued that the petitioners cannot take shelter under
section 206A of the Act, because it was the act of the company to refuse the
registration. Section 206A applies only when the dispute is pending
about the transfer of registration, and not, when the company illegally refuses
to register and, returns the papers. It is alleged that particularly the
petitioner No. 3 has shown total indifference and has abdicated his duties in
not abiding by the true legal position and there is no justification for
claiming any relief under section 633 of the Act.
7. The first objection raised does not appear to be of any substance. As the notice/letter dated 10-3-1998 issued by the respondents was admittedly to all the petitioners jointly without attributing any different role to any of the petitioners, filing of this joint petition by all of them cannot be faulted. The petition has been filed in consequence of the notice sent by the respondents. After all the prosecution threatened was under section 207. The prosecution would be based on the allegations made in the notice. The petition has set out necessary material for seeking relief under section 633 of the Act. There was, in the circumstances, no necessity to file separate petitions or separate affidavits by each of the petitioners, the hyper-technical objection does not have much merit and is rejected.
8. The more serious objection raised by Sri Ratnakar,
the learned counsel for the respondent Nos. 2 to 5, is that the petitioners
have not acted honestly or bona fide in
not registering the transfer of shares in favour of the respondent Nos. 2 to 5
and particularly in not paying the dividend in question from 1990 onwards, to
any one. In the argument it is reiterated that a plan was hatched to cause as
much loss to respondents, as was possible in circumstances. This plan was
result of a family feud between the respondent No. 2 and his brother. The brother
of the respondent No. 2 has instigated and aligned with the petitioner No. 2,
to deprive the respondents Nos. 2 to 5 of their legitimate claim. I do not
think that such a plea can be entertained in this petition. Whatever may be the
personal disputes between the respondent No. 2 and his brother or, between the
respondent Nos. 2 to 5 and the petitioner No. 2, they have to be sorted out
elsewhere and not in this petition. The Court is concerned with bona fides as can be found from
factual and undisputable material available in the whole episode. It is
unfortunate that the respondent Nos. 2 to 5 thought it fair and fit to make
certain allegations against a Senior Counsel of Calcutta High Court, who has
given opinion to the petitioners and also against a Firm of Solicitors of
Calcutta. They have no opportunity to meet such allegations. Making such
allegations in collateral proceedings may not be appropriate. It cannot be
disputed that the Senior Advocate, Sri. R.N. Bajoria of Calcutta High Court,
was consulted by the petitioner- company in the matter and he had given his
opinion advising the petition ers to take certain steps before effecting the
transfer. The material also shows that the Solicitors' Firm of Khaitan &
Co. was consulted in the matter and legal opinion was obtained from them. It
may be, that the opinion given was not in accordance with the correct legal
position. It was not so, is now established by the decision of the CLB which
was affirmed by the decision of this Court. Fact remains that steps taken by
the company for not registering the claim of the respondent Nos. 2 to 5 were on
advice obtained by them from competent persons. The fact that steps were taken
to obtain advice before refusing registration of the shares, prima facie shows the lack of mala fides on part of the
petitioners. It is argued by the learned senior counsel Sri Shanthi Bhushan,
appearing on behalf of the petitioners, that the petitioners at no point of
time wanted or desired to utilise the amount of dividend in question for the
use of the Company. The Company has shown its fairness by depositing all the
dividend due in the account called as 'Unpaid Dividend Account' as envisaged
under section 205A. Section 206A enjoins that during the period when
registration in respect of transfer of shares has not been done,
notwithstanding anything in any other provision, the dividend in relation to
such shares has to be transferred to the special account referred to under
section 205A. It is thus argued that non-payment of dividend by the company to
the respondent Nos. 2 to 5 during the interregnum was in accordance with
provisions of law and the petitioners cannot be held responsible for such
non-payment.
9. Sri Ratnakar, the learned counsel for the
respondent Nos. 2 to 5, has however argued that section 206A has no application
in the facts and circumstances of this case. Such provision comes into play
only when transfer of share is pending
with the company, (underlined to give emphasis). If the question of
transfer is not pending with the company
(underlined to give emphasis), this provision will not apply.
Section 206A is as
follows :
"Right
to dividend, rights shares and bonus shares to be held in abeyance pending
registration of transfer of shares.—Where any instrument of transfer of
shares has been delivered to any company for registration and the transfer of
such shares has not been registered by the company, it shall, notwithstanding
anything contained in any other provision of this Act,—
(a) transfer the dividend in relation to such shares to the special account referred to in section 205A unless the company is authorised by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares any offer of rights share under clause (a) of sub-section (1) of section 81 and any issue of fully paid-up bonus shares in pursuance of sub-section (3) of section 205."
10. The argument is, that in the instant case
the company has rejected the application of the respondent Nos. 2 to 5 on each
occasion and had returned the share certificates along with other documents on
every occasion. The matter was not pending with the company. It is argued that
the company was thus devising ways and means not to register the transfer. It
is said that the course of events show that the whole exercise was mala fide. In any event, the question
of transferring shares in favour of the respondent Nos. 2 to 5 and registering
them in their name was not pending with the company and therefore, the payment
of dividend could not have been kept in abeyance. The learned counsel for the
respondent Nos. 2 to 5 brings to my notice the observations made by the learned
Author Shri Ramaiya in his Book
on the Companies Act, 1956, (13th Edition). The learned Author had stated that
section 206A does not apply where registration of company's shares was refused
by company itself. Though such opinion of an author has undoubtedly some
weight, it cannot be said that it is the last word. It is possible to take the
view that section 206A applies in all cases where the instrument of transfer of
shares has been delivered to a company but the transfer has not been registered
by the company for any reason whatsoever. In any event, in view of advice
obtained by petitioner-company from a senior advocate and a Firm of Solicitors,
the registration of transfer of shares was not done is the factual position.
11. It is next argued by Sri Ratnakar, the
learned counsel for the respondent Nos. 2 to 5, that whether registration was
done or not done on proper legal advice, is not very relevant. The learned
counsel argues that the company should have obtained, if at all it was acting bona fide, opinion on the point of
liability to make payment of dividend with reference to section 206A. The
advice and opinion obtained by the petitioners was really with reference to
section 108 of the Act. In other words, the advice or opinion was obtained as
to whether shares should be transferred and registered in the name of the
respondent Nos. 2 to 5 or not. It is true that the petitioners had obtained
advise as argued by the learned counsel for the respondent Nos. 2 to 5, merely
for registering the shares on a transfer. But once the petitioners were advised
not to register the shares in the name of the respondent Nos. 2 to 5 till
necessary compliance was done, it followed naturally that the payment of
dividend to the respondent Nos. 2 to 5 could not have been made. The learned
counsel for the respondent Nos. 2 to 5 then argues that in any event the
petitioners were bound to pay the dividend to the transferors from whom the
respondent Nos. 2 to 5 were seeking transfer. Had such dividend has been paid
to the transferors, the petitioners could have validly said that they had
discharged the liability. Then the matter would have been between the
transferor and the respondent Nos. 2 to 5. There is some force in this
contention. There was no reason for petitioners not to pay dividend to the
transferor. If the petitioners were not inclined to accept the respondent Nos.
2 to 5's request for transfer, it only meant that the said shares continued to
be the property of the transferor. There was thus no reason for not paying
dividend to the transferor. If the transferor did not dispute the validity of
transfer, he would have held the dividend amount in trust for the respondent
Nos. 2 to 5 or, would have immediately passed it on, to the respondent Nos. 2
to 5. In fact there is material on record to show that prior to 1990 the
dividend was paid to the transferor. Sale of shares to the respondent Nos. 2 to
5 was dated 15-9-1986. The dividend from 1986 to 1990, was then passed on by
the Administrator to the respondent Nos. 2 to 5 who also informed that the
Deccan Company was acknowledging the respondent Nos. 2 to 5 as the transferees.
However, non-payment of dividend to the transferor-shareholders is not the
subject matter of this petition, as the petitioners are seeking protection, or
shield from prosecution of a likely complaint to be filed by the respondent
Nos. 2 to 5 under section 207 for non-payment of dividend to them. The question
therefore is whether petitioners should be relieved unconditionally of
liability arising out such likely prosecution ?
12. have found that non-payment of dividend to
transferor-shareholders by the petitioner-company was unjustified. However, for
such nonpayment to the transferor-shareholders, complaint can be lodged by the
transferor-shareholders and not by the respondent Nos. 2 to 5. As long as
shares were not transferred and registered in their name they could not have
made a claim to the dividend amount. Therefore, we have to find out in the
first place whether non-transferring and non-registering shares in name of the
respondent Nos. 2 to 5 was a bona fide
act or not ? I have no doubt in my mind that if the Court finds that the
company mala fide or, lacking bona fides, did not transfer the
shares in the name of the transferee then such act of non-registration will not
be covered by provisions of section 206A. In such case the company would be
liable to pay the dividend not to the transferor but to the transferee, due to
the absence of bona fides on
its part. No body can take advantage of his own wrong. However, in the instant
case as pointed out earlier, the company had taken care to obtain advice from a
Senior Counsel as well as from a Firm of Solicitors. Though the advice was
proved to be incorrect, it cannot be said that the company lacked bona fides. Furthermore, in my view
it is not open now to attribute any ulterior motives to the senior counsel who
gave opinion or, to the Firm of Solicitors. The question had to be agitated
before the CLB as also in appeal before this Court. I have gone through the
judgments of CLB as well as of this Court dated 4-2-1998 in company application
Nos. 1, 2, 3 and 4 of 1995. Neither the CLB nor this Court has anywhere
commented adversely or, attributed any foul play in respect of opinion obtained
by the petitioner-company. In those proceedings the opinion obtained by the
company was a point directly in issue. It does not appear that any argument was
advanced about the lack of credibility of advice/opinions obtained by the
company. I do not think that it would be proper to allow to agitate that
question now, in the present proceeding. In my view the presumption has to be
made about the honesty in matter of the opinions/advice given by the senior
counsel as well as the firm of solicitors, notwithstanding the fact that the
said opinion was found to be inaccurate and not accepted by Court of law. In
this view of the matter, I think that petitioners action, in not paying the
dividend to the respondent Nos. 2 to 5 from 1990 to 1998 cannot be stamped as mala fide. True it is, that non-payment of dividend to the
transferor was not proper but that is another issue and not required to be
discussed at this juncture.
13. From the affidavit and the counters
including additional counter and additional rejoinders, it has come on record
that the company has opened an account in the name 'unpaid dividend account' of
that company. It also appears that the company as soon as it declares dividend
within the permitted period, transfers the whole amount of dividend to this
account and from that account payment of dividend to the shareholders is made.
The unpaid-dividend remains in the same account, undisbursed. The learned
counsel for the respondent Nos. 2 to 5 says that the Act nowhere envisages that
the whole-declared dividend of the company should be transferred to such
account. It is only the unpaid dividend which is required to be transferred to
such account. The act of the company in transferring gross-dividend declared at
once to such an account is violation of the provisions of Act and, for that
violation, the petitioners can be prosecuted. It is argued that such factual
position is admitted by the petitioners themselves and therefore, no shield
should be provided to the company for facing such prosecution. Apart from the
fact that the present petition is in respect of seeking protection from prosecution
only under section 207, the contention raised by the learned counsel for the
respondent Nos. 2 to 5 though may appear attractive, does not convince me prima facie. The learned senior
counsel appearing for the petitioners is right in saying that if the company
has done more than what it was required to do to provide protection to the
investing public, the petitioners cannot be faulted for such over-cautious
attitude. Sri Shanthi Bhushan, the learned Senior Counsel states that initially
when section 206A was about to be inserted by an amendment, in the Act, the
note circulated, for inserting the section at the time of presentation of the
bill, envisaged that such an account should be opened in which company should
transfer the declared dividend. It was probably by way of extra-caution that
the company took the step of transferring of the whole dividend to the account.
In any event, this point really does not arise in the present petition and
therefore, need not be dealt any further.
14. Having regard to all the discussion above, I
think that the petitioners should be given relief. However, the relief cannot
be given unconditionally in the facts and circumstances of the case. The facts
now show that the registration of the transfer of shares in name of the respondent
Nos. 2 to 5 was kept in abeyance for no fault of the respondent Nos. 2 to 5. As
pointed out already, the petitioners did not care to pay dividend to the
transferor also, during all the relevant period. The effect of the judgment of
this Court in confirming the CLB's decision, is obviously that the transfer of
shares ought to have been done in favour of the respondent Nos. 2 to 5 when the
shares were first lodged with company. The respondent Nos. 2 to 5 have been,
for no fault of their, deprived of the amount of dividend for all these years
due to non-registration of transfer in their favour. They are entitled to reasonable interest according
to the current market custom. It would be improper, inequitable and unjust to
direct the respondent Nos. 2 to 5 to file a suit for claiming relief of
interest. In fairness, the petitioners company should have given reasonable
interest to the respondent Nos. 2 to 5, in the circumstances of the case.
Further, the respondent Nos. 2 to 5 were embroiled in various litigations for
considerable time.
In
these circumstances, the petitioners are relieved of liability under section
207 on a condition precedent that the petitioners, or the company, pay interest
to the respondent Nos. 2 to 5 on their respective dividends, at the rate of 12
per cent per annum (simple) on the amount declared from 1990 till 1998 as and
when the said amount become due for payment to the shareholders. It is made
clear that the respective interest shall start from the days when the Act
requires the despatch of warrants to the shareholders. The petitioners shall
also pay costs of Rs. 10,000 in one set to respondent Nos. 2 to 5. If the
interest and costs so ordered are paid within a period of one month, the
petitioners shall stand relieved of the liability of prosecution under section
207 of the Act, on any complaint of the respondent Nos. 2 to 5 individually or,
jointly.
15. The company petition No. 60 of 1998 is
accordingly disposed of.
[1975] 45 Comp Cas 429 (DelHI)
HIGH COURT OF
DELHI
v.
Globe United Engg. & Foundry
Co. Ltd.
V.S. DESHPANDE AND B.C. MTSRA, JJ.
COMPANY APPEAL NO. 6 OF 1974
G.L. Sanghi, B.P.
Singh and K.K. Bhatia for the Appellant.
D.S. Dang, R.C. Beri and
N.W. Goswami for the Respondent.
The question
for decision involving construction of sections 9, 36, 85, 100, 102, 205, 211
(read with Schedule VI), 217 and 511 of the Companies Act, 1956 (hereinafter
called "the Act"), is whether the holders of preference shares
carrying a right to a fixed cumulative dividend payable when the company is a
going concern only out of profits earned and when dividend is recommended to be
paid by the directors in a general meeting are entitled during the winding-up
of the company to the arrears of the fixed cumulative dividend in view of
article 7 of the articles of association out of the assets of the company which
did not make any profits at any time at all.
The
appellant-company, Messrs. Globe Motors Ltd., are the equity shareholders of
respondent No. 1, Messrs. Globe United Engineering & Foundry Company Ltd.
Respondents Nos. 2 to 7 are the holders of the company's (respondent No. 1)
preference shares carrying a fixed cumulative dividend as per article 7(i) of the articles of association which
is as follows:
"The
preference shares shall confer on the holders thereof the right to a fixed
cumulative preferential dividend of 9.5% per annum free of company's tax but
subject to deduction of taxes at source at the prescribed rates on the capital
paid up thereon, and in the event of winding up, the right of repayment
of capital and arrears of dividend whether earned, declared or not, up to the
commencement of the winding-up in priority to the equity shareholders."
As the expected foreign technical collaboration did
not materialise, the company did not go into business at all but went into
voluntary liquidation which was later put under the supervision of the court.
The liquidator made a reference to this court under section 518 of the Act as
to whether the preference shareholders of the company were entitled to the
payment not only of their share capital but also of the arrears of the fixed
cumulative dividend thereon before any payment is made to the equity
shareholders out of the assets of the company in liquidation. The learned
company judge answered the question in the affirmative relying mainly on the
unanimous opinions of writers on British company law based on English
decisions. Hence this appeal by the equity shareholders.
Shri G.L. Sanghi for the appellant urges that the
answer to the above question should be governed not so much by the weight of
the British text books and precedents but by the provisions of our Companies
Act which may be dissimilar. Shri D.S. Dang for the respondents submitted that
the provisions of our Companies Act would lead to the same conclusion. In the
light of their arguments and our own further thinking, we shall consider the
question in depth primarily on the construction of the relevant provisions of
the Companies Act and article 7 and then see if the British precedents and the
opinions of well-known authors lead to the same conclusion.
We first start with the premise that the company and
its shareholders are two different legal entities. When the company was
incorporated, it adopted its memorandum and articles of association including
article 7. These were the statutory terms of contract governing the
relationship between the company and the shareholders. Persons who contributed
the preference share capital became members of the company on these terms. The
effect of the memorandum and articles of association is stated in section 36(1)
of the Act as follows:
"Subject to the provisions of this Act, the
memorandum and articles shall, when registered, bind the company and the
members thereof to the same extent as if they respectively had been signed by
the company and by each member, and contained covenants on its and his part to
observe all the provisions of the memorandum and of the articles."
The expression "subject to the provisions of
this Act" recalls section 9 of the Act which is as follows :
"Save as otherwise expressly provided in the Act—
(a) the provisions of this Act shall have effect
notwithstanding anything to the contrary contained in the memorandum or
articles of a company, or in any agreement executed by it, or in any resolution
passed by the company in general meeting or by its board of directors, whether
the same be registered, executed or passed, as the case may be, before or after
the commencement of this Act; and
(b) any provision contained in the memorandum,
articles, agreement or resolution aforesaid shall, to the extent to which it is
repugnant to the provisions of this Act, become or be void, as the case may
be."
At the first blush, one may think that every
provision of the Act would override every provision in the articles to the
extent of repugnancy between the two. We would like to emphasise that this is
not so. The reason is that the Companies Act, like all law relating to companies,
consists of two distinct parts, namely, (1) relating to the formation and the
management of a company as a going concern, and (2) relating to its winding-up.
The difference between the two is the same as between running and stopping. The
memorandum of a company sets forth the objects to be achieved by the working of
the company during its lifetime. It does not usually provide for what is to
happen during its winding-up. Parts I to VI of the Companies Act contain
provisions regulating the formation and the management of companies. Part VII
relates to the winding-up of companies. Similarly, the majority of the articles
of association are concerned with the formation and working of the company
while article 7 consists of two parts, the first part relating to the company
as a going concern and the second part relating to its winding-up. The
existence of two distinct provisions in the same article strikingly brings out
the contrast between the working of the company and its winding-up. The effect
is that some provisions of the company law and of the articles would apply
exclusively to a company which is a going concern while the other provisions
would apply only to a company in liquidation.
It is in this background that section 511 has to be
read which is as follows:—
"Subject to the provisions of this Act as to
preferential payments, the assets of a company shall, on its winding-up, be
applied in satisfaction of its liabilities pari passu and, subject to such
application, shall, unless the articles otherwise provide, be distributed among
the members according to their rights and interests in the company."
Subject to the making of preferential payments (e.g., under sections 520 and 530),
the assets of the company are distributed among the members according to their
rights and interests in the company unless
the articles otherwise provide (emphasis
supplied). The rights and interests of the members in the company are based
both on the provisions of the Act and of the articles of association. In
striking contract with sections 9 and 36, the articles prevail over the second
part of section 511. Since sections 9 and 36 ensure the superiority of the
provisions of the Act as against the provisions of the articles, the obvious
difference between them and the provisions of section 511 securing the
superiority of the articles over its second part can be understood only on the
hypothesis that sections 9 and 36 relate to those provisions of the Act which
apply to the working of a company as a going concern while section 511 refers
to those provisions of the Act which apply during the winding-up of the
company. This is why the former override the articles while the latter is subject
to the articles.
The prospectus was issued in 1967 long after the
terms of the contract between the company and the members were settled by the
articles which were finalised in 1963. The representation made in the
prospectus inviting the public to subscribe capital and buy the shares of the
company would not change the terms of the contract between the company and the
members which are already settled. The prospectus did not become a contract
between the company and the members inasmuch as the subscribers buying the
shares did so with the knowledge that the contract would consist of the
memorandum and the articles of association and not of the representations made
in the prospectus. Any variation between the language of the prospectus and
article 7(i) is, therefore, to
be construed as the article prevailing over the prospectus.
Originally, the statutes relating to companies in
England made provisions only for the formation and the working of the
companies. Insolvent companies were left to be governed like ordinary persons
by the law relating to insolvency. It was only later that it was realised that
a company may have to be wound up even though it may not have become insolvent.
This led to statutory provisions for the liquidation of companies. Historically,
therefore, the conception of a limited liability company is essentially one of
a working company which, as a legal person, functions side by side with natural
persons. Just as a natural person is governed fully by laws of contract and
property before insolvency but is not governed without modifications by them
during insolvency, similarly a company is governed by such provisions of the
Companies Act and the articles as are applicable to its working but is governed
by a totally different set of provisions and articles which apply during its
liquidation. The fundamental difference between the law governing the working
of a company and the law governing its liquidation was recognised by Lord
Macnaghten in the leading decision of the House of Lords in Birch v. Cropper as follows:
"When the company is wound up, new rights and
liabilities arise............. While the company is a going concern no capital can
be returned to the shareholders, except under the statutory provisions in that
behalf............In the case of winding-up everything is changed. The assets
have to be distributed."
The distinction was also emphasised in a subsequent
leading decision of the House of Lords in Scottish Insurance Corporation Ltd. v. Wilsons & Clyde Coal Company .
The counsel on both sides emphasised the distinction between "the rights
of the stockholders to dividends while the company is a going concern and their
rights in a liquidation, first, to return of capital and, secondly, to surplus
assets" (page 471) and "the status and rights of the preference
stockholders in the company as a going concern.............and the statement of
the rights of the preference stockholders in a liquidation" (pages 474 and
475). The contrast was put in a literary flourish as follows: "There is no
known status of a company being moribund or comatose. Either it is in
liquidation or it is not and the members when they join it contract on the
basis of those two alternatives. There is no half-way house—half law, half fact
and almost wholly picturesque language." (page 475).
The contract between the preference shareholders and
the company is contained in article 7(i)
reproduced above. The first part of article 7(i) obviously refers to the company as a going concern. What is
the meaning of "the right to a fixed preferential cumulative
dividend" conferred on the preference shareholders ? It means that the
company must pay every year to the preference shareholders dividend at a fixed
rate. Why is the dividend to be "cumulative" and
"preferential" ? The reason is that another primary principle of
company law both in our country and in England is that the capital of a company
must be maintained. Sections 100 to 102 ensure that the capital of a company is
not to be reduced except with the consent of a competent court and if any
dividend were to be paid by a company as a going concern without making any
profits, then such dividend would come out of the capital of the company. This
would result in a reduction of the capital without the consent of the court and
would be illegal even if such a payment were to be provided for in the
memorandum and articles of association which themselves would be overridden by
sections 100 and 102. If this was so why was it necessary to enact further
section 205 to ensure that no dividend shall be paid except out of profits ?
The reason seems to be that the word "profits" is itself capable of
having different meanings depending on the different methods of how they are
calculated (Gore-Browne on Companies, 42nd
edition, pages 285-291 and 618 to 624). This is why section 205 specifies how
the profits out of which dividends can be paid are to be ascertained. Even if
profits are earned by a company, it may not choose to distribute dividends out
of them. It is, therefore, for the board of directors to recommend the payment
of dividend in a general meeting under section 217. These provisions of the Act
restrict the contractual right of a preference shareholder to the fixed
dividend during the working of the company. But the second part of article 7(i) relates to the winding-up of the
company and gives the preference shareholder "the right of repayment of
capital and arrears of dividend whether earned, declared or not." This is
the crucial provision in the contract between the preference shareholders and
the company on the true construction of which the decision of the appeal
depends. Let us, therefore, understand the meaning of every important word in
it. What is the meaning of "dividend" ? As pointed out by Buckley on the Companies Acts (13th
edition, page 895) :
"Etymologically a dividend is the 'dividendum',
the total divisible sum. But, in its ordinary sense, it means the sum paid and
received as the quotient forming the share of the divisible sum payable to the
recipient."
From the point of view of the company, the profits
are earned and divided. The profits or a part of the profits may, therefore, be
the dividend to the company. The word "earned" qualifying the word
"dividend" may, therefore, mean either of the two things depending on
whether it is used in relation to the company or in relation to the preference
shareholders. A company earns dividend in the sense of earning profits. A
preference shareholder earns dividend in the sense that the contract between
him and the company embodied in article 7(i) gives him the right to the dividend. What is the nature of
this right ? The phases through which a contractual right passes till it is
enforced by the receipt of a payment of money are described by Hidayatullah
C.J. in H.H. Madhav Rao Scindia v.
Union of India ,
in paragraph 63, as follows :
"The dynamic theory of obligations regards a
debt as a claim to 'an equivalent in value to a floating charge against the
generality of things which are the properties of the debtor'. From this is
developed the notion of a credit-debt where property rights arise from a
promise, express or implied, in respect of ascertained or readily ascertained
sums of money. Thus a debt or a liability to pay money passes through four stages.
First, there is a debt not yet due. The debt has not yet become a part of the
obligor's 'things' because no net liability has yet arisen. The second stage is
when the liability may have arisen but is not either ascertained or admitted.
Here again the amount due has not become a part of the obligor's things. The
third stage is reached when the liability is both ascertained and admitted.
Then it is property proper of the debtor in the creditor's hands. The law
begins to recognise such property in insolvency, in dealing with it in fraud of
creditors, fraudulent preference of one creditor against another, subrogation,
equitable estoppel, stoppage, intransitu, etc. A credit-debt is then a debt
fully provable and which is fixed and absolutely owing. The last stage is when
the debt becomes a judgment debt by reason of a decree of a court. Thus an
American judge held 'outstanding uncollected accounts' as property (Standard Marine Insurance Co. v. Board of Assessors ).
It is because of this that the French law includes such obligations in
mobiles."
What is the reason why in the first part of article
7(i) only the word
"dividend" is used while in the second part of article 7(i) the words "arrears of
dividend" are used ? The answer is given by Professor R. R. Pennington in
his Company Law, 3rd edition.
The learned author deals with the company as a going concern at page 180 and
observes as follows :
"It is common to speak of the unpaid balance of
preference dividend as 'arrears' but this is misleading because it conveys the
impression that the unpaid balance is a sum of money which the company already
owes the preference shareholders. The preference dividend only becomes owing
when (a) there are profits
available to pay it, and (b) it
has been properly declared in accordance with the articles, unless they
dispense with a declaration, and when there are arrears of preference dividends
ex hypothesi one or other or
both of these things have not happened."
This is why the first part of article 7(i) does not talk of arrears of
dividend but merely emphasises that the dividend is cumulative. That is to say,
even if a dividend is not declared and paid in one year, the right to it continues
to accumulate till the whole accumulation is declared and paid later. Strictly
speaking, when the company is a going concern, unearned and undeclared dividend
is not due and does not amount to arrears. But the situation is completely
changed during the winding-up. At page 186 Professor Pennington comments on an
article under which arrears of preference dividend are payable in a winding-up
in the following words:
"Under such a clause unpaid preference dividends
are payable for periods up to the repayment of the preference capital, even
though the dividends have not been declared, and even though the company did
not earn sufficient profits to pay them while it was a going concern."
The learned author does not dispute the use of the
word "arrears" as applied to a company in liquidation and thus
recognises the fundamental difference between the two situations. The same
dividend which is not payable during the life of a company as not having been
earned or declared becomes payable with
all the arrears during liquidation even if it is not earned or declared.
Section 85 of
the Act defines "preference share capital" and expressly recognises
the distinction between the right of a preference shareholder to the payment of
a dividend when the company is a going concern and to the same right when the
company is in liquidation. It reads as follows :
"Preference
share capital means, with reference to any company limited by shares, whether
formed before or after the commencement of this Act, that part of the share capital
of the company which fulfils both the following requirements, namely :
(a) that
as respects dividends, it carries or will carry a preferential right to be paid
a fixed amount or an amount calculated at a fixed rate, which may be either
free of or subject to income-tax ; and
(b) that
as respects capital, it carries or will carry, on a winding-up or repayment of
capital, a preferential right to be repaid the amount of the capital paid up or
deemed to have been paid up, whether or not there is a preferential right to
the payment of either or both of the following amounts, namely :
(i) any
money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding-up
or repayment of capital; and
(ii) any
fixed premium or premium on any fixed scale, specified in the memorandum or
articles of the company."
The words
"whether or not there is a preferential right to the payment
of...........any money remaining unpaid in respect of the amounts specified in
clause (a)" are decisive.
They recognise that a contract between the preference shareholder and the
company may provide for the payment of unpaid preferential dividend on a
preference share capital during the winding-up. Because they apply only during
the winding-up proceedings, they are not subject either to section 205 or to
section 217 which restrict payment of dividends to earning of profits and to
the declaration of dividends. Article 7(i)
is, therefore, clearly authorised by section 85(1)(b)(i). It is to be
noted that the words the amounts specified in clause (a) in section 85(1)(b)(i) simply mean the amount of
preferential dividend calculated at the fixed rate. They do not import the
restrictions imposed by sections 205 and 217 on the payment of such amount.
These restrictions would be implied in section 85(1)(a) which refers to the company as a going concern but not in
section 85(1)(b) which refers
to it during liquidation. Had section 85(1)(b)(i) been
subject to sections 205 and 217, it could not have permitted a contract to
provide for payment of dividend to preference shareholders during winding-up.
Such a provision could be permitted by contract only because sections 205 and
217 are not applicable during winding-up. Section 205(1) says "no dividend
shall be declared or paid by a company for any financial year except out of the
profits of the company for that year arrived at after providing for
depreciation in accordance with the provisions of sub-section (2)". The
determination of profits for a particular year after providing for depreciation
can only be the act of a company which is a going concern. Section 217(1)
refers to a report by the board of directors placed before a general meeting.
But the board of directors becomes extinct and is replaced by the liquidator
during the winding-up proceedings. None of these sections can, therefore, apply
during winding-up. They do not, therefore, restrict or affect the right of the
preference shareholders to payment of arrears of dividend during winding-up.
The reason
why article 7(i) is so worded
is historical. Formerly, the English judges were also dominated by the idea
that dividends not being payable except out of profits could not be paid during
winding-up if no profits had been made. This view was expressed in In re W.J. Hall & Co. Ltd.
The distinction between the company as a going concern and a company during
liquidation was, however, soon realised and this decision was dissented from
successively in the subsequent decisions in In re New Chinese Antimony Co. Ltd.,
in In re Springbok Agricultural
Estates Ltd.
and finally in In re Wharfedale
Brewery Co. Ltd.,
all of which suggested or concluded that arrears of dividend were
payable to the preference shareholders during winding-up irrespective of
profits having been made. This view was followed in India by K.K. Desai J. of
the Bombay High Court in In re Bombay
Chlorine Products Ltd.
The same view was also expressed in In
re F. De Jong & Co. Ltd.
and in In re E.W. Savory Ltd.
It is in the light of this development of judicial decisions that Palmer's Company Precedents, 17th
edition, states the following conclusion at pages 779-780 :
"Prima facie a preference dividend is
payable only out of the profits made whilst the company is a going concern, and
it wants special provision to give the holders a right to have the arrears paid
out of assets in winding-up........If by the articles arrears are to be paid,
they may be payable although no profits have been made."
Shri Sanghi
suggested that the words in article 7(i)
"arrears of dividend whether earned, declared or not" should not be
literally construed. He put forward the distinction between the earned and the
unearned income, the former being due to appreciation of the assets of the
company. He argued that the latter part of article 7(i) only meant that dividend was payable whether profits
were by way of earned or unearned income or not. He maintained, therefore, that
if the profits were not made by a company at all, then dividend was not payable
in winding-up. Firstly, the expression "earned, declared or not" is
not accidental but deliberate. The juxtaposition of the words
"earned" and "declared" recalls the two limits on payment
of dividend when the company is a going concern, namely, non-earning of profits
and non-declaration of dividends referred to in sections 205 and 217 of our
Act. The word "earned" is not, therefore, used in contradistinction
to the word "unearned".
While the company is a going concern, it has to
prepare a balance-sheet annually as per section 211 and Schedule VI to the
Companies Act-The left side of the balance-sheet shows the liabilities and the right
side shows the assets. As remarked by Professor Pennington at page 600 of his
book referred to above, "the left hand side of a balance-sheet is often
misleadingly referred to as the liabilities side ; it is certianly true that
the company's debts and liabilities appear there but so also do other items
such as paid up capital and reserves which are not liabilities owed by the
company but represent the interest of its shareholders in its undertaking. The
left hand side of the balance-sheet should be regarded as a statement of the
way in which the company's assets shown on the right hand side would be applied
if the company were wound up immediately". Item No. (13)(3) under the
heading "Provisions" on the side of the liabilities in the statutory
form of balance-sheet in Schedule VI is as follows :
"Arrears of fixed cumulative dividends". An
explanatory note added to it says that "the period for which the dividends
are in arrears.......shall be stated". This is a statutory recognition of
the fact that in the balance-sheet of a company, provision has to be made for
payment of the liability consisting of the arrears of fixed cumulative
dividends. This may or may not mean that there is an enforceable debt due to a
preferential shareholder against a company while it is a going concern. But it
does mean that a provision has to be made by the company for the payment of the
arrears of cumulative dividend in its balance-sheet with a view to provide for
payment of such cumulative dividends in the event of winding-up.
Shri Sanghi then argued that the English decisions
should not be allowed to influence the construction of article 7(i) inasmuch as there was no provision
in the English Companies Act, 1948, corresponding to section 205 of our
Companies Act. This argument ignores the fact that article 116 of Table A of
Schedule I of the English Companies Act corresponds to section 205 of our
Companies Act.
The reason why the distinction between profits on the
one hand and the capital and the other assets of the company on the other hand
so important when the company is a going concern disappears when the company is in liquidation is that in
liquidation the whole of the property of the company is treated as its assets
without any difference between the sources from which the assets have accrued
to the company. Shri Sanghi contended that even during liquidation a
distinction between the different sets of assets could be made according to
their sources. He relied on the special definition of a "dividend" in
the Income-tax Acts by which income-tax could be imposed on that part of the
assets of a company in liquidation which could be traced to the profits made by
the company (Hari Prasad Jayantilal
& Co. v. Income-tax Officer
,
Bharat Fire and General Insurance Co. v. Commissioner of Income-tax
and Kantilal Manilal v. Commissioner of Income-tax ).
But these very decisions show that such a distinction could be made during
winding-up only for the purposes of taxation and that it was not relevant for
the purposes of the distribution of the assets of the company.
On the other hand, in J.K. (Bombay) (P.) Ltd. v. New
Kaiser-I-Hind Spg. & Wvg. Co. Ltd.,
the Supreme Court recognised the distinction between a company as a
going concern and the company during winding-up, in the following words :
"..................the very object for which the
company existed and which also was the assumption on which the scheme was framed
ceased to exist......... The effect of a winding-up order is that except for
certain preferential payments provided in the Act the property of the company
is to be applied in satisfaction of its liabilities pari passu. Pari passu distribution is to be made in
satisfaction of the liabilities as they exist at the commencement of the
winding-up."
Applying this principle to our case, it is apparent
why some but not all rights created during the working of the company survived after
the winding-up order is made. Those rights which concern the working of the
company do not survive. For, the very objects of the company ceased. On the
other hand, those rights which are expressly meant to be worked out only during
the winding-up of the company survived and become enforceable after the
winding-up, e.g., the right to
the preferential payment of cumulative dividends to preference shareholders
being a right which becomes enforceable only during the winding-up.
Lastly, Shri Sanghi stressed that this was a very
exceptional case. The company did not go into business at all. In such a case
cumulative dividends to preference shareholders should not be paid out of
capital. We do not see, however, any difference between such a company and a company
which has made no profits and which may have run into losses. In either case,
the cumulative dividend shall have to be paid out of the capital of the
company. The rule against reduction of capital or nonpayment of dividends
except from profits ceases to apply during winding-up simply because the very
object of winding-up is to obliterate all distinctions in the kinds of assets
and to apply the assets under section 511 of the Companies Act.
For the above reasons, the answer given to the
reference made by the liquidator by the learned company judge, namely, that the
arrears of dividends on preference shares are payable during the winding-up
under article 7(i) is upheld.
The appeal is dismissed. The parties to bear their own costs.
[1986] 59 COMP. CAS. 35 (DELHI)
v.
AVADH
BEHARI ROHATGI AND G.C. JAIN, JJ.
LETTERS
PATENT APPEAL NO. 18 OF 1975.
K.K.
Jain and Pramod Dayal, for the Appellants.
B.N.
Lokur, R.K. Mehra, and D.S. Dang, for the Respondent.
Rohatgi, J.—The short question in this appeal is whether the
declaration of interim dividend by the directors of a company is a
"liability". This question arose on a writ petition filed by the appellants,
the Punjab National Bank Ltd. (the company), and its three shareholders,
against the respondent, the Union of India, under art. 226 of the Constitution.
It will be recalled that by the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 5 of 1970 (the Act), the banking business of the company,
known as the Punjab National Bank, was taken over by the Central Government
with effect from July 19, 1969. The Central Government paid to the company
compensation of Rs. 1,020 lakhs.
What the Act did was this.
It took over the "existing banks". It created the "corresponding
new banks" of which profits will henceforth go to the Central Government.
The banking business was nationalised with a view to serve the people better
and to meet the needs of a developing economy, as the preamble said.
Three days before the
acquisition, the board of directors of the company had passed a resolution on
July 16, 1969, declaring an interim dividend for the half year ending June 30,
1969, at the rate of Rs. 1.20 gross per share. This resolution was passed by
the board of directors pursuant to the authority conferred on them by 84th
article of the articles of association of the company which provided as
follows:
"The directors may
from time to time pay to the members such interim dividend as appear to the
directors to be justified by the profits of the company."
Founding themselves on s.
5(1) of the Act, the company claimed in the writ petition that the respondent,
Union of India, be directed to pay the amount of interim dividend to the
shareholders as it was a "liability" and an "obligation" of
the Central Government under the said provision :
Section 5(1) of the Act
reads :
"5. General effect of vesting.—(1) The
undertaking of each existing bank shall be deemed to include all assets,
rights, powers, authorities and privileges and all property, movable, and
immovable, cash balances, reserve funds, investments and all other rights and
interests' in, or arising out of, such property as were immediately before the
commencement of this Act in the ownership, possession, power or control of the
existing bank in relation to the undertaking, whether within or without India,
and all books of account, registers, records and all other documents of
whatever nature relating thereto and shall also be deemed to include all
borrowings, liabilities and obligations of whatever kind then subsisting of the
existing bank in relation to the undertaking."
The Union of India
contested the claim. The learned single judge by his judgment dated October 4,
1974, held that it was an "obligation" within the meaning of s. 5(1)
of the Act. But he dismissed the writ petition on the ground that the interim
dividend could be paid only out of profits and the profits having gone to the
Central Government under s. 10(7) the Custodian, Punjab National Bank,
respondent No. 3, could not be directed to pay the interim dividend to the
shareholders as that would be a violation of the statutory provision. His
judgment is reported as Punjab
National Bank Ltd. v. Union of
India [1975] 45 Comp Cas 408 ; [1975] ILR 1 Delhi 415.
Section 10(7) says:
"10. Closure of accounts and disposal of
profits....(7) After making provision for bad and doubtful debts,
depreciation in assets, contributions to staff and superannuation funds and all
other matters for which provision is necessary under any law, or which are
usually provided for by banking companies, a corresponding new bank shall
transfer the balance of profits to the Central Government."
So the learned judge
dismissed the writ petition. From his order, the company and the shareholders
have appealed to this court.
The principal question for
decision is whether the interim dividend declared by the directors on July 16,
1969, is a "liability" of the taker of the undertaking. The Central
Government was the taker of the existing bank of the company. In other words,
can the Central Government be directed to pay interim, dividend to the
shareholders of the company, it being a "liability" ?
The answer to this question
admits of no difficulty. It is settled law in England and India that in case of
an interim dividend which the directors have resolved to pay, it is open to
them at any time before payment to review their decision and resolve not to
pay. This was established in England as early as 1901 by the decision of Joyce
J. in Lagunas Nitrate Co. Ltd. v.
Henry Schroeder & Co. &
Schmidt [1901] 85 LT 22; [1901] 17 TLR 625. This case has since been
followed in England and India.
In India, the Supreme Court
in J. Dalmia v. CIT [1964]
53 ITR 83 ; 34 Comp Cas 668, following Lagunas
Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625, held that the
interim dividend is not a debt and, therefore, not an enforceable obligation.
Shah J. said (at p. 87 of 53 ITR and at p. 672 of 34 Comp Cas):
"But a mere resolution
of the directors resolving to pay a certain amount as interim dividend does not
create a debt enforceable against the company, for it is always open to the
directors to rescind the resolution before payment of the dividend."
And again (at p. 88 of 53
ITR and at p. 673 of 34 Comp Cas):
"Even if the directors
have resolved to pay interim dividend, they may before payment rescind the
resolution."
The legal position of final
dividend is entirely different. Where a dividend is declared, it becomes a debt
due from the company to the shareholders. If final dividend is declared by the
company without any stipulation as to the date of payment, the declaration of
the dividend creates an immediate debt: In
re Severn and Wye and Severn Bridge Ry. Co. [1896] 1 Ch 559. As Shah J.
said (at p. 87 of 53 ITR and at pp. 671 and 672 of 34 Comp Cas):
"There is no doubt
that a declaration of dividend by a company in general meeting gives rise to a
debt. When a company declares a dividend on its shares, a debt immediately
becomes payable to each shareholder in respect of his dividend for which he can
sue at law, and the statute of limitation immediately begins to run: In re Severn and Wye and Severn Bridge Rly.
Co. [1896] 1 Ch 559. But this rule applies only in case of dividend
declared by the company in general meeting. A final dividend in general may be
sanctioned at an annual meeting when the accounts are presented to the
members."
Comparing and contrasting
final dividend from interim dividend, he said (at p. 88 of 53 ITR and at p. 672
of 34 Comp Cas):
"Therefore, a
declaration by a company in general meeting gives rise to an enforceable
obligation, but a resolution of the board of directors resolving to pay interim
dividend or even resolving to declare interim dividend pursuant to the
authority conferred upon them by the articles of association gives rise to no
enforceable obligation against the company, because the resolution is always
capable of being rescinded."
In the present case, the
learned judge took a different view. He held that Lagunas Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625, did
not apply because the resolution was never rescinded by the board of directors.
Till it is rescinded, he said, it was a "legal obligation" within the
meaning of s. 5(1) of the Act.
With due deference to the
learned judge, his view is based on a complete misapprehension of the true
legal position. In Buckley on the
Companies Acts (14th edition), vol. I, at p. 1030, the author says:
"Where the directors are
authorised to pay interim dividends, a mere resolution to pay does not create a
debt as between the company and the members so as to prevent the directors from
subsequently rescinding the resolution."
In Pennington's Company Law (4th edition), p. 367, the author says
:
"An important
difference between final and interim dividends is that once a final dividend
has been declared, it is a debt payable to the shareholders and cannot be
revoked or reduced by any subsequent action of the company; but where directors
have power to pay interim dividends, their decision to do so is not a
declaration of dividend, and so can be rescinded or varied at any time before
the dividend is paid."
It is not necessary to multiply
the authorities. But reference can usefully be made to Gore-Browne on Companies, 42nd edition, p. 297 ; Palmer's Company Law, 23rd edition,
vol. I, p. 979 ; Halsbury's Laws of
England, 4th edition, vol. 7, p. 355, para. 608 ; Topham and Ivamy's Company Law, 16th
edition, p. 181. Lagunas Nitrate's case
[1901] 85 LT 22 ; [1901] 17 TLR 625, has been cited everywhere as the leading
case for the proposition that a directors' declaration of interim dividend may
be rescinded before payment has been made.
Following Lagunas Nitrate's case [1901] 85 LT
22 ; [1901] 17 TLR 625, Brightman J. in Potel
v. IRC [1971] 2 All ER
504, 513, has recently held "that an interim dividend is, as it were,
subject to the will of the directors until it is actually paid."
There is a difference
between declaring a dividend and paying a dividend. The declaration of a
dividend by a company in general meeting creates a debt enforceable immediately
or in the future, according as to whether the dividend is or is not expressed
to be payable at a future date. The payment of dividend is a different
operation. It is an actual distribution of profits of the company. The two
processes—declaration and payment—are quite separate. The article in the
present case did not in terms authorise the directors to declare a dividend,
that is to say, to create a relationship of debtor and creditor between the
company and its members. It only authorised the act of payment. This is usual
in the case of an interim dividend. (Potel
v. IRC [1971] 2 All ER
504 at p. 513). On payment, undoubtedly, interim dividend becomes the property
of the shareholder, as Shah J. said in J.
Dalmia v. CIT [1964] 53 ITR 83 ; 34 Comp Cas
668.
From the cases and the
standard text book writers, it appears that the proposition that a declaration
by the directors of an intended dividend to be paid at some future date may be
rescinded by a resolution of the directors before that date arrives is now
firmly established. The decisive act is the payment and not the declaration. A
mere declaration without payment has no value. The essential thing is payment.
If the directors declare but do not pay, there is no liability. A declaration
is a mere intention. The declaration can be reviewed. It can be varied. It can
be rescinded.
Before declaring an interim
dividend, the directors must satisfy themselves that the financial position of
the company warrants the payment of such dividend out of profits available for
distribution. But, as Lord Alverstone C.J. observed:
"The declaration of
interim dividend depends much more upon estimates and opinions than the
declaration of a final dividend, which is made upon the information contained
in a formal balance-sheet." (Lucas
v. Fitzgerald [1903]
20 TLR 16, 18).
Between declaration and
payment of interim dividend there are many a slip between the cup and the lip.
It may turn out that the position of the company does not justify the payment
of dividend, as happened in Lagunas
Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625. There was a pending
litigation and the company was advised by their solicitors that no profits
ought to be divided till the termination of the pending litigation. The
directors decided not to pay even though they had set apart the money for
payment in a separate "Interim dividend account". In a reserved
judgment, Joyce J. said :
"As at present advised
I do not see why the board of directors might not before an interim dividend is
actually paid, acting bona fide, reconsider the question as to whether it ought
to be paid at all." (Lagunas Nitrate's
case, [1901] 85 LT at p. 23).
He held that this is so
even if the cash to cover the proposed dividend has been placed into a separate
account. The directors' paramount duty is not to pay dividends out of capital,
and accordingly, after declaring an interim dividend and before payment, the
directors can reconsider the matter and properly refuse to pay it for they may
discover that it will, if paid, have to be paid out of capital. (Palmer's Company Precedents, 17th
edition, Part I, p. 601).
In the present case, the
directors passed the resolution declaring interim dividend on July 16, 1969.
The Act came into force with effect from July 19, 1969. This extraordinary
happening of acquisition of the most profitable banking business of the company
by the Central Government would upset all estimates of profit and no directors
in that situation will ever dream of paying interim dividend even if they have,
as in this case, already declared it. The company was faced with an
unprecedented situation. By one stroke of the pen, the draftsman took over the
entire undertaking of the existing bank. This was a singular exercise of power
of eminent domain. The cold and paralysing hand of the draftsman brought the
banking business of the company to a dead end. The Government took over the
going concern, the kernel of the thing, leaving behind the husk of the company.
When its very existence was at stake, there was no question of paying interim
dividend by the company.
The Act strikes at the
heart of private ownership. The Legislature authorised the taking of property,
subject to paying compensation. This was appropriation of private property for
public use by virtue of the power of eminent domain. The corporate wealth was
taken in the public domain, leaving no part of the profits with the directors
out of which they could pay the interim dividend which they had declared just
three days before the taking over of the existing bank. In these circumstances,
the directors had incurred no liability. If it was no longer the directors'
liability, it could not be the liability of the taker.
The take-over situation in
this case itself amounted to rescission, a nullification, of the directors'
resolution without anything more. Interim dividend was to be paid out of
profits. That is a cardinal principle of company law. Now, if under the Act the
profits of the existing undertaking vest in the Central Government on
acquisition, the directors' resolution is nullified by the very act of
take-over. In one word, the acquisition meant the death of the resolution.
A mere declaration of
intention has no insignia or characteristic of a "liability" or
"obligation" as used in s. 5(1). To hold, as was held by the learned
judge, that till it is rescinded, the declaration of interim dividend is a "liability"
is to miss the real point. As Pennington tersely puts it: "Where directors
have power to pay interim dividends, their decision to do so is not a
declaration of dividend", because it can be rescinded. A thing which is
subject to the will of another is not an "obligation". He may or may
not perform the obligation.
The resolution of July 16,
1969, was neither a "liability" nor an "obligation". It was
an expression of a desire. It was not a debt. It was at best a pious wish but
not enforceable at law. It was an intention. But intention is one thing and
payment another. In my opinion, the learned judge was wrong in holding that it
was an "obligation" within the meaning of s. 5(1). The fundamental
fallacy in his reasoning is that he equates intention with an obligation to
pay. The learned judge thought that Lagunas
Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625 did not apply. I
think it is a complete answer to the case of the shareholders which the company
espouses.
Having held that the
declaration of interim dividend is a liability of the Government, the learned
judge decided against the company on another point. This other point is that
dividend can be paid only out
of profits and since the profits of the corresponding new bank under the Act
are to be transferred to the Central Government under s. 10(7), the Custodian
of the new Punjab National Bank cannot be asked to pay the interim dividend.
With all respect, this view is equally fallacious. Section 5(1) deals with the
effect of vesting. On a take-over, the assets and liabilities vest in the
Central Government, the taker of the undertaking. That all profits in future of
the corresponding new bank will belong to the Central Government under s. 10(7)
has nothing to do with the liabilities that are imposed on the taker of the
undertaking by the Act. Whether the Central Government makes profits or incurs
losses, the taker must meet the "liabilities and obligations of whatever
kind then subsisting of the existing bank in relation to the undertaking."
The taker has to discharge the liabilities of the undertaking subsisting at the
time of the take-over of the "existing bank". Whether the
"corresponding new bank" makes profits or not is not the concern of
the expropriated owner. Section 10(7) deals with the future set-up of the
"corresponding new bank" and not with the past liabilities of the
"existing bank".
"Borrowings,
liabilities and obligations" have nothing to do with profits under section
10(7). The taker of the undertaking must pay the "borrowings",
discharge the "liabilities", perform the "obligations".
This is made incumbent on the taker by the statute. He who takes the benefit
must take the burden also. "Liability" means an existing legal
liability, actually existing in law at the relevant date.
"Obligation" means a duty or a liability arising in law or from
contract. "Liability" itself means subjection to a legal obligation.
In truth, s. 10(7) has
nothing to do with the question at issue. Section 10 deals with the future
framework of the nationalised banks in which profits will go to the Central
Government. In the old order, the banks had incurred liabilities, obligations
and debts. They were now to be discharged by the taker of the undertaking under
s. 5(1). Section 10 deals with the new dispensation. Section 5 speaks of the
pre-existing "liabilities" of the old order. In the new order, the
profits will go not to private pockets but to the coffers of the State. The Act
made a profound change. The old order was abolished. Out of the ashes of the
old, a new order was born.
"The old order changeth, yielding place to
new. And God fulfils himself in many ways, Lest one good custom should corrupt
the world."
(Tennyson—The Idyll of the King. The Passing of
Arthur).
The essence and innate
character of a "liability" is that it is fixed by law or agreement or judgment of a
court of justice and it cannot be got rid of
at will. The primary meaning (in law) of the word "liable" is
"that can be bound". Directors were not bound to pay interim dividend
on July 19, 1969, the day of take-over. It depended on their will.
In my respectful opinion,
the learned judge was wrong on both points. The resolution of July 16, 1969,
created no "liability" within the meaning of s. 5(1) and that is the
end of the matter.
For these reasons which are
entirely different from those of the learned judge, I would dismiss the appeal
with costs.
G.C. Jain J.—I agree.
Appeal
dismissed.
[1972] 42 COMP. CAS. 160 (KER.)
HIGH COURT OF KERALA
v.
Joseph
K. SADASIVAN, J.
CRIMINAL APPEAL NOS. 210 AND 211 OF 1970, 43 AND 44 OF 1971
V. Parameswara Menon for the Income-tax Officer.
K. Sukumaran for the Respondents.
JUDGMENT
Sadasivan,
J.—The
Income-tax Officer, A-Ward, Kottayam, is the appellant in all these appeals.
Complaints were brought against the respondents-office bearers of the
Ettumanoor Motors (P.) Ltd., under sections 276(d) and 276B of the Income-tax Act, 1961, as amended by the
Finance Act, 1969, for non-payment to the credit of the department all the tax
collected on the dividend distributed among the shareholders of the company.
C.C. Nos. 107 and 108/69 are the complaints filed. In C.C. No. 107/69, the
complaint was against accused, M/s. C.L. Joseph and V. Devassia, complaining
that their company had declared dividend amounting to Rs. 27,000 and odd on
December 20, 1961, and distributed the same on February 1, 1962, after
deducting Rs. 8,217 from the dividend towards tax under section 18(3D) of the
Income-tax Act, 1922. Under section 18(6) of the said Act and under section 200
of the Income-tax Act, 1961, the principal officer of the company was bound to
pay the tax so deducted within 7 days from the date of deduction to the credit
of the Central Government. It was not so remitted. The dividend was distributed
on February 1, 1962. Under the Act, therefore, the tax had to be credited to
the Central Government on or before February 7, 1962. It was averred in the
complaint that accused Nos. 1 and 2 were the principal officers of the company
during the period when the deduction was made. Even though the dividend was
distributed as early as on February 1, 1962, the tax was paid only on May 26,
1969, and as such the accused are liable to be punished under sections 276(d) and 276B of the Income-tax Act,
1961.
In
the connected case, C.C. No. 108/69, the complaint was against three of the
office-bearers (M/s. C.L. Joseph, V. Devassia and V.M. Joseph). It was averred
that they had committed offences falling under sections 276(d) and 276B of the Income-tax Act,
1961, as amended by the Finance Act, 1969. According to the complainant, the
accused were the principal officers of the company during the relevant period.
A sum of Rs. 3,237 was deducted towards the tax under section 194 of the
Income-tax Act, 1961, but they defaulted to pay the same to the credit of the
Central Government until May 24, 1969.
The
common question that arises in the two cases is whether the accused were the
principal officers of the company during the relevant period and whether the
company had distributed dividends and deducted the tax (Rs. 8,217 in one, and
Rs. 3,237 in the other), and whether they had failed to remit the tax to the
credit of the Central Government within the time specified. The contention of
the accused was that they were never the principal officers of the company and
that no dividends were distributed and no tax deducted by them. It was also
contended in C. C. No. 107/69 that the offence, if at all, had been committed
long before the 1961 Act had come into force and in such a case the prosecution
initiated under the successor Act cannot be sustained. The complainant’s answer
to this contention was that the offence was a continuing one and so the
prosecution brought under the successor Act was valid. The learned District Magistrate
upheld the complainant’s case and convicted the accused in both the cases and
sentenced them to fine. Against the conviction and sentence they preferred
appeals to the Sessions Judge, Kottayam (Crl. Appeal No. 61/70 against C. C.
No. 107/69 and Crl. Appeal No. 62/70 against C.C. No. 108/69). The learned
Sessions Judge has allowed the appeals and acquitted all the accused. It is
from the order of acquittal that the present appeals—Appeals Nos. 43 and 44/71
have been preferred.
Criminal
Appeals Nos. 210 and 211 of 1970 are appeals preferred by the same Income-tax
Officer against the finding of the lower court that since section 276B was
introduced in the Act only from April 1, 1969, by amendment of the Indian
Finance Act, 1969, since the failure to deduct the tax from the dividend took
place after 7 days from December 7, 1962, in the one case, and February 1,
1962, in the other, no offence was committed by the accused under section 276B
inasmuch they are entitled to protection under article 20(1) of the Constitution.
According to the appellant, this finding is erroneous and it would in effect
amount to acquittal under section 276B of the Act. These two appeals, however,
can summarily be dismissed as the grounds alleged are not sustainable. It was
not proved by the prosecution that the accused had committed an offence
punishable under the law in force at the time of the commission. They are,
therefore, protected by the bar of article 20(1) of the Constitution. Learned
counsel for the appellant did not labour much on this point. These two appeals
are, therefore, dismissed.
In
respect of the other appeals—Cr. Appeals Nos. 43 and 44/71—the first point
arising for consideration is whether any of the accused was the principal
officer of the company at the relevant time, and whether any tax was in fact
deducted. The case of the complainant is that till April 15, 1963, the first
respondent in Criminal Appeal No. 44/71 (Sri C.L. Joseph) was the managing
director and as such he was the principal officer of the company. It is also
their case that dividends were distributed for the year ending March 31, 1962,
and the tax was actually deducted by the said C.L.Joseph under section 200 of
the Income-tax Act, 1961. Under rule 30(1)(b), it is the duty of the person making the deduction to pay the
amount to the credit of the Central Government. As no deduction was made by
either of the two persons, C.L. Joseph and V. Devassia, no liability can be
fastened on them. “Principal officer” is defined under section 2(35) of the
Income-tax Act, 1961, as follows:
“
‘Principal officer’, used with reference to a local authority or a company or
any other public body or any association of persons or any body of individuals,
means—
(a) the secretary, treasurer, manager or agent of the authority,
company, association or body, or
(b) any
person connected with the management or administration of the local authority,
company, association or body upon whom the Income- tax Officer has served a
notice of his intention of treating him as the principal officer thereof.”
The
learned appellate judge has held that as the 1st respondent, C.L. Joseph, was
the managing director he should be presumed to be the person in actual
management of the affairs of the company and as such the principal officer of
the company. The finding entered by the learned judge is:
“As
the 1st appellant (C.L. Joseph) was confessedly the managing director entitled
to manage under an agreement or the articles of association of the company, it
has to be presumed, unless otherwise shown, that he was in actual management of
the affairs of the company......I would, therefore, hold that the 1st accused
was the manager of the company up to April 15, 1963, and as such he was the
‘principal officer’ of the company within the meaning of the definition in
section 2(35) of the 1961 Act.”
I
am afraid the learned appellate judge has approached the question from a wrong
standpoint. The managing director is not one of the persons falling under the
category enumerated under section 2(35)(a)
or 2(35)(b). The persons taken
in under clause (a) are “the
secretary, treasurer, manager or agent.” Under the Indian Companies Act,
manager and managing director are two different entities (see sections 2(24) and
2(26) of the Companies Act). So the managing director cannot be equated with
the manager. The learned appellate judge, it appears, has brought the
respondent under clause (b) as
“a person connected with the management or administration of the company.” The
“managing director”, under the Indian Companies Act, means :
“A director who by
virtue of an agreement with the company......is entrusted with powers of
management...”
Even
if the respondent is construed as one entrusted with or entitled to the management
of the company, he should have been served with a notice by the Income-tax
Officer of his intention to treat him as the principal officer in order that he
may be brought under clause (b)
of section 2(35) of the Act. Such a notice were evidently not given in the
instant case. It would, therefore, be wrong to say that the respondent, C.L.
Joseph, was the principal officer of the company at the relevant time. Learned
counsel placed reliance on exhibit P-4 in C.C. No. 107/69, statement filed by
the secretary of the company before the Income-tax Officer on August 23, 1969,
wherein C. L. Joseph is described as the principal officer. In the statement as
against C. L. Joseph’s name, the designation “principal officer” is shown
within brackets. The statement, of course, is not signed by C.L. Joseph. It is
seen to have been signed by the secretary and we are at a loss to know how the
secretary happened to describe C.L. Joseph as the principal officer in the
statement. In the statement, V. Devassia, the 2nd accused, is shown as
“director/secretary/ principal officer.” The person who was responsible for
signing this statement has not been examined and we are not in a position to
say under what circumstances the statement was submitted and what prompted the
secretary who is seen to have submitted the statement to describe them as
principal officers. In the circumstances no guilt can be fastened on the
respondent by virtue of his being the principal officer for purposes of the
Act.
Regarding
the question whether any deduction was, in fact, made also the evidence is
confusing. Exhibit P-4 (marked in C.C. No. 108/69) is a statement submitted by
the accused’s company to the Income-tax Officer on May 23, 1969. This document
is relied on by the prosecution to show that dividends were actually paid to
the shareholders and the tax deducted. In the document the query as to “when
the income-tax dues were deducted at source”, the answer given is “no amounts
were deducted at source on these dividends.” Then in answer to the query as to
the “dates when the dividends were actually paid to the shareholders” it is
stated that “the amounts were only credited in the accounts of shareholders
after declaration of dividends.” Under query No. 5, “whether the tax deducted
at source has since been paid”, it is stated that, “this has been paid as under
in the Ettumanoor treasury.” From these dubious statements it is impossible to
come to the conclusion either that the dividends were declared and distributed
or that tax was deducted therefrom. The mode of distribution of dividend has
been indicated in section 2(22) of the Income-tax Act, 1961, and under section
194 of the said Act:
“The
principal officer of an Indian company or a company which has made the
prescribed arrangement for the declaration and payment of dividends (including
dividends on preference shares) within India, shall, before making any payment
in cash or before issuing any cheque or warrant in respect of any dividend or
before making any distribution or payment to a shareholder, of any dividend
within the meaning of sub-clause (a)
or sub-clause (b) or sub-clause
(c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2,
deduct from the amount of such dividend, income-tax at the rates in force
:....”
Dividend
is distributed as seen from the above section by payment in cash or issue of
cheque or warrant. But the mode indicated in exhibit P-4 (in C.C. No. 108/69)
is that the amounts were credited in the accounts of the shareholders. This
cannot be treated as an. approved mode of distributing dividend. Section 205
(3) of the Companies Act, 1956, provides that no dividend shall be payable
except in cash and, under sub-section (5)(b), the mode of payment is indicated and that is :
“Any
dividend payable in cash may be paid by cheque or warrant sent through the post
directed to the registered address of the shareholder entitled to the payment
of the dividend....”
Payment
of dividend by crediting in the accounts of the shareholders is thus no
approved mode of disbursement of dividend. I would, therefore, agree with the
learned appellate judge in his finding that evidence is lacking as to whether
any tax was deducted from the dividend. For the accused to be hauled up under
the penal provisions of the Act, the prosecution must show that the deductions
were made by the particular officer and he failed to pay it to the credit of
the Central Government; in other words, the offence is one attaching personally
to the offender and not to the company as such and unless the prosecution
succeeds in showing that the deduction was made by the particular accused no
conviction can be entered on them. Accused Nos. 2 and 3 (V. Devassia and V. M.
Joseph) came into the picture long after the offence was complete and they
cannot, therefore, be found guilty in any event.
“It
is evident that the dealer cannot reasonably be made liable for any past
misconduct of his employee though the dealer can be made liable for any act
done by his employee in the course of the employment and whom he can reasonably
be expected to influence or control. The maxim qui facit per alium facit per se (he who acts through another
acts through himself) is not generally applicable in criminal law” (vide Harakchand Ratanchand v. Union of India).
In
respect of the first accused the contention was put forward that the offence
though was complete under the 1922 Act, the same must be deemed to continue
under the 1961 Act. The offence was committed if at all under section 51(a) of the 1922 Act; but there is no
charge under that section; the charge is under section 276(d) of the 1961 Act; but, as a matter
of fact, no offence has been committed by the accused under that section.
Section 276(d) is to the effect
that “if a person fails without reasonable cause or excuse ....
(d) to deduct and pay tax as required
by the provisions of Chapter XVII-B or under sub-section (2) of section 226 . .
. . “
So,
to fasten guilt upon the accused the complainant must show that they failed to
deduct and pay the tax as required by the provisions of Chapter XVII-B and we
have already seen from section 194 which falls under Chapter XVII-B that the
principal officer when he declares and pays dividends under sub-clause (a), (b), (c), (d) or (e) of clause (22) of section 2 should deduct from the amount of
such dividends income-tax at the rates in force. Such a contingency has never
arisen at all in the present case. Here, the allegation is that they deducted
tax under the Income-tax Act, 1922, and failed to pay the same which is an
offence under section 51 of the said Act. That offence was complete under the
Act of 1922, and the prosecution ought to have been launched under that Act at
the appropriate time. I see no force in the contention that the offence
committed under the 1922 Act must be deemed to continue, so that the
prosecution could validly be launched under the subsequent Act which came into
force on April 1, 1962. Here it has to be borne in mind that the offence is not
a mere default or omission to pay tax ; but the failure on the part of the
principal officer to deduct tax from the dividend and pay to the credit of the
Central Government. If the offence is the omission to do a thing, the act
constituting the offence would continue so long as the obligation to do the
thing continues. But, in the present case, the obligation to pay the tax has
not been established. The accused could be burdened with that obligation only
if it is further shown that the dividends were declared and paid and that the
tax also was collected by them from the dividends. Then only the obligation to
pay to the credit of the Central Government would be cast on the accused; in
other words, it is not a mere default or omission to pay tax which a party is
bound to pay. That is not the subject-matter of the offence here. Here the
offence is the failure to deduct and pay. When the deduction itself is hot
proved, the further obligation to pay cannot be thrown on the accused. The
offence, if at all, was committed under section 51 of the 1922 Act, which
cannot survive so as to be made the subject-matter of a complaint under the
1961 Act, as under the latter Act section 276(d) requires that the deduction and payment of tax should be one
under the provisions of Chapter XVII-B of the 1961 Act. That requirement being
absent, the charge is bound to fail and in confirmation of the order of
acquittal, these appeals are dismissed.
[1985] 58 COMP. CAS. 320 (BOM.)
HIGH COURT OF BOMBAY
v.
Tata Engineering and Locomotive Co.
Ltd.
N.K. PAREKH, J.
Originating Summons No. 365 of 1983 in Suit No. 1164
of 1983.
R.J.
Joshi, S.H. Shah for the Defendant.
JUDGMENT
Parekh, J.—On this originating summons, the question that needs to be
determined is as follows:
"Whether the defendant
company having made a bonus issue in proportion of 2 : 5 (40%) to its equity
shareholders is, under the terms of clause (d) under the head 'Options' of the principal terms of the
prospectus dated 14-8-1980 issued by it, bound and liable to give to the
plaintiff, who holds sixty-five bonds, issued by it pursuant to the said
prospectus a reduction of Rs. 90 (40%) in the conversion price of Rs. 225 per
equity share fixed in the said prospectus."
The plaintiff's case is
that on or about August 14, 1980, the defendant issued a prospectus offering to
the public 5,35,500 100% convertible bonds of Rs. 450 each for cash at par on
the terms set out therein. The terms, inter alia, provided as follows:
"4. Value :
The bonds will have a face
value of Rs. 450 each.
Options:
Each bond carries a right
to receive two ordinary shares of Rs. 100 each of the company at a price of Rs.
225 as per following terms:
(a) The first option to
receive one share will be available within three months after the expiry of
three years from the date of allotment.
(b) The second option to
receive one share will be available within three months immediately preceding
the expiry of seven years from the date of allotment and will be exercisable
even if the first option was not exercised.
(c) On the exercise of
each option, the face value of the bond will be reduced by Rs. 225 and this
amount, which will be due to the bond holder, will be applied towards the price
of one fully paid ordinary share of Rs. 100 each of the company at a premium of
Rs. 125. Thus, there will be a constructive receipt of Rs. 225 by the bond
holder and constructive payment of the same amount by the bond holder to the
company towards the price of one fully paid ordinary share.
(d) If the company makes
any bonus issue prior to respective dates for exercising option, the price of
Rs. 225 per share will stand proportionately reduced by the same lower amount.
However, the number of shares which can be obtained will remain the same, viz., two per bond. The balance sum
of the capital will be repaid to the bond holder on the date of maturity, viz., at the end of seven
years". (reproduced as recorded).
The defendant company
through the aforesaid issue raised an amount of Rs. 47 crores. In so far as the
plaintiff was concerned, he was allotted 13 bonds of the face value of Rs. 450
each. However, at present, he holds in all 65 bonds of the face value of Rs.
450 each. That in or about July, 1981, the defendant company announced a bonus
issue in the proportion of 2:5 to the shareholders of the defendant company and
at the same time announced a reduction of Rs. 64.30 per option share of the
shareholders. The conversion price of each option share was announced at Rs.
160.70.
It is the plaintiff's case,
that since the defendant company had made a bonus issue at the ratio of 2:5,
the proportionate reduction expressed in arithmetic unity must mean 225 × 2 =
450 divided by 5 = 90 or 2/5 of Rs. 225 which is Rs. 90. That in or about July,
1981, the plaintiff wrote to the defendant company disputing the defendant's
construction of cl. (d) (see
para. 2 above) and setting out what, according to him, would be the proper
interpretation and calculation. In reply, the defendant company sent to him a
letter dated September 21, 1981, addressed by them to the Bombay Shareholders'
Association, who had also raised a similar dispute. In the said letter, the
defendant company has pointed out that the defendant's approach to the
subject-matter was correct but the plaintiff has contended that the word
"proportionate" can only mean equality of relationship between two
sets of numbers. That if this is accepted, then cl. (d) under the head "Options"
can only be read as put forth by the plaintiff. The plaintiff has also
contended that it would be obligatory on the part of the defendant to set apart
a sum of Rs. 200 out of the face value of the bond of Rs. 450 towards
fulfilment of the company's obligation under the "principal term" and
then derive a method to achieve a reduction under the head "Options",
as otherwise, the whole scheme must result in contradictions. It is the
plaintiff's case that it is in these circumstances he has filed the suit for
the reliefs set out in the plaint.
The plaintiff's case is, of
course, resisted by the defendant, and the latter have contended that the
approach of the plaintiff is wholly illogical and that their approach to the
subject is wholly correct and the plaintiff would be entitled to no relief.
The controversy hence lies
in a narrow compass, viz., keeping
in view the announcement of the bonus issue in proportion of 2:5, what is the
construction to be placed on cl. (d)
(reproduced above). In this context, what needs to be examined is as to what
are the mechanics of issuing a bonus share. In Pennington's Company Law, fourth edition, at page 371 it has
been observed as under:
"The mechanics of
issuing bonus shares or debentures are similar to those of issuing shares or
debentures subscribed for in cash. After the necessary resolution for the
capitalisation of profits or reserves has been passed, certificates in respect
of the bonus shares or debentures are issued to the members entitled to them,
and appropriate entries are made in the register of members or debenture
holders. Alternatively, if the bonus shares are to be renounceable for a
period, letters of allotment or renounce-able certificates are issued in the
first instance. Because private companies must place effective restrictions on
the free transferability of their shares, there is nothing to prevent them from
issuing such documents in respect of bonus debentures.
The practical advantage of
bonus issues are:
(a) They enable the
company to retain money required for its business which it would otherwise have
to raise by issuing new shares or debentures on the market or by borrowing;
(b) The market value of
the company's shares is reduced to a figure nearer nominal value, and this
makes them more saleable. But a bonus issue increases the total market value of
a shareholder's holding only marginally; he merely has more shares of a
correspondingly lower value each.
(c) formerly bonus shares
and debentures were not treated as income in the hands of the recipient
shareholder, and he did not have to pay income-tax or surtax on their value.
This was so even if the resolution to capitalise profits gave the shareholders
an option to take a cash dividend instead. But income-tax is now payable if a
company issues redeemable preference shares or debentures as a bonus issue,
whether on a capitalisation of profits or reserves or otherwise, but not to the
extent that the nominal value of the new shares is provided out of share
premium account. Moreover, when the shares or debentures are redeemed, the
company is treated as though it were paying a cash dividend equal to the amount
paid on redemption (except any amount paid up on the securities out of share
premium account), and so the company pays advance corporation tax on the
redemption payment, and it is treated as part of the income of the holders of
bonus securities for income-tax, but the tax which has already been paid on the
issue of the bonus shares is allowed as a credit against the income-tax payable
on redemption."
Note 6 reads as follows:
"6. If a company has
an issued capital of Ł1,00,000
in ordinary shares of Ł 1 each,
and reserves of Ł50,000, and
the market value of its shares is Ł 1.50,
a capitalisation of the reserves on the basis of one bonus share for each two
shares already held will reduce the market value of each share to Ł 1 or a few pence more. Each
shareholder will now have three shares worth about Ł 1 each instead of two shares worth Ł 150 each. These observations are true, of course, only if the
bonus shares are ordinary shares."
Bearing these principles in
mind and turning to the subject-matter, what must be apparent is that the
consequences of this bonus issue must be that the number of shares would
increase and must bring down (proportionately) the value of the shares,
irrespective of as to whether the value is the market value, the book value,
the intrinsic value or the notional value fixed for conversion. The phrase
"proportionate reduction" cannot admit of different connotations for
each or any of the values mentioned above in the event of a bonus issue. The
distinction must necessarily be worked out looking to the ratio the number of
bonus shares bears to the increased number of shares after the bonus issue, and
it is a condition of proportionate reduction. The reduction must be such that
the figures, after reduction, are in proportion. The plaintiff's stand proceeds
on the basis that proportionate reduction means a reduction of the same
percentage, a position to my mind, which is wholly untenable. In view of this,
the method adopted by the defendant company cannot be faulted. The plaintiff's
contention must, hence, be rejected.
What is more is that by the
method adopted by the defendant, a shareholder and a bond holder would be
placed on a footing of equality, as is evident from the calculations, set out
in appendix 2, the plaint.
These calculations are not
challenged.
In
view of this, the question must now be answered in the negative. The summons
must stand dismissed. There will, however, be no order as to costs on the
summons.
SUPREME
COURT
COMPANIES ACT
[2005] 62 SCL 574 (SC)
SUPREME COURT OF INDIA
v.
Peerless General Finance &
Investment Co.
S.N. VARIAVA AND DR. AR. LAKSHMANAN, JJ.
CIVIL APPEAL NO. 12640 OF 1996
AUGUST 9, 2005
Section 205 of the Companies Act, 1956 - Dividend -
Manner and time of payment of - Respondent-company increased its share capital
by issuing bonus shares out of credit standing in revaluation reserve account -
Appellant, a shareholder, challenged said issue, inter alia, on ground that
issue of bonus shares out of revaluation reserve was contrary to article 182 of
articles of association of company - However, it was found that article 182
itself provided that where law permitted issue of bonus shares from
appreciation of value in capital asset, same could be done - Whether Act, under
section 205(3), specifically permits utilization of reserve arising from
revaluation of assets for purpose of issuing fully paid up bonus shares and,
therefore, article 182 authorized company to issue bonus shares out of reserves
arising from revaluation of capital assets - Held, yes - Whether, therefore,
High Court was justified in holding that respondent-company was entitled to
issue bonus shares out of revaluation reserve - Held, yes
FACTS
The respondent-company, increased its share capital by issuing bonus shares out of credit standing in revaluation reserve. The appellant, who was one of the shareholders of the company, filed a suit against the respondent for a declaration that the respondent was not entitled to issue bonus shares out of revaluation reserve. The appellant challenged the power of the respondent-company to issue bonus shares out of revaluation reserve on three grounds, viz., (a) that the bonus shares had been issued contrary to SEBI guidelines; (b) that the issue was contrary to the circular issued by the Department of Company Affairs; and (c) that the issue could not have been made as it was contrary to article 182 of the articles of association of the company. The High Court, in its impugned order, held that the respondent-company was entitled to issue bonus shares out of revaluation reserve.
On appeal to the Supreme Court :
HELD
The SEBI
guidelines, which had been relied upon, were clarified on 13-8-1992 wherein it
has been stated that those guidelines do not apply to issue of securities by
existing private/closely held and other unlisted companies. In view of that
clarification, there was no infirmity in the impugned judgment wherein it had
been held that the SEBI guidelines were not applicable to the
respondent-company. [Para 6]
The High Court
was also justified in holding that circular did not have any mandatory effect.
Those circulars were merely advisory in character. [Para 7]
The appellant
submitted that article 182 permitted capitalization of profits by issuance and
distribution of fully paid up shares, debentures, debenture stock amongst
others out of the revaluation of capital assets only in such cases where the
‘funds are available for dividends’. [Para 9]
However, from
a reading of article 182, it was clear that the word ‘dividend’ wherever it
appeared in the articles also included ‘bonus’. Thus, the words ‘available for
dividends’ would necessarily meant ‘available for dividend/bonus’. Article 182
itself provided that where the law permitted issuing of bonus shares from
appreciation of value in the capital assets, the same could be done. If read in
the manner suggested by the appellants, the portion of article, i.e., issuing of bonus out of revaluation
reserves would be rendered otiose. So would certain other provisions of article 182, viz., the provision regarding issuing of bonus
out of share premium account and capital redemption reserve account. Section
205 provides that the dividend can only be issued out of profits of company.
The proviso to section 205(3) permits capitalization of profits or reserve of a
company for the purpose of issuing fully paid up bonus shares or paying up any
amount for the time being unpaid on any shares held by the members of the
company. Thus, the Act specifically permits utilization of reserve arising from
revaluation of assets for purpose of issuing fully paid up bonus shares. When
the law so permits, article 182 authorized the company to issue bonus shares
out of reserves arising from revaluation of capital assets. Thus, even though
the interpretation given by the High Court on article 182 was not correct,
still the final conclusion that article 182 did not prohibit issuance of bonus
shares was correct and required no interference. [Para 11]
CASE REFERRED TO
Peerless General Finance & Investment Co. Ltd. v. Reserve Bank of India [1992] 2 SCC 343 (para 2).
C. Mukund, Ashok Jain, Pankaj Jain and Bijoy
Kumar Jain for the Appellant.
Ashok Desai, Bhaskar P. Gupta, Abhijit Chatterjee, S. Sukumaran, A. Deb
Kumar, Ramesh Babu M.R., Ms. Radha Rangaswamy, Pradeep Kumar Malik for the Respondent.
JUDGMENT
S.N. Variava, J. - This appeal is against the judgment dated 23rd August, 1995 passed by the Calcutta High Court.
2. Briefly stated the facts are as follows :
The respondents are an investment company. The Reserve Bank of India had issued certain directions to them. The Respondents had challenged the authority and power of the Reserve Bank of India to issue such directions. That challenge ultimately culminated in this Court. By the judgment reported in Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India [1992] 2 SCC 343 this Court held that the Reserve Bank of India had authority and power to issue direction in order to provide stable, identifiable and monitor able method of operation. This Court held that such directions would ensure security to the depositors at all times and also make the account of the Company accurate, accountable and easy to monitor. This Court held that the directions given by the Reserve Bank of India were just, fair and reasonable not only to the depositors but, in the long run, to the very existence of the Respondent Company and its continued business itself. One of the directions was that the depositors’ monies must be shown, in their balance sheets, as a ‘liability’ instead of ‘income’ as had been done by the Respondent Company. As this Court held that the directions issued by the Reserve Bank of India were valid the Respondents became liable to transfer Rs. 217.34 crores to the Depositors’ account by debiting the Profit & Loss account with Rs. 217.34 crores. The Reserve Bank of India had, by a letter dated 11th March, 1992, called upon the Respondents to prepare its Balance Sheet in conformity with its earlier directions. It seems that the Respondent Company did not immediately comply with this direction but instead took a long period to show the Depositors’ money as liability.
3. The respondent company issued a notice calling for an A.G.M. to consider increasing the share capital of the company from Rs. 3 crores divided into 3,00,000 Equity Shares of Rs. 100 each to Rs. 35 crores divided into 35,00,000 Equity Shares of Rs. 100 each. The notice also provided as follows :
"RESOLVED"
(a) That pursuant to the provisions of article 182(1) of the articles of association of the company, a sum of Rs. 31,08,36,000 out of Rs. 73,82,87,261.60 standing to the credit of Revaluation Reserve as per the Audited Accounts for the financial year ending on 31st March, 1994, be capitalized and accordingly, the Directors of the company be and are hereby authorized and directed to appropriate the said sum of Rs. 31,08,36,000 to and amongst the members of the Company whose names shall appear on its Register of Members on 7th November, 1994 being the Record Date for this purpose (hereinafter called "the said date") in proportion to the Equity Shares held by them respectively in the Company as on the said date and to apply the said sum of Rs. 31,08,36,000 in paying up in full of the unissued Equity Shares of the Company of Rs. 100 each at par, such shares (hereinafter referred to as the "Bonus Shares") be allotted, distributed and credited as fully paid up to and amongst such members in proportion of 15 (Fifteen) Bonus Shares for every existing Equity Share held by them respectively as on the said date and that the Bonus shares so distributed shall, for all purposes be treated as an increase in the nominal amount of the Capital of the Company held by each such member and not as Income.
(b) That the Bonus Shares so allotted shall always be subject to the terms and conditions contained in the Memorandum and Articles of Association of the Company and the Guidelines for Bonus Shares issued by SEBI.
(c) That such allotment of Bonus Shares to non-resident shareholders of the Company shall be subject to the approval of the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973, if any.
(d) That the Bonus Shares so allotted pursuant to this resolution shall rank in all respects pari passu with the existing fully paid Equity Shares of the Company and shall also be entitled for the dividend in respect of the financial year ending on 31st March, 1995.
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4. The Appellant, who is one of the shareholders of the Company, filed a Suit against the Respondents for a declaration that they are not entitled to issue Bonus Shares out of Revaluation Reserve. In the Suit it was prayed that the impugned notice be cancelled. The appellant applied for interlocutory injunction which was refused by a single Judge. The Appellants then filed a Letters Patent Appeal. The Appellate Court also did not grant an injunction. It only directed that the resolution passed at the Meeting would abide by the result of the Appeal. Accordingly the Meeting was held. The Appellant attended and objected to the Resolution being passed. But the Resolution was passed by a majority. The Appeal was subsequently withdrawn by the Appellant with a liberty to file a fresh Appeal. The Appellant then filed a fresh Appeal, wherein he applied for an injunction restraining the Respondents from issuing the Bonus Shares. The Division Bench of the Calcutta High Court permitted the Respondents to process all formalities but not to effect the delivery of the Bonus share scrips without obtaining prior leave of the Court. This Court refused to interfere in the Special Leave Petition filed by the Appellant but directed the High Court to dispose of the appeal expeditiously. The Appeal was then disposed of by the impugned Judgment wherein it has been held that the Respondents were entitled to issue Bonus Shares out of Revaluation Reserve.
5. The Appellant challenges the power of the Respondent-company to issue Bonus Shares out of Revaluation Reserve on three grounds viz., (a) that the Bonus Shares had been issued contrary to SEBI guidelines, (b) their issue is contrary to the Circular of the Department of Company Affairs dated 6th September, 1994 and (c) that the issue could not have been made as it is contrary to Article 182 of the Articles of Association of the Company.
6. The SEBI guidelines, which have been relied upon, were clarified on 13th August, 1992 wherein it has been stated that these guidelines do not apply to issue of securities by existing private/closely held and other unlisted companies. In view of this clarification, we see no infirmity in the impugned Judgment wherein it has been held that the SEBI guidelines were not applicable to the Respondent-Company.
7. We are also in agreement with the observation, in the impugned Judgment, to the effect that the Circular dated 6th September, 1994 does not have any mandatory effect. These Circulars are merely advisory in character.
8. The relevant portion of Article 182 of the Articles of Association of the Company which has been strongly relied upon reads as follows:
"182. (1) Any General Meeting may resolve that any amounts standing to the credit of the shares premium account or the Capital Redemption Reserve Account or any monies, investments or other assets forming part of the undivided profits including profits or surplus monies arising from the realization and (where permitted by law from the appreciation in value of any capital assets of the Company) standing to the credit of the General Reserve, Reserve or any Reserve Fund or any other Fund of the Company or in the hands of the Company and available for dividend by capitalized:—
(i) by the issue and distribution as fully paid up of shares, debentures, debenture stock, bonds or other obligations of the Company, or
(ii) by crediting shares of the Company which may have been issued and not fully paid up, with the whole or any part of the sum remaining unpaid thereon.
Provided that any amounts standing to the credit of the share premium account or the Capital Redemption Reserve Account shall be applied only in crediting the payment of capital on shares of the Company to be issued to members (as herein provided) as fully paid bonus shares.
|
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9. Reference must also be made to the definition of "Dividend" under Article 2, wherein it has been stated that the word "Dividend" includes "Bonus". On behalf of the Appellant it has been submitted that Article 182 permits capitalization of profits by issuance and distribution of fully paid up shares, debentures, debenture stock amongst others out of the Revaluation of Capital Assets only in such cases where the "funds are available for dividends". It was submitted that the words "available for dividends" under Article 182 cover all the categories of funds which could be capitalized for the purpose of issue of fully paid up shares. It was submitted that any fund which was not available for dividend could not be used for purposes of issue of fully paid up shares. Reliance was then placed upon Article 175 wherein it was provided that no dividend would be payable except out of profits arising from the business of the company. It was submitted that both the Articles have to be read together and, if read together, it is clear that dividends as well as issue of fully paid up shares could only be made out of profits arising from the business of the company and not from the revaluation of capital assets. It was submitted that the High Court erred in holding that the words "available for dividends" only applied to words "other funds of the company or in the hands of the company" and that it did not apply or restrict the other categories laid down under Article 182.
10. On the other hand, on behalf of the Respondents it is submitted that the High Court was right in coming to the conclusion that the words "available for dividends" did not apply to any other categories except the category of funds of the company in the hands of the company.
11. Both sides have also relied on various provisions of the Companies Act, some other Articles in the Articles of Association and various authorities. In our view it is not necessary to set those out or deal with them as the decision will have to be based on an interpretation of Article 182. For consideration of the rival arguments Article 182 would have to be broken up in the following manner:
"Any General Meeting may resolve that any amounts standing to the credit of
(a) Share Premium Account,
(b) Capital Redemption Reserve Account and
(c) any monies, Investments of other assets forming part of the undivided profits including profit or surplus monies arising from (i) realization and (ii) where permitted by law, from the appreciation in value of any capital assets standing to the credit of General Reserve, Reserve or any Reserve Fund or any other Fund of the Company or in the hands of the Company and available for dividends."
If read in this manner it is clear that the words "available for dividends" would be applicable to all categories. The High Court was thus wrong in concluding that these words only applied to the last category i.e., funds of the company or in the hands of the company. However, it must be seen that the word "Dividend" wherever it appears in the Articles also includes "Bonus". Thus the words "available for dividends" would necessarily mean "available for dividend/bonus". Article 182 itself provides that where the law permits issuing of bonus from appreciation of value in the capital assets the same could be done. If read in the manner suggested by the Appellants this portion of Article 182 i.e., issuing of bonus out of Revaluation Reserves would be rendered otiose. So would certain other portions of Article 182 viz., the provision regarding issuing of bonus out of Share Premium Account and Capital Redemption Reserve Account. Section 205 of the Companies Act provides that the dividend could only be issued out of profits of the company. The proviso to sub-section (3) of section 205 permits capitalization of profits or reserve of a company for the purpose of issuing fully paid up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company. Thus the Companies Act specifically permits utilization of reserve arising from revaluation of assets for purpose of issuing fully paid up bonus shares. When the law so permits, Article 182 authorizes the company to issue Bonus shares out of reserves arising from revaluation of capital assets. Thus, even though the interpretation given by the High Court on Article 182 is not correct, still the final conclusion that Article 182 does not prohibit issuance of Bonus shares is correct and requires no interference.
12. It was next submitted on behalf of the Appellant that as the directions of the Reserve Bank of India had not been complied with the balance sheet of the Company did not reflect the true picture and in actual fact when the bonus shares were sought to be issued the Company was in a loss. On the other hand it was submitted on behalf of the Respondents that the Company had complied with the directions and had been granted time of 7 years to regularize its accounts. In our view it is not necessary for us to go into this controversy as it will always be open to the Reserve Bank of India to take such action as is available to it in law, if it feels that its directions were not complied with.
In this view of the matter, we see no reason to interfere. The Appeal stands dismissed. There will be no order as to costs.
[1989] 65 COMP. CAS. 259 (BOM.)
HIGH COURT OF BOMBAY
Consolidated Pneumatic Tool Co. (I) Ltd.
v.
Additional Registrar of Companies
V.S.
KOTWAL J.
Criminal Writ Petition No. 664 of 1985
V.P.
Vashi for the petitioners.
P.M.
Vyas for the State.
V.S. Kotwal J.—Three directors of a company are non-residents, two
ordinarily residing in the United States of America while one in the United
Kingdom. These directors represent the parent company and in that capacity are
on the board of directors of the company in question.. They themselves were
entitled for the payment of dividend from the company of which they :are
directors and for not having paid the amount or not separated the said amount
due to non-payment, they faced prosecution. Ultimately, all the requisite amounts
of dividend after permission of the Reserve Bank of India have been remitted to
them. The complaint is filed after this payment when the default, if any, was
already rectified. The relevant provisions of the Companies Act as also all
these features are not properly considered by the learned Magistrate. All these
characteristic features are enveloped in this proceeding, which make the
continuation of the proceeding a sheer waste of public money, time and energy
and even on the ground of propriety, it is desirable to close the chapter at
this stage itself.
The first petitioner is a
public limited company (company) registered under the Companies Act with their
registered office located on Lal Bahadur Shastri Marg in Mulund area of the
metropolis. Petitioners Nos. 2 to 6 are directors of the company. Petitioners
Nos. 3 and 4 are ordinarily residing in the United States of America, while
petitioner No. 5 ordinarily resides in the United Kingdom and thus they are
nonresidents. They represent the parent company, M/s. Chicago Pneumatic
Holdings Limited, United Kingdom, on the board of directors of the company.
As per the balance-sheet of
the company as on December 31, 1982, it is disclosed that the company had paid
interim dividend of 10% on equity shares in February, 1984, and declared the
final dividend of 5% on June 27, 1984. Petitioners Nos. 3 to 5 were entitled to
the said amounts of dividend. However, the company had not remitted the said
dividend nor warrant in respect thereof has been posted within 42 days from the
date of the declaration to the respondent in the capacity as shareholders who
were entitled to dividend nor had the company within seven days thereafter
transferred the total amount of dividend which remained unpaid or in respect of
which no dividend warrant has been posted to a special account, which was to be
opened by the company in that behalf, in any scheduled bank, as prescribed by
section 205A(1) of the Companies Act (Act), which is made an offence punishable
as prescribed in sub-clause (8) of section 205A of the Act.
It is on these allegations
that the Additional Registrar of Companies, Maharashtra, filed a private
complaint against the company and five of its directors, petitioners Nos. 1 to
6 respectively being Criminal Case No. 1301/RC of 1985 under section 205A(8)
for contravention of section 205A(1) of the Companies Act of 1956 in the court
of the learned Additional Chief Metropolitan Magistrate, Third Court,
Esplanade, Bombay.
The process has been issued
on the said complaint by the learned Magistrate and the said order is being
placed under challenge in this petition invoking the inherent powers of the
court under section 482 of Code of Criminal Procedure as also powers of
superintendence under article 227 of the Constitution of India.
The dominant plank
submitted by Shri Vashi, learned counsel for the petitioner, in assailing the
impugned order relates to the construction of provisions of section 205A as
also section 207 of the Act. According to him, since there was an obstacle or
prohibition by the operation of law to paying the money as under the provisions
of the Foreign Exchange Regulation Act the permission of the Reserve Bank of
India is necessary for transmitting any amount to non-residents and the said
permission was not obtained till then, the moneys could not be remitted. So
Shri Vashi, learned counsel, contends further that if that be so, then, once
non-payment is excluded even specifically under section 207 under its proviso,
then it must be tagged and transplanted into the second provision of section
205A holding that if the payment was not permissible by operation of law, then
the further fact that the said amount was being treated as unpaid dividend was
not required to be deposited in the unpaid dividend account, since, according
to him, the initial disqualification would continue till the end creating an
umbrella of protection for the petitioner. In other words, when there was no
default at the initial stage, there cannot be default at the consequential
Stage also. The alternate plank is that even assuming there was a default, it
could not be said as wilful as required by law, especially when three of the
directors are ordinarily residing abroad while the other two are not associated
with the daily routine work. As a third count, it was submitted that even
assuming otherwise, still on facts, if properly construed, there is no
propriety of continuing the prosecution especially when the amounts have been
deposited in full even prior to the lodging of the complaint. All these contentions
are countered by Shri P.M. Vyas, learned public prosecutor for the State.
According to him, even though there might be protection under the proviso of
section 207 of the Act for not depositing the amount on account of statutory
disqualification since the Reserve Bank's permission had not been obtained,
still, the protection stops at that and the further consequence of
non-depositing the said unpaid amount to the special account cannot be excused
It is also submitted that petitioners Nos. 2 to 6, being directors, would be
presumed to have acted wilfully. It is, therefore, submitted that issuance of
process is justified.
As regards the first count
canvassed by Shri Vashi, learned counsel, the contention is wholly
unsustainable. In that behalf, the provisions of section 205A, sub-section (1)
and sub-section (8), and section 207 become relevant. Section 205A(1) reads as:
"205A(1). Where, after
the commencement of the Companies (Amendment) Act, 1974, a dividend has been
declared by a company but has not been paid, or the warrant in respect thereof
has not been posted, within forty-two days from the date of declaration to any
shareholder entitled to the payment of the dividend, the company shall, within
seven days from the date of expiry of the said period of forty-two days,
transfer the amount of dividend which remains unpaid or in relation to which no
dividend warrant has been posted within the said period of forty-two days, to a
special account to be opened by the company in that behalf in any scheduled bank
to be called Unpaid Dividend Account of......Company Limited/Company (Private)
Limited."
Sub-section (8) read as
under:
"If a company fails to
comply 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 hundred rupees for every day during which the failure
continues."
Section 207 read as under:
"Where a dividend has
been declared by a company but it has not been paid, or the warrant in respect
thereof has not been posted, within forty-two days from the date of the
declaration, to any shareholder entitled to the payment of the dividend, every
director of the company; its managing agent or secretaries and treasurers; and
where the managing agent is a firm or body corporate, every partner in the firm
and every director of the body corporate; and where the secretaries and
treasurers are a firm, every partner in the firm and where they are a body
corporate, every director thereof; shall, if he is knowingly a party to the
default, be punishable with simple imprisonment for a term which may extend to
seven days and shall also be liable to fine."
This provision has a
proviso of which proviso (a) is quite relevant which can be reproduced as;
"Provided that no
offence shall be deemed to have been committed within the meaning of the
foregoing provision in the following cases, namely:—
(a) where the
dividend could not be paid by reason of the operation of any law."
The scheme, legislative
intent and the object behind this enactment would be quite relevant in this
field. The requirement of section 205A can be dissected into seven clauses.
First, there should be a declaration by the company of the dividend. Then there
is a prescribed mode of payment of the dividend, first by actual payment and
second by posting a warrant in respect thereof. The second ingredient suggests
that the said amount is required to be paid or warrant to be despatched for
which a fixed period of forty-two days from the date of declaration is
stipulated. The third part indicates that this would apply vis-a-vis shareholders who are
entitled to receive the said dividend. The fourth part indicates the
consequence of not fulfilling this obligation within forty-two days whereupon a
further obligation comes into play that within seven days after completion of
the said period of forty-two days, the company is enjoined to transfer the
total amount of unpaid dividend to a special account to be opened by the
company in that behalf in any scheduled bank with a label as "Unpaid
Dividend Account" of the company.
Sub-section (8) creates the
default of not depositing the unpaid dividend amount in the special account as
an offence prescribing certain punishment.
Correspondingly, the
provisions of section 207 are required to be analysed under which non-payment
of the dividend by any of the said two modes after declaration of dividend to
any shareholder entitled to the said dividend entails the commission of an
offence for which certain punishment is prescribed thereunder. The proviso
carves out that it could be a defence to this charge if the dividend could not
be paid due to operation of any law.
It would, therefore, be
proper in juxtaposition to read the provisions of section 207 and then to go to
the provisions of section 205A. A composite reading of these two provisions
makes it clear that once the dividend is declared and once it is shown that the
shareholder is entitled to the said dividend, then the company is enjoined to
pay the said dividend to such shareholder within a period of forty-two days
after declaration through either of the two prescribed modes of payment. If
that is not done within the stipulated period, then it becomes an offence for
which punishment is prescribed. However, the company or its officers concerned
can legitimately raise a defence that they could not make the payment only
because of the hurdle created by operation of law and if they succeed in that
behalf, then the offence is wiped out. However, whether it creates an offence
or not by reason of such a defence as contemplated by section 207 of the Act,
still the basic fact remains intact that there is a primary obligation on the
company to be responsible for making payment to a shareholder who is entitled
to such payment within forty-two days after the declaration is made. The
obligation comes into play but its implementation may be deferred by reason of
operation of law, which may serve as a defence for the prospective offence. In
effect, therefore, though the obligation is not wiped out, still the legal
disqualification is removed and it is thereafter that the obligation becomes
excusable.
However, the defence as
carved out under the proviso to section 207 as incompetence on the part of the
company to make the payment due to some legal hurdle cannot be transplanted
into the provisions of section 205A to serve as a parallel defence for the
consequence of non-payment. In other words, it may be a good defence for
non-payment to a shareholder entitled to payment but it is hardly a defence to
the consequence which may ensue under section 205A under which the company is
under an obligation to deposit all such amounts of unpaid dividend in a special
account of the said company. The protection, therefore, for non-payment very
much stops at that point of time inasmuch as if the payment cannot be made due
to operation of law, then no offence is made out under section 207, since the
payment could not be made. However, in spite of this protection which is for
the limited purpose of non-payment to the shareholder, the further consequence
is not suspended, much less wiped out. In other words, even if the company is
exempted from paying such amounts on account of operation of law, still, the
said amount which remains unpaid will fall in the same category along with
other amounts which remained unpaid to the shareholder entitled to the payment.
The right of the shareholder to be entitled to the payment as also the
obligation of the company to make payment to such shareholder both remain
intact, though the obligation to make immediate payment is suspended till the
legal hurdle is wiped out. That does not affect in any manner the further
obligation as stipulated under section 205A which comes into operation only
after the non-payment and that too only after the period of forty-two days is
over. It is thereafter that the company is enjoined to deposit the said unpaid
amount in the special account as prescribed thereunder, until the further
formalities are observed. In other words, therefore, there is nothing in
section 205A to support the claim that where dividend is remittable to a
shareholder entitled to the said payment but cannot be made due to some legal
hurdle or impediment, as in the instant case it could not be done without the
Reserve Bank's permission, the company is exempted from the provisions of
section 205A (1) in not depositing the said unpaid dividend amount in the
unpaid dividend account of the company. The obligation cast within the span of
forty-two days and the obligation that comes into existence after the said
period of forty-two days is over and within seven days thereafter are distinct,
and the protection afforded under proviso to section 207 obviously cannot be
engrafted to serve as a protection even for the second part of section 205A.
This is also because the disqualification is for the payment of the amount to
the shareholder entitled to the payment as in the instant case it could not be
paid unless there is permission of Reserve Bank as the directors are
non-residents and as stipulated by the Foreign Exchange Regulation Act.
However, this so called disqualification merely suspends the payment to be made
till the hurdle is removed and it is not as if that the protection of
non-payment remains in force all throughout or even assuming otherwise, it
hardly makes any difference to the conclusion because non-payment to the
shareholder does not serve as exemption for non-deposit of the said unpaid
amount to the special account, whereas the obligation to deposit the unpaid
amount in the special account is independent of everything and comes into
operation when the bare fact that the amount has not been paid or could not be
paid within the stipulated period is established. Compliance with the
stipulations under section 205A(1) is necessary as per the scheme of the
provisions contained in all the sub-sections of section 205A as the amount
after a particular period has to be transferred to the general revenue account
of the Central Government while the person to whom the amount is due can lodge his
claim and get the amount. All these provisions form a complete unit with a
specific purpose in the interest of all the parties concerned, highlighting the
object and utility of transferring such amounts of unpaid dividends. Therefore,
in effect, it is not the reason for non-payment but it is the consequence of
non-payment that brings into play the second part of section 205A casting an
obligation on the part of the company to deposit the unpaid amount in a special
account within the period of seven days after the said stipulated period of
forty two days is over. This position is manifestly clear and admits of no
doubt.
Examined on the facts of
the instant case and on an analysis of these provisions, the position is clear that
the dividend was declared in February, 1984, but it was actually paid on June
1, 1984, while final dividend was declared on June 21, 1984, but it was
actually paid on January 22, 1985. These amounts could not be paid till June,
1984, and January, 1985, respectively, because till then the permission of the
Reserve Bank under the provisions of the Foreign Exchange Regulation Act was
not obtained. Obviously, that permission was granted some time in June, 1984,
in the matter of the first payment and prior to January 22, 1985, in respect of
the second payment. It is accepted that both these payments have been made
after the permission was granted by the Reserve Bank. It would, therefore,
follow that as long as the permission was not granted, the statutory hurdle was
operating in the way of making payment to these petitioners by the company and,
therefore, under the first proviso (a) to section 207 of the Act, the company
was fully protected and no offence could be made out. However, as observed
earlier, the protection stops at that and the obligation came into effect
immediately thereafter, i.e.,
after the period of forty-two days after declaration was over under section
205A(1) under which the company ought to have deposited the said amount of
unpaid dividend in the special account prescribed thereunder. Admittedly, the
company has not done that within the stipulated period of seven days or for
that matter at any time, but directly paid to these three petitioners in June,
1984, and January, 1985.
In view of the discussion
hereinabove on the basis of analysis of these provisions and in the context of
the facts of the instant case, it is inescapable to hold that the company has
failed to discharge the obligation as prescribed under the second part of
section 205A, sub-section (1). Once that is done, then the provisions of
sub-section (8) which create a offence for this lapse and prescribe punishment
would obviously come into play and consequently normally the company and the
concerned officers would make themselves liable for the penal consequence. The
first count will have to be held against the petitioners and the contention
raised by Shri Vashi, learned counsel, in that behalf is negatived.
It would, therefore,
obviously be necessary now to consider the second count canvassed by Shri
Vashi, learned counsel, as to whether in spite of such a default, the
petitioners can be made liable as contemplated by the provisions of the Act. In
that behalf, some other provisions are required to be examined.
I have already indicated
that sub-section (8) prescribes that if a company fails to comply with the
provisions of section 205A(1), then it gives an indication as to which of the
officers of the company would be held liable for punishment and for that
purpose a specific terminology has been used as "the company and every
officer of the company, who is in default" who are made liable for
punishment. It, therefore, follows that with some purport, the Legislature has
employed this term "every officer of the company who is in default",
and the prosecution must establish that petitioners Nos. 2 to 6 squarely fall
in this category. This, however, is an incomplete reading of the situation as
it would be necessary to find out as to what was really intended by the
Legislature in enacting this provision using this particular terminology
embracing not "every officer of the company" being made liable for
punishment but restricting only to such officer of the company who is in
default being made liable for punishment.
Section 5 of the Act furnishes
the meaning of the term "Officer who is in default" and it reads as:
"For the purpose of
any provision in this Act which enacts that an officer of the company who is in
default shall be liable to any punishment or penalty, whether by way of imprisonment,
fine or otherwise, the expression ' officer who is in default' means any
officer of the company who is knowingly guilty of the default, non-compliance,
failure, refusal or contravention mentioned in that provision, or who knowingly
and wilfully authorises or permits such default, non-compliance, failure,
refusal or contravention."
Even this remains
incomplete unless the meaning of the term "officer" simpliciter is
properly followed which finds incorporated in sub-section (30) of section 2 of
the Act, which defines "officer" as:
"'officer' includes
any director, managing agent, secretaries and treasurers, manager or secretary,
or any person in accordance with whose directions or instructions the board of
directors or any one or more of the directors is or are accustomed to act, and
also includes—
(a) where the
managing agent, or the secretaries and treasurers is or are a firm, any partner
in the firm;
(b) where the managing agent or the secretaries and treasurers is or
are a body corporate, any director or manager of the body corporate..."
On a composite reading of
section 2, sub-section (30), section 5 and sub-section (8) of section 205A, a
harmonious conclusion flows out of the same. Firstly, there must be a default
as contemplated by section 205A, sub-clause (1), either in not depositing the
said amount in the special account. Though there is a default, it is not that
every officer who would be made liable, but only such officers, who are deemed
to be in default as contemplated by section 5 only would be made liable. The
term "officer in default" cannot be complete unless the provisions of
section 2(30) and section 5 are read together or otherwise it would be a
truncated form.
A harmonious reading of
these three provisions, therefore, would properly prescribe the following:
"If a company fails to
comply with any of the requirements of section 205A, the company or any
director, managing agent, secretaries, treasurers, manager or secretary or any
person in accordance with whose directions or instructions the board of
directors or any one or more of the directors is or are accustomed to act,
including where the managing agent is a firm, then any partner of that firm, or
where the managing agent is a body corporate, then manager or agent of body
corporate, and who is knowingly guilty of non-compliance, failure or refusal or
contravention mentioned in that provision or who knowingly and wilfully
authorises or permits such default, non-compliance, failure, refusal or
contravention, would be liable for punishment with fine which may extend to 500
rupees for every day during which the failure commenced."
It would, therefore, be
manifest from this composite definition emerging out of those provisions that
it is not every officer of the company who will be liable but that officer must
be an officer in default and for that purpose he must have been guilty of that
default knowingly or he must have authorised the said default knowingly or
wilfully. It is true that in the first part, wilful default is not contemplated
but nonetheless the person must be knowingly guilty of the said default,
contravention or non-compliance and in respect of authorising the act then it
must be not only knowingly but also wilfully.
Applying this composite
definition to the case, Shri Vashi, learned counsel, contends that respondents
Nos. 2 to 6, by merely being the directors of the company, cannot be presumed
to have been knowingly guilty or have knowingly and wilfully authorised the
said default. This is to counter the contention of Shri Vyas, learned public
prosecutor, that their mere capacity as directors would make them knowingly
guilty or also make them knowingly or wilfully authorise the said default or
contravention. I am afraid, such a specious interpretation as sought to be
placed by Shri Vyas is difficult to uphold. Obviously, the Legislature did not
want every officer to be tagged in this category to suffer the penal
consequence, but such officer is to be supplemented by the knowledge or also
with intention. Consequently, therefore, the element of mens rea is obviously
sought to be introduced through this provision for the purpose of formulation
of an offence. In other words, the prosecution must establish, though not
necessarily by direct evidence but at least inforentially supported by enough
material, that the default has been done knowingly or the default has been
authorised knowingly or wilfully. In other words, the bare fact of default or
contravention does not make an officer of the company suffer penal consequence
but to incur that disqualification, he must have knowledge and that for the
second part, he must also have the intention. This would be in contrast with
the other provisions under the Act itself or under other laws such as the
Customs Act, the Prevention of Food Adulteration Act, etc., where in respect of
some offences, there is no further qualification but an officer of the company
or partner of the firm by reason of his capacity in that behalf is made liable.
Consequently, user of this terminology is obviously with some purpose.
Significantly, there is not even a whisper in the complaint either about the
knowledge much less about the intention. This is practically conceded on behalf
of the prosecution. It is not even suggested that by reason of their being
directors, the consequences must follow. As stated, petitioners Nos. 3, 4 and 5
are ordinarily residing abroad and they rarely come to India to attend some of
the meetings, while petitioners Nos. 2 and 6 say that they were not concerned
with the day-to-day affairs of the company and that they had no knowledge of
the case. Under the circumstances, knowledge cannot be imputed to these
directors, much less any intention. As stated at the threshold, the peculiar
feature is that petitioners Nos. 3, 4 and 5 are themselves recipients of the
dividend and they being abroad, their counterpart in the company having not
deposited the said amount to the special account cannot be tagged to that as a
wilful default or a default committed knowingly. As stated, there is absolutely
no evidence worth the name which is sought to be produced by the prosecution
nor is there anything in the complaint even to inferentially suggest
application of these provisions of the Act vis-a-vis petitioners No. 2 to 6. In the absence of any such
material and in the event of the glaring features which are indicated earlier,
the vital ingredients of the offence are blissfully missing. Consequently,
notwithstanding that there has been a default by the company in not depositing
the said amount in a special account, petitioners Nos. 2 to 6 cannot be made
liable for the same. The case of the company of course may stand on a different
footing. Shri Vashi, learned counsel, also contended that the company and the
concerned officers bona fide
believed that as per their interpretation of section 205A(1) read with section
207 along with proviso (a), once they were protected by that proviso from not
incurring any penal liability for non-payment of the amount as they could not
do the same in the absence of permission from the Reserve Bank, they were also
excused or exempted from depositing the same in the special account and this is
fortified as they obtained legal opinion in that behalf. -He has also brought
to my notice the correspondence exchanged between the parties and the
consistent replies given by the company to show-cause notices and other queries
made by the complainant that it is mainly because of the absence of permission
from the Reserve Bank that they not only could not pay but also they felt
honestly that it was not necessary to deposit the amount in the special
account, and but for which advice perhaps they would have acted otherwise.
Since, however, the material on this crucial aspect not only about the element
of mens rea but also about these petitioners being knowingly associated with
the said default being wholly non-existent, on this point alone the petitioners
deserve to be exonerated. This further plank in the argument of Shri Vashi,
learned counsel, for the absence of mens rea and acting in good faith need not
detain us.
All said and done and even
otherwise, the facts are so peculiar that there is no propriety in allowing
this proceeding to continue. In that behalf, as I have already indicated at the
threshold, three of the petitioners are normally resident abroad and they are
non-residents. They themselves are recipients being entitled to dividend as
shareholders as they were representing the parent company on the board of
directors of the company, and the amounts have been fully paid on June 1, 1984,
and on January 22, 1985. In spite of that, we find that it is an admitted
position that the complaint was filed on June 27, 1985. This would, therefore,
mean that the complaint was filed even after full payment was made to these
petitioners by the company after obtaining the permission of the Reserve Bank
of India. The delay can be justified as the permission was not granted till
then. These three petitioners rarely come to India as they are ordinarily
residing in the United States and the United Kingdom. There is no charm in
compelling these people to face trial in India in view of all these features.
Having regard to the
totality of all the circumstances in the proper perspective, I have no
reservation in holding that on the ground of propriety also, this prosecution
should not be encouraged much less allowed to be continued which exercise would
be sheer waste of public money and time and energy and may even be an abuse of
the process of law. It is better if the court's precious time is saved to
attend to better proceedings than the one at hand. Prolonging the agonies of
the petitioners under these circumstances would be thoroughly unjustified. Even
the complainant should have considered the propriety of lodging the complaint
even after the payment was remitted in full. Any way, it is a past event while
at present and for the future, the same can be rectified by not continuing the
proceeding.
Unfortunately, the learned
Magistrate did not consider any of these facts and almost mechanically issued
process. It is true that the inherent jurisdiction should not be lightly
exercised to quash the proceeding. However, when even ex facie it appears to be
manifestly clear and even desirable on the ground of propriety not to continue
the proceeding, then this court on the ratio of R.P. Kapur v. State of
Punjab, AIR 1960 SC 866, State
of Karnataka v. L. Muniswamsy, AIR
1977 SC 1489, and Triloks Singh v.
Satya Deo Tripathi, AIR 1979 SC
850, would be entitled to step in in the interest of justice to quash the
proceeding for otherwise expressing inability and merely assuming the character
of a spectator would really be against the interest of justice. Under the
circumstances, I am satisfied that this is a fit case to exercise such
discretion in favour of quashing the proceeding.
Rule made absolute.
The impugned order recorded
by the learned Additional Chief Metropolitan Magistrate, Third Court,
Esplanade, Bombay, issuing process under section 205A(8) for contravention of
the provisions of section 205A(1) of the Companies Act on the basis of the
complaint filed by the Additional Registrar of Companies, Maharashtra, in
Criminal Case No. 1301/RC of 1985 is set aside and the said proceedings are
quashed and the said complaint stands dismissed.
The petitioners-accused are
discharged.
[1974] 44 COMP. CAS. 390 (DELHI)
v.
Lord Krishna Sugar Mills Ltd.
P. N. KHANNA AND PRITHVI RAJ, JJ.
COMPANY APPEAL NO. 11 OF 1971
MAY 11, 1972
R. M. Lai, G. C. Mittal for
the appellant.
Ved Vyas, R. L. Aggarwal, S. P. Aggarwal and Satish Chandra for the respondents.
P. N.
Khanna, J.—This judgment
will dispose of three Company Appeals Nos. 8, 10 and 11 of 1971, directed
against the judgment dated May 27, 1971, of the learned company judge, arising
out of the winding up petition, which was filed by Smt. Abnash Kaur, herein
called "the appellant"being the appellant in Company Appeal No. 11 of
1971. In her winding up petition, she had impleaded as respondents, Lord
Krishna Sugar Mills Ltd., herein called "the company"(respondent No
1), being one of the two appellants in Company Appeal No. 8 of 1971, Anand
Kumar, Sushil Kumar and S. D. Chawla, herein called "respondents Nos. 2, 3
and 5"respectively, appellants in Company Appeal No. 10 of 1971, and Smt.
Shanta Rani, herein called "respondent No. 4", who is the first
appellant (the company being the second appellant), in C. A. No. 8 of 1971.
The company
was incorporated in 1938 under the Indian Companies Act, 1913, as a public
company limited by shares with a nominal capital of Rs. 34 lakhs and a paid up
capital of Rs. 12 lakhs) (which to begin with was Rs. 10 lakhs). By article 116
of its articles of association, the company was required to take over the
business of Lord Krishna Sugar Mills, promoted by a firm, of which Seth Shiv
Prasad and his brothers, Seth Devi Chand, Seth Kundan Lai and Seth Banarsi
Dass were the only partners. Seth Shiv Prasad was able, during the course of
time, to acquire the entire shareholding in the capital of the company and to
become its virtual sole proprietor. The company runs a sugar mill and a textile
mill, both situated at Saharanpur and has its registered office at present, in
Chand Hotel, Chandni Chowk, Delhi.
Seth Shiv Prasad had seven sons, viz., Bimal Prasad
(deceased), husband of respondent No 4, Anand Kumar, respondent No 2, Sushil
Kumar, respondent No 3, Kuldip Chand, Ramesh Chand, Suresh Chand and Nirmal
Kumar, from his first wife, Sita Rani, who had died in 1951 On June 27, 1953,
he married the appellant from whom he got another son, Kanwal Kishore. The
appellant was appointed a director of the company in July, 1953, and remained
so till March, 1960. She holds 7,200 fully paid up equity shares of the company
in her own name gifted to her by Seth Shiv Prasad She also claims certain other
shares standing in the names of her husband and certain benamidars. Seth Shiv Prasad was the managing director during
his lifetime. After his death in May, 1957, his eldest son, Bimal Prasad,
became the managing director. The latter died in March, 1959, since when
respondent No. 2 has been the managing director. Respondents Nos. 3, 4 and 5
are the other directors of the company. Respondent No. 5 is the father-in-law
of respondent No. 2 and holds his shares benami
for the latter. The total number of shareholders in the register of
members, it is stated, was fifteen (fourteen according to the respondents),
including Seth Shiv Prasad. Five out of them held shares benami for the late Seth Shiv Prasad
The appellant filed her petition for the winding up
of the company on November 25, 1960, on the grounds, inter alia, that the
company is a purely domestic or family concern in the nature of a partnership,
between the members of the family of Seth Shiv Prasad, formed without an appeal
to the public. Principles applicable for the dissolution of a partnership are
said to be attracted for its winding up. Respondents Nos. 2, 3 and 4 are in
complete control of the company and are said to be illegally diverting its
funds and assets into their own pockets to the detriment of the appellant and
the company. The appellant is in a minority and not in a position to have
recourse to the domestic forum. There is said to exist incompatibility between
the views and methods of its various members in regard to its affairs, the
blame for which is thrown entirely on the sons of Seth Shiv Prasad from his
first wife, who, it is stated, harbours animosity against her and her minor
son. Respondents Nos. 2 to 4 in order to get rid of her opposition to their
illegal acts are said to have not re-elected her when she retired by rotation
on March 23, 1960. Respondent No. 5, the father-in-law of respondent No. 2, was elected a director in her
place. Respondents Nos, 2 to 5 are stated to have vacated their offices as
directors because of the various
contraventions of sections 294 and 314 of the Companies Act, 1956, herein
called "the Act", inasmuch as their relatives held and are holding
offices and/or places of profit without the previous consent of the company by
special resolutions. The business of the company, is thus being carried on and
contracts, commitments and obligations are being entered into by persons who
have no authority to act, the directors having vacated their offices since
long. It is then stated that the balance-sheets do not reflect the true state
of affairs, the directors and their associates have been taking loans and
advances from the company against the provisions of law, large funds have been
misappropriated by the management and vouchers, records and accounts have been
manipulated, various irregularities have been committed by the directors in
withdrawing huge amounts which would be brought to light if the accounts of the
company are scrutinised in detail; and the company did not declare dividends excepting
once in the year ending May 31, 1959, when the appellant was a director. The
company is said to have set up an underground pipe direct from the molasses
tank, through which the molasses is taken out of the mill and sold in black
market unnoticed by the excise department and others, for the benefit of
respondents Nos. 2, 3 and 4 who have not drawn remuneration from the company
for years, the same being credited to their accounts, while they have been
leading luxurious lives without having any other source of income. All their
expenses are said to have been met by illegal withdrawals from the company's
funds. The company's cars are said to be used for the personal use of the
respondents and their relatives, although the petrol consumed is paid for by the
company. Respondents Nos. 2 and 3 are said to have been selling bagasse and
coal allotted to their mills in black market and misappropriating the amounts
themselves without bringing the sale proceeds in the company's books. It has
further been alleged, inter alia, that respondents Nos. 2 and 3 have been
taking various advances from the company in the name of the appellant and
others. An advance of Rs. 5,600 taken by them from V. N. Kapur, accountant of
the company, is alleged to have been shown in the account books against the
appellant's name. The appellant and her minor son are said to have not been
paid dividends, large donations had been given to political parties, income-tax
dues have been accumulating and notices of the meeting of the directors and shareholders
have not been issued. The petitioner is thus said to have justifiable lack of
confidence in the conduct of the management in the hands of respondents Nos. 2,
3 and 4. This is based on lack of probity of respondents Nos. 2 to 4 in the
conduct of the affairs of the company and towards the interest of its
shareholders. Conditions are said to exist providing prima facie justification
for an investigation into the affairs of the company Respondents Nos. 2
to 4 are alleged to have ousted the appellant from the management of the
company and its affairs in order to put pressure on her and her minor son to
sell their shareholding to respondents Nos. 2 to 4 and their real brothers and
immediate relatives at unconscionable low prices; and that the majority was
oppressing the minority to such an extent that the appellant was left with no
other option, but to seek the company's winding up. It was said to be just and
equitable, under these circumstances to wind up the company.
In the written statements, the respondents have
traversed each and every allegation of the appellant in her petition. It was
stated that the petition was mala fide and moved with an ulterior motive. The
affairs of the company were said to have been conducted properly and the
practice and procedure prevalent from the time of Seth Shiv Prasad was said to
be still being followed without there being any illegalities or anything else
to the detriment of the appellant or any other shareholder. The allegations of
fraud, misappropriation, diversion of funds and other irregularities were
specifically denied and were said to be devoid of particulars. The petition was
characterised as an abuse of the process of court to coerce the respondents
into paying to the appellant an unconscionable price for the shares belonging
to her and her minor son. The company was said to be a flourishing concern and
for this reason it was stated that it was neither just nor equitable to wind it
up. A number of affidavits, counter-affidavits, rejoinder-affidavits and replication
were filed. A number of applications for the appointment of the provisional
liquidator were also filed from time to time, but without any success.
After going through the voluminous evidence and the case
law on the subject, the learned company judge found that the appellant was
trying to exploit the situation and her petition was not bona fide. At the same
time, he was of the view that her step-sons were either ignoring her or not
giving her legitimate share of profits to which she was entitled. She,
therefore, could not be blamed for asserting her rights. The learned judge,
therefore, concluded that the petition could not be thrown out merely on the
ground of mala fides. On merits, the learned judge held that the company was a
domestic company and in the nature of a partnership. Partnership principles
were, therefore, attracted to its winding up.
The learned judge also concluded that there was lack
of probity in respect of the proprietary rights of the appellant and her son as
shareholders. He, therefore, held that it was a fit case for winding up, but in
view of section 443(2) of the Act, he felt that such an order could not be
passed, as it was a nourishing company and considerable delay (by then more
than ten years) had occurred in the disposal of the petition and as the
appellant was not taking advantage of the alternative remedy provided under
sections 397 and 398 of the Act. He, therefore, ordered that the interest of
the appellant and her minor son should be bought over by the group comprised of
respondent No. 2 and his real brothers and Shanta Rani, respondent No. 4 and
her children, after the price of the shares was determined by the court for
which purpose a chartered accountant was appointed to evaluate the assets and
liabilities of the company to find out the value of the shares. The said group
was required to make payment of the amount thus determined due, to the
appellant on her own behalf and as the guardian of her son, in five equal instalments.
During the period of evaluation it was considered necessary to entrust the
management of the company in the hands of a neutral board of directors. It was,
therefore, provided that the board of directors would comprise of the appellant
or her nominee (other than Ajit Singh), and a nominee of the group of Anand
Kumar, respondent No. 2 (other than respondents Nos. 2 or 3), presided over by
Mr. A. N. Kirpal, advocate, the court's nominee, who was also to act as the
managing director.
The appellant as well as the respondents felt
dissatisfied with the orders of the learned company judge and have filed three
separate appeals, referred to earlier. On interlocutory applications filed by
the respondents in their appeals (Company Appeals Nos. 8 and 10 of 1971), another
Division Bench dealing with these applications, modified the orders of the
learned company judge by allowing the old board of directors to continue as
before with the addition of Shri A. N. Kirpal as the chairman. On another
application moved before us by the appellant, we appointed a firm of chartered
accountants as internal auditors to keep under observation and check the
day-to-day affairs of the company.
Mr. R. M. Lal, the learned counsel arguing before us,
on behalf of the appellant, submitted that the learned company judge had fallen
into an error in holding that the winding up order was not justified in this
case, merely on account of the delay in the disposal of the petition, although
he did find that the company was in the nature of a partnership and for its
winding up, the partnership principles were attracted and that the affairs of
the company had been conducted in a manner prejudicial and oppressive to the
appellant and her son, and further that respondents Nos. 2 and 3 had been found
guilty of various acts of omission and commission detailed in the judgment. The
relief granted under sections 397, 398 and 402 of the Act, according to him,
could not meet the ends of justice. The delay in the disposal of the petition,
which persuaded the learned judge to refuse winding up, was due, according the
to learned counsel, largely to the steps taken by respondents Nos. 2 to 4
themselves to defeat the appellant's just claim. Respondents Nos. 2 to 4,
therefore, could not be allowed to take advantage of their own defaults.
Mr. Ved Vyas, the learned counsel for the
respondents, on the other hand, submitted that the entire approach of the
learned company judge was erroneous, as the petition should have been dismissed
outright on the ground that it was wholly mala fide. It had been filed, said
the counsel, on the instigation of the appellant's brother, Ajit Singh, who had
vowed to take revenge and ruin the respondents and the company because Bimal
Prasad and later Anand Kumar and Sushil Kumar, respondents Nos. 2 and 3, had
refused to accommodate him by investing money in his speculative business with
the result that he had to face extreme financial embarrassment, resulting in
his being declared insolvent. The attempts at settlement had proved of little
avail because of the illegal pressure alleged to have been exerted by Ajit
Singh on the respondents in order to make them purchase the shares of his
sister and her son at an unconscionably high price and on other unreasonable
terms.
The learned counsel further submitted that the
findings on which the impugned judgment is based are beyond the scope of the
pleadings as contained in the petition. Vague and general allegations, which
deserved to be ignored, had been given meaning, which could not be attached to
them and conclusions had been reached on the basis thereof, thereby causing
great prejudice and injustice to the respondents. Even so, the findings,
contended the learned counsel, are far-fetched and unsupported by the record.
In order to appreciate the rival contentions of the
learned counsel, it is necessary first to take note of the historical
background of the case. Ajit Singh, the brother of the appellant, started in
1956, a film business under the name of Mehtab Films Private Ltd. Seth Shiv
Prasad did not approve of this, as is apparent from his letter dated August 22,
1956 (exhibit PW 2/60), to his wife, the appellant, in which he wrote that the
business of producing films was not only unsocial but prone to losses Towards
the end of 1958, Ajit Singh fell into financial difficulties and made demands
on Seth Bimal Prasad and his brothers. As nothing came about, the appellant, in
order to help her brother, was obliged to raise loans in January, 1959, on the
security of two mortgages of the house, 3, South End Road, New Delhi, which was
purchased by her in 1956 from the money gifted to her by Seth Shiv Prasad. The
amount thus raised was given over to Ajit Singh, as is apparent from the
statement of the appellant's Delhi bank account, exhibit PW 5/1, bank draft, dated
January 30, 1959, her Bombay bank account statement, exhibit P4, and cheque,
exhibit P 7, duly endorsed at its back by Ajit Singh. Maya Dass Mehta, PW 10, a
close friend of Seth Shiv Prasad, stated on oath that in December, 1958, he had
approached Bimal Prasad at the instance of Ajit Singh to persuade him to invest
Rs. 10 lakhs in Mehtab Films. In March, 1959, Seth Bimal Prasad died. The
Central Bank of India Ltd. asked the surviving heirs of Seth Shiv Prasad,
including the appellant, as. also the heirs of Bimal Prasad to execute fresh
guarantees to the bank. In April, 1959, the witness (Maya Dass) again went to
Saharanpur to arrange funds for Ajit Singh from the surviving sons of Seth Shiv
Prasad. The appellant, according to him, utilised this occasion as a lever to
extract funds from respondents Nos. 2 and 3 by expressing readiness to sign the
fresh bank guarantees, only if the required financial aid for Ajit Singh was
forthcoming. This caused considerable worry to Anand Kumar, who asked Ajit
Singh, according to the witness, to give him a concrete proposal. Ajit Singh
then handed over to him exhibit P-l, spelling out a scheme, inter alia, for
investment of Rs. 10 laks on certain terms. Ajit Singh admits exhibit P-l to
have been written by him, but says that it was written during the lifetime of
Seth Shiv Prasad in 1954 and denies having made a demand on respondents Nos. 2
or 3. The learned company judge rejected this contention and observed that Ajit
Singh had deliberately spoken a lie. The document obviously could not have been
written in 1954, as one of the sheets on which the writing appears, has a
letter-head of the company, with its address printed as 3, South End Road, New
Delhi, which was purchased in 1956. Even D. K. Mahajan J , before whom Ajit Singh
was cross-examined (sic), had, thus, rightly been held to be a proposal by Ajit
Singh made in April, 1959, to secure the investment of Rs. 10 lakhs in his
business from the respondents Negotiations were apparently in progress between
the parties. The other proposal proved to have been made then was to separate
the interest of the appellant and her son in the company. Various letters
exchanged between the Bombay office of the Central Bank of India Ltd. and its
office in Delhi and between its Delhi office and Saharanpur branch have been
proved as exhibits PW-11/2 to PW-11/14, showing the keenness of the bank to
have the differences between the parties smoothened out, so that the guarantees
and the other necessary documents required to safeguard its own advances to the
company could be duly signed and executed by all the major sons of Seth Shiv
Prasad, the appellant, and the widow of Seth Bimal Prasad. B. N. Puri, the
controller of the bank in Delhi, was examined. This evidence proves that Ajit
Singh was keen to obtain a sum of Rs. 5 to 10 lakhs for being put in his
business (exhibit PW-11/4). The appellant had indicated to the bank that on the
respondents' unwillingness to give the necessary money, she would like to be
separated (exhibit PW-11/5). She proposed to sell her and her son's shares to
her step-sons, who were prepared to purchase the same, but were not keen to
hurry through as that might make them pay a higher price. They wanted to gain
time also for arranging funds to pay the purchase price (exhibit PW-11/5). In
about May or June, 1959, there appears to have been some rapprochement between
the parties and a sum of Rs. 10,000 was given as loan to Ajit Singh, as
evidenced by pronote dated May 21, 1959, for that amount. Exhibit PW-11/6 is a
letter dated June 10, 1959, addressed by respondent No. 2 on behalf of the
company to the sub-agent of the bank at Saharanpur saying that the mutual
differences have been ironed out and all members of Seth Shiv Prasad's family
have signed the documents. Bank guarantees were signed by the appellant also.
On October 20, 1959, Ajit Singh was declared
insolvent by the Bombay High Court and the differences between the parties
again took an ugly turn. Exhibit PW-11/7 is a letter dated November 11, 1959,
addressed by, B. N. Puri to the general manager of the bank in Bombay, saying
that the appellant had contacted him and informed him that differences have
cropped up between her and her step sons and that by way of settlement she was
being offered Rs. 26 lakhs for her and her son's shares, half of which was to
be paid immediately and the balance within six months. But this offer was not
acceptable to her as she wanted Rs. 30 to 32 lakhs. She is also alleged to have
indicated that if the settlement was not arrived at, to her liking, she would
see that the operation of the bank account was stopped, by her withdrawing the
bank guarantee furnished by her earlier. This threat, according to Mr. Puri,
was being used by her as a "trump card". The letter dated December 9,
1959, exhibit PW-11/9, written by Mr. Puri to the head office shows that
respondents Nos. 2 and 3 had made enquiries about the possibility of the bank
advancing Rs. 6 to 7 lakhs to enable them to make some payment towards the
price of shares of the appellant and her son, which was proposed to be fixed
through arbitration. Other documents show that the required facility was being
made available to the respondents by the bank. Exhibits PW-7/1 and PW-7/2 are
the two bank drafts for Rs. 1,00,000 and Rs. 20,000 obtained by respondents
Nos. 2 and 3 to make initial payments for the purchase of the appellant's
shares. Chaman Lai, PW-12, and Dwarka Dass have confirmed this. It is, thus,
established that Ajit Singh did put forth his demands on behalf of the
appellants and Anand Kumar and Sushil Kumar did make serious efforts to pay to
the appellant a reasonable price for the shareholdings belonging to her and her
son. It spite of a temporary rapprochement between the parties the negotiations
ultimately fell through, as after respondents Nos. 2 and 3 had arranged money
for payment to the appellant, Ajit Singh raised his demands once again and
wanted the said respondents to recognise the appellant to be the sole and
absolute owner of 3, South End Road, New Delhi, and to absolve her from her
share of the liabilities of the debts of Seth Shiv Prasad. As respondents Nos.
2 and 3 did not accede to this demand, the negotiations fell through, resulting
in Ajit Singh threatening the company and the said respondents with ruination,
by bringing up awinding up petition. The learned company judge has rightly
accepted the respondent's version in this connection. Ajit Singh was putting
undue pressure on respondents Nos. 2 and 3 to make them agree to his demands.
We are in agreement with the learned company judge that the winding up petition
was filed by the appellant at the instigation of her brother, Ajit Singh, with
a view to indulge in extortion. The appellant, in fact, never wanted the
company to be wound up. Her aim was merely to squeeze money out of respondent
No. 2 and his real brothers, more than what they were willing to pay. This is
amply borne out from her own answers to questions put to her in
cross-examination, some of which are reproduced as under :
"Q: In
order to end the dispute, are you prepared to sell your shareholding and the
shareholding of your son for a price to be settled by this court or by an
arbitrator or a person to be nominated by this court ?
A : I am not prepared to sell my shares in this
flourishing company.
Q : Are you
prepared to work at Saharanpur as working director for a period of three years
in the first instance on the remuneration to be fixed by this court with
opportunity to file another winding up petition, in which the ground of the
present petition may also be included in case of dissatisfaction ?
A : I am not
prepared to work with, the present directors because they have already cheated
me. I will only agree if the management is changed. I only want independent
management of the company.
Q : Do you want a flourising company to be wound
up ?
A: I do not want it to be wound up. All I want
is that the management should go into other hands".
At this stage, the court asked the following question
:
"Q
: If Ajit Singh is appointed as working
director, would you agree to join the management ?
A : I still
maintain that no relation should go into the management and the management
should remain absolutely independent".
The appellant, it is thus clear, was not keen for the
winding up of the company; nor was she prepared to participate in its
management. She just wanted to have a price for her shares, which she perhaps
knew was unreasonable; but she would not say so, as she felt that it would
expose her mala fides. And to provide a cloak to hide her mala fides, she said
instead that she would not sell her shares and wanted only a change in the
management, which she knew was not possible without a mandate from the
shareholders. The petition under these circumstances is a move with an oblique
motive for a collateral purpose and is mala fide. It is clearly an attempt on
the part of the appellant to put pressure on the respondents to agree to her
demands which are not clear even to her and obviously therefore, are
unreasonable.
We have also noticed that the appellant after filing
her petition was not at all keen to pursue and expedite its disposal. According
to Mr. R M. Lai the delay was caused by respondents' application, C. M. 197-Dof
1961, for dismissing the petition on the ground of mala fides and C. M. 198-D
of 1961 for recalling the order admitting the petition. These applications took
three years to be disposed of. Mr. Ved Vyas pointed out that the appellant
herself had, during the three years, submitted as many as 24 applications. And
when the main trial started she filed a list of 99 witnesses on December 14,
1964, saying that she will file another list later and bring other witnesses on
the date of hearing. Another list dated January 21, 1965, for summoning 125
other witnesses was then filed. The lists were prepared in a most irresponsible
manner, as two of the witnesses were described as "Diwali rebates
"and "Sundries". The leisurely manner in which the witnesses
were summoned and examined is obvious from the fact that on January 20, 1967,
the respondents after getting fed up with the appellant's delaying tactics,
offered by their application, C.A. No. 151 of 1966, to serve dasti summons on her witnesses. This
offer was refused. The appellant herself attached no value to the statement of
her witnesses, laboriously examined over a number of years, as none was
referred to before us by her learned counsel. The attitude of the appellant in
obstructing the trial is not at all understood. On September 1, 1967, H. R.
Khanna J (as he then was) had occasion to observe in his order that the
petitioned was in the habit of moving applications at the last moment and then
delay the proceedings. Her grievance that the delay inherent in the court
procedure should not have influenced the "learned company judge to refuse
passing the compulsory order is, thus, without any basis. Her part in
deliberately causing delay, which according to Mr. Ved Vyas was a sword of
Democles, kept hanging over the respondents' heads to maintain a constant
pressure over them, though not conclusive proof in itself of her other than
bona fide intentions, speaks against her when the question of her mala fides is
taken into consideration.
Mr. R. M. Lai contended that in a winding up
petition, the motive was irrelevant and in support he relied on Bachharaj Factories Ltd. v. Hirjee Mills Ltd. and Harinagar
Sugar Mills Ltd. v. M. W.
Pradhan.
In both these cases petitions for winding up had been filed by the
creditors. The Bench in Harinagar case,
relied on the observations of the Chief Justice Chagla in Bachharaj's case, where the company was insolvent and
its substratum had gone. The petitioner himself being largely responsible for
bringing about the impasse in the affairs of the mill was said to be guilty of
mala fides. But the petition was supported by all holders of debentures of Rs.
37 lakhs and the Bank of Baroda with a loan of Rs. 50 lakhs. The labourers, to
whom Rs. 36 lakhs was due, strongly supported the petition. The learned Chief
Justice was of the view that if the petitioner was to stand to benefit by the
order, "undoubtedly the court would say that a party cannot derive benefit
by its own wrong". But the winding up order in that case was considered to
be not only in the interest of the petitioner, but in the interest of the
company and all its shareholders and creditors in general. It was in these
circumstances that he found it difficult to understand what the motive of the
petitioner had to do with the question whether an order of winding up could be
made or not. A creditor's petition for payment of an undisputed debt even
otherwise has always been treated differently and it has been said that the
court must ex debito justitiae make
the winding up order if the petitioner brings the case within the Act. (See In re London Suburban Bank,
In re Amalgamated
Properties Rhodesia (1913) Ltd.
and In re Davis Investment (East Ham) Ltd.)
In the present case, it is difficult to ignore the
motive of the appellant. According to section 433(f) of the Act, a company may
be wound up by the court if it is of the opinion that it is just and equitable
that the company be wound up. The law requires the court to form an opinion
about the equitable nature of the case. Equity jurisdiction thus has been
vested in the court by the statute itself; and then it is not imperative on the
court to make a winding-up order even if the court forms the opinion that it
was just and equitable to do so. The use of the word "may" creates a
further discretion in the court to order or not to order a winding up. The
discretion cannot be exercised arbitrarily or according to one's own will or
whim. It has to be regulated by law and the well-known rules of equity in order
to assist the law, allay its rigour, advance the remedy and to relieve against
abuse. The court, therefore, exercising equity jurisdiction cannot ignore the
well-known maxims of equity. Two such maxims are that he who seeks equity must
do equity and he who comes into equity must come with clean hands. Another
equally well-known maxim is that where both parties to the litigation are at
fault, the defendant's position is stronger (see Pomeroy's Equity Jurisdiction, volume 2, page 90).
Mr. Ved Vyas cited a number of English and Indian
cases where the winding up order was refused on the ground that the petition
was presented really for some other purpose, such as putting pressure on the company.
It is, however, not necessary to refer to them, as we have a number of
decisions of the Supreme Court dealing with this question.
In Shanti
Prasad Jain v. Kalinga Tubes
Ltd.,
the Supreme Court refused to accept the petitioner's claim, as his real
aim was found to be to get control of the company. In Amalgamated Commercial Traders (P.) Ltd. v. A. C. K. Krishnaswami ,
S. M. Sikri J. (as he then was) approvingly quoted Buckley on the Companies Acts, saying that a petition presented
ostensibly for a winding-up order but really to exercise pressure will be
dismissed and under circumstances may be stigmatized as a scandalous abuse of
the process of the court.
In National
Conduits (P.) Ltd. v. S. S. Arora ,
the petition was not bona fide. Shah J. set aside the orders of the High
Court Bench, directing advertisement of the petition and, speaking for the
Supreme Court, observed that if the view of the Bench was accepted, it would
make the court an instrument in possible cases of harassment and even
blackmail. In Madhusudan Gordhandas
& Company v. Madhu Woollen
Industries Pvt. Ltd.,
Ray J. dismissed the appeal before the Supreme Court with costs, as the
petition, inter alia, did not appear to be for any legitimate purpose.
Motive, it is thus settled, assumes great importance
in deciding whether or not to entertain the winding-up petition.
Mr. R. M. Lai submitted that the appellant had genuine
grievances, which could not be ignored. The step-sons, according to him, had
never reconciled themselves to accept the appellant as the wife of their
father. They were helpless so long as Seth Shiv Prasad was alive. They lost no
time in throwing her out, after their father died. This contention is contrary
to facts proved on record. The step-sons, as was contended by Mr. Ved Vyas, had
been treating the appellant as their mother and their relations continued to be
cordial till the death of Bimal Prasad. This is apparent from the fact that
when Seth Bimal Prasad was seriously ill, it was the appellant who made all
arrangements to herself take Bimal Prasad to Europe for treatment. Seth Shiv
Prasad had died in 1957, but the appellant continued not only to be on the
Board till May, 1960, but also to enjoy all her amenities including the use of
a car. It is, therefore, wrong for Mr. R. M. Lai to say that the relations
between them were strained from the very beginning. On the other hand, they
appear to have remained very cordial till Ajit Singh started instigating her
against the step-sons in order to take undue advantage of her position. It was
then that she refused to sign the renewal guarantees which the bank insisted
her to sign. Respondents Nos. 2 and 3, therefore, had justification to doubt
the advisability of keeping her on the Board, as aided by her brother, she had
started indulging in extortion and blackmail. In fact, the appellant herself
does not seem to have been keen at that time to be re-elected on the Board. She
had made up her mind to sell her own and her son's shareholding to her
step-sons. Negotiations were already afoot for this purpose. In any case her
non-election as director cannot be said to be her exclusion from the management
in which, Mr. R. M. Lai says, she had been participating. According to her, she
did not attend any board meeting during her tenure in office as a director from
1953 to 1970, except once, although respondents Nos. 2 and 3 assert that she
attended many meetings as recorded in the minute books. Her grievance that she
was excluded from management, therefore, has no basis.
The petition in the present case having been filed
for putting pressure on the respondents in order to make them agree to invest
in the speculative business of the appellant's brother or to pay fancy price
for the shareholding of the appellant and her son, was obviously for an
ulterior purpose with an oblique motive and was mala fide. It, therefore,
deserved to be dismissed. But as the merits of the case have been discussed at
length by the learned company judge and the case has been pending in the court
for nearly twelve long years during which a bulky record running into eighteen
volumes of the paper book has been constructed, it would be appropriate to consider
the merits as well.
The trial court has confined its attention to the
period between June 1, 1957, i.e., after the death of Seth Shiv Prasad on May
24, 1957, and May 31, 1962, when an application for appointment of a
provisional liquidator and a receiver was made. During his lifetime, Seth
admittedly was all in all, and no one else interfered with the working of the
company. It was, therefore, no use going into the period before his death. That
is why the starting point was rightly taken by the trial court to be June 1,
1957.
The winding-up order relates back to the date of the
petition and the proceedings being of quasi-criminal nature, it would be
refused if sufficient cause is not laid in the petition. The case has to be
decided on the facts as on the date of the filing of the petition. Subsequent
events are not taken into consideration (see Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao,
Shanti Prasad Jain v. Kalinga
Tubes Ltd.
and Seth Mohan Lai v. Grain Chambers Ltd).
The petition was filed on November 25, 1960. Events after that date, therefore,
cannot be taken into account. The period to be reviewed, therefore, is from
June 1, 1957, to November 25, 1960.
Two considerations influenced the learned single
judge to come to the conclusion that it was a fit case for winding up. In the
first place, he was of the opinion that there was lack of probity in respect of
the proprietary rights of the appellant and her son which he found from some of
the instances discussed in his judgment. This was coupled with the absence of a
domestic forum to which the appellant could hope to appeal. Secondly, he found
that the company was, in substance, a partnership in the guise of a, company.
The partnership principles, according to him, were, therefore, attracted for
its winding up. On the first point reliance was placed on the raising of
certain false debits against the appellant. This was said to have been done to
offset the credits that were raised in her and her son's favour for dividends
that became due to them.
The first of these debits of Rs. 5,600 was raised on
May 31, 1959. The allegation in respect of this entry was made in paragraph 3 8
of the petition in the following words :
"that the respondents Nos. 2 and 3 had
personally taken an advance of Rs. 5,600 from V. N. Kapur, accountant of the
company. But, in the account books of the company, this advance has been shown
against the name of the appellant, which is entirely incorrect and the entry is
false. Respondents Nos. 2 and 3 are misappropriating the funds of the
company".
In the verification, this statement was said to be
true, not according to the appellant's knowledge, but on information believed
to be true. In the written statement filed on behalf of the company and other
respondents, the allegations in paragraph 38 of the petition were denied as
false.
V. N. Kapur, the manager of the textile sale depot of
the company in Delhi, had asserted that this sum had been paid in cash. Receipt
was not obtained as the money was expected to be paid back the next day. His
explanation was demanded by other directors, when they learnt about it; and a
resolution was passed warning him not to repeat this in future and directing
him to take steps to recover the amount. The amount was then debited to the
appellant's account, a copy of which was sent to her on June 17, 1960. The
appellant, after five months, in her letter dated November 16, 1960, denied the
receipt of this payment. It was then that V. N. Kapur wrote exhibit P.W. 30/13
to the appellant saying, inter alia, that he was surprised to find "that a
person of your position should stoop to this level and deny the payment
received in cash from me". V. N. Kapur, appearing as P.W. 13, however, stated
that this amount had not been paid in cash. On the other hand, a sum of Rs.
5,596 12 had been spent on the appellant's behalf, not in one lump sum but over
a period of time. On May 31, 1959, Rs. 5,600 were debited to her account in
round figures. The difference of Rs. 3.88 was paid in cash. V. N. Kapur was
directed by D. K. Mahajan J. to prepare the details of this amount (Rs. 5,600), which he did (vide exhibit P.W.
30/11). These details do not find mention in the Delhi office books,
where the entry of Rs. 5,600 appears in lump sum.
The learned company judge was not impressed by the
explanation given by V. N. Kapur in the witness box, which was totally
different from his version in his letter and the explanation he had given to
the directors. He was of the view that the entry of Rs. 5,600 having been
falsely made, some of the expenses are now being collected and added up to
justify the same. He was not satisfied with the explanation of Anand Kumar and
Sushil Kumar that they could not be held responsible for this. It was under
these circumstances that he held this entry in the books of the company to be
incorrect.
The appellant, it is noticed, filed her replication
on August 21, 1964, to the written statement dated July 10, 1964, after she had
the opportunity of inspecting the records. No attempt was made to amend her
allegations about respondents Nos. 2 and 3 having withdrawn this amount. Simple
denial of paragraph 38 of the written statement was made and the corresponding
paragraph in the plaint was reiterated. Anand Kumar and Sushil Kumar have
stated on oath in their affidavits that they have not withdrawn this amount
from the company as was alleged in the petition. No questions were asked from
them in cross-examination on this aspect. Nothing has been brought on record to
show that the various entries as appeared in exhibit PW-30/11 were within the
knowledge of the directors. The finding, however, is that it was a false entry
and not that respondents Nos. 2 and 3 had withdrawn this amount as alleged in
the petition. The allegations in the petition are in respect of one kind of
default, while the finding is of different default.
Although the inconsistency of the stand taken up by
V. N. Kapur is glaring, yet it cannot be ignored that the various amounts,
which are said to have been added up to make up the said sum of Rs. 5,600 were
actually disbursed on various dates from December 19, 1957, to April 22, 1959,
as are found to be duly entered
in exhibit PW-30/1 and exhibit PW-30/3, which are the books seized in the
police raid and are held by the learned company judge to be the genuine rough
books, written in regular course of business from day-to-day. Apart from a few
items paid in cash, receipt of which is not denied, the remaining items are
miscellaneous household expenses towards salaries of servants and for supplies
of milk, meat, etc., spread over a period of a year and a half. These details
had not been carried into the fair book of the Delhi office, where the entry
was made in one lump sum.
Abnash Kaur had become a director in 1953 and
continued to be so till March, 1960. She was the wife of the managing director;
and had cordial relations with her step-sons till Bimal Prasad's death in
March, 4081959. The entries in the rough books relate to the years 1957-58.
There was no opportunity to tamper with these books. V. N. Kapur was just an
employee of the company, The possibility of his acting according to the
appellant's instructions from time to time cannot be ruled out. V. N. Kapur
could not have dared to defy her instructions during this period. Although the
entry may be incorrect, inasmuch as Rs. 5,600 was admittedly not paid in lump
sum in cash on May 31, 1959, yet the entry is not bogus and its genuineness
cannot be doubted. In cross-examination V. N. Kapur was asked on the
appellant's behalf that except two items from these details, of Rs. 500 and Rs.
63, the rest had nothing to do with the appellant. The answer was that all
items related to the appellant. The trend of the question showed that at least
two items from the said details were admitted. In fact, in none of the various
affidavits filed by the appellant, the details in exhibit PW-30/11 were
disputed. Even Mr. R. M. Lai accepted at the Bar the genuineness of the rough
books seized in the police raid. He contended that there were many similar
items in the rough books which had not been debited to the appellant. The ones
that were said to constitute the break-up had been picked up merely because
when added up, they totalled up to Rs. 5,600. But the learned counsel was
unable to point out any such other item. His contention, therefore, cannot be
accepted. The individual items in exhibit PW-30/11 have to be accepted as
correct. None of these items is said to have been paid back or otherwise
adjusted.
The item of Rs. 5,600 was noticed by the directors in
their meeting dated January 28, 1960, when a resolution in respect thereof was
passed as is apparent from the minute book. Notice of this meeting was duly
served on the appellant, although she in her cross-examination has stated that
she received the notice on January 31, 1960. She does not say that the agenda
of the meeting did_ not accompany the notice, nor was any question asked from
Anand Kumar or Sushil Kumar about the agenda She was, therefore, aware of this amount
having been debited to her account. She did not protest. The resolution cannot
be said to have been manipulated, especially as the minute book was duly signed
by Mr. K. K. Jain, the appellant's learned counsel, on December 1, 1960, in
pursuance of the orders of G. D. Khosla C.J.
It has been stated that this item of Rs. 5,600
together with other items were falsely debited to the appellant's account in
order to offset any credits that were given to her on account of dividends.
This allegation is, without any basis, as no dividend was declared by the
company before March 23, 1960, which became payable 42 days after its
declaration. This being the first dividend ever declared, the question of
raising debit entries about a year in advance in May, 1959, did not arise and
in any case this one isolated instance cannot be magnified to give a verdict of
lack of probity on the part of the directors towards the proprietary rights of
the appellant. The above aspect of the case obviously was not brought to the
notice of the learned company judge and we must say, with respect, that we are
unable to agree with his conclusion to the effect that this item of Rs. 5,600
was falsely debited to the appellant's account. In any case, this entry does
not in any way affect the appellant's proprietary right as a shareholder.
The second debit against the petitioner was of a sum
of Rs. 3,000 on March 15, 1961, by way of a transfer entry from the name of one
Sardar Jasmer Singh, a brother-in-law of the appellant. According to the appellant,
this was another advance taken by the respondents. But it is not in dispute
that Rs. 3,000 were actually paid some years earlier to Jasmer Singh, under the
appellant's instructions towards the repair charges of a car belonging to the
company. Jasmer Singh was asked to submit a bill as the auditors were raising
objections. In reply he wrote that he had submitted the bill to the appellant.
The appellant, when approached, did not care to reply. The amount was,
therefore, debited to her account by means of a transfer entry made after the
winding-up petition was filed. This subsequent event, therefore, should not
have been taken note of. And, in any case, we have not been able to appreciate
the contention of Mr. R. M. Lai that this amount should have been kept debited
to Jasmer Singh. His contention that this debit was raised against the
appellant merely to harass her is without any basis.
The item of Rs. 3,000 together with the item of Rs.
5,600 forms part of the total debit balance of Rs. 13,348 58, which was shown
in the balance-sheet for the year ending March 31, 1959, as advances to
directors or their associates, Jasmer Singh, having been treated as an
associate of the appellant, being her brother-in-law. Mr. R. M. Lai contended
that the note in the balance-sheet could not be read to mean advance to the
appellant. It could be an advance to some other director. The contention,
however, is without any substance. The entry regarding this advance is repeated
in the balance-sheet for the year ending May 31, 1960, where it is shown as due
from "ex-directors and associates". The appellant was the only
"ex-director "during this year, all other directors continuing to be
directors as before. This entry, therefore, does not advance the appellant's
plea of lack of probity on the part of respondents Nos. 2 and 3.
The third debit entry, which the learned company judge noticed, is of Rs. 780 56, said to be in respect of the alleged supply of barbed wire, etc., for the appellant's house, 3, South End Road, New Delhi. This material, said Mr. Ved Vyas, was required by the appellant and the company had paid for it and so the debit had to be raised against her. The learned company judge was of the view that this was a fictitious debit raised to make up a particular amount. The affixing of the barbed wire around the house is not denied. Its cost, as evidenced from the bill, was Rs. 788 56 for which a "hundi "had been drawn by the supplier and presented to the company at Saharanpur, but appears to have been dishonoured. A sum of Rs. 788 56 was subsequently paid at Delhi as is found from the relevant voucher, exhibit PW-30/4. It is not understood as to why Rs. 780 56 only were debited to the appellant. According to Mr. R. M. Lai the amount was reduced in order to make it fit in the total amount of Rs. 13,348 58, which according to the note in the balance-sheet was the "advances to the directors and their associates". This contention is entirely baseless. In the first place, this amount was not included in the total of Rs. 13,348 58. Secondly, the statement of account given to the appellant in June, 1960 (Vide letter exhibit RW-6/43), mentions Rs. 780 56 as "cost of barbed wire at kothi". No objection was raised by her for five months. Even in the winding-up petition filed on November 25, 1960, this item was not included in her objections, although an objection had been raised to Rs. 5,600. There was no challenge to it even in the affidavit of the appellant which she filed in evidence. There was thus no opportunity to cross-examine Abnash Kaur on this item, nor was there any occasion for the respondents to lead evidence on this question. Lai Chand, Sushil Kumar and Anand Kumar were not asked when being cross-examined, to explain this discrepancy, although the hundi was put to Anand Kumar for getting it exhibited. The respondents were not allowed to re-examine Anand Kumar to elicit an explanation from him about the discrepancy. Mr. R. M. Lai referred to better particulars filed in court on March 20, 1970, where a reference is made to this item. These particulars were filed not in connection with the main winding-up petition, but to elaborate an application for the appointment of the provisional liquidator, long after the respondents had cross-examined the appellant's witnesses and had led their entire evidence so far as the examination-in-chief was concerned. Only three witnesses of the respondents including Anand Kumar and Sushil Kumar were left to be cross-examined and Anand Kumar, as stated above, was not allowed to be re-examined. It would not be fair under these circumstances to entertain doubts about this entry and make it a basis for charging lack of probity on the part of the respondents.
There is a credit entry of Rs. 910 in favour of the
appellant for fees for board meetings attended by her. This was challenged
before us, although not before the learned company judge. This entry was
expressly shown in favour of the appellant in the statement of account, exhibit
RW-6/42 and was disputed by her after about five months. According to her, it
was an attempt to create evidence to show her attendance at certain board
meetings. She alleged in her petition that she always signed the minutes of the
meetings attended by her. This is, however, contrary to the practice as it is
found that none of the minutes were ever signed by any director except the
chairman, in paragraph 51 of the petition, it is alleged that a vital meeting
in which the balance-sheet as on May 31, 1958, was approved was not attended by
her. Only two directors were present, which was less than the required quorum.
The accounts and the balance-sheet and the directors' report, accordingly, are
said to have not been duly passed. An examination of the minutes book shows
that the grievance is imaginary. The appellant's presence has not been
recorded. The meeting was perfectly valid, with the presence of two directors,
as the required quorum was two. Again the appellant takes credit for the
declaration of dividend for the first time on March 24, 1960, in a meeting
attended by her. From her letter dated November 16, 1960, exhibit PW-2/28,
however, it is apparent that she had opposed the declaration of dividend which,
according to her, was "declared for ulterior motive". A note in the
minutes book records her dissent. Then again a general meeting of the company
was held on June 10, 1959. The proceedings of this meeting are signed by her,
as after her objections in or about May, 1959, her signatures used to be
obtained on the minutes of the meeting attended by her. In her affidavit dated
June 14, 1956, she has stated in paragraph 21 that she was present in that
meeting and had raised certain objections to certain resolutions. In her
cross-examination on March 3, 1965, she, however, said, "the proceedings
of the general meeting dated June 10, 1959, do not bear my signatures……I did
not attend the meeting held on June 10, 1959". Ajit Singh, her brother,
has identified and proved her signatures on the minutes of this meeting. Even
Mr. Justice D. K. Mahajan did not find her to be a trustworthy witness. The
minutes up to September 15, 1957, had been signed either by Seth Shiv Prasad or
Seth Bimal Prasad, as chairman, both of whom are now dead. No other director
ever signed the minutes. All proceedings before October, 1959, are in the
handwriting of one Piare Lai Sood, who died on October 11, 1959. When the
petition for winding up came up for admission before G. D. Khosla C.J. on
November 30, 1960, he, at the instance of the appellant, ordered the company's
books to be signed by Mr. K. K. Jain, the appellant's counsel. This was done on
December 1, 1960. There is, therefore, no possibility of subsequent tampering
with the minutes books; and the entries therein have to be taken as correct.
According to the minutes book, the appellant had attended 18 meetings in all.
The meeting fee was Rs. 50. The sum of Rs. 10 sent by her to cover the cost of
registration of notices meant for her was also credited to her. Thus, a credit
of Rs. 910 was perfectly justified and the objection of Mr. R. M. Lai to this
credit entry has no justification.
The next grievance against respondents Nos. 2 and 3
is said to be their failure to register the transfer of shares to which the
appellant and her son were entitled, thereby depriving them of the dividends in
respect thereof. Mr. R. M. Lai drew our attention to the findings of the
learned company judge to the effect that the respondents did what they liked,
when they liked, so far as their own interests were concerned, as is apparent
from their registering the transfer of shares in the name of Shanta Rani, but
deliberately not doing anything for the petitioner and her minor son, and their
registering the shares to which they were entitled, in their names. The
respondents, on the other hand, according to Mr. Ved Vyas, were at all times
ready and willing to register the shares, on the appellant's applying for the
same, which she failed to do as she did not want the shares to stand in her
name and thereby incur the risk of being attached in realisation of heavy
amounts due from her towards income-tax and to other creditors. The shares
which had been given by Seth Shiv Prasad to the appellant and to his sons had
been registered in their respective names. The shares of the face value of Rs.
3,85,360, however, still stood in the name of Seth Shiv Prasad himself and
shares of the value of Rs. 1,70,050 stood in the names of benamidars. After the death of Seth
Shiv Prasad, the appellant and her son were admittedly entitled to 2/9th share
in the said shares. The benami shares
were divided between the parties on 14th April, 1958, while those standing in
the name of Seth Shiv Prasad were divided on December 26, 1959. The share
scrips and the relevant signed transfer deeds, in respect of shares allotted to
her and her son, were duly handed over to the appellant. There is a letter
dated December 26, 1959, signed by Anand Kumar as director of the company
addressed to the appellant, undertaking on the company's behalf that the shares
of the face value of Rs. 86,000 which had been handed over to her as part of
her inheritance along with her son will be readily transferred by the company
in her name on her asking and submitting the share certificates. In her
cross-examination she admitted that she did not submit the shares for transfer.
In fact, she never protested nor was any notice served on the company, nor any
grievance ever made about the non-transfer of shares. The present objection,
therefore, is without any justification and cannot provide a ground for the
winding up of the company. On the death of Bimal Prasad, the Central Bank of
India Ltd. insisted that his widow, Shanta Rani, should sign the guarantees to
the bank and for this, the directors were asked to get the shares registered in
her name as early as as possible (vide exhibit PW-11/3 dated March 30, 1959).
Exhibits R-6 toR-22 are the duly executed transfer deeds dated October 15,
1959, which were presented to the company and on the basis of which the
transfers were made in favour of Shanta Rani and her children. This is also
corroborated by a regular entry in the register of transfers. There is also an
application, exhibit R-31, for the transfer to Shanta Rani and her children, of
shares which previously stood in Bimal Prasad's name. The shares allocated to
the appellant's step-sons and Shanta Rani were thus duly registered in their
names on November 7, 1959, as per resolution passed in the directors' meeting
of that date. The transfer of shares was not an item of the agenda for that
meeting, the last item being : "any other businesses with the permission
of the chair". The grievance is that in the absence of the agenda and
without an application for transfer, the registration of transfer was passed in
favour of Shanta Rani under the last item of the agenda, which was said to be
irregular. But, as noticed above, the transfer applications were there and the
law does not require an agenda for the meeting of the directors. In this
connection, a comparison of section 172 of the Act, dealing with general
meetings with section 286 dealing with board meetings is useful. According to
section 172(1) every notice of a meeting of a company is required to specify
the place and the day and hour of the meeting and to contain a statement of
business to be transacted thereat. Under section 286, notice of the meeting of
the board is required to be given in writing to every director. Any business
whatsoever, thus can be transacted at a board meeting, while the shareholders
are required to be informed in advance of the agenda in the case of a general
meeting.
A grievance had been made before S. B. Capoor J. also
that 7,500 benami shares which fell to her and her minor son's share in the
family arrangement had not been registered by the company. On June 6, 1966, the
learned judge passed an order in accordance with the respondents' offer that if
the transfer forms and other relevant documents were submitted to the company,
it will after notice to the income-tax authorities and subject to any
objections made by them duly register the transfers. The appellant in spite of
this order has not taken any steps so far to present the share scrips to the
company for registering and endorsing thereon the transfers. The
non-registration of transfers in the names of the appellant and her son, or the
registration in favour of Shanta Rani, therefore, cannot be said to show that
the respondents Nos. 2 and 3 did what they liked when they liked as far as
their own interests were concerned; or that they deliberately did nothing for
the appellant and her son; or that they tried to keep them financially
handicapped.
The contention that the withholding of the dividends
due to Kanwal Kishore who is a minor was out of spite in order to deny the
availability of funds to the appellant is likewise without any justification. The
appellant had moved an application, C.A. No. 17-D of 1965, for the appointment
of a provisional liquidator on the ground, inter alia, that dividends due to
her and her son were being withheld by the respondents and not being paid to
her. S.B. CapoorJ. then passed an order directing the company to pay Rs. 3,000
per month to the appellant on account. This amount is admitted to have been
paid regularly to the appellant. The objection is that adjustment has been
given for these payments against the dividends not only due to the appellant,
but also due to her son, Kanwal Kishore The adjustment against the dividends
due to Kanwal Kishore is said to be unauthorised as, according to the
appellant, S. B. Capoor J. authorised adjustment against the dues of the appellant
alone. The relevant extracts from the order of the learned judge are as
follows:
"The first grievance is that, for one reason or
the other, the dividends due to the petitioner and her minor son has not been
regularly and fully paid. It appears the proceedings of the guardianship of
Kanwal Kishore are going on in the court at Saharanpur and dividend accruing in
the name of Kanwal Kishore are being deposited in the court, most of which it
is stated, have been withdrawn by the petitioner. However so far as the
dividends due to the petitioner since 1959 are concerned, it would appear from
the statement, annexure 'A', filed along with the supplementary affidavit of
Anand Kumar that very little cash is actually given in her hands. It seems that
the petitioner possibly because of this litigation has become indebted and
there are a number of decrees outstanding against her in respect of which
attachment orders have been issued and these attach ment orders are being
adjusted out of the amounts of dividend Mr Sen has proposed that a sum of Rs.
3,000 per month be deposited in' this court by the company in the account of
the petitioner which may be adjusted towards future dividends. Mr. Ved Vyas has
no serious objection to this, but submits that there are still attachment
orders subsisting These may be passed on to this court and withdrawal by Abnash
Kaur would of course, be subject to these attachment orders. Any dividends
which 'are lying unpaid with the company for the previous years on the shares
registered in the name of Abnash Kaur and her minor son are also to be
similarly deposited in court".
The grievance before S. B. Capoor J. was obviously in
respect of the payment of dividends due not only to the appellant but also to
her minor son. The respondents, therefore, cannot be blamed if they took the
order as authorising adjustment against the dividends due to both. In the cover
ing letters of the company to the Deputy Registrar of this court every month
enclosing the draft for monthly payments in puruance of the said orders, it is
always mentioned that "this amount will be adjusted from the dividends of
Smt. Abnash Kaur and Kanwal Kishore". Letters were also addressed every
year direct, both to the appellant and her minor son through her, specifically
mentioning that the amounts had been adjusted towards the dividends payable to
the appellant and her minor son, Kanwal Kishore
No protest or objection was ever raised by the
appellant to this interpretation of the order.
Another order dated September 2, 1966, passed by A.
N. Grover J. (as he then was) also supports the contention of the respondents.
It appears that in execution of certain decrees against the appellant, the
monthly sums so deposited were sought to be attached. The company raised an
objection that calculating dividends at the rate of 20 per cent, less tax, the
net amount of dividend payable to Abnash Kaur and her minor son will work out
to Rs. 37,520 per annum, out of which the share of the appellant will be Rs.
1,300 and odd per month. The company asserted that the amount that was
deposited did not belong in its entirety to the appellant because the son also
had a share in it. The learned judge ordered that there could be no doubt that,
in the circumstances mentioned, the respondent-company will not be liable or
responsible in any manner, as was admitted by the appellant herself, for any
dispute which may be raised by the minor son in that behalf and that the
responsibility for that will be of Abnash Kaur.
Even otherwise, there is no substance in the allegation
that dividends have been withheld from the appellant or her minor son. (Under
section 206 of the Act, no dividend can be paid by a company in respect of any
share therein except to the registered holder of such share or to his order or
to his banker) The appellant and her minor son, therefore, could not claim
dividends in respect of the shares which were not registered in their names.
The statement of dividends paid, exhibit RW 21/14, however, shows that all the
dividends have been paid to the appellant and her minor son, even in respect of
the shares which have not yet been registered in their names. In any case, the
dividends about which grievance was sought to be made out, were payable after
the institution of the winding-up petition. This was, therefore, a subsequent
event which should not have been taken into consideration. We must, therefore,
say with respect that we are unable to agree with the observation of the
learned company judge, to the effect that the respondents had injured not only
Kanwal Kishore but also the appellant in this manner and that this amounted to
lack of probity on the part of the respondents towards the appellant and her
son in respect of their proprietary rights as shareholders.
Mr. R. M. Lai, then laid great stress on certain
deposits said to be fictitious, which stand in the names of various persons.
According to him, these monies really belonged to the company and should have
been available for computation of profits for distribution among the
shareholders. Mr. Ved Vyas, however, urged that no specific plea about
fictitious deposits having been raised in the petition, it would not be
appropriate to examine this contention. He raised strong objection to the
contentions of
Mr. R. M. Lai in this regard, more so as the respondents
never had the opportunity to lead evidence in respect of such vague and wild
allegations. Mr. R. M. Lai read out paragraph 18 of the petition where it was
pleaded that respondents Nos. 2, 3 and 4 were in complete control over the
affairs of the company and were in a position and were in fact alleged to be
illegally diverting the funds and assets of the company to their own pockets to
the disadvantage and detriment of the appellant. In paragraph 19(2)(a) there
was a similar bald allegation about the respond-dents misappropriating the
funds and monies of the company. In paragraph 24, it was stated that large
funds of the company had been misappropriated by the management and vouchers,
etc., had been manipulated. According to Mr. R. M. Lai, the appellant was
required to plead facts and not the evidence in support thereof. The existence
of the fictitious deposits, according to him, was the evidence of the illegal
diversion of funds and misappropriation, which he said had been amply alleged
in the said paras, of the petition. The contention of the learned cousel is not
sound. According to Order 6, rule 2, of the Code of Civil Procedure, every
pleading is required to contain a statement of the material facts on which the
party pleading relies for his claim or defence as the case may be and not the
evidence by which they are to be proved. Rule 4 requires that in all cases in
which the party pleading relies on any misrepresentation, fraud, breach of
trust, etc., and in all other cases in which particulars may be necessary
beyond such, as are exemplified in the forms aforesaid, particulars with the
date and items if necessary, are required to be stated in the pleadings. Mere
statement that respondents Nos. 2 and 3 have been illegally diverting the funds
and assets of the company into their own pockets or have misappropriated funds
and vouchers have been manipulated cannot be said to be a statement of material
facts and particulars. The provisions of rules 2 and 4 are mandatory. The word
"material "in the words of Hidayatulla C.J. in 5. N. Balakrishna v. GeorgeFernandes
"shows that the facts necessary to formulate a complete cause of
action must be stated. Omission of a single material fact leads to an
incomplete cause of action and the statement of claim becomes bad. The function
of particulars is to present as full a picture of the cause of action with such
further information in detail as to make the opposite party understand the case
he will have to meet. There may be some overlapping between material facts and
particulars, but the two are quite distinct". The allegations of diversion
of funds and misappropriation are vague, as there may be hundred and one ways
of diverting or misappropriating funds. The respondent cannot be left guessing
as to which particular way the appellant has in mind. To be fair to him, he
must know what precisely he is required
to explain. And then when the respondent has led evidence the appellant cannot
pick and choose and say that the respondent's own evidence shows
misappropriation, for the respondents may have led evidence for some other
objective and not with a view to meet this charge; and he may explain the
evidence already produced by some other evidence if the precise charge had been
made known to him. To state material facts in the pleadings, it would be
mentioned that monies belonging to the company were shown in the books as
deposited in favour of various names. This would, then, be said to be
fictitious. While giving the particulars, the actual names in which these
deposits stand in the books, the amounts and the dates on which they were
entered in the books, will all be mentioned. There may be variations here and
there; but this will be the basic approach. There may be numerous deposits in
hundreds of names; and the respondent cannot be expected to keep on explaining
each and every one of them without being called upon to explain any one.
Material facts will thus indicate the precise grounds of the allegation and the
complete cause of action; and the particulars will give the necessary
information to present a full picture of the cause of action. These facts, if
proved, will enable the court to come to the conclusion that the accounts of
the company have been manipulated. Merely stating the conclusions at which the
court is expected to arrive without giving the material facts on which such
conclusions can be based is not what the law requires. The statement of
material facts must appear and the particulars must be full as to enable the
opposite party to know the case he is required to meet. The absence of the
particulars and the material facts from the pleadings would mean that the plea
has not been raised at all and, therefore, it cannot be looked into by the
court. A party cannot be allowed to prove that which he has not pleaded.
In this case,
the winding-up petition was filed on November 25, 1960. Extensive inspection of
the records of the company was made in 1963 and 1964. Certain records were
seized in searches from the residence of V. N. Kapur and the premises of the
company. The written statements and affidavits-in-opposition were filed on July
10 and 15, 1964. Replications and rejoinder affidavits were filed by the
appellant on August 21, 1964, and October 26 and 30, 1964. No mention of any
fictitious deposits was made anywhere; nor were any facts disclosed from which
it could be gathered that there were fictitious deposits. On November 13, 1964,
S. B. Capoor J. passed an order with the consent of the parties to the effect
that evidence would be recorded on affidavits with liberty to either party to
cross-examine the deponents. On behalf of the appellant, affidavit of Ajit
Singh was filed on January 2, 1965, and of the appellant was filed on January
14, 1965. Still there was no indication that any fictitious deposits
were being alleged. Affidavit in evidence of Anand Kumar was filed on February
5, 1965, in opposition to Abnash Kaur's and on February 8, 1965, in opposition
to Ajit Singh's affidavit. Affidavits of Sushil Kumar, Lai Chand, Chaman Lai
and Atma Ram were filed on February 10, 1965. Some further affidavits in
connection with certain applications were filed by Anand Kumar, Sushil Kumar
and Lai Chand on July 14, 1967. No one said a word about fictitious deposits as
no one was called upon to say anything about it. After the respondents had thus
led their evidence and had completed even the cross-examination of the
appellant and all her witnesses and the deponents, who had deposed on behalf of
the respondents, were left to be cross-examined only, application, C.A. No. 51
of 1970 (already referred to), was moved on January 27, 1970, for the
appointment of a provisional liquidator. Better particulars of this application
were allowed by S. N. Andley J., which were then filed on March 20, 1970,
alleging that the respondents are guilty of acts of fraud, misrepresentation,
oppression, mismanagement, defalcations, removal, tampering with and
substitution of the original records. No particulars or details were attempted.
Five letters all dated March 15, 1963, said to be written by the company to the
income-tax department relating to the assessment years 1946-47, 1949-50,
1951-52, 1952-53 and 1953-54, for which penalty proceedings were proposed to be
initiated, were, however, enclosed. The actual accounting period covered by
these letters is from the years 1945-46 to 1952-53. The appellant did not file
her own affidavit in support, nor did she herself sign the particulars. Nothing
was said even then about fictitious deposits which are now sought to be spelt
out from these letters. The appellant was married to Seth Shiv Prasad in June,
1953. The period covered by these letters, therefore, was long before the
appellant came on the scene. There can be no question of lack of probity shown
by these letters towards the appellant or her minor son. Some of these letters
show that certain credits in the books of the company were in respect of
deposits alleged to have been shown fictitiously in favour of certain persons.
These deposits had been surrendered to the income-tax department by Seth Shiv
Prasad himself during his lifetime; and now it was proposed to levy penalties,
as the said monies had been treated as belonging to the company. It is not
understood how the respondents can be held responsible for the same. Anand
Kumar became a director somewhere in 1948, when he was about 20 years of age.
There is, therefore, nothing to cast any doubt on his statement that he did not
know anything about these deposits till 1958 especially as he was quite young
and raw in business when he joined. If, on the other hand, Anand Kumar can be
said to be in the know of these deposits merely because he was a director, then
the appellant herself was aware of these deposits as she had joined as a
director in 1953 and continued to be so till
1960 Some of the amounts had continued to exist in
the account books during her tenure of office as a director. She did not make
any mention of these deposits in her petition. She did not apply for amendment
of the petition even after she had inspected the records of the company; nor
did she make any mention thereof in her replication or rejoinder-affidavit or
affidavits sworn by her in evidence. She in fact never placed her reliance on
any such deposit for the purpose of a compulsory order which she sought. In any
case, the mere statement of Anand Kumar that he did not know about these
deposits cannot be made a ground for winding up of the company on the plea that
his statement cannot be believed.
Mr. R. M. Lai placed strong reliance on the better
particulars, dated March 20, 1970, but he failed to explain as to why these
could not be filed earlier and not in 1963 or 1964 when the appellant had had
inspection of the company's books. The appellant could have amended her
petition, if she really was serious to rely on these allegations and wanted to
broaden her attack. This not having been done, it would not be proper to allow
the appellant to travel outside the allegations in the petition and ask for a
finding, the foundation for which was never laid in the petition, especially
when the respondents had already closed their case and had completed the
cross-examination of the appellant and her witnesses and had no opportunity to
rebut such allegations.
The contentions of Mr. R. M. Lai on this question are
even otherwise without any merit. One of the names in whose favour the deposit
standing in the books of the company is said to be fictitious is Maya Dass, who
appeared as a witness on behalf of the respondents. No question was asked from
him on this subject. Another name about which Mr. R. M. Lai tried vehemently to
build a case was Uggar Sen. According to Mr. R. M. Lai, he was a man of no
means and it was not possible for him to have this deposit of Rs. 30,000 in his
name. This name had never been mentioned before and the respondents had no
opportunity either to produce Uggar Sen in the witness box to demonstrate the
hollowness of the appellant's contention. Our attention was drawn to letter
dated March 15, 1963, written by the company to the Income-tax Officer, Special
Investigation Circle "A", Meerut, asserting that the deposit in
favour of Uggar Sen had since been proved to be genuine and had been accepted
by the directorate. The company had said that penalty as proposed could not be
attracted. Mr. Ved Vyas raised strong objections to questions about these
deposits and advances being asked in cross-examination of Lai Chand and others
as no allegations about them had been made in the petition. The learned company
judge by his order dated November 26, 1970, observed that the appellant has to
succeed on the grounds taken by her in the petition. The evidence on other
matters was allowed only to throw light on the allega-tions already made. It
cannot, therefore, be said that questions were asked from the witness in
cross-examination without protest from the respondents. In fact, it cannot be
denied that the respondents got no opportunity to lead any evidence on these questions.
These allegations have, therefore, to be ignored. The effect of the appellant
in raking up her imaginary grievances from the long past, when she was not on
the scene herself, cannot help her in her prayer for the winding up of the
company. The observation of the Court of Appeal in In re H. R. Harmer Ltd.,
quoted with approval by Tek Chand J. in In re Thakur Hotel (Simla) Company Private Ltd. ,
can be appropriately repeated here, thus :
"The purpose of this section (section 210,
corresponding to section 397 of the Act), is not so much to rake up the past as
to redeem the future".
Another allegation of the appellant is that
respondents Nos. 2 and 3 and persons connected with them had been taking huge
advances from the company and had been manipulating records to hide the same.
Some of those advances are said to have been palmed off to the appellant. All
these allegations are vague and without any material facts or particulars. It
is not necessary to deal with the lengthy arguments of Mr. R. M. Lai about the
remarks of the auditors on the balance-sheet of the company about the advances
to the directors and their associates, as we have already held that the said
advances were in fact made to the appellant herself. Nor is it necessary to
deal with the various entries in the books of the Delhi office as most of them
tallied with the entries in the seized books, which even Mr. R. M. Lai says are
genuine books. Although amounts were advanced to respondent No. 2 from time to
time, they are debited to the advance account of Anand Kumar by a consolidated
entry after a time lag. There was nothing wrong in it; nor did any question of
avoiding interest on these amounts arise, as respondents Nos. 2 and 3 had not
been withdrawing their salaries which were credited to their account without
earning any interest. It is otherwise found that there always existed huge
credit balances in favour of Anand Kumar and Sushil Kumar. The withdrawals by
Anand Kumar and Sushil Kumar cannot correctly be said to be advances by the
company. They were withdrawing from out of their own monies lying with the
company; and this cannot be stigmatised as unauthorised or illegal use of the
company's funds. Mr. R. M. Lai contended that it was not understood as to how
respondents Nos. 2 and 3 have been living luxuriously when they have not
withdrawn their salaries. But he himself admitted that large withdrawals had
been made by them. He failed to explain what he meant by
"luxuriously". The observations of the learned company judge that a
full investigation be made in regard to manipulation of accounts, we say with respect, do not appear to be justified as the
investigation cannot be made on hypothetical and unsubstantiated allegations.
If the appellant really considered that she could make out a case for
investigation, the appropriate remedy should have been under section 235 or 237
of the Act and not a winding-up petition. But, according to the counsel, she is
not prepared to pursue that remedy.
Mr. R. M. Lai
then contended that respondents Nos. 2 and 3 have been selling coal and bagasse
in the black market and have been misappropriating huge amounts without
bringing the sale proceeds in the company's books. Paragraph 33 of the petition
relies on the company's records to show the total quantity of coal allotted and
consumed, the consuming capacity of the boilers and number of hours worked.
Calculations from these records would have revealed, said the appellant, that
the quantity allotted was much more than consumed. Bagasse was also consumed
instead of coal, thereby effecting saving in coal. All these coal was alleged
to have been sold in the black-market. Paragraph 33 of the petition was
verified on the appellant's information and not on knowledge. No particulars of
the serious charge were given nor attempted at any stage. Coal register of the
company was minutely inspected by the appellant for several weeks as far back
as in 1963. Nothing concrete has been noticed. The allegations have been
allowed to remain vague, reckless and inconclusive and must, therefore, be
rejected as worthless.
Mr. R. M. Lai
then came to, what he called, his main contention to the effect that the
winding up in this case was to be on the principles of dissolution of
partnership. According to the learned company judge, partnership principles may
be applied in the case of small private and domestic companies, if there was a
deadlock or lack of probity on the part of the directors in the conduct of its
affairs or in their dealing with the shareholders; and there was either
unjustified exclusion of a member or a group or there was gross mismanagement
or exploitation by those in the control of its affairs and real and effective
appeal to the domestic forum was not available; and the minority had no
alternative remedy.
In the
present case, the learned judge found that the business of the company was
being conducted by one family, which held the entire shareholding. The
principles of partnership were, therefore, attracted. The appellant being in a
minority could not appeal to the domestic forum. She could well be regarded as
a partner, who had been excluded, though not unjustifiably. There was no
deadlock by virtue of which the company could be said to have ceased to do
business. In spite of the ousting of the appellant, the business was still
being run profitably. The misconduct of the respondents, however, was such that
mutual confidence which must subsist in a partnership was destroyed, and a
state of animosity, which precluded all reasonable hope of
reconciliation and friendly co-operation, prevailed. It was, therefore,
impossible for the appellant and her step-sons to place confidence in each
other which each has a right to expect. The company was not a losing concern.
On the other hand, it was prosperous, but the appellant was not getting her
fair share. He, therefore, was of the view that it was a case where the company
could be wound up under the just and equitable clause.
Mr. Ved Vyas strongly criticised these findings and
urged that neither the company in the present case was in the nature of a
partnership nor are the principles applicable to the dissolution of a
partnership attracted to this company. A number of cases were discussed by the
learned company judge and also cited before us at the Bar. It is, therefore,
necessary to examine them in brief.
The earliest case on the subject is In re Furrier's Alliance Ltd.
, where the just and equitable clause for winding up was invoked by a
shareholder. He and one Mr. F, being the only directors, held 6,000 shares each
out of 12,005. The remaining five shares were held by certain persons, one
share each. Two of them supported the petitioner. Each share carried one vote.
The two directors were unwilling to get together to manage the company
satisfactorily. Warrington J. said that it was not reasonably practicable for ,
the business to be carried on upon the terms on which it was intended to be
carried on just as in cases under a similar clause in the Partnership Act, when
it was not reasonably practicable for the business of a partnership to be
carried on in accordance with the terms on which the partnership was
constituted, the partnership might be dissolved. But, in this case, the
authority of the majority, which might only be one vote was available and could
be invoked. There was, therefore, no deadlock as under the articles an
additional director could be appointed and the business of the company could go
on. It was under these circumstances that he dismissed the petition.
Warrington L. J. was a party to the celebrated
judgment of the Court of Appeal in In
re Yenidje Tobacco Company Ltd.
which has been oft-quoted in all such cases of winding up. W. and one R. carrying
on separate businesses amalgamated and formed a private limited company. They
were the only two directors having equal rights of management and voting. One
director was to form quorum. Differences or disputes were to be referred to
arbit ration. As differences had arisen, reference was made to arbitration and
an award was made. But R. declined to give effect to the award and instead
brought an action against W. So this was not considered a satisfactory method
of solving disputes and at any rate not one for solving day-to day differences.
Ultimately, neither would speak to the other. Communications had to be conveyed
between them through a third person. In spite of this, the company transacted
its business and large profits were made. W. presented a petition for winding
up under the just and equitable clause alleging complete deadlock and the
disappearance of the substratum. Lord Cozens-Hardy M.R. was of the opinion that
the just and equitable clause could not be strictly limited to cases where the
substratum was gone or where there was a complete deadlock. Circumstances which
would justify the winding up of the partnership between the two are the
circumstances which should induce the court to exercise its jurisdiction under
the just and equitable clause to wind up the company. The learned Master of the
Rolls proceeded :
"If ever there was a case
of deadlock, I think it exists here; but, whether it exists or not, I think the
circumstances are such that we ought to apply, if necessary, the analogy of the
partnership law and to say that this company is now in a state which could not
have been contemplated by the parties when the company was formed and which
ought to be terminated as soon as possible".
The circumstances in that case, in the words of
Warrington L.J., who wrote the supporting judgment, treating it as a case of
deadlock, were
:
"The company does not appear as such because
there was no means by which instructions can be given to anybody to appear on
its own behalf. In substance, therefore, it seems to me these two people are
really partners...I am prepared to say that in a case like the present, where
there are only two persons interested, where there are no shareholders other
than those two, where there are no means of overruling by the action of a
general meeting of shareholders, the trouble which is occasioned by the
quarrels of the two directors and shareholders, the company ought to be wound
up if there exists such a ground as would be sufficient for the dissolution of
a private partnership at the suit of one of the partners against the other.
Such ground exists in the present case".
The learned Master of the Rolls had, after narrating
the facts, observed :
"In those circumstances, supposing it had been a
private partnership, an ordinary partnership between two people having equal
shares, and there being no other provision to terminate it, what would have
been the position ? I think it is quite clear under the law of partnership as
has been asserted in this court for many years and is now laid down by the
Partnership Act, that that state of things might be a ground for dissolution of
the partnership for the reasons which are stated by Lord Lindley in his book on
Partnership at page 657 in the
passage which I will read, and which, I think, is quite justified by the
authorities to which he refers
"Refusal to meet on matters of business,
continued quarrelling, and such a state of animosity as precludes all
reasonable hope of reconciliation and friendly co-operation have been held
sufficient to justify a dissolution. It is not necessary, in order to induce
the court to interfere, to show personal rudeness on the part of one partner to
the other, or even any gross misconduct as a partner. All that is necessary is to
satisfy the court that it is impossible for the partners to place that
confidence in each other which each has a right to expect, and that such
impossibility has not been caused by the person seeking to take advantage of
it.'"
The company in substance was held to be a partnership
in the form or in the guise of a private company; and in spite of certain
general and wide observations of the learned Master of the Rolls, the case was
that of a deadlock, as the only way of resolving it under the articles was arbitration,
which was illusory and held to be quite unsatisfactory for resolving day-to-day
differences.
The judgment in Yenidje's case
has come up for consideration in a number of subsequent decisions. In all those
cases, the company was treated in substance to be a partnership. The question
for determination was whether the principles of dissolution of partnership
ought to operate only where there was a deadlock. In In re Davis and Collett Ltd.,
the petitioner and the respondent held equal shares. The respondent who was the
chairman was able, by the use of his casting vote, to appoint two of his
nominees as new directors, although they were not qualified to be directors. He
acquired complete control and then excluded the petitioner from management.
Crossman J. did not decide this case on the question of deadlock, as there was
none, in view of the casting vote of the chairman. His Lordship in deciding
whether it was just and equitable to wind up the company, considered in the
widest possible terms, what justice and equity required. The company was
ordered to be wound up, as, on the authority of Yenidje's case, the position was considered in the
same way, as it would have been considered if the question arose as to the right
of one of the partners to have the partnership dissolved.
In In re
Lundie Brothers Ltd.,
two brothers, Cyril Lundie and Reginald Lundie, on the one hand, and the
petitioner, on the other, had equal voting power. One of the Lundie Brothers
was the chairman with a casting vote. The petitioner had been forced out of his
position as working director. Plowman J. observed that if this were a
partnership and not a company, he should have no hesitation in concluding that
the petitioner is entitled to an order for dissolution on the ground that the termination of his employment was an
unjustified exclusion from the partnership. There was obviously an
incompatibility of temperament between the petitioner and Reginald Lundie.
Winding up was ordered on just and equitable grounds.
The judgment
in both, in In re Davis and Collett
Ltd.
and in In re Lundie Brothers
Ltd.
did not limit the Yenidje's doctrine,
as the ratio in Yenidje's case
has sometimes been called, to cases of deadlock In the former, Crossman J.
considered what justice and equity required and was influenced by the irregular
appointment of directors. In the latter case, the incompatibility of
temperament and the unjustified exclusion of the petitioner weighed heavily
with Plowman J. Both these cases came up for consideration before the Court of
Appeal in In re Westbourne Galleries
Ltd.
where the company under consideration was admitted to be in substance a
partnership, but winding up was refused. It was held that the exercise by a
majority in the general meeting of the power under the provisions of the
Companies Act or the articles to remove a director from office and exclude him
from participation in the management did not form a ground for winding up on
the just and equitable clause, unless the power was shown to have not been
exercised bona fide in the interest of the company or that the ground for
exercising it was such that no reasonable man could think that the removal was
in the interest of the company. References were made before the court to
particular passages in particular judgments attributing to them a weight or
width which according to the court would have surprised the authors. Russell
L.J., who spoke for the court, said that the decision in In re Davis and Collett Ltd.
may be supported on the ground that irregularity was involved. In re Lundie Brothers Ltd.,
according to the learned law Lord, was wrongly decided on the question of
winding up. Thus, rejecting the views of Plowman J., in this case, the Yenidje
doctrine has been considered to be applicable to deadlock cases. Applicability
of partnership principles to winding up of closely-held companies has come up
for consideration in a number of other English cases. The trend has been to
apply these principles to deadlock cases. If the deadlock is found to be
resolvable by resort to the articles of association, then the applicability of
the said principles has been ruled out. The articles have thus been given great
importance. We, therefore, turn to examine the other cases.
In In re
Bleriot Manufacturing Aircraft Company,
Neville J. considered the alleged misconduct of directors, which in
itself was not a sufficient ground for winding up, and observed :
"The words 'just and equitable' are words of the
widest significance and do not limit the jurisdiction of the court to any case.
It is a question of fact, and each case must depend on its own
circumstances".
The company was so constituted that it was found to
be deprived of its usual remedies and this was held sufficient for a winding
up. Winding up was ordered on the same principles in In re American Pioneer Leather Company Ltd
The provisions in the articles, permitting winding up, on the facts of that
case, were followed.
In Loch v.
John Blackwood Ltd.,
decided by the Privy Council, the company was registered to carry on the
testator's business and to divide the profits between members of his family
under his will. The managing director, who was the husband of one of the
legatees, had a preponderating voting power. Although taking the form of a
public company, the concern was practically a domestic and a family concern.
Upon a petition for winding up by minority shareholders, it appeared that the
directors had omitted to hold general meetings or to submit accounts or to
recommend a dividend and that they had laid themselves open to the suspicion
that their object in so omitting was to keep the petitioners in ignorance of
the company's position and affairs and to acquire their shares at an
undervalue. It was impossible for the petitioners to obtain relief by calling a
general meeting, owing to the permanent preponderance of the voting power in
the other group, who had refused even to submit the value of shares to
arbitration. Lord Shaw was of the view that:
"……….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, wherever 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".
Yenidje's case
and the opinion of the Master of the rolls was noticed; but the board specially
referred to the opinion of Warrington L.J. as "accurate and careful".
Lord Shaw quoted with approval a passage from the judgment in Symington v. Symington's Quarries Ltd
to the following effect:
"But then this is not a company that is formed
by appeal to the public. It is what, for want of a better name, I may call a
domestic company. The only real partners are the three brothers of family, the
other shareholders having only a nominal interest for the purpose of complying
with the provisions of the Act. In such a case it is quite obvious that all the
reasons that apply to the dissolution of private companies on the grounds of
incompatibility between the views or methods of the partners, would be
applicable in terms to the division amongst the shareholders of this company,
and I agree with your Lordship that this is a case in which it would be just
and equitable that this company should be wound up, and the partners allowed to
take out their money and trade separately if they please".
The following words of Lord Clyde, Lord President of
the Court of Sessions, in Baird v.
Lees
were also quoted with approval:
"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 denned 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".
The board allowing the appeal ordered winding up on
the broad ground that confidence in the company's management was, and that most
justifiably, at an end.
In In re Cuthbert Cooper and Sons Ltd.,
Simonds J. said:
"Whether it be a matter of articles of
association or articles of partnership, the rights of the parties are
determined by those articles, and the question whether it is right for me,
applying here the principles of partnership to the question of dissolution, to
wind up this company or not largely depends on what are the contractual rights
of the parties as determined by the articles of association in this case.
Accordingly, when I come to consider the allegations, which are made in the
petition, I must be guided by what are the legal rights of the parties as
determined by the bargain into which they entered".
Mala fides was not alleged and the refusal to
register the transfer of shares was not outside the provisions of the articles.
The petition for winding up under these circumstances was dismissed. Cuihbert Cooper's case was cited before the Court of Appeal
in In re Swaledale Cleaners Ltd.
This was not a case for winding up, but was a case dealing with transfer of
shares. Harman and Sachs L.JJ. made no reference to Cuthbert's case But Danckwerts L.J. said, in
passing, that the conclusion reached in Cuth-bert
Cooper's case
was wrong, saying further that it was a very hard case on the younger brothers
to whom the shares had been bequeathed by their father but had not been
registered by the directors.
The learned company judge noticed the above views of
Danckwerts L.J. in Swaledale Cleaners'
case,
and on the basis thereof ignored the decisions in Cuthbert Cooper's case
as being an extreme view. But Cuthbert
Cooper's case1 was
considered by the Court of Appeal in two other cases. The first case was Charles Forte Investments Ltd. v. Amanda.
Danckwerts L.J. had been a party to the judgment in this case. The
defendant threatened to present a winding up petition contending that the
directors' refusal to register transfer was against the company's interest and
constituted an abuse of power. The company sought an injunction restraining the
defendant from presenting the petition on the ground that it was an abuse of
the process of the court. The trial court refused to continue the interim
injunction obtained ex parte. On
appeal, it was found to be an attempt of the defendant to put pressure on the
board. Willmer L.J. considered Cuthbert
Cooper's case
and said that the decision of Simonds J. was a sound decision and one that
should be followed. The threat was said to be misconceived even if the
allegation could be substantiated, having regard to the existence of an
alternative and more suitable remedy under the articles. Danckwerts L.J. also
observed that the case was covered by the decision in Cuthbert Cooper's case
and said that the defendant being a minority shareholder, was governed by the
articles and that it would be most unreasonable to deal with him as if he were
a partner with the rights of dissolution which were conferred by the rules of
partnership law in an appropriate case. Cross J., agreeing with Willmer and
Danckwerts L.JJ also found support in Cuthbert
Cooper's case to say that winding up was not the
form of relief which the defendant could properly invoke.
The other case is a recent one, In re Westbourne Galleries Ltd.,
where Russell L.J., speaking for the Court of Appeal, referred to Cuthbert Cooper's case
and said that it "was plainly and rightly decided".
In ignoring the dicta in Cuthbert Cooper's case
on account of Swaledale Cleaner's case,
the learned company judge, we must say, with respect, was not justified.
In In re
Davis Investment (East Ham) Ltd.,
the company had only two shareholders, who were the only directors, each
holding fifty shares. In winding up proceedings at the instance of one of them,
the petition had been dismissed as the articles had not been put in evidence.
On appeal, Danckwerts L.J., who wrote the leading judgment of the Court of
Appeal, noticing the absence of the articles of association, said that may be
that the apparent differences can be overcome through the operation of those
articles. In the absence of evidence of that kind, the trial judge was said to
have reached his conclusions rightly and the appeal was dismissed.
In In re
Surrey Garden Village Trust Ltd.
the learned judge was of the view that a very strong case must be made out
before the court will bypass the domestic forum and make a winding-up order on
the "just and equitable "ground; and that misconduct or mismanagement
by the management was not of itself a ground for making an order on the
petition where other remedies were available. The winding up petition was
dismissed.
In In re
Expanded Plugs Ltd.
the petitioner and another held between them the whole capital and were held
in substance to be partners. The petitioner sought winding up. Speaking of
deadlock, Plowman J. held that there was none, owing to the existence of the
chairman's casting vote. According to the learned judge, this was a company and
not a partnership and while the partnership analogy may be of assistance in
certain circumstances, it could not be pressed too far and in particular it
could not be invoked for the purpose of giving a locus standi to a petitioner who, by company law, was denied
one. The analogy seemed to him to break down in at least two important respects
:
"In the first place, the liability of an
ordinary partner is unlimited so that he has a financial interest in bringing
the partnership to an end, whereas in the case of a limited company a fully
paid member's liability cannot be increased by further trading. Secondly, an
insolvent partnership cannot be dissolved at the instance of creditors, whereas
they have the right to petition for the winding up of an insolvent company and,
indeed, are the only persons with a financial interest in doing so since, if a
winding-up order is made, the property of the company will be exhausted in
meeting their claims".
And further :
"...in a partnership action the rights of the
parties must be determined in the light of their partnership articles, so, in
my judgment, must the rights of quasi-partners be determined in the light of
the regulations which govern their relationship, namely, the company's articles
of association".
In the absence of any proof of lack of probity in the
conduct of the company's affairs, the petition was dismissed.
In In re
Anglo-Continental Produce Co. Ltd.,
the majority desired to have repaid to them the money which they had
tied up in the company and complained of deadlock and friction. The court, it
was held, inter alia, could not make a winding-up order unless some wrong had
been done to the company and the company was deprived of its remedies in
respect of it by the improper use of voting power of the shareholders. In Elder v. Elder and Watson Ltd.,
two of the petitioners had been forced to retire as secretary and factory
manager, while the offer of the others to sell their shareholding to the
directors was rejected. There was no mismanagement to the detriment of the
shareholders. Nothing was found that was designed to "injure their rights
as shareholders". Therefore, no relevant ground was found for winding up.
In In re K/9
Meat Supplies (Guildford) Ltd.,
the only shareholders were the three directors who ran the company
virtually as a quasi-partner-ship. One of them got into financial difficulties
and resigned and was later adjudged bankrupt. Pennycuick J. treated the
company, as a partnership, constituted upon the articles of association of the
company. The event of bankruptcy was covered by the transmission articles,
vesting the bankrupt's interest in his trustee. The learned judge was of the
view that the relation of quasi-partnership ceased when the bankrupt resigned
his office. Certainly, it did not continue to subsist when the bankrupt's
trustee came into the saddle. The trustee in bankruptcy had no right or duty to
take part in carrying on the business of the company. His position was from the
start simply that of an ordinary minority shareholder. There never was a
quasi-partnership between the trustee in bankruptcy on the one hand, and the
other two directors on the other.
In In re
Fildes Bros. Ltd.J
Megarry J. was of the opinion that the words "just and equitable
"were very wide in their scope. In the Cuthbert Cooper's
a and K\9 Meat Supplies cases
the principles of quasi-partner-ship,
according to the learned judge, had been extended so as to have regard to the
contract between the parties as shown by the articles of association. But, as
it was a contract between the parties which was important, the learned judge
regarded not merely what the articles said, but also what the parties were
shown to have agreed in any other manner. The settled and accepted course of
conduct between the parties, whether or not cast into the mould of a contract,
was considered to be important.
Coming to Indian cases, the first one that attracts
attention is B. Cowasji v. Nath Singh Oil Co. Ltd. ,
decided by the Lower Burma Chief Court. It was held that it would only
be in extreme cases that, at the suggestion of the minority, the wishes of the
domestic forum may be disregarded and the company be condemned to extinction.
In Murlidhar Roy v. Bengal Steamship Company
the Calcutta High Court refusing winding up, in an allegedly deadlock case, was
of the opinion that the Act creates, as between the shareholders, a domestic
Tribunal, and, unless a clear case was made out, the court will be slow to
withdraw from it the decision whether the company's business shall or shall not
be carried on. In re Janbazar Manna
Estate Ltd.
was a deadlock case of a private company. The dissatisfied shareholders' remedy
was said to lie in obtaining a majority in favour of their views and through
such majority electing a new directorate. The practical difficulties may be
considerable, but this did not entitle them to the order asked for.
In the Great
Indian Motor Works Ltd. v. Chandi
Das Nundy a private company took over the
business of a firm of partnership of two brothers, Chandi and Kristo. Kristo so
arranged matters that he was able to have on the board other directors of his
choice and his three sons as shareholders. The petitioner was removed from his
position as managing director and thus deprived of his remuneration. The
company was not declaring any dividends. The majority was being used not for the
benefit of the company, but for Kristo. It was, under these circumstances,
pointed out that it was nothing more than a partnership converted into a
company and the court applied to a very great extent the rules applicable to
the winding up of a partnership. It was considered just and equitable that the
company should be wound up, as it was impossible for the company to carry on
the business fairly and honestly.
In Jaldu
Anantha Raghurama Arya v. East
Coast Transport & Shipping Company (Private) Ltd.
the petitioner and the second respondent holding among themselves shares of the
value of Rs. one lakh out of the subscribed capital of Rs. two lakhs, prayed
that the company consisting of the five shareholders should be wound up. The
third respondent did not seem to take serious objection to this. Respondents
Nos. 4 and 5 alone opposed strongly the petition and complained that the
affairs of the company have not been carried on in a spirit of amity among the
shareholders, laying the blame on the petitioner and the second respondent,
who, according to them, were trying to squeeze them out of the company by means
of the winding up order. They themselves had filed applications for the
appointment of an inspector for investigation and also for the appointment of
an administrator for administering the company's affairs. It was considered,
under these circumstances, that if the petitioner and respondents Nos. 2 to 5
had been carrying on their business as a partnership, there would have been
every justification for directing a dissolution of the partnership. The fact
that they conducted the business by means of the machinery of a limited company
was not considered to make any difference. The compulsory order was, therefore,
made on the just and equitable ground.
In Veeramachineni Seethiah v. Bode Venkata Subbiah
it was held that the just and equitable clause should not be invoked in
cases where the only difficulty was the difference of view between the majority
and the minority. The mere incompatibility of good relations between the rival
factions in the directorate, in the absence of the other grounds such as
misappropriation or malversation of funds, was not sufficient for ordering
winding up. In S. S. Rajakumar v. Perfect Castings Private Ltd.
the Madras High Court was of the view that though the just and equitable
rule is wide, it has its own circumspection. Existence of factions amongst
shareholders, bickerings as between one group and another group, vague
allegations against the quality of management by persons in charge of the
company and mere exclusion from management were not considered by themselves a
ground for winding up of a company. Proved malversation and conversion of
funds, deliberate and wanton oppression by the management in power of the
minority shareholders with a view to make personal illegal gains, indulging in
subversive activities so as to jeopardise the substratum of the company, a
justifiable lack of confidence in the conduct and management of the company's
affairs due to lack of probity on the part of those in management, when there
is open mismanagement and there is no panacea to remedy the evil, such are
instances, though not exhaustive, when the courts, it was said, exercised their
jurisdiction under the "just and equitable"rule to wind up companies.
In the case before the court, the cumulative effect of the facts and
circumstances do not disclose such necessary circumstances to shake the
conscience of the court, and direct the winding up of the company. The observations
of Plowman J. in In re Expanded Plugs
Ltd.
were quoted with approval.
In In re
Bilasraj Juharmal the general allegation regarding the
oppression of the minority by the majority was considered to be of no avail.
That was a question relating to internal management; and it was a settled
principle that it was the right of the majority to carry on the management of
the company. The mere fact of differences between two groups by itself was not
considered sufficient to conclude that a situation similar to that of deadlock
had arisen. Referring to the Yenidje's
case,
the Bombay High Court was of the view that the principles relating to the
dissolution of partnership were applicable because of the peculiar
circumstances and facts prevailing in that case and could not necessarily be
applied to all private companies. The position of a partner, it was , observed,
stood on a different footing from the position of shareholders qua shareholders
of a company. The doctrine of agency prevailed in the case of a partnership and
each partner represented the other partner and had a right to participate in
the conduct of the affairs of the firm. That was not the case so far as the
position of the shareholders of a company was concerned. The management of the
affairs of a company was vested in a small body of directors. It was only when
a situation analogous to deadlock arose amongst the directors inter se that the principles relating
to the dissolution of partnership could be extended to the winding up of a
company. No shareholder was considered to have a right to participate in the
governance of the affairs of the company.
In Maharani
Lalita Rajya Lakshmi v. Indian
Motor Co. (Hazaribagh) Ltd.
it was held that denial of access to or inspection of the books of
account of the company to the shareholder is not an act of oppression because a
shareholder has no such right recognised by the Act. Similarly, the board of
directors has a discretion to declare dividend and the rate of such dividend.
There is no law which obliges a board of directors to use up all its profits by
declaring dividend. This will be no ground for winding up. Where the company is
unquestionably a profitable and thriving one, far be wound up, it was held to
be just and equitable to prevent such a company from being pushed into winding
up.
In Raghunath Prasad Jhunjhunwala v. Hind Overseas (Private) Ltd.
the original idea was to form a partnership and a common account was J opened. Later, however, a company
was formed and the shares were held mainly by two groups in the proportion of
six to ten. Disputes arose between the two groups and though there was no
deadlock in the administration of the company and no mismanagement, one of the
groups filed a winding-up petition in the Calcutta High Court. Mr. Justice A.
N. Ray (as he then was) kept in mind, firstly, that the petitioners and the
respondents did not hold shares in equal proportions, secondly, that there were
19 shareholders, thirdly, that the parties were not of the same family, and
fourthly, that the domestic company on the pattern of a partnership was not to
be found as a feature in that case. Discussing the various cases, both English
and Indian, the learned judge came to the conclusion that the partnership
principle could not be applied to that case, as it was not a case of equal
shareholding. In applying the partnership principles, the emphasis, according
to the learned judge, was on equal holdings, which are not capable of solution,
secondly, there must be exclusion from management, thirdly, there should be
exclusion from any benefit as shareholders, fourthly, there must be persistent
illegal and wrongful acts for long continuous period. It : was in such a
structure of domestic disharmony, that it was often said that no redress was
possible except by destruction of the structure itself. Further, the rights of
shareholders, said the learned judge, should not be allowed to be imperilled
because of friction between directors or because of conflict or competition for
power between them. Such disputes or friction are of internal quality and character
in regard to the members of the board. The learned judge further observed that
the dissolution of partnership principle had been applied to companies on the
ground of complete deadlock or on the ground of domestic or family companies.
The complete deadlock was where the board has two real members or the ratio of
shareholding was equal. In the domestic or family companies, courts applied the
dissolution of partnership principle where shareholdings were more or less
equal and there was ousting not only from, management, but also from benefits
as shareholders. Lack of probity has to result in prejudice to company's
business affecting rights of complaining parties as shareholders and not as
directors. If the deadlock could be resolved by the articles there was no
deadlock to bring a winding-up and if there were alternative remedies the
company should not be wound up. The learned judge, therefore, found that this
was not a case where the partnership principles could be applied; there was no
evidence to establish continuous and persistent mismanagement and further that
the substratum of the company was not gone. The application for winding up was,
therefore, dismissed.
This case went up in appeal before the Division Bench
of the Calcutta High Court, which set aside the judgment of the learned single
judge (see Raghunath
Prasad Jhunjhunwala v. Hind Overseas Private Ltd.).
The appellate Bench held that the company had to be wound up applying
the principles of partnership. The company in that case at its inception and
for a number of years afterwards was found to be really in substance a
partnership. This did not of course mean, observed the Bench, that all the
legal features of a partnership will be found in the company. In the nature of
things that could not be, for, after all, it was a company incorporated under
the Companies Act. It was just possible to expect that if a company was
dissected, the anatomy of a partnership was found. When one says that a company
is in substance a partnership, what was really meant was that a company should
be in the image of a partnership. The three most important indices of
partnership, viz., equal status of the partners (though not necessarily equal
interest), equal participation in management and mutual confidence, are the
basis of association. A private limited company which is an association of
persons in a joint-stock company, who have agreed to keep the membership
amongst themselves and who have divided the participation more or less equally
should, therefore, be ordinarily treated as analogous to partnership. In this
case a specific averment of the petitioner in the application for appointment
of provisional liquidator that the company was in substance a partnership was
not denied by the other side. Mukherjea J., who spoke for the Bench, was,
therefore, of the opinion that circumstances which will justify the dissolution
of a partnership would be applicable to that case. And quoting Lindley, the
dissolution of partnership.was said to be justified, if the partnership
agreement was wilfully and persistently violated; or one partner so behaved in
the partnership business that the other partners found it impossible to carry
on business in partnership with him; or some partners were in effect excluded
from the concern; or the misconduct of one or more partners was such that the
mutual confidence which must subsist in a partnership was destroyed; or there
was a state of animosity which precluded all reasonable hope of reconciliation
and friendly co-operation; or it was impossible for the partners to place that
confidence in each other which each has a right to expect, provided that the
impossibility was not caused by the persons seeking to take advantage of it.
While the learned single judge interpreted the
judgment in Yenidje Tobacco Company's case
,
to mean that unless there was a deadlock the partnership principle did not
apply, the Bench was of the view that, according to the said ratio, if a
private company could be fairly called a partnership in the guise of a private
company then the things which might be a ground for dissolution of a partnership
will apply also in the case of a private company. Deadlock was not material. It
was under these circumstances that the judgment of the learned single judge was
set aside; and it was considered just and equitable to wind up the company.
With utmost respect for the learned judges of the
Calcutta Bench, in Raghunath Prasad's case,
we do not find ourselves in agreement with them. For a company, after all, on
incorporation, becomes an entity different from a partnership. And the rules
for dissolving a partnership on just and equitable grounds cannot easily be
imported in a case for dissolving a company on similar grounds. There may be
cases where the partnership principles may be applicable, such as deadlock
cases; but, apart from other things, the provision in the articles, whereby the
deadlock, if any, can be resolved and the availability of the alternative
remedies cannot be ignored. , Specific provisions have been made in the
Companies Act, to which we will refer later, which have made available to the
shareholders, in suitable cases, remedies not open to a partner in a
partnership. We are, therefore, in respectful agreement with the views in that
case expressed by the learned single judge. We were informed by the learned
counsel that an appeal against the judgment of the Bench is pending in the
Supreme Court.
The question of applying the partnership principle
for winding up a company came up for consideration before the Gujarat High
Court in In re Atul Drug House Ltd.
In this case, the company was started as a small family company of Shahs.
Subsequently, East African Match Com pany Ltd. consisting mainly of two
families joined in capital participation. Disputes arose between the Shahs and
the two families. The Shah group petitioned for winding up invoking the
partnership principle. The judg ment in this case was delivered after the
judgment of the learned single judge in Raghunath
Prasad's case, but before the aforesaid judgment of
the Bench in appeal. J. B. Metha J. held that a company was a domestic concern,
so long as it was a private limited company of the Shah group; but with the
participation of East African Match Company, it ceased to be a domestic
concern, notwithstanding the majority of the shares of East African Company
being held by two families. There was no irresolvable deadlock in the
administration of the company. The learned judge held that it was only in cases
of complete irresolvable deadlock, where remedies of sections 397 and 398 were
not available, that the partnership principle can apply. A case of deadlock was
considered to arise where there were really two partners or where the partners
had equal holding, for there was something in the constitution itself in such
cases which resulted in a deadlock. The learned judge was of the view that the
legislature by enacting sections 443(2), 397 and 398 must be taken to have
intended that the winding-up jurisdiction even on partnership lines could be
invoked in a solvent company only when there was an irresolvable deadlock
because of something in the constitution of the company itself, without any
oppression or mismanagement. In that case the petitioner had alternative
remedies under sections 397 and 398. They had availed of the remedy of
investigation under section 408. The petition for winding up, therefore, was
not admitted.
It may be useful here to notice two other decisions.
In Kalinga Tubes Ltd. v. Shanti Prasad Jain,
the case was under section 397 of the Act. The company consisted of
three groups, who amongst themselves had entered into an agreement to share in
the management of the company. They were like partners so long as the company
continued to be a private company. Later on, the company was converted into a
public company. The contractual obligations worked out with reference to the
theory of partnership were held to be no longer continuing, as the articles
constituted the contractual obligations amongst the shareholders.
This case went up in appeal to the Supreme Court (Shanti Prasad Jain v. Kalinga Tubes Ltd.).
The judgment of the Orissa High Court was affirmed. The Supreme Court observed:
"As has already been indicated, it is not enough
to show that there is just and equitable cause for winding up the company,
though that must be shown as preliminary to the application of section 397. It
must further be shown that the conduct of the majority shareholders was
oppressive to the minority as members and this requires that events have to be
considered not in isolation but as a part of a consecutive story. There must be
continuous acts 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 from 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 shareholder".
Starting from Yenidje's
case,
we thus find that although the learned Master of the Rolls was not prepared to
limit the just and equitable clause as one of the grounds for winding up a
company to complete deadlock cases, yet the case before his Lordship was of a
company consisting of only two members who were the directors. The animosity
between them had reached the state of a complete deadlock. Apart from them,
there was no general body of shareholders to whom an appeal could be made. The
partnership principles were applied under these circumstances to the said case
and the company was wound up. These principles in main have continued to hold
the field throughout.
It is, therefore, safe to conclude that the powers of
the court under the just and equitable clause are not limited : and the court
will be guided by the rules of equity and will do what justice demands, keeping
in view the facts and circumstances of each case. All the same, the principles
on which a partnership is dissolved may be applied to the case of a company,
which consists of two members only or where the shareholding is equal or where
it is a family or domestic company with the shareholding equally divided
between two rival groups, which has resulted in a deadlock. Extending this
doctrine a little, the articles of association of the company assume great
importance; and if the articles can help to resolve the deadlock the winding up
has to be ruled out. The articles have to be taken as the terms of the contract
between the members, showing their intention as to how they agreed to transact
the business of the company; and which must, therefore, govern the relationship
amongst them inter se. Another important principle that has emerged from the
aforesaid decisions is that winding up of a domestic or family company on just
and equitable rule is permissible if there is a justifiable lack of confidence
in the conduct and management of the company's affairs, grounded on the conduct
of directors in regard to the company's business. This lack of confidence must
not arise from mere dissatisfaction at being outvoted on the business affairs
or the domestic policy of the company. It must rest, on the other hand, on a
lack of probity in the conduct of the company's affairs; and provided that an
appeal to the domestic forum is not possible; and further that the lack of
probity results in injury to the petitioner in his character as member.
Mr. R. M. Lai submitted that the company in this case
was a domestic company. It was a partnership to begin with, which had later on
been converted into a limited company. The essential features of partnership,
according to him, did not disappear on its assuming the guise of a limited
company. It would be of some importance, therefore, to examine the
circumstances under which the company was formed.
The family of Seth Shiv Prasad consisting of himself
and his brothers acquired in 1930 one-fourth interest in the Laxmi Sugar Mills.
This was sold and with the sale proceeds and certain loans, a sugar mill called
Shiv Prasad Banarsi Dass Sugar Mill business was converted into a partnership
of Shiv Prasad and his brothers. The other assets of the undivided family were
also partitioned by an award, exhibit RW-18/1, as stated by Shiv Raj Bhalla,
the arbitrator. A partition deed, exhibit RW-17/1, was also executed, where the
disruption of the family was narrated. Shiv Prasad at that time was married and
had four sons, and, therefore, formed a joint family along with his wife and
sons. He obtained the share as his family's share on disruption and was
assessed to income-tax as a Hindu undivided family. In 1938, Shiv Prasad along
with his three brothers, Kundan Lai, Banarsi Dass and Devi Chand set up a new
sugar mill under the name of Lord Krishna Sugar Mills, which was later
converted into a public limited company, the actual business starting in 1939,
after the company was formed. The original partnership consisted of four
partners. Three others, viz., Munna Lai, Kanshi Ram and Puran Chand, joined
them as subscribers to the memorandum and articles of association. Their
shareholding was unequal. Shiv Prasad and Banarsi Dass held shares of the face
value of Rs. 2,61,500 each. Kundan Lai had shares of the face value of Rs.
2,00,000. Devi Chand held shares of the face value of Rs. 1,75,000. Munna Lai,
who was not one of the partners in the original partnership, purchased shares
of the face value of Rs. 1 lakh, while Kanshi Ram and Puran Chand held shares
of the face value of Rs. 1,000 each. Munna Lai cannot be said to have joined
merely to comply with legal formalities, as his stake in the company was
substantial being l/10ths of the then total subscribed capital. Only four out
of the seven members were directors. There was, thus, no intention from the
very beginning to have an identity of ownership and management. A director did
not hold office in his own right as, according to article 96, he was to be
excluded on being requested in writing by his co-directors to resign. Article
143 provided that the shareholders other than the directors had no right to
inspect the accounts or other books or documents of the company except such as
were allowed to be inspected. The company was registered as a public company
and not a private company, showing that the intention was not to limit the
membership to only a few. On account of certain disputes, winding-up petitions
were filed on two occasions but were compromised. Ultimately, Seth Shiv Prasad
gave up his family's l/6th share in the Bijnore Mill and purchased the entire
shareholding in the company by July 16, 1948, thereby becoming its virtual sole
proprietor.
Mr. R. M. Lai contended that Shiv Prasad's
shareholding was his personal asset and not the asset of the Hindu undivided
family. It is, however, not necessary to decide this controversy in view of
Seth Shiv Prasad having become the virtual sole proprietor. On May 3, 1953,
Seth Shiv Prasad transferred shares of the face value of Rs. 71,750 to his
eldest son, Bimal Prasad, and of the face value of Rs. 71,640 each separately
to each of his other six sons. He also gifted shares of the face value of Rs.
72,000 to the appellant and shares of the value of Rs. 71,000 to Kanwal
Kishore, his minor son, from the appellant. According to Mr. Ved Vyas, this was
by way of partial partition. According to Mr. R. M. Lai, these transfers were
by way of gift. He, however, changed his stand and said that the transfers to
the appellant and her son were by way of gift, but the transfers to his sons
from the first wife were merely benami.
Nothing, however, appears to be turning on that. The important features
to be taken note of are that the present shareholders of the company are
fourteen in number, namely, the appellant and her minor son, respondents Nos. 2
and 3 and their four brothers, and Shanta Rani and her minor children. Two of
them, viz., respondents Nos. 2 and 3, are the whole-time directors. Shanta Rani
is a non-working director. Kuldip Chand and Ramesh Chand, sons of Seth Shiv
Prasad, are officers in the employment of the company. The remaining sons of
Seth Shiv Prasad and the children of Bimal Prasad are merely shareholders. The
interest of all of them are not identical. None of them has invested any money
in the business of the company, nor have they entered into any agreement
between themselves to share the profits of the business, nor is the business
carried on by all or any of them acting for all, nor have they come together on
the basis of any mutual trust or confidence. The members have become members by
force of circumstances, by accepting the shares, whether as gifts or on
partition, or by inheritance, on terms and conditions spelt out in the articles
of association of the company. The chairman of the company has, under article
71, a casting vote. A director can be excluded, as already stated, at the
instance of his co-directors. The members do not have an unrestricted right of
inspection and, therefore, have no unrestricted right to look into the
company's affairs. The members thus neither have the right to take part in the
management nor to share in the profits of the company, although they can
receive such dividends, if any, as may be declared. There is no element of
agency, as the directors are the agents of or trustees for the company and not
the agents of members.
It has been stated in paragraph 10(f) of the petition
that respondents Nos. 2, 3 and 4 have not only defrauded the appellant and her
minor son but also the other minors (children) of Seth Shiv Prasad and Seth
Bimal Prasad. There are members of the company, other than the appellant and
her son, whose interest, according to the appellant herself, conflicts with
that of respondents Nos. 2 to 4. Their interests 'are not shown to be identical
inter se. It cannot, therefore, be said that the company consists of two
individuals or two or more groups equally or more or less equally balanced,
having rights analogous to those enjoyed by partners. The company has not the
remotest resemblance with a partnership. It would be dangerous to think that any one of them in such a set up has the
right to send the company into winding up on the analogy of a partnership. Many
shareholders, who may be vitally affected, are not even parties to these
proceedings.
The law of
partnership in England differs from that in India, inasmuch as agreement, as
such, is not a necessary condition precedent for the formation of a partnership
under the English law. Section 1 of the U. K. Partnership Act, 1890, reads as
follows:
"(1) Partnership is the
relation which subsists between persons carrying on a business in common with a
view of profit.
(2) But the relation between
members of any company or association which is—
(a) Registered as a company.... or
(b) Formed
or incorporated....; or
(c) A company engaged in working mines....;
is not a partnership within the
meaning of this Act".
Section 5 of
the Indian Partnership Act, on the other hand, specifically provides that the
relationship of partnership arises from contract and not from status. The
members of the Hindu undivided family carrying on a family business as such, in
particular have been excluded from the definition of partners. The concept of
Hindu undivided family does not exist under the English law. Therefore, the
English decisions on this aspect of the question may not be a very safe guide
for deciding all such cases in our country. If the veil of incorporation of a
limited company is pierced, what may be found may not necessarily be a
partnership; it may be a Hindu undivided family or some other relationship for
the dissolution of which the principles under which partnership is dissolved
may have no bearing. A member of a Hindu undivided family, for example, cannot
dissolve the family although he may have a right to separate his own interest.
Even this right may not be available to a member in the lifetime of his father
in Punjab. Respondent No. 1-company, therefore, can under no circumstances be
said to be a partnership between its members under the guise of a company. The
question of the applicability of partnership principle for its winding up
would, therefore, not arise. Even if for any reason such principles are
considered to be applicable, the present is not a fit case where the same can
be so applied.
The concept
of an incorporated company is a concept which envisages certain amount of
continuity and a comparatively more permanence. The analogy of a partnership,
therefore, cannot be extended too far to a company, for the basic idea would be
frustrated if it could be dissolved in the like manner as a partnership would
be. A partner's liability is unlimited; he, therefore, is financially
interested to bring the partnership to an end when things are going bad.
But a fully paid member's liability in a limited company cannot be increased by
further trading. This aspect makes an important difference. Under the company
law in cases of extreme mismanagement or oppression, under certain
circumstances, it was found just and equitable to wind up the company. It was
then felt that it was unfair even in such cases to wind up an otherwise solvent
company merely on account of the fault of a few. Section 210 was, therefore,
included in the English Companies Act, 1948, to provide an alternative remedy
so that winding up could be avoided. A similar provision was introduced in the
Indian Companies Act, 1913, in the shape of section 153(3), which now has been
incorporated in the 1956 Act as sections 397 and 398. These sections provide an
alternative remedy where, inter alia, the affairs of the company are found to
be conducted in a manner oppressive to any member or prejudicial to the public
interest or the interest of the company. A further safeguard has been
introduced by section 443(2) reading as follows :
"Where the petition is presented on the ground
that it is just and equitable that the company should be wound up, the court
may refuse to make an order of winding up, if it is of opinion that some other
remedy is available to the petitioners and that they are acting unreasonably in
seeking to have the company wound up instead of pursuing that other
remedy".
The basic idea is to maintain the continuity and
permanence of the entity of the company as far as is possible and to avoid an
easy approach to the court for a compulsory order.
In the present case, the appellant has failed to
establish any deadlock in the affairs of the company as the company is carrying
on a thriving business and, in spite of the pendency of the present
proceedings, has been able to declare dividends ranging from 20% to 35%. It has
been able to carry out considerable expansion in its textile units. The
company's affairs are not facing any deadlock. The appellant has failed to
establish any justification for her lack of confidence in the conduct and
management of the company's affairs, nor has she been able to prove any lack of
probity on the part of the directors in regard to the company's affairs or towards
her interest as a shareholder. Her prayer for the winding up of the company,
therefore, is wholly unjustified and cannot be accepted.
Having come to the above conclusion, the question
arises whether the petition should be dismissed or some other order should be
passed. Section 443 of the Act deals with the powers of the court on hearing
the winding-up petition. The court may dismiss it or under sub-section (1)(d)
make an order for winding up or any other order that it thinks fit. In this
case, although the appellant is not entitled to a compulsory order, yet in the
interest of the company and of all shareholders including the appellant and the
respondents, it would be appropriate if the appellant and her son are allowed
to withdraw and separate their interests from the company. This is exactly what
the learned single judge directed, although for reasons, with which, we say
with respect, we have not been able to persuade ourselves to agree. But the
directions of the court were addressed to parties some of whom were not before
it and the date on which the valuation of the shares was to be made was not
determined. We, therefore, consider that the said judgment and order cannot be
maintained and the same are set aside.
Mr. Ved Vyas submitted on behalf of the respondents
that the company or its shareholders were not desirous of excluding Abnash Kaur
and Kanwal Kishore from the membership of the company. They, on the other hand,
were willing to allow them to continue as members entitled to full proprietary
rights as such. He even offered to accept the appellant as a director if she
was prepared to join in a spirit of co-operation. He stated that after Kanwal
Kishore had completed his education and if he desired to join the company as an
officer, the respondents would even be willing to give him a suitable
assignment. If, on the other hand, the appellant insisted on separating her
interest, it may not be possible for the sons of Seth Shiv Prasad from his
first wife or the children of Seth Bimal Prasad, to purchase her shares, more
especially as some of them were not parties to these proceedings and others are
minors. Respondents Nos. 2 to 4 would find it extremely difficult to pay the
price of the shares of the appellant. In this situation, he suggested that the company
would be prepared to accept the surrender of the shares of the appellant and
her minor son at a fair price to be fixed by the court. In view of the extreme
stringency in the money market and the practical impossibility of raising loans
on the security of shares of the company, which are not quoted on the stock
exchange, it was not possible, said the learned counsel, even to accept the
surrender of the appellant's interest, unless instalments spread over five
years were provided. It was further contended by him that so far as the shares
of Kanwal Kishore are concerned, he was not a party to these proceedings. His
shares should be left out of consideration. If, however, the appellant insisted
on his shares also being taken over, the same could not be surrendered to or
taken over by the company unless the requisite sanction was obtained from the
guardianship court, which should be so obtained by the appellant.
Mr. R. M. Lal submitted that this offer was not
acceptable to the appellant. She was not prepared to invoke even the
investigation provisions of the Act. She only pressed for the winding up of the
company, as that was the only way, according to him, which could bring
to light the misdeeds of respondents Nos. 2 to 4. We must say, with regret,
that this attitude is most unreasonable.
The offer of Mr. Ved Vyas is fair and just in order
to give time to the appellant to consider the above offer in its true light,
and to bring to an end this unfortunate and prolonged litigation, we allow her
an option to surrender her interest in the capital of the company, for being
taken over by the company, thereby resulting in consequent reduction of its
share capital for which purpose suitable applications shall be made by the
company. The purchase price shall be determined by the court (the company
judge) after taking into consideration the report of an expert valuer, whom it
shall appoint for the purpose and after hearing the parties. The valuer will
determine the fair value of the shares after taking into consideration all the
relevant factors including the revaluation of the assets and liabilities. The
value so determined shall be paid by the company in five equal six monthly
instalments spread over two and a half years. The date for the payment of the
first instalment shall be fixed by the court.
Ordinarily, the value is determined at the date of
the filing of the petition (see the decision of the House of Lords in Scottish Co-operative Wholesale Society Ltd.
v. Meyer).
This, however, is a peculiar case which has remained under trial now for about
twelve years. We, therefore, are of the view that the value of the shares shall
be determined as on the date of this judgment. In case the appellant is
desirous of the interest of Kanwal Kishore also being taken over by the
company, she shall make the offer to that effect in her capacity as the
guardian of Kanwal Kishore to the company in writing and obtain the required
sanction from the guardianship court for that purpose. In the absence of such
an offer regarding the interest of Kanwal Kishore, the company shall take over
the shares to which the appellant may be found to be entitled, whether they
actually stand registered in her name or not. The appellant must exercise the
above option both in respect of her own shares as also in respect of the shares
of her son, within six months from the date of this judgment. If the option is
exercised, the order in this appeal would be a direction to the company to take
over and to the appellant to surrender to the company, her shares, as well as
that of her son, if surrendered on the above terms, and the appeal would stand
disposed of accordingly. If the option is not exercised by the appellant within
six months from the date of this judgment, her appeal, C.A. No. 11 of 1971,
shall stand dismissed.
In appeals, CAs. Nos. 8 and 10 of 1971, the
respondents have prayed for the dismissal of the appellant's winding-up
petition. In case the appellant exercises her aforesaid option within six
months the said two appeals shall stand disposed of in accordance with the
aforesaid order. If the appellant does not exercise her said option, these two
appeals shall stand accepted; and the petition for winding up shall stand
dismissed, as already stated.
The appointment of the chairman of the board of directors as also of the internal auditors of the company shall come to an end with effect from May 31, 1972. During this period, the chairman with the help of the internal auditors shall work out last balances in the books of account of the company as on the date of this order and shall sign the same as also other relevant records and books of the company. In the peculiar circumstances of this case, the parties shall bear their own costs.
[1956]
26 COMP. CAS. 168 (SC)
V.
H. K. Adhyaru
S R DAS, C.J.
AND
BHAGWATI AND VENKATARAMA AYYAR, JJ.
FEBRUARY
14, 1956
BHAGWATI, J.-These are two appeals filed with
certificates under article 133(1) of the Constitution against the judgment and
order of the High Court of Judicature at Bombay setting aside the order passed
by the District Judge, Ahmedabad.
The National
Mills Company Limited, Ahmedabad, hereinafter referred to as the National
Mills, was ordered to be compulsorily wound up by an order of the Joint Judge,
Ahmedabad, dated the 14th March, 1950, and Trikamlal J. Patel, Manvantray T.
Mehta (since deceased) and Krishnalal B. Dave were appointed liquidators of the
National Mills. The liquidators invited sealed tender for the purchase of the
Mills, land, bungalow, warehouses, etc., and the Himabhai Manufacturing Company
Limited, Ahmedabad, hereinafter referred to as the Himabhai Company, submitted
their tender on the 15th September, 1953, offering to purchase the same. The
said offer was sanctioned by the court on the 22nd September, 1953, and an
agreement was entered into between the liquidators and the Himabhai Company for
the sale of the properties therein mentioned for a consideration of Rs.
12,68,000. Rs.3,00,000 were to be paid in cash and the balance in 1936 shares
of the Himabhai Company which were taken to be of the value of Rs. 500 per
share. There were 484 shares of the National Mills held by 232 shareholders. It
was then contemplated that, after the payment of all debts by the liquidators,
these 1936 shares would be distributed amongst the contributories in the
proportion of 4 shares of the Himabhai Company to 1 share of the National
Mills. Clauses 5 and 6 of the agreement, however, provided:-
"Clause
(5). That the managing agents of the second party Sheth Chunilal Khushaldas by
way of and in consideration of this agreement, agrees to purchase the shares to
be issued by the second party from the contributories of the first party as
agreed at Rs. 500. this amount of Rs. 500 per each share of the second party
shall be payable by the said Sheth Chunilal Khushaldas within five months from
the date of the execution of the sale deed to such contributories who intend to
cash the said shares of the second party and who shall notify his intention and
deliver his share certificates with transfer forms duly signed and executed by
him, to Sheth Chunilal Khushaldas to cash the said share with in the period
aforesaid.
Clause (6).
That over and above, Rs. three lacs to be paid in cash as and by way of
consideration by the second party, if the official liquidators require further
funds for payments to the creditors, the official liquidators may at any time
submit up to seven hundred shares allotted to the first party's name by second
party to Sheth Chunilal Khushaldas and Sheth Chunilal Khushaldas hereby agrees
and undertakes to pay to the extent of Rs. three and half lacs on such
submission of shares with transfer form A duly executed at the rule of Rs. 500
(rupees five hundred) per each such share in addition to expenses of such
transfer of shares pertaining to those shares only."
On the 3rd
November, 1953, another agreement was entered into between the liquidators and
Chunilal Khushaldas Patel, hereinafter referred to as Chunilal, incorporating
therein the terms of clauses (5) and (6) set out above and Chunilal agreed to
abide by the same. The sale deed was actually executed on the 18th April, 1954,
and the five months period provided in clause (5) expired on the 18th
September, 1954.
Even though
the liquidators had anticipated that the work of liquidation would be over
within the said period of five months and the 1936 shares of the Himabhai
Company distributed amongst the contributories, the liquidators found that the
Income-tax authorities assessed the National Mills heavily beyond their
expectations and the creditors also could not be paid more than as.8 in a
rupee. It was, therefore, not possible to distribute the shares to the
contributories. The market price of the shares of the Himabhai Company, which
was Rs. 435 in September, 1953, was about Rs. 450 in September, 1954, and
neither the liquidators nor the contributories were in a position to realise
anything beyond this sum by sale of the shares in open market. Therefore, with
the object of cashing the shares at Rs. 500 as provided in the agreement, the
liquidators secured letters of authority from contributories holding 277 shares
in the National Mills representing 908 shares of the Himabhai Company, and,
armed with these letters of authority, approached Chunilal at 7-30 p.m. on the
17th September, 1954, asking him to take delivery of the 1936 shares which had
been allotted to them along with blank transfer forms duly signed by them. They
purported to tender these shares under clause (5) of the agreement dated the
28th September, 1953, and called upon Chunilal to fulfill his obligation under
the agreement dated the 3rd November, 1953. Chunilal, however, contended that
the tender was not valid and he was not bound to accept the same. A letter and
a telegram dated the 17th September, 1954, were addressed by the liquidators to
Chunilal and he replied the same day denying that he had ever refused to accept
delivery of whatever the liquidators wanted to deliver to him. he further
called upon the liquidators to deliver to him that very day whatever they
wanted to deliver. The liquidators replied on the 18th September, 1954, reiterating
the position which they had taken up and insisted upon Chunilal fulfilling his
obligation. They wound up by saying that the question of their delivering
whatever they wanted to deliver did not arise unless Chunilal made payment by
cash or by cheque of Rs. 9,68,000 against delivery, Chunilal rejoined by his
letter dated the 19th September, 1954, setting out the correct facts according
to him and pointed out that the tender was invalid and inoperative and that he
had not refused the same.
The liquidators
sent no reply to this letter but it appears that they approached Chunilal and
his legal advisers with a view to bring about a settlement of the dispute.
These attempts failed and the liquidators had, therefore, to approach some
other party. They tried to induce Harshad- Kumar K. Adhyaru, hereinafter
referred to as Adhyaru, to purchase these 1936 shares. Adhyaru was at first
unwilling to do so. Held had, in March, 1955, purchased five shares of the
Himabhai Company in the open market and had submitted them to the Himabhai
Company for registration in his name. Chunilal, who was the senior partner in
the managing agents firm of the Himabhai Company, is alleged not to have
sanctioned the transfer and Adhyaru took umbrage at it and resolved to buy up the
whole lot of 1936 shares of the Himabhai Company which were offered to him by
the liquidators at the price of Rs. 500 per share which Chunilal had agreed to
pay for the same in certain events contemplated in the agreement of 3rd
November, 1953. Between 19th July, 1955, and 29th July, 1955, 11 letters were
addressed by 57 contributories of the National Mills holding 108 shares to the
liquidators authorising them to dispose of the said 1936 shares to anyone in
open market inasmuch as, according to their information Chunilal had failed to
make payment for those shares and to recover the loss, if any, incurred thereby
from Chunilal, if need be, by taking necessary ledged steps against him.
On the 27th
July, 1955, Adhyaru addressed a letter to the liquidators offering to purchased
the said 1936 shares at Rs 500 per share and enclosed a cheque for Rs. 1,00,000
as and by way of earnest money promising to pay the balance forthwith on the
approval and sanction by the District Judge of his said offer. It appears that
Chunilal also about the same time thought of waiving the objections which he
had raised to the purported tender by the liquidators on the 17th September,
1954, and approached Trikamlal J. Patel one of the two surviving liquidators,
hereinafter referred to as Trikamlal, offering to take the said 1936 shares. On
the morning of the 29th July, 1955, there was an interview between one Ratilal
Nathalal, a co-director of the Himabhai Company on the one hand and Trikamlal
on the other in the office of Vasavda, a labour leader in Ahmedabad, in the
premises of the Majoor Mahajan. Trikamlal, at that interview, drafted a letter
which he handed over to Ratilal Nathalal with instructions that, if a letter in
those terms was addressed by Chunilal to the liquidators accompanied by a
cheque for the full amount of Rs. 9,68,000, the said 1936 shares would be
delivered to him. Chunilal accordingly addressed to the liquidators a letter on
the same date in accordance with the said draft waiving all the objections to
the tender made on the 17th September, 1954, and offering to take delivery of
the said 1936 shares at the said rate in pursuance of the agreement dated the
3rd November, 1953. He sent a cheque for Rs. 9,68,000 along with the said
letter and requested the liquidators to deliver the said 1936 shares to him
with transfer forms duly signed by them.
Matubhai, son
or Chunilal, went along with the said letter and the cheque to Trikamlal at his
office in the court premises at 2 p.m. Trikamlal, however, told him that Chunilal
should addressed another letter to the liquidators promising to pay the
dividend which would be sanctioned at the annual general meeting of the
Himabhai company for the year 1954 and he, Matubhai, should bring such a letter
to him in the court premises at about 4 p.m. Chunilal accordingly addressed
another letter to the liquidators promising to pay the dividend which would be
sanctioned at the annual general meeting of the Himabhai Company for the year
1954. When, however, Matubhai went with both the letters and the cheque to
Trikamlal in the court premises, he was not found there as evidently he had
taken ill and gone home. Matubhai and Ratilal Nathalal, therefore, went to
Trikamlal's place of residence at 7-30 p.m. the same evening and handed over the
two letters and cheque to Trikamlal. Trikamlal accepted these documents but
said that the share certificates were with his co-liquidator Krishnalal B.
Dave, hereinafter referred to as Dave, and stated that he would hand them over
on Tuesday the 2nd August, 1955, after Dave had returned from Bombay where he
had gone that evening, and after the relative transfer forms had been duly
signed by both the liquidators. Trikamlal, however, handed over to Matubhai at
that very time proxies for the said 1936 shares for the annual general meeting
of the Himabhai Company which was to be held on the 6th August, 1955. On the
30th July, 1955,l Chunilal addressed a letter to Trikamlal thanking him for
giving him the proxies for the said 1936 shares. He put on the record that
Trikamlal had already received the cheque for Rs. 9,68,000 and promised to
deliver the share certificates of the said 1936 shares together with the
transfer forms duly signed by both the liquidators on Tuesday the 2nd August,
1955, on Dave returning from Bombay. He stated that he would be sending his man
Shri Thakersey N. Shah, to Trikamlal's chambers at the court premises at 11.30
a.m. that day and requested that Trikamlal should deliver the said share
certificates and the transfer forms duly signed by both the liquidators to him.
On the same date Trikamlal also addressed a letter to Chunilal acknowledging
the receipt of the cheque for Rs. 9,68,000 and the said letter. He stated that
his co- liquidator Dave had gone outside, i.e., to Bombay, and intimated that
the liquidators would properly deal with the subject after Dave had been
acquainted with the matter. Chunilal sent Thakersey N. Shah to Trikamlal on the
2nd August, 1955, along with his letter of the same date asking Trikamlal to
deliver the said 1936 shares to him and also 20 transfer forms duly signed by
the liquidators. He also asked for the stamped receipt for the amount paid by
him in full settlement of the amount of the said shares. Trikamlal replied the
same day stating that Dave had not returned from Bombay and, therefore, nothing
could be done till he returned. He stood further that on the return of Dave,
he, Trikamlal, would submit the correspondence between Chunilal and himself to
Dave for further action. He, however, stated that, without prejudice to the
rights of the liquidators and subject to the approval by Dave4 and subject to
the sanction of the District Judge, he was sending the cheque for acceptance.
This cheque was cashed by the bank and the amount was credited to the account
of the liquidators.
After Dave
returned from Bombay and the liquidators had consultations amongst themselves,
they made a report on the 3rd August, 1955, submitting both the offers of
Chunilal and Adhyaru for sanction by the court.
In the report
which they submitted to the District Judge, the liquidators set out the facts
in regard to the alleged breach of the agreement of 3rd November, 1953, by
Chunilal and the letters which had been addressed by the contributories to them
between the 19th July, and the 29th July, 1955, and what had transpired between
Chunilal and Trikamlal on and after the 29th July, 1955. They also set out the
offer which was made by Adhyaru and stated that the offer of Adhyaru was prior
and made on the 27th July, 1955, that Chunilal had committed a breach of the
agreement dated the 3rd November, 1953, by refusing to encash the said 1936
shares, that by the said breach of the agreement the liquidators were put to
great trouble and could not pay th remaining annas 8 to the creditors and that Adhyaru
also was a mill owner and a substantial party. The liquidators submitted both
the offers to the court for its consideration and sanction.
As the annual
general meeting of the Himabhai Company was to be held on 6th August, 1955, the
liquidators made an application to the District Judge on the evening of 3rd
August, 1955, and the District Judge fixed the hearing for the next day, the
4th August, 1955. He ordered that notice of the application should be given to
Chunilal and Adhyaru and they should file their statements and appear at the
hearing before him. Chunilal and Adhyaru accordingly filed their statements,
Chunilal denied that he had committed a breach of the agreement dated the 3rd
November, 1953, reiterated that he was always ready and willing to purchase the
said 1936 shares as per the agreement and pointed out that he had even then
showed his readiness and willingness to purchase the said shares and already
given the two letters as also the cheque for Rs. 9,68,000 to the liquidators
and that the matter of sale was thus really completed and concluded between him
and the liquidators and submitted that in these circumstances the liquidators
had no right to sell the said shares to anybody else except himself and were
bound to transfer the said shares to him. As regards Adhyaru's offer, he stated
that the same did not appear to be genuine and should not be accepted. Adhyaru,
in his statement, pointed out the circumstances under which he came to make his
said offer and submitted that his offer being prior in time should be accepted
in preference to the offer of Chunilal.
The District
Judge, after hearing the arguments advanced before him by the liquidators as
well as Chunilal and Adhyaru, sanctioned the offer of Chunilal. He negatived
the contention that Chunilal had committed a breach of the agreement dated the
3rd November, 1953, observing that the tender purporting to have been made by
the liquidators on the 17th September, 1954, was not a valid tender. He took
into consideration the circumstance under which Chunilal had come to write the
letter dated the 29th July, 1955, and the events that had since happened in
regard to Chunilal's offer to purchase these shares and observed that even if
Adhyaru may be inconvenienced by reason of Chunilal's offer it would be unfair
to penalise Chunilal and deprive him of the right to which he was entitled
under the agreement. He, therefore, ordered that the offer of Chunilal be
accepted by the liquidators and as the full price had already been paid by him
the 1936 shares be delivered to him or his duly authorised agent together with
the necessary transfer forms duly signed. The cheque given by Adhyaru was
ordered to be returned and the parties were ordered to bear their own costs.
It may be
observed that Madhubhai, one of the signatories to the letter dated the 19th
July, 1955, had not appeared before the District Judge. When the offer of
Adhyaru was not accepted by the District Judge, both Adhyaru and Madhubhai
joined in taking an appeal to the High Court on the 6th August, 1955, filed a
common memo of appeal and applied for interim relief before Mr. Justice
BAVDEKAR, which was, however, refused, Chunilal undertaking through his
advocate to hand back the shares to the liquidators on Monday the 8th August,
1955, if they were handed over to him that day.
The appeal
came for admission before Mr. Justice BAVDEKAR on the 18th August, 1955, and at
that time Mr. Justice BAVDEKAR enquired of Madhubhai who had joined in the
appeal what grievance he had to make against the order in appeal and the
advocate for Madhubhai told Mr. Justice BAVDEKAR that his grievance was
substantial inasmuch as the contributories felt that the shares in question
might fetch a much higher value than Rs. 500 per share. Mr. Justice BAVDEKAR
called upon the contributories to show the bona fides of this contention by
requesting Adhyaru to raise his offer to Rs. 550 per share and deposit the
required additional amount in court. The said additional amount was accordingly
deposited in court.
The appeal was
heard before a Bench of the Bombay High Court constituted by GAJENDRAGADKAR and
GOKHALE JJ. on the 24th and 25th August, 1955. Adhyaru and Madhubhai appeared
by separate counsel and Madhubhai, in the first instance, supported Adhyaru. At
the end of the second day's hearing, however, his advocate was instructed to
tell the court that the contributories had withdrawn from the liquidators the
authority to sell the shares by private negotiations but had asked them instead
to sell the shares by private negotiations but had asked them instead to sell
the shares in the open market so that the shares might fetch a much higher
value in the open market at Ahmedabad. The hearing of the appeal was then
adjourned. The appeal came for further hearing before the same bench on the 6th
September, 1955. Further affidavits were filed by Madhubhai and by Matubhai the
son of Chunilal pointing out the state of the market in regard to these shares.
At the further hearing, the advocate for Madhubhai produced before the court a receipt
passed by the liquidators showing that one Pasavala had deposited with them an
amount of Rs. 11,61,600 at the rate of Rs.600 per share. Counsel appeared also
on behalf of one Gangaprasad Puria offering to purchase the said 1936 shares en
bloc at the rate of Rs. 625 per share. The High Court set aside the order of
the District Judge and ordered that the said shares should be sold in the open
market and that the offer made by Pasavala should be taken as the minimum offer
made for the purchase of the shares in question. The amount of Rs. 11,61,600
deposited by Pasavala in support of the offer was ordered to continue in
deposit with the liquidators until the public auction was held and the bid made
at the public auction was sanctioned by the District Judge. Chunilal and
Adhyaru were declared entitled to bid at the auction if they so desired.
Adhyaru was declared to be at liberty withdraw the additional amount deposited
by him with the liquidators. Each party was ordered to bear and pay his own
costs.
In the
judgment which it delivered, the High Court laid great stress upon the
observation of the District Judge that Chunilal was entitled to a right under
the agreement. This position was severely attacked before the High Court and
the High Court came to the conclusion that Chunilal had no right under the
agreement dated the 3rd November, 1953, that neither on the 17th Nor on the
18th September, 1954, Chunilal was willing to abide by his undertaking and that
he had committed a breach of the agreement, that Chunilal made his offer on the
29th July, 1955, after coming to know that Adhyaru had made his offer on the
27th July, that, if the matters had stood there, Adhyaru's offer should have
been accepted but, having regard to the conduct of the liquidators, Adhyaru's
offer also could not be accepted, that the interests of the contributories were
primarily to be considered by the court and there being higher offers for the
purchase of these shares as evidenced by the offer of Pasavala the proper
course was to sanction a sale by public auction of these shares so as to fetch
the highest price available in the open market for the benefit of the
contributories. The High Court accepted the position that normally the
discretion exercised by the District Judge should not be interfered with but
came to the conclusion that "the exercise of the discretion here by the
District Judge was erroneous inasmuch as the District Judge was influenced by
two considerations, viz., (1) that Chunilal had a right under the agreement dated
the 3rd November, 1953, and (2) that Chunilal had not committed a breach of the
said agreement, both of which considerations were wrong in law." The high
Court, therefore, felt justified in setting aside the order of the District
Judge in favour of Chunilal and ordering the sale by public auction of these
shares.
Chunilal and
Adhyaru both applied for certificates for leave to appeal to this court and the
High Court granted the requisite certificates. The appeal filed by Chunilal
before this court is Civil Appeal No.2 of 1956 and the appeal filed by Adhyaru
is Civil Appeal No.3 of 1956. Both these appeals have come for hearing and
final disposal before us.
The learned
Attorney-General appearing for Chunilal before us contended that even though on
a construction of the terms of the agreement dated the 3rd November, 1953, he
had no right to the purchase of these 1936 shares, he had acquired a right to
his offer being accepted in the events that had happened and the District Judge
was not wrong when he stated that he had thus acquired a right under the
agreement. He further contended that the offer made by Chunilal was really for
Rs. 520 per share he having agreed to give to the liquidators the dividend
sanctioned in the annual general meeting of the Himabhai Company for the year
1954 and was, therefore, higher than the offer of Adhyaru by Rs. 20 per share.
He also contended that the District Judge was right in holding that the had not
committed a breach of the agreement and had exercised his discretion properly
in his favour. He, therefore, contends that the discretion exercised by the
District Judge, not being in any manner whatever erroneous, should not have
been interfered with by the High Court and the order made by the District Judge
should have been confirmed. In regard to the order of the High Court directing
a sale by public auction of these shares, he contended that throughout up to
the 4th August, 1955, the market price for these shares had never gone beyond
Rs. 427-8-0 or at the highest Rs. 450 per share, that the contributories had
accepted the same position not only in their letters addressed to the
liquidators between the 19th July and the 29th July, 1955, but also in the
grounds of appeal which had been filed by Madhubhai along with Adhyaru and right
up to the end of the second day of hearing before the High Court on the 25th
August, 1955, and that the High Court was not justified in taking into
consideration the situation which subsequently developed as the result of the
keen competition between Adhyaru and Chunilal on Adhyaru's offer not having
been accepted by the District Judge and of Madhubhai having brought in a number
of speculators to bid for the enbloc purchase of the 1936 shares with a view to
acquire the managing agency of the Himabhai Company. He, therefore, submitted
that the order of the High Court should be aside and the order of the District
Judge restored.
Counsel for
Adhyaru contended that there was nothing in the conduct of the liquidators which
would justify either the District Judge or the High Court in refusing to accept
his offer which was prior in point of time to that of Chunilal. He supported
the conclusion reached by the High Court that the agreement dated the 3rd
November, 1953, conferred no right on Chunilal and that his offer should have
been accepted by both the courts below. he contended in the alternative that
the order which was made by the High Court directing a sale by public auction
of these shares was, under the circumstances, quite correct.
Counsel for
Madhubhai contended that the order made by the High Court directing a sale of
these shares by public auction in the open market was conducive to the benefit
of the contributories, that the contributories had in fact countermanded the
authority given by them to the liquidators by their subsequent letters
addressed to them between 19th July and 27th July, 1955, and that the judgment
of the High Court should be sustained.
The
liquidators had come in for considerable criticism at the hands of all the
parties. Chunilal had charged them with having sided with Adhyaru when they
made the report to the court on the 3rd August, 1955. Adhyaru had charged them
and in particular Trikamlal with having obtained the offer of Chunilal, and Madhubhai
had charged them with not having prominently brought to the notice of the
District Judge the fact that the contributories had countermanded their
authority as above and also the fact that the said 1936 shares if sold en bloc
would fetch a much higher price than was offered either by Chunilal or by
Adhyaru. Their conduct met with disapproval at the hands of the high Court and
it was by reason of what the High Court thought of their attitude that even
though the High Court refused to accept Chunilal's offer it also refused to
accept Adhyaru's offer and directed that a sale by public auction of these
shares should be held by the District Court as above stated. Counsel for the
liquidators urged before us that they were no doubt guilty of an indiscretion
in so far as they did not prominently bring to the notice of the District Judge
the fact of the countermanding of their authority by the contributories and the
further fact that if the said shares were sold en bloc in open market they
might have fetched much more than Rs. 500 per share which had been offered by
Chunilal and Adhyaru. He, however, endeavoured to justify the conduct of the
liquidators in all other respects and urged that it was in the interest of the
contributories that the order made by the High Court should be sustained.
It is
necessary to clear the ground by considering the two points which particularly
weighed with the High Court, viz.,(1) that Chunilal had committed a breach of
the agreement dated the 3rd November, 1953, and (2) that he was not entitled to
any right under the agreement. Clauses 95) and (6) of the agreement dated the
28th September, 1953, which were in terms incorporated in the agreement entered
into between the liquidators and Chunilal provided that Chunilal would purchase
the shares issued by the Himabhai Company at the rate of Rs. 500 per share
within five months from the date of the execution of the sale deed from such
contributories as intended to cash the said shares and notify their intention
and deliver the share certificates with transfer forms duly signed and executed
by them to Chunilal and pay the said amount of Rs. 500 per share to such
contributories. A sum of rupees three lacs was paid in cash by the Himabhai
Company to the liquidators but if the liquidators required further funds for
payment to the creditors the liquidators were entitled under clause (6) at any
time to submit up to 700 shares allotted to them by the Himabhai Company to
Chunilal and Chunilal agreed and undertook to pay to the extent of Rs. 3 1/2
lacs on such shares on transfer forms duly executed at the rate of Rs.500 per
each such share in addition to expenses of such transfer of shares pertaining
to those shares only. No period was specified within which the liquidators were
entitled to submit these 700 shares to Chunilal. It appears that the
liquidators expected to wind up the affairs of the company within a period of
five months from the execution of the sale deed and to distribute the 1936
shares or such part thereof as remained with them after they had exercised
their right under clause (6) to the contributories and it was after such
distribution that the contributories were entitled to exercise their right
under clause (5) to cash the said shares with Chunilal at the rate of Rs. 500
per share on their complying with the formalities therein contained. That
expectation of the liquidators was not realised. The liability of the National
Mills for payment of income-tax was assessed at a very high figure which was
beyond their expectation and it was, therefore, not found possible by the
liquidators to pay off the debts due to the creditors and to distribute the
shares to the contributories. It appears that they were not able to proceed
with the work of winding up even by the exercise of their right under clause
(6) and did not think it feasible for them to get Rs. 3,50,000 from Chunilal by
offering 700 out of these 1936 shares which were allotted by the Himabhai
Company in their names. They, therefore, set about obtaining letters of
authority from the contributories and by the 14th September, 1954, succeeded in
obtaining such letters of authority from the contributories to the extent of
908 out of these 1936 shares according to their own version. They appear to
have considered that with the letters of authority in respect of the 1236
shares they would be entitled to tender the whole lot of 1936 shares to
Chunilal and call upon him to pay the sum of Rs. 968,000 computed at the rate
of Rs. 500 per share by the combined operation of clauses (5) and (6), they
being entitled in their own right to submit 700 shares to Chunilal under clause
(6) and they having letters of authority from the contributories to the extent
of the balance of 1236 shares. These were the documents which they purported to
tender to Chunilal on the evening of 17th September, 1954. The whole tender was
a composite tender and Chunilal was not satisfied that it was a valid tender of
these 1936 shares by the liquidators to him. The correspondence which took
place between the liquidators and Chunilal between the 17th September, 1954,
and the 19th September, 1954, makes it abundantly clear that at that stage the
liquidators had not got with them the requisite letters of authority from the
contributories so as to enable them to tender oven the 1236 shares to Chunilal
nor did they at that time make it clear to Chunilal that they were tendering
the balance of 700 shares to Chunilal in exercise of their right under clause
(6). It may be that Chunilal expected that he would ultimately be able to acquire
these shares from the individual contributories beyond the said period of five
months at the then market rate which according to the then expectation could
never be more than Rs. 450 per share, which was much less than Rs. 500 per
share which he had agreed to pay under the terms of his agreement. Whatever may
have been at the back of his mind, the fact remains that the liquidators, on
the evening of the 17th September, 1954, did not make a valid tender of these
1936 shares to Chunilal and Chunilal was well within his rights in refusing to
accept the same. He made his position clear in his letter dated the 19th
September, 1954, which he addressed to the liquidators and it is futile to urge
that the attitude which he took up on the 19th September, 1954, was a pure
after- thought. We are of the opinion that the District Judge was right in his
appreciation of the situation as it obtained on the 17th September, 1954, and
the High Court's conclusion that Chunilal committed a breach of the agreement
was clearly erroneous.
It is no doubt
true that on true construction of clauses (5) and (6) of the agreement dated
the 3rd November, 1953, Chunilal had no right to acquire these shares from the
contributories or the liquidators. The contributories and the liquidators were
not bound to offer any portion of these shares to him and if they wanted to
sell these shares to other parties they would have been entitled to do so.
Clauses (5) and (6) of the agreement, however, were beneficial to the
contributories and the liquidators and the liquidators had obtained from
Chunilal and undertaking that, if the contributories offered their shares to
Chunilal within five months of the execution of the sale deed and likewise they
also submitted to him 700 out of these 1936 shares at any time thereafter,
Chunilal would pay to them the price of these shares at the rate of Rs. 500 per
share which price was certainly far higher than the price of the shares which
obtained in the market at or about the times when the agreements were entered
into between the parties. It was a distinct advantage which was stipulated for
the benefited of the contributories and the liquidators and it was with a view
to secure that advantage to themselves that the liquidators armed themselves
with the letters of authority from the contributories such as were available to
them and purported to make the tender of all the 1936 shares to Chunilal on the
evening of the 17th September, 1954. The price of these shares quoted in the
market was no more than Rs. 427-8-0 per share and in purporting to make this
tender the liquidators wanted to secure a definite advantage to themselves and
the contributories by trying to hold Chunilal to his obligation to pay Rs. 500
per share. It was contended that Chunilal committed a breach of the agreement
and the agreement, therefore, came to an end. There was nothing, however, to
prevent the liquidators from submitting to Chunilal 700 shares in exercise of
their right under clause (6) at any time and there was also nothing to prevent
Chunilal, if any such offer had been made in the future, from waiving his right
to have the shares offered by the contributories to him in terms of clause (5)
within a period of five months from the date of the execution of the sale deed.
As a matter of fact, the alleged breach by Chunilal of the agreement was not
accepted as such by the liquidators and they, in fact, carried on negotiations
with him after the 19th September, 1954, to induce him to fulfill his
obligation thereunder. Chunilal, however, would not yield and the liquidators,
therefore, gave the contributories to understand that Chunilal had committed a
breach of the agreement. The liquidators also approached Adhyaru who was
unwilling in the first instance to go in for the purchase of these shares. It
was only when Adhyaru found himself frustrated in his attempt to get the five
shares of the Himabhai Company which he had purchased in the open market
transferred to his name in the register of the shareholders of the company that
his amour proper was wounded and he decided to go in for the purchase of this
whole lot of 1936 shares obviously with a view to make a bid for the managing
agency of the Himabhai Company after acquiring these shares. Madhubhai and the
other contributories in the shape of the 57 shareholders of 108 shares of the
national Mills wrote the 11 letters between the dates 19th July and the 29th
July, 1955, whereby they called upon the liquidators to sell the said shares in
the open market and to recover the loss, if any, from Chunilal by taking the
necessary legal proceedings. These letters were intended to secure for the
contributories the sum of Rs. 500 per share which had been agreed to be paid by
Chunilal in terms of clause (5) of the agreement and the directions which were
given by these contributories to the liquidators under those letters could not
have been given if Adhyaru's offer of purchase of these 1936 shares at the rate
of Rs. 500 per share had already been obtained by the liquidators before those
letters were addressed to them by the contributories. The whole idea at that
time was to sell these shares in the open market at the risk and cost of
Chunilal and to sue him in the court of law, if necessary, for recovering the
loss, if any. The contributories also by these letters asked the liquidators to
support Madhubhai and others in the resolution which they were going to move at
the annual general meeting of the Himabhai Company which was to be held on the
6th August, 1955, with a view to safeguard the interest of the contributories
but these directions also were not calculated to do anything further than try
to punish Chunilal for his alleged breach of the agreement. Adhyaru made up his
mind finally on the 27th July, 1955, and he wrote a letter to the liquidators
offering to purchase these 1936 shares at the rate of Rs. 500 per share subject
to the sanction of the District Court. He gave a cheque of Rs. 1,00,000 as and
by way of earnest which cheque the liquidators kept with themselves pending the
sanction of the District Court. It was not cashed by them at any time. In the
meanwhile, Chunilal, through his co-director Ratilal Nathalal, had an interview
with Trikamlal in the office of Vasavda and Trikamlal gave to Ratilal Nathalal
a draft of the letter to be addressed by Chunilal to the liquidators waiving
his objections to the tender which purported to have been made by the
liquidators to him on the evening of the 17th September, 1954, and offering to
take delivery of the said 1936 shares for the full consideration of Rs. 9,68,000.
Trikamlal had no express authority from his co-liquidator, Dave, in the matter
of these negotiations but Trikamlal appear to have thought that he would be
able to persuade Dave and complete the transaction. He not only procured from
Chunilal on the 29th July, 1955, a letter withdrawing his contentions about the
contract to purchase the shares at the value of Rs. 500 per share but also
procured from him on the same day another letter agreeing to give the
liquidators the dividend sanctioned at the annual general meeting of the
Himabhai Company for the year 1954 in respect of these 1936 shares. These two
letters along with the cheque for Rs. 9,68,000 were handed over to Trikamlal
gave to Madhubhai, the son of Chunilal, at that time the proxies in respect of
these 1936 shares to enable Chunilal to vote at the annual general meeting of
the Himabhai Company which was to be held on the 6th August, 1955, in any
manner he desired so that Chunilal would be able thwart the move which was
contemplated by Madhubhai and other shareholders of the company. Trikamlal
also, on the 2nd August, 1955, cashed the cheque of Rs. 9m68,000, though in the
receipt which he gave to Chunilal he stated that the same was subject to
approval by his co-liquidator, Dave, and subject to the sanction of the
District Court. These were the circumstances attendant upon the offer of
Chunilal to purchase these 1936 shares which was placed by the liquidators
before the court on the 3rd August, 1955. Even though Chunilal had initially no
right to have these 1936 shares offered to him by the contributories and the
liquidators under clauses (5) and (6) of the agreement, the events that
happened in July, 1955, culminating in his addressing those two letters of the
29th July, 1955, to the liquidators, his giving the cheque of Rs. 9,68,000
drawn by him in favour of the liquidators to Trikamlal, the giving of the
proxies by Trikamlal to him and the encashment of the cheque though it was
hemmed in with a condition that the acceptance was subject to the sanction of
the District Court, really created in Chunilal an expectation amounting to an
inchoate right depending on the fulfillment of the conditions or at least a
preferential claim to have these 1936 shares delivered to him together with the
relevant transfer forms duly signed by the liquidators. This was what may well
have been referred to by the District Judge in his judgment delivered on the
4th August, 1955, as a right. Even though both the offers of Chunilal and
Adhyaru were placed before the court each offering no more than Rs. 500 per
share for the purchase of the whole lot of 1936 shares, the District Judge was
perfectly right in the exercise of his discretion in sanctioning the offer of
Chunilal who was fulfilling his obligation under the agreement and was
certainly entitled to better consideration at the hands of the court than
Adhyaru. The fact that Adhyaru's offer was dated the 27th July, 1955, and
Chunilal's offer was dated the 29th July, 1955, was neither here nor there.
Both were in effect simultaneous offers for the purchase of this block of 1936
shares at the price of Rs. 500 per share as it appears to have been understood
and if that was the position there was in the events that happened perfect
justification for the District Judge exercising his discretion in favour of
Chunilal in spite of the recommendation which had been made by the liquidators
in their report in favour of Adhyaru. There was no erroneous exercise of
discretion by the District Judge in favour of Chunilal as held by the High Court.
It was
strenuously urged both before the High Court and before us by counsel for
Madhubhai and the liquidators that no notice was given to the contributories of
the application made by the liquidators before the District Judge and the
interests of the contributories were not properly safeguarded. The liquidators,
it was contended, should have brought specifically to the notice of the
District Judge the desire of the contributories to have the said shares sold in
the open market and ought to have pointed out that a sale by public auction of
these shares at that stage was likely to fetch more than Rs. 500 per share. The
discretion exercised by the District Judge therefore in favour of Chunilal was,
it was submitted, erroneous and was rightly interfered with by the High Court.
This argument,
however, ignores the true position that at no material time prior to the 4th
August, 1955, the market price of the shares of the Himabhai Company was
anywhere beyond Rs. 427-8-0 or at the highest Rs. 450 per share. This position
was well-known to the liquidators as well as to the contributories and it was a
realisation of this position that actuated the liquidators in obtaining the
letters of authority from such of the contributories as they could before the
17th September, 1954, and purporting to tender the whole lot of 1936 shares to
Chunilal so as to hold him to his obligation to pay the sum of Rs. 500 per
share. The market never improved up to the 4th August, 1955, and it was after
considerable effort that the offer of Adhyaru for the purchase of these 1936
shares was obtained by the liquidators on the 27th July, 1955. The anxiety of
the liquidators all along was to obtain the sum of Rs. 500 for each share and
that was also the anxiety of the contributories in the letters which were
addressed by them to the liquidators between the 19th July and the 29th July,
1955. The contributories and the liquidators in fact wanted to hold Chunilal to
his obligation and to all intents and purposes would not have taken any further
proceedings against Chunilal if in fact he had fulfilled his obligation and
paid to the liquidators the full amount of Rs. 9,68,000 in exchange for the
share certificates for 1936 shares which had been allotted by the Himabhai
Company in their names together with blank transfer forms duly signed by both
the liquidators. There was thus no prospect at all on the 3rd August, 1955,
when the application was made by the liquidators to the District Judge of
obtaining anything beyond the said sum of Rs. 500 per share and there was also
no question of giving any notice to the contributories in the matter of the
said application. No contributory would have cared as the matters then stood to
appear before the District Judge and we fail to understand what contention the
contributories would have urged before the District Judge apart from that which
was already urged by the liquidators in their report. There was no question
also at that time of any competition between Chunilal on the one hand and
Adhyaru on the other, much less between either or both of them and outside
parties. Nobody at that time thought that the shares were capable of realising
more than Rs. 500 per share which Chunilal or Adhyaru were willing to offer. As
a matter of fact, Madhubhai, who was one of the biggest contributories of the
National Mills, joined Adhyaru in the appeal which he took to the High Court
against the judgment and order of the District Judge dated the 4th August,
1955, and made common cause with him. The grounds of appeal which were urged
recognised this very position that nothing more than Rs. 500 was ever possible
to be realised by a sale of these shares in open market and the answer which
was made by the counsel for Madhubhai to Mr. Justice Bavdekar on the 16th
August, 1955, that these shares would probably fetch a higher price in the open
market was merely the result of concerted action on the part of Madhubhai and
Adhyaru to clinch the bargain in favour of Adhyaru by making him offer Rs. 50
more per share than what Chunilal had offered in his turn. Even at that time
there was no question of any higher price being obtained by public auction of
this block of 1936 shares in the open market. The hearing before the High Court
also proceeded on this basis and in the early stages of the hearing of the
appeal before the High Court on the 24th August, 1955, and the 25th August,
1955, Madhubhai actually supported Adhyaru. It was only on the evening of the
second day of the hearing, viz., 25th August, 1955, that counsel was instructed
by Madhubhai to convey to the court that these shares might fetch a much higher
value in the open market at Ahmedabad. The High Court then called upon him to
prove the bona fides and the genuineness of his complaint by producing before
it an offer at the higher rate and the further hearing of the appeal was
adjourned. It was only when the hearing was resumed on the 6th September, 1955,
that counsel for Madhubhai produced before the High Court a receipt passed by
the liquidators that Pasavala had deposited with the liquidators a sum of Rs.
11,61,600 at the rate of Rs. 600 per share. It must be noted that right up to
the evening of 25th August, 1955, there was nothing before the court to show
that beyond the trumped up offer of Adhyaru there was any possibility of securing
anything beyond Rs. 500 per share even by a sale in the open market. It was
after the adjournment of the hearing of the appeal on the 25th August, 1955,
that Madhubhai appears to have approached other parties and procured Pasavala
to offer Rs. 600 per share and deposit the total price of 1936 share at that
rate with the liquidators. It was then that Adhyaru and Madhubhai parted
company and it was on the 6th September, 1955, that this offer of Pasavala was
brought to the notice of the High Court in effect submitting to the court that
Adhyaru's offer also should not be accepted. Counsel for one Gangaprasad Puria
also offered to purchase en bloc the 1936 shares at the rate of Rs. 625 per
share. The High Court, under the circumstances, thought in the interest of the
contributories a sale by public auction of these 1936 shares en bloc should be
held by the District Court with Rs. 600 per share as the minimum offer for the
purchase of the shares in question.
It is clear
from the above that there could be no question of the District Court giving any
notice to the contributories and the District Judge was right in the
circumstances of the case in considering the only two offers which were
submitted before him and exercising his discretion and giving the sanction in
favour of Chunilal as he did. If even the contributories whose interests were
primarily to be safeguarded had not the slightest notion that anything more
than Rs. 500 per share could be obtained by a sale of the shares in open market
as is evident from the attitude of Madhubhai right up to the 25th August, 1955,
much less could the liquidators or the District Judge himself have thought of
having these shares sold in the open market. if that step had been then taken
the result would have been disastrous and not even Rs. 427-8-0 per share would
have been obtained at such auction sale. the contributories would certainly
have suffered and even the offers made by Chunilal and Adhyaru would then have
been of no avail. The adventitious circumstances of third parties coming into
the field after the 25th August, 1955, could not have been foreseen by any of
the parties concerned and it would be certainly unfair to Chunilal and to
Adhyaru to refuse to accept their offers merely on the ground that a sale by
public auction was directed by the contributories and might have fetched a
higher price than that Rs. 500 per share actually offered by Chunilal or
Adhyaru.
It was urged
that the appeal was by way of re-hearing of the original application and it was
open to the High Court to take into consideration the further facts and events
in arriving at its conclusion as it did. We are not impressed with that
argument. Even though an appeal is in the nature of a re-hearing and the courts
in this country can take into account the facts and events which have come into
existence after the decree appealed against, it could be only for moulding the
relief to be granted in the appeal (Vide observations of VARADACHARIAR J. in
Lachmeshwar Prasad Shukul v. Keshwar Lal Chaudhuri). In the events that had
happened as narrated above, there was no justification, therefore, for the high
Court taking into consideration the higher offers which were brought into
existence by Madhubhai after the 25th August, 1955, based on a bid for the
managing agency of the Himabhai Company on the strength of the acquisition of
the voting rights in respect of the whole block of 1936 shares. The position as
it stood on the 4th August, 1955, was to be considered and it was on an
appreciation of the position as it then stood that the District Judge had to
and did consider whether the offer of Chunilal or that of Adhyaru should be
sanctioned.
If, therefore,
the discretion of the District Judge was not, on the facts and circumstances as
they then stood, erroneously exercised as stated before and there was also no
prejudice to the interests of the contributories, the High Court was not
justified in interfering with the discretion exercised by the District Judge
and setting aside the order of the District Judge and directing a sale of these
1936 shares by public auction as it did.
There is also
a further consideration why the offer of Chunilal should have been accepted in
preference to that of Adhyaru. By his letter dated the 29th July, 1955,
addressed to the liquidators, Chunilal had offered to give to the liquidators
the dividend sanctioned at the annual general meeting of the Himabhai Company
for the year 1954. The directors of the company had recommended Rs. 20 per
share as and by way of dividend and that dividend was to be declared t the
annual general meeting which was to be held on the 6th August, 1955. The shares
stood in the name of the liquidators in the register of shareholders of the
Himabhai Company and, so far as the company wAs concerned the dividend would be
payable to the liquidators in whose names the shares stood, unless by the time
that the dividend came to be declared the shares were transferred in the
register of shareholders to the name of Chunilal. The books of the company were
to be closed from the 30th July, 1955, and unless the transaction had been
completed and the shares transferred in the register of shareholders of the
company to the name of Chunilal he would not have been entitled receive the
dividend which would be sanctioned at the annual general meeting of the company
on the 6th August, 1955. This circumstance was considered enough by the High
Court to enable it to hold that the offer of Chunilal to the liquidators to
give them the dividend was illusory. it is no doubt true that unless and until
the shares were transferred in the name of Chunilal in the register of
shareholders of the company before the date of the annual general meeting
Chunilal would not have been entitled to the dividends on these 1936 shares.
The company would not recognize anybody except the person whose name was shown
as the shareholder in the register of shareholders of the company and would
certainly not be bound to pay the dividends to Chunilal even though the
transaction between the liquidators and Chunilal had been completed. The
position, however, between the liquidators and Chunilal was quite different.
Even though Chunilal could not under these circumstances claim the dividend
from the company, as between the liquidators and Chunilal. Chunilal would be
entitled to the dividend and the liquidators, even though they received the
dividend from the company by virtue of their having been shown as shareholders
in the register of shareholders of the company, would be bound, once the
contract of sale had been entered into between them and Chunilal, to hand over
the said dividend to Chunilal. The position in law is thus enunciated in
Palmer's Company Law, 19th Edition, page 205:
"Declared
but unpaid dividend passing on transfer.
A transfer of
shares, after dividend is declared, does not, as against the company, carry the
dividend, even where the transferee has expressly bought cum dividend; but, as
between a buyer and seller of shares, the buyer is entitled to all dividends
declared after the date of the contract for sale, unless otherwise
arranged."
There is
nothing in the record of the case to show that there was any other arrangement
in this behalf and the normal position was that, after the contract for sale
was entered into between the liquidators and Chunilal, Chunilal would become
entitled to the dividend on these 1936 shares. Even if the date of the sanction
by the District Court, viz., 4th August, 1955, be considered as the material
date for this purpose, the position would have been no different because both the
offers of Chunilal and Adhyaru were before the District Court and the moment
the court sanctioned either of the two offers, the contract of sale would
become complete. If the contract of sale thus became complete on the 4th
August, 1955, before the declaration of the dividend at the annual general
meeting of the Himabhai Company on the 6th August, 1955, as between the
liquidators and the purchaser the liquidators would be entitled to recover the
dividends from the company but would be bound to hand over the same to the
purchaser. If Adhyaru's offer had been sanctioned Adhyaru would have got these
dividends from the liquidators and the liquidators would not have been entitled
to retain the same there being nothing to that effect in the terms of the offer
given by Adhyaru to the liquidators on the 27th July, 1955. On the other hand,
the liquidators would have been entitled to retain the dividends as against
Chunilal because, by his letter dated the 29th July, 1955, he had agreed to
give the dividends to the liquidators. In either view of the situation, the
liquidators stood to gain Rs. 20 more per share if Chunilal's offer was
sanctioned. They were thus in a position to realise Rs. 520 per share as
against Rs. 500 per share offered by Adhyaru. If this circumstance was taken
into account there is no doubt that the offer of Chunilal was higher than that
of Adhyaru and deserved to be sanctioned by the District Court.
Having regard,
therefore, to all the circumstances of the case, we are of the opinion that the
order made by the District Judge was right and the High Court was in error when
it set it aside and directed that the said 1936 shares should be sold by public
auction.
Civil Appeal
No.2 of 1956 will, therefore, be allowed, Civil Appeal No.3 of 1956 will be
dismissed, the order made by the High Court will be set aside and the order
made by the District Judge restored. Under the peculiar circumstances of this
case, we feel that the proper order for costs should be that each party
appearing before us should bear and pay his own costs throughout.
Chunilal will
be at liberty to withdraw the sum of Rs. two lacs deposited by him as and by
way of security in the Court of the District Judge at Ahmedabad pursuant to the
order of this court, dated 7th October, 1955. The liquidators will hand over to
Chunilal 1936 shares of the Himabhai Company standing in their name in the
register of shareholders of the Himabhai Company together with such number of
transfer forms duly signed by them as Chunilal requires within a fortnight of
the certified copy of this decree being served upon them.
Civil
Appeal No.2 of 1956 allowed.
Civil
Appeal No.3 of 1956 dismissed.
[1945] 15
COMP CAS 45 (ALL.)
HIGH COURT OF ALLAHABAD
Scientific
Apparatus and Chemical Works, Ltd.
v.
B. Joti Prasad
MALIK, J.
CIVIL REVISION NO. 11 OF 1944.
SEPTEMBER 21, 1944
Brijlal Gupta, for the
Applicants.
A. Sanyal and Gopalji Mehrotra, for the opposite
party.
The plaintiff, Joti Prasad, sold certain shares that he held in the Scientific
Apparatus and Chemical Works, Ltd., Agra, to R.C. Khandelwal, defendant 2, and
the said sale was registered in the books of the company on 20th January 1942.
After the registration of the said sale certain dividends were declared in
October 1942. The dividend was paid sometime in the month of November to R.C.
Khandelwal. The plaintiff in January 1943 gave a notice to the company claiming
that under a private arrangement between him and the purchaser he was entitled
to a proportionate amount of the dividend. The company, having repudiated his
claim to the dividend on the ground that they could only pay the dividend to
the person in whose name the shares were registered, the plaintiff filed this
suit against the company and against R.C. Khandelwal. The Court below held that
there was an agreement between the vendor and the vendee under which it was
arranged that the vendor would be entitled to the proportionate amount of the
dividend. The lower Court further went on to hold that the sale was negotiated
through one Nathi Lal who was working as a clerk in the defendant company and
Nathi Lal was informed by the plaintiff of this agreement. On that ground the
Court below held that the company had knowledge of this agreement and it was
equally liable to the plaintiff and passed a joint decree against the company
and against Mr. R.C. Khandelwal. R.C. Khandelwal has submitted to the decree.
The company has filed this revision before me.
It is urged on behalf of the company that the company was bound to pay dividend
to its member whose name was registered in the books of the company and the
company could not take notice of any private arrangement entered into between
the vendor and the vendee. It is further argued that any information given to
Nathi Lal would not in law amount to an information to the company and even on
that ground the company was not liable to apportion the dividend. To my mind it
would lead to great complications if it is held that by reason of a private
arrangement between the vendor and the vendee of certain shares a joint stock
company is liable to apportion dividend between the two and it is on that
uccuunt that in most articles of association of companies there is a provision
that the company would recognise the claim of the person whose name is
registered in its share registers. In this case also, in the articles of
association of the company, there are Arts. 143 and 145 which make the dividend
payable to the person whose name is registered in the books of the company.
I, therefore, am of the opinion that the lower Court was not justified in
giving a decree to the plaintiff against the company. Though R.C. Khandelwal
has not filed a revision, Mr. Gopalji Mehrotra appeared before me and he has
raised two points. His first contention is that even though R.C. Khandelwal
did* not file a revision he is entitled to challenge the decree of the Court
below. To my mind it is not open to R.C. Khandelwal, having submitted to the
decree of the Court below, now to urge before me that the decree was not properly
passed. Even on the merits, however, R.C. Khandelwal has no case. Mr. Gopalji
Mehrotra has urged that the claim of the plaintiff was based according to his
view on the law as contained in Section 36, Transfer of Property Act, and he
was not relying on a private contract. I had the plaint read out and I am
satisfied on a reading of the plaint and the other evidence which the Court
below has relied on that the plaintiff was setting up a private agreement and
the Court below has accepted that there was such a private agreement between
the vendor and the vendee. The plaintiff's suit was, therefore, rightly decreed
against R.C. Khandelwal.
Mr. Sanyal on behalf of the plaintiff has urged that if there is no
decree against the company and the dividend is not apportioned between the
vendor and the vendee his client, the plaintiff vendor, will not get the
benefit of income-tax rebate as the Income-tax Officer will not take into
account his proportionate share of the income-tax paid by the company without a
certificate to that effect. To my mind this difficulty that may arise will not
entitle the Court to give Mr. Sanyal's client a decree against the company.
What I suppose his client may be able to do is to summon the dividend warrant
and the income-tax certificate from the vendee Khandelwal and prove from other
evidence before the Income-tax Officer that he received a part of the dividend
after deduction of the proportionate amount of income-tax. I allow this
revision, modify the decree of the Court below and direct that the plaintiff's
suit shall be dismissed against the company. The decree, however, against R.C.
Khandelwal will stand. The company will get its costs in both the Courts from
the plaintiff.
Revision allowed.
[1999] 21
SCL 224 (BOM.)
HIGH COURT OF BOMBAY
v.
Deepak Fertilisers &
Petrochemicals Corpn. Ltd.
F.I.
REBELLO, J.
COMPANY
PETITION NO. 120 OF 1991
MARCH 10/11, 1999
Section 206, of the Companies Act, 1956 - Dividend - Payment of - Petitioner-bank
claimed that it had purchased debentures of respondent company from their
holders but company refused to register same in its name - It also claimed
interest paid wrongly to transferor in some cases and in one case deposited
with Enforcement Directorate - Whether even though there was a transfer of
security (i.e. debenture herein) person in whose name security stood registered
would be entitled to receive dividend (interest herein) unless transferee took
steps to get his name registered with company - Held, yes - Whether, however,
mere fact that transferor had received interest did not affect right of
transferee to enforce against transferor or any other person his right, if any
- Held, yes - Whether in respect of those debentures against which there was
dispute regarding signature, etc., petitioner could be relegated to a suit -
Held, yes - Whether remaining debentures could be registered by company as
claimed by transferee, and company should pay interest to petitioner, even
though already paid to persons whose name appeared in register, with liberty to
file a suit against those persons for recovery of interest wrongly paid -Held,
yes - Whether petitioner should give an undertaking that in case of
confiscation of such debentures by Enforcement Directorate, it would refund
moneys received with interest - Held, yes
FACTS
The petitioner bank purchased
debentures of the respondent company from the debenture holders and forwarded
the same to the company for registering the transfer in its name. The company
did not register the transfer on the grounds that (i) in respect of 16,000 debentures held by 'U', the RBI's
permission was not forwarded and there was difference in specimen signature of
the transferor and signature in transfer form, (ii) in respect of 20,000 debentures held by Patels, the names of
witnesses were not disclosed in transfer document, (iii) in respect of 92,000 debentures held by Jains, Patkars and
Shahs, there was difference of signature and also there was Enforcement
Directorate's direction under the FERA that the transfer should not be
effected. The petitioner bank sought reliefs against the refusal, as well as
prayed for interest. The petitioner submitted that the RBI's permission in
respect of 'U' had already been lodged with the company and that the names of
witnesses in case of Patels were shown in the transfer documents itself.
Further Jains and Patkars had given their no objection to transfer their
respective debentures. However, the company contended that a mandatory duty was
cast on them to pay interest as required by the provisions of the Companies
Act, read with the Securities Contract (Regulation) Act, and, therefore, they
had paid interest instalments so far directly to persons shown as holders in
its registers in case of 16,000 and 20,000 debentures and, in addition, in
respect of 92,000 debentures they had deposited instalments of interest with
the Enforcement Directorate as per their direction. Therefore, according to the
company, interest instalments could not be awarded to the petitioner bank.
HELD
Insofar
as the objection regarding group of 'U' were concerned, the relief as prayed
for could not be granted as apart from 'U' having written to the company that they
might have lost the debentures, the signatures themselves were in dispute. In
that light of the matter, the petitioner would have to be relegated to a suit
for the purpose of getting the declaration that they were the owners of the
said debentures and consequent to such declaration the respondents company
could be called upon to rectify the register of debentures if the relief
granted so warranted. Amount on redemption and accrued interest could be
provided for whilst passing the final order.
Insofar
as the debentures pertaining to Patels was concerned, there could be no
objection and the directions could be issued to rectify the register and record
the name of the petitioners in the register maintained The money from redeemed
debentures and the interest accrued thereon should be paid to the petitioners.
Insofar
as the balance 92,000 debentures were concerned, there was no objection for
rectification of the register insofar as Jains and Patkars were concerned
except the objections raised by the Enforcement Directorate that the
acquisition of the debentures was in contravention of the provisions of the
FERA. These debentures total to 72,000 being 36,000 each. There could not be
any objection for rectification except to protect the interest of the Enforcement
Directorate. The remaining 20,000 debentures standing in the name of Shahs were
returned on the ground that there was a dispute regarding signature.
Petitioners would have to be relegated to a suit and suitable directions could
be made insofar as the redemption value of the debentures and accrued interest
thereon were concerned.
The
interest of the Enforcement Directorate could be protected by directing the
petitioners to file an undertaking that in the event the Enforcement
Directorate passed any order of confiscation, petitioners undertook to refund
the monies received alongwith interest at 10 per cent, subject to the legal
remedies that they might have and any interim order that might be passed in the
legal remedy that they might pursue. As the petitioners had purchased the
debentures any order of confiscation would have adverse effect on their civil
rights, the Enforcement Directorate should issue them notice and proceed
according to law.
In
terms of the debenture deed, debentures were transferable and transmissible in
the same manner and to the extent and subject to the same restriction and
limitation as in the case of the shares of the company, meaning thereby that
the same procedure for transferring of shares of the company would also be
applicable in respect of transfer of debentures. Even though there is a
transfer of security, the person in whose name the security is registered is
entitled to receive the dividend unless the transferee take steps to get his
name transferred. However, the mere fact that the transferor has received the
interest does not affect the right of the transferee to enforce against the
transferor or any other person his right, if any. In other words, the
transferor becomes merely the person who hold the interest on the security for
and on behalf of the transferee.
As a
result, in respect of the debentures held by 'U' no relief for registration
could be granted in favour of the petitioners. The petitioners, therefore, at
the highest while suing 'U' also could sue them for the interest which they had
received. In respect of third, fourth and fifth instalments of interest paid to
Patels, interest had been deposited with the Enforcement Directorate.
Therefore, direction could be issued to the Enforcement Directorate to pay
the said interest on the said 20,000
debentures to the petitioners subject to certain terms and conditions. In
respect of unpaid interest, the respondent company could be directed to pay the
said interest to the petitioners. In respect of the balance interest which was
paid to Patels, it had been held earlier that the refusal to register was not
sustainable. Once the reason itself was found not to be non-sustainable and
direction given to get the debentures registered in the name of the
petitioners, the respondent company would be duty bound to pay interest to the
petitioners. The arguments that they had paid the interest to the persons whose
name appeared in the register could not be sustained as the respondent company
was a party to these proceedings. It had made payments in respect of debentures
claimed by the petitioners at their own risk. It was, however, always open to
respondent company to file a suit against the said persons for recovery of
interest wrongly paid to them.
CASE REFERRED TO
Ammonia Supplies Corpn. (P.)
Ltd. v. Modern Plastic
Containers (P.) Ltd [1998] 17 SCL 463/94 Comp. Cas. 310 (SC).
S.U. Kamdar and Matubhai Jamietram for the Petitioner. Mrs. S.V. Bharucha and S.V. Daijode for the Respondent.
1. The pleadings are prolix. The few facts, however, necessary to
decide the reliefs prayed for are as under :
The
petitioners had purchased debentures from their holders, which will be
hereinafter referred to as debentures Part 'C' of the respondent company. The
subject of the present petition are the following debentures:
(a) 16,000
part 'C' debentures purchased from a group known as Uttamchandani;
(b) 20,000
part 'C' debentures standing in the name of Shri Suryakant A. Patel and Smt.
Jyotsnaben S. Patel; and
(c) 92,000
part 'C' debentures standing in the name of two Jains and two Patkars and two
Shahs.
When these debentures were forwarded to the company for transfer in the
name of the petitioners, the transfer was not effected on account of the
defects pointed out by the respondent. The defects may be listed as under:
(i) in respect of Uttamchandani, the
objections were that no Reserve Bank of India permission had been forwarded and
secondly that there was a difference in the specimen signature of the
transferor and the signature on the transfer form.
(ii) insofar as Shri Suryakant A. Patel and
Smt. Jyotsnaben S. Patel, the objection is that the name of the witnesses were
not disclosed in the transfer document and
(iii) insofar as the Jains, Patkars and Shahs are
concerned, the objections were two fold. Firstly, there were orders by the
Enforcement Directorate who had investigated matter under FERA that the
transfer should not be effected and (b)
there was difference in specimen signatures and the signatures on the transfer
forms.
From the correspondence on record and the material available, the
objections can now be dealt with.
2. Insofar as Uttamchandani are concerned, the argument was that
there was no permission of the RBI permission. It is contended on behalf of the
company that they wrote to the petitioners on 23-12-1991 that the RBI
permission had not been forwarded. On the contrary, it is the case of the
petitioners that these debentures form part of the 5,58,000 debentures lodged
with the company along with the RBI permission
as set out in paragraph 9 of the affidavit in rejoinder of Shri Bharat Kantilal
Vajani. It is no doubt true that the learned counsel for the company has
pointed out that there are two different dates insofar as Uttamchandani are
concerned. The RBI's permission is purported to have been forwarded on
16-9-1990 whereas insofar as 5,58,000 debentures are concerned they were lodged
with the RBI's permission on 27-9-1990. However, the fact remains that the
petitioners have averred that the permission was taken. The Enforcement
Directorate who has been enquiring about other 92,000 debentures has not
enquired about these 16,000 debentures and in the light of that the averment by
Shri Bharat Vajani that the RBI permission had been submitted can be accepted.
However, what remains is the objection by the company that there is difference
in signatures. In that light of the matter, it would not be possible to grant
the reliefs as prayed for by the petitioners. However, suitable directions can
be passed insofar as the amount due and payable against these debentures are
concerned.
3. Insofar as the 20,000 part 'C' debentures of Mr. and Mrs.
Suryakant Patel are concerned, the only objection was that the names of the
witnesses were not shown in the transfer document and secondly there was an
objection raised on behalf of the transferor. Insofar as the objection by the
transferor is concerned, no legal proceedings have been initiated against the
petitioners and/or the company and in that light of the matter once the
signatures tally it will be difficult to hold the objection as valid to
disentitle rectification of the register of the debentures. The other objection
regarding names of witnesses. It is pointed out by the learned counsel for the
company (sic) are shown in the
transfer document itself. Once that be the position insofaras these 20,000
debentures are concerned, the reliefs as prayed for by the petitioners herein
can be granted as also consequential relief of paying the amount on maturity
and interest thereon.
4. Insofar as the objections regarding the 92,000 part 'C' debentures are concerned, the Jains and Patkars have given their no objection. Therefore, the objection regarding signatures insofar as they are concerned will no longer survive. The only objection would be to 20,000 debentures standing in the name of Shahs against whom there is an objection that their signature differ. The other objection is in respect of the order of the Enforcement Directorate. The Enforcement Directorate has filed the affidavit dated 25-2-1999 of Shri S.L.J. Gallyot, Assistant Director of Enforcement Directorate, Foreign Exchange Regulation Act, 1947. The said objection also can be dealt with by protecting the interest of the Enforcement Directorate in the event any adverse order is passed in respect of the said 92,000 debentures.
5. The petition had come up for hearing at the request of the petitioners as it was the contention of the petitioners that they had floated a mutual fund which is due to be redeemed on 13-3-1999.
6. It may also be clarified at this stage that section 155 of the Companies Act, 1956 ('the Act') has since been omitted. However, there has been amendment to section 111 of the Act and by virtue of sub-section (4) of section 111, section 155 has been bodily incorporated as sub-section (4) of section 111. Earlier an objection had been taken that there was no rejection or refusal to register as contemplated by section 155. In view of that objection, this court passed an order dated 30-4-1991 directing the company to communicate its decision to the petitioners in writing on or before 3-5-1991. Pursuant to the said order dated 30-4-1991 the company has by its letter of 3-5-1991 given the reasons as to why the transfer could not be effected and, consequently, why the register could not be rectified.
I have perused the reliefs prayed for and the question that would arise
in the matter. To my mind the said question can be decided by this Court
considering the law as now laid down by the Apex Court in the case of Ammonia Supplies Corpn. (P.) Ltd. v. Modern Plastic Containers (P.) Ltd. [1998]
17 SCL 463/94 Comp. Cas. 310. The Apex Court has now held that it is the
company court (after amendment to section 111 the Company Law Board) which will
have exclusive jurisdiction to decide issues unless the issues require going
into issues involving title etc. in which event it will be the civil court that
can decide the said issue. Considering the law laid down by the Apex Court in Ammonia Supplies Corpn. (P.) Ltd.'s case
(supra) the objection raised
earlier and the objections raised and the issues which arise can now be
decided.
7. (1) Insofar as
the objection regarding Uttamchandani are concerned, the relief as prayed for
cannot be granted as apart from Uttamchandani having written to the company
that they may have lost the debentures, the signatures themselves are in
dispute. In that light of the matter, the petitioners will have to be relegated
to a suit for the purpose of getting the declaration that they are the owners
of the said debentures and consequent to such declaration the respondents
company can be called upon to rectify the register of debentures if the relief
granted so warrant. Amount on redemption and accrued interest can be provided
for whilst passing the final order.
(2) Insofar as the
debentures pertaining to Mr. and Mrs. Suryakant A. Patel is concerned, there
can be no objection and the directions can be issued to rectify the register
and record the name of the petitioners in the register maintained. The money
from redeemed debentures and the interest accrued thereon to be paid to the
petitioners.
(3) Insofar as the
balance 92,000 part 'C' debentures are concerned, there is no objection for
rectification of the register insofar as Jains and Patkars are concerned except
the objections raised by the Enforcement Directorate that the acquisition of
the debentures was in contravention of the provisions of FERA. There are no
other objections. These debentures total to 72,000 being 36,000 each. There
cannot be any objection for rectification except to protect the interest of the
Enforcement Directorate. Insofar as the 20,000 debentures stand in the name of
Shahs they were returned on the ground that there was a dispute regarding
signature. Petitioners will have to be relegated to a suit and suitable
directions can be made insofar as the redemption value of the debentures and
accrued interest thereon are concerned.
8. Insofar as the objection by the Enforcement Directorate are
concerned from the correspondence it emerges that the original transfer
documents were seized by the Enforcement Directorate. However, on behalf of the
Enforcement Directorate it is pointed out that from the correspondence it is
apparent that the documents were given to the petitioners. Letter dated
9-4-1992 by the company to the petitioners show that only photostat copy of the
original transfer deed were sent to the company alongwith the debenture
certificate. The debentures seem not to be available. The Enforcement
Directorate to handover the original transfer deeds if in their possession
within 30 days from today. In the event that is not done, the petitioners are
directed to forward the xerox copies alongwith the affidavit affirming that the
xerox copy is a part of the photo copies which were forwarded by the company to
the petitioners. The company to effect transfer in their Register on such
submission.
Insofar as the Enforcement Directorate are concerned, their interest can
be protected by directing the petitioners herein to file an undertaking that in
the event the Enforcement Directorate passes any order of confiscation.
Petitioners undertake to this Court to refund the monies received alongwith
interest at 10 per cent subject to the legal remedies that they may have and
any interim order that may be passed in the legal remedy that they may pursue. As the petitioners had
purchased the debentures any order of confiscation would have adverse effect on
their civil rights, the Enforcement Directorate to issue them notice and
proceed according to law.
9. In the course of arguments it is contended
on behalf of respondent No. 1 that they had paid in some cases interests
directly to the persons whose names were shown in the registers. It is their
contention that a mandatory duty was cast on them to pay interest as required
by the provisions of the Companies Act, read with the Securities Contracts
(Regulation) Act, 1956. On the other hand on behalf of the petitioner, it is
contended that the matter was sub
judice before this Court and the Court was seized of the matter. The
challenge in the petition was to the refusal of the registration on extraneous
grounds and/or on non-existing grounds.
It is true that as pointed out
that in a notice of motion taken out relief was granted to pay interest to the
petitioner in respect of certain debentures. That by itself, it is pointed out,
would not be sufficient to hold that respondent No. 1 could without considering
that the matter was in issue before this Court pay interest to the persons in
whose names the shares were transferred. It is pointed out that the relief if
granted would relate back to the date of the order. From the order of this
Court passed in notice of motion the interest is made payable only from the
date the Court directed the registration.
In terms of the debenture deed,
clause 9 provides that debentures shall be transferable and transmissible in
the same manner and to the extent and subject to the same restriction and
limitation as in the case of the shares of the company. What this means is that
the same procedure for transferring of shares of the company will also be
applicable in respect of transfer of debentures. In terms of section 205A read
with sections 206 and 207 of the Act dividend insofar as shares is concerned,
has to be paid as set out therein. Parties are agreed that the same procedure
will also be applicable insofar as the interest on debentures are concerned.
Section 205A contemplates that if the dividend has not been paid within the
time set out the company has to transfer unpaid dividend to a special account.
Under section 206 the dividend has to be paid only to registered holder of such
shares or to his order or to his banker. Similarly, under section 207, if the
company fails to pay the dividend the Director and others set out therein are
liable for prosecution and imprisonment. Section 108 contemplates that no
debenture shall be registered unless accompanied in a manner set out therein.
Section 111 is the power to refuse registration. Under section 2(h) of the Securities Contracts
(Regulation) Act, with Rules, defines 'securities' which includes debentures.
Section 27 of the same Act provides that it shall be lawful for the holder of
any security whose name appears on the books of the company issuing the said
security to receive and retain any dividend declared by the company in respect
thereof for any year, notwithstanding that the said security has already been
transferred by him for consideration, unless the transferee who claims the
dividend from the transferor has lodged the security and all other documents
relating to the transfer which may be required by the company with the company
for being registered in his name within fifteen days of the date on which the
dividend became due. The period is specified in terms of the Explanation. Sub-section (2) further
provides nothing contained in sub-section (1) shall apply to the right of a
company to pay any dividend which has become due to any person whose name is
for the time being registered in the books of the company as the holder of the
security in respect of which the dividend has become due. Similarly, under
sub-section (2)(b) the
transferee of any security has the right to enforce against the transferor or
any other person his claim, if any, in relation to the transfer in any case
where the company has refused to register the transfer of the security in the
name of the transferee All that means is that even though there is a transfer
of security, the person in whose name the security is registered is entitled to
receive the dividend unless the transferee take steps to get his name
transferred. However, the mere fact that the transferor has received the
interest does not affect the right of the transferee to enforce against the
transferee or any other person his right, if any. In other words, the
transferor becomes merely the person who hold the interest on the security for
and on behalf of the transferee. From the above can the contention of
respondent be accepted that in terms of the requirement of law they have paid
the interest in favour of those whose names were appearing in the register.
The respondent No. 1 initially
had merely returned the Transfer Forms. It is only pursuant to the order dated
30-4-1991 of this Court that by letter of 3-5-1991 the respondent rejected the
transfer application and/or disclosed the reason for the rejection. The
respondent No. 1 in respect of 16,000 and 20,000 debentures which were held in
objection, has paid dividend to registered holders and in respect of the
balance 92,000 debentures has deposited the same with the Enforcement
Directorate pursuant to direction issued by the Enforcement Directorate.
Therefore, the only question is in respect of interest on the 16,000 and 20,000
debentures. Out of these 16,000 debentures were purchased from a group known as
Uttamchandani. In respect of the debentures held by Uttamchandani no relief for
registration can be granted in favour of the petitioners. The petitioners,
therefore, at the highest while suing Uttamchandani also can sue them for the
interest which they have received. That leaves 20,000 debentures standing in
the same of Suryakant A. Patel and Smt. Jyotsnaben S. Patel. Here also in
respect of the 3rd, 4th and 5th instalments, the interest has been deposited
with the Enforcement Directorate. Therefore, direction can be issued to the
Enforcement Directorate to pay the said interest on the said 20,000 debentures
to the petitioners subject to the terms and conditions as will be set out. That
leads us to the remaining interest payable on the other debentures. In respect
of unpaid interest, respondent No. 1 can be directed to pay the said interest
to the petitioners. That only leaves the balance interest which was paid to Mr.
Suryakant A. Patel and Smt. Jyotsnaben S. Patel. In these two cases, it has
been held earlier that the refusal to register is not sustainable. Once the
reason itself is found not to be non-sustainable and direction given to get the
debentures registered in the name of the petitioners, the respondent No. 1
would be duty bound to pay interest to the petitioners. The arguments that they
had paid the interest to the persons whose name appeared in the register cannot
be sustained as the respondent No. 1 is a party to these proceedings. It has
made payments in respect of debentures claimed by the petitioners at their own
risk. It is, however, always open to respondent No. 1 to file a suit against
the said persons for recovery of interest wrongly paid to them.
10. Having said so, the reliefs to be granted can now be
crystallised as under:
(a) Respondents company to rectify the register of debentures in respect of 20,000 debentures standing in the names of Shri Suryakant A. Patel and Smt. Jyotsnaben S. Patel in favour of the petitioners and consequently to pay to them the redemption amount alongwith all interest thereon except the interest deposited with the Enforcement Directorate. The Enforcement Directorate to deposit the interest of 3rd, 4th and 5th instalment on an amount of Rs. 2,29,600 within twelve weeks from today. Liberty to the petitioners to withdraw the said amount.
(b) Respondent company in respect of 72,000 debentures standing in the name of Jains and Patkars, to rectify the register in favour of the petitioners and to pay the redemption amount alongwith pending interest. The Enforcement Directorate with whom the balance interest is deposited to deposit the interest received by them on these debentures in this Court within twelve weeks from today subject to their rights of refund from the petitioners of redemption amount and interest alongwith 10 per cent interest from the date of deposit till refund the event of passing of any order of confiscation.
(c) Insofar as 16,000 debentures
standing in the name of Uttamchandani and 20,000 debentures standing in the
name of Shahs relief rejected. Petitioners are directed to file a suit and seek
appropriate declaration. In the meantime the redemption amount to be deposited
in this Court within eight weeks from today alongwith unpaid interest, if any,
company to inform the petitioners of such deposit. Petitioners to file a suit
thereafter within eight weeks from such communication. The Enforcement
Directorate to deposit the interest received by them for the 20,000 shares
standing in the name of the Shah's in this Court within twelve weeks from today.
The amount deposited to be transferred to the said suit account. Liberty to the
petitioners to apply for directions in the said suit. The civil court to pass
orders after hearing Enforcement Directorate and securing the Directorate in
respect of the debentures standing in the name of the Shah's.
(d) Payment of interest on the
debentures held by Mr. Uttamchandani, the prayer for interest is rejected.
Liberty to the petitioners to claim the interest received by Mr. Uttamchandani
in the suit that they may file against Uttamchandani, if so advised.
(e) In respect of the interest paid to
Suryakant A. Patel and Smt. Jyotsnaben S. Patel by respondent No. 1, the
respondent No. 1 is directed to pay to the petitioners the first, second and sixth
to eighteenth instalments as also remaining unpaid interest.
(f) Liberty to the respondent No. 1 to
sue Shri Suryakant A. Patel and Smt. Jyotsnaben S. Patel for recovery of the
interest wrongly paid by them to the petitioners, if so advised.
(g) Petitioners insofar as 72,000
debentures are concerned and the redemption value received thereon including
interest, to file an undertaking to refund the amount to the Enforcement
Directorate in the event any order is passed adverse to the petitioners alongwith
interest at 10 per cent from the date of payment/deposit till repaid. The
undertaking to be filed in this Court within four weeks from today. On filing
such undertaking, liberty to the petitioners to withdraw the amount deposited.
11. In the circumstances of the case, there shall be no order as
to costs.
[1982] 52 COMP. CAS. 177 (PAT)
HIGH COURT OF PATNA
v.
Manik Lal Chatterjee
MEDINI PRASAD SINGH, J.
CRIMINAL MISC. NO. 258 OF 1978.
Upendra
Kumar Joshi in person.
G.C.
Bharuka for the Respondent.
M.P. Singh, J.— In this application only a question of jurisdiction
arises. A complaint was made on 10th September, 1975, by the petitioner for
offences under ss. 207 and 630 of the Companies Act, 1956 (briefly " the
Act") against 17 persons including Kesoram Industries and Cotton Mills
Ltd., Calcutta (for short, "the company"), before the Chief Judicial
Magistrate, Bhagalpur, on the allegation of failure to pay to him his dividend
amounting to Rs. 30 on three shares held by him. The dividends were declared by
the company on 14th August, 1975, for the year ending on March, 1975. The
petitioner, after having come to know about it from the company, instructed the
company to send his dividend in cash by money order. But the dividend was not
sent to him and hence it was not paid to him within 42 days of the declaration
as provided by s. 207 of the Act. Hence this complaint in Bhagalpur Court. The
complaint was dismissed on 27th July, 1977, by the Magistrate on the ground that
no offence under s. 207 or s. 630 of the Act was committed at Bhagalpur, the
registered office of the company being at Calcutta. Relying on Hanuman Prasad Gupta v. Hiralal [1970] 40 Comp Cas 1058 ; AIR
1971 SC 206 ; [1970] 2 Cr. LJ 195, the Magistrate held that the registered
office of the company being in Calcutta, the alleged offences must be held to
have been committed in Calcutta and hence the complaint in question was not
maintainable in the Bhagalpur Court and that the Bhagalpur Court had no jurisdiction
to try the offences. The Magistrate by the same order discharged the accused,
Manik Lal Chatterjee (opposite party No. 16 before this court) from the
liability of the bail bond. It will not be out of place to mention here that
this revision was dismissed as against the other accused persons due to
non-compliance with the order of this court dated 4th July, 1978, regarding the
taking of steps for fresh service on them. It was also ordered by the
Magistrate that the processes as against the other accused persons of the case
be recalled. Being aggrieved by the order dated 27th July, 1977, Mr. U. K.
Joshi, an advocate of this court, namely, the complainant, has filed the
present revision application. He has appeared in person. His first contention
is that the Bhagalpur Court has jurisdiction to try the offences because the
dividend had to be paid at his own registered address which was at Bhagalpur
and where the consequence of non-posting, that is, wrongful loss ensued.
Counsel relied on the provision of s. 179, Cr. PC, which runs as under.
"When an Act is an
offence by reason of anything which has been done and of a consequence which
has ensued, the offence may be inquired into or tried by a court within whose
local jurisdiction such thing has been done or such consequence has
ensued."
In my opinion, the argument
is devoid of any merit. The offence of non-payment of dividend by non-posting
became complete once and for all at Calcutta, and no further question of any consequence
ensuing at Bhagalpur arises. The contention is, therefore, rejected. The matter
to be noticed is that s. 207 of the Act makes the failure to post and not the
non-receipt of the warrant by the shareholder, an offence. Prima facie both the
obligations to post the dividend warrant and the failure to satisfy that
obligation would occur at the place where the obligation is to be performed and
that would be the registered office of the company and not the address at which
the warrant is to be posted. Since the obligation to post the warrant in the
present case arose at the registered office of the company at Calcutta, failure
to discharge that obligation also arose at the registered office of the company
at Calcutta and, therefore, the alleged offence must be held to have taken
place at the place where the company's registered office is situate and not
where the dividend warrant when posted would be received. The controversy in
question is set at rest by the decision in the case of Hanuman Prasad Gupta [1970] 40 Comp Cas 1058 (SC), which has
been relied upon by the Magistrate. In that case, with reference to s. 207 of
the Act, it was held that the obligation to pay the dividend arose at the place
of the company's registered office and that the alleged offence must be held to
have taken place at the place where the company's registered office was situate
and hence the court of that place and not the court where the dividend was to
be received had jurisdiction to try the offence. In view of this decision of
the Supreme Court, the complainant did not seriously press the maintainability
of his complaint in respect of the offence under s. 207 but he vehemently
contended that his complaint was maintainable in Bhagalpur Court for the
offence under s. 630 of the Act. Section 630 provides for penalty for the
wrongful withholding of the property of a company by its officer or employee.
Counsel appearing for opposite party No. 16 urged that there is absolutely no
allegation in the complaint for establishing any ingredient of this offence. He
further argued that even if such offence is assumed to be committed, it must be
held to have been committed in Calcutta and not at Bhagalpur. In my opinion,
the agrument is well founded and must be accepted as correct. I am of the view
that even if this offence is assumed to have been committed, it was committed
in Calcutta and not at Bhagalpur on the principles laid down in the aforesaid
Supreme Court case.
The complainant further
relied on Banwarilal Jhunjhunwala v.
Union of India, AIR 1963 SC
1620, but that was a case of a conspiracy. It was held in that case that a
court trying an accused for an offence of conspiracy is competent to try him
for all offences committed in pursuance of that conspiracy irrespective of the
fact that any or all the other offences were not committed within its
territorial jurisdiction. That is not the case here. That case, therefore, does
not help him.
It was next contended by
the complainant-petitioner that the offences in the present case were committed
by letters and hence the provisions of s. 182 Cr. PC, will apply and,
therefore, the Court at Bhagalpur where the petitioner received the notice from
the company concerning the declaration of the dividend will have jurisdiction
to try the offence. Section 182 is as follows :
"Any offence which
includes cheating may, if the deception is practised by means of letters or
telecommunication messages, be inquired into or tried by any court within whose
local jurisdiction such letters or messages were sent or were received; and any
offence of cheating and dishonestly inducing delivery of property may be
inquired into or tried by a court within whose local jurisdiction the property
was delivered by the person deceived or was received by the accused
person"
In my opinion, the
contention is without any substance. By no stretch of imagination it can be
said in the instant case that the offence was committed by any letter or by the
notice sent by the company to the complainant informing him about the annual
general meeting to be held on 14th August, 1976, at the company's registered
office to declare a dividend for the year ending 31st March, 1975. The
contention, therefore, must be repelled.
It was next canvassed that
the principle underlying s. 187, Cr. PC, would apply to the present case and in
view of these principles the Bhagalpur Court will have jurisdiction to try the
offence. In my opinion, the contention is not sound. This section will apply
only to a case where the accused is a person residing within the local
jurisdiction of the court. In the instant case not a single person lives within
the jurisdiction of any of the courts at Bhagalpur. They are all of Calcutta.
Another contention raised
by the complainant is that in any view of the matter his complaint should not
have been dismissed and should have been returned to the Chief Judicial
Magistrate under the provisions of s. 322 of the Cr. PC. In my opinion, this
contention is equally without substance. The complaint could be returned to the
Chief Judicial Magistrate only if any court in Bhagalpur would have
jurisdiction to try. In the instant case, no court in Bhagalpur could try the
alleged offence because the offences, if any, were committed in Calcutta.
Section 322, therefore, would not apply to the facts of this case.
The complainant next
attacked the validity of the order passed by S. S. Hassan J. on 4th July, 1978,
for the non-compliance of which the present revision stood dismissed as against
the accused other than opposite party No. 16, Shri Manik Lal Chatterjee. In my
opinion, the contention requires to be stated only to be rejected. The High
Court had full jurisdiction to ask the petitioner to take steps for fresh
service of notices on opposite parties Nos. 1 to 15. The contention must,
therefore, be rejected as untenable.
The last matter to be
considered is whether the Magistrate, after giving a finding that the Bhagalpur
Court had no jurisdiction to try the offence, was justified in dismissing the
complaint and discharging the accused, Manik Lal Chatterjee and recalling the
processes which had been issued against the other accused persons. In my
opinion, the dismissal of the complaint is not on the merits of the case. It
was dismissed as not being maintainable and hence the Magistrate had not
committed any illegality in doing so. The petitioner has not been able to show
any provision of law in the Criminal Procedure Code under which the complaint
can be returned to him in a situation like this. I think that the complainant
is competent to file a fresh complaint, if he so chooses, in a court at
Calcutta.
There is also a prayer to
transfer the case from the court below to the High Court, Patna, but that can
be considered only if the case is in the proper court. That question,
therefore, does not arise.
For the foregoing, I do not
find any merit in this application. It is accordingly dismissed.
[1970] 40 COMP. CAS. 1058 (SC)
SUPREME COURT OF INDIA
v.
J. M. SHELAT AND G. K. MITTER, JJ.
CRIMINAL APPEAL NOS. 225 TO 232 OF 1966
FEBRUARY 24, 1970
K. K. Jain, Bishamber Lal and
H. K. Puri, for the appellant.
SHELAT, J.—All these appeals, founded on a certificate
granted by the High Court of Allahabad, raise a common question as to
jurisdiction. The appeals arise from complaints filed by the respondent in the
Court of First Class Magistrate at Meerut under section 207 of the Companies
Act, 1956, on an allegation of failure on the part of the appellant, the
director-in-charge of M/s Iron Traders (Private) Ltd., to pay to him dividends
on shares held by him, although the dividends were declared by the company for
the respective years. The question being common, all these appeals are disposed
of by a common judgment.
The appellant
contended that the Magistrate at Meerut had no jurisdiction to try the
complaints and that the Magistrate at Delhi, where the company's registered
office is situate, who would have the jurisdiction. The Magistrate rejected the
contention and held that as the dividend had to be paid at the registered
address of the respondent, which was at Meerut, it was the Meerut court which
had the jurisdiction. The Sessions Judge, on appeal, upheld the order of the
Magistrate and in revision the High Court, rejecting the appellant's
contention, confirmed the view taken by the Magistrate and upheld by the
Sessions Judge. The High Court in taking the aforesaid view observed :
"The
object behind the statute is to ensure prompt payment of a dividend to o
shareholder. That payment may be made to him directly or it may be made by
sending a cheque or warrant to his registered address. If a shareholder
complains that he has not received payment, he is entitled to proceed against
the company and its directors by filing a complaint at the place where he
resides, because the law demands that payment should have been made to him there."
The High
Court's reasoning was clearly based on the premise that payment of dividend has
to be made at the place where the shareholder resides, and, therefore, it is
the Magistrate within whose jurisdiction the shareholder's registered address
is situate who has the jurisdiction. The contention in these appeals is that
such a view is not in accord with section 207. The question is of some
importance, for, if the view taken by the High Court is correct, it would mean
that directors of companies would be liable to be prosecuted at hundreds of
places where the registered addresses of their shareholders are on allegations
that dividends are not paid to them.
Section 205
deals with dividends and the manner and time of payment thereof. Sub-section
(1) provides that no dividend shall be declared or paid by a company for any
financial year except out of the company's profits for that year arrived at in
the manner therein set out. Sub-section (3) provides that no dividend shall be
payable except in cash. Sub-section (5)(b),
however, empowers payment of dividend by cheque or dividend warrant sent
through the post directed to the registered address of the shareholder entitled
to the payment of the dividend or in the case of joint shareholders to the
registered address of that one of them who is first named in the register of
members or to such person or to such address as the shareholder or the joint
shareholders may in writing direct. Section 206 provides that no dividend shall
be paid by a company in respect of any share therein except to the registered
holder of such share or to his order or to his bankers, or where a share
warrant has been issued to the bearer of such warrant or to his bankers.
Section 207 lays down the penalty for failure to distribute dividends declared
by the company and provides that where a dividend has been declared by a
company but has not been paid or a cheque or a warrant in respect thereof has
not been posted within 42 days from the date of declaration to any shareholder
entitled to the payment of the dividend, every director of the company, its
managing agent or secretaries and treasurers shall, if he is knowingly a party
to the default, be punishable with simple imprisonment for a term which may
extend to 7 days and shall also be liable to fine. But the section further
provides that no offence shall be deemed to have been committed within the
meaning of the foregoing provision in the cases therein set out.
A dividend
once declared is a debt payable by the company to its registered shareholders.
It is clear from section 205 that although under sub-section (3) no dividend
shall be payable except in cash, sub-section (5) authorises a company to pay
the dividend by a cheque or a warrant. Therefore, dividend can be said to have
been paid either when it is paid in cash or when a cheque or a warrant is sent
through the. post directed to the registered address of the shareholder
entitled to payment thereof. Indeed, section 207 itself lays down that the
offence thereunder is committed when dividend is either not paid or a cheque or
a warrant in respect thereof has not been posted within the time prescribed
therefore. Once, therefore, a dividend warrant is posted at the registered
address of the shareholder, dividend is deemed to have been paid.
The section
casts an obligation on the company to pay the dividend, which is declared to
the shareholder entitled thereto within 42 days from its declaration. The
offence under the section takes place when there is failure to pay or a cheque
or a warrant therefore is not posted to the registered address of the
shareholder, It will be noticed that the section makes the failure to post
within the prescribed period and not the non-receipt of the warrant by the
shareholder an offence. Therefore, the obligation to pay within the prescribed
period is satisfied once the dividend is paid or a cheque or a warrant
therefore is posted at the registered address of the shareholder. Prima facie,
both the obligation to post the dividend warrant and the failure to satisfy that
obligation would occur at the place where the obligation is to be performed and
that would be the registered office of the company and not the address at which
the warrant is to be posted.
But the
question is since the dividend, when declared, becomes a debt payable by the
company to the shareholder and the company becomes a debtor, does the common
law rule that the debtor must seek out the creditor apply ? There are two
considerations which must not be lost sight of before that rule is applied.
The, first is that section 207 does not make non-receipt of the dividend
warrant by the shareholder within 42 days an offence. The offence consists in
the failure to post the dividend warrant within the prescribed period. The
provisions of section 205 empower payment of dividend by a cheque or a warrant
and treat the posting of a cheque or a warrant as payment. Therefore, payment
in cash or the posting of a cheque or a warrant are equivalent arid the
obligation to pay is discharged when either of them is done. The second
consideration is that the power to pay dividend by posting a cheque or a
warrant provided in section 205(5) is incorporated in the articles of
association of the company by article 132. That article reads:
"Unless
otherwise directed by the company in general meeting any dividend may be paid
by cheque or warrant sent through the post to the registered address of the
member entitled or in the case of joint holders to the registered address of
that one whose name stands first on the register in respect of the joint
holding and every cheque so sent shall be made payable to the order of the
person to whom it is sent."
Section 36 of the Act, which is in the same terms as
section 20 of the English Companies Act, 1948, provides that subject to the provisions
of the Act the memorandum and articles of association, when registered, bind
the company and the members thereof to the same extent as if they respectively
have been signed by the company and by each member, and contained covenants on
its and his part to observe all the provisions of the memorandum and of the
articles. It is well established that the articles of association constitute a
contract between a company and its members in respect of their ordinary rights as members (see Hickman v. Kent or Romney Marsh Sheep-Breeders' Association
and Beattie v. Beattie ).
If under a contract, a promise prescribes the manner in which the
promise is to be performed, the promisor can perform the promise in the manner
so prescribed (see section 50 of the Contract Act). Thus, if A desires B, who
owes him Rs. 100 to send him a note for that amount by post, the debt is
discharged as soon as B puts into the post a letter containing the note duly
addressed to A (see illustration (d)
to section 50 of the Contract Act). In this connection the decision in Thairlwall v. Great
Northern Railway Co.
shows how the problem is dealt with by the English courts. The
plaintiff there, who held certain stocks of the defendant company, filed an
action to recover dividend payable on those stocks. The defence was that the
dividend was paid having been sent by post to the registered address of the
plaintiff. The question was looked at from the point of view whether there was
any agreement by or obligation on the plaintiff to accept the dividend warrant
as payment. If there was any such agreement, the principle laid down in Norman v. Ricketts would apply, namely, that a debtor or
a creditor can agree to make and accept payment of the debt in some form other
than cash and that when the creditor asks his debtor to send the amount by
post, then if the debtor sends a cheque for the amount by post the risk of loss
in transit falls on the creditor and the posting is equivalent to payment.
Further, the stock certificates had upon the back of them a clause that
dividend would be payable by warrant which would be sent by post to the
proprietor's registered address, or to any person duly authorised to give a
receipt for the same. Section 9 of the Act of 1890, under which the
defendant-company was incorporated, also provided that the terms and conditions
on which the stock was issued shall be stated on the certificate thereof. In the
six-monthly report of accounts issued by the directors to the stockholders
there was a statement that the profits of the company had enabled the directors
to declare a dividend and there was at the back of that report a notice that
the dividend warrants would be payable on a certain date and would be sent by
post to the stockholders on the previous day. Under section 90 of the Companies
Act, 1845, it was within the power of the directors to fix the date at which
and the mode in which dividends should be paid, subject of course to the
control of a general meeting. The stockholders of the company at their general
meeting had declared the amount of dividend as proposed by the directors but
had passed no resolution as to how payment was to be made. It was held that
though no such resolution was passed by the stockholders, they had notice as to
how the directors proposed to pay the dividends and as no alteration was made
in those proposals, the stockholders were held to have decided among themselves
by a proper resolution that the dividend should be paid on a certain day and in
the manner proposed by the directors. Such a conduct was equivalent to a
request, and, therefore, the stockholders became entitled to payment in that
way and in that way alone. Consequently, when the dividend warrant had been
sent by post the dividend was paid and the company's obligation to pay stood
discharged.
If follows, therefore, that once a mode of payment of
dividend is agreed to, namely, by posting a cheque or a warrant, the place where
such posting is to be done is the place of performance and also the place of
payment, as such performance in the manner agreed to is equivalent to payment
and results in the discharge of the obligation.
It is clear from section 205(5) that the company
could pay dividend either in cash or by posting a cheque or a warrant at the
registered address of the respondent. Article 132 of the articles of
association also authorises the company to pay dividend either in cash or by
posting a cheque or a warrant to the shareholder at his registered address. The
effect of article 132 is that when a dividend warrant is posted at the
registered address of the shareholder that would be equivalent to payment. Once
a warrant is so posted the company is deemed to have paid and discharged its
obligation. As aforesaid, the articles of association constitute an agreement
between the company and the shareholders, and the latter was entitled to the
payment of dividend in the manner laid down in the articles and in that manner
alone. Article 132 thus not only authorises the company to make the payment in
the manner laid down therein but amounts to a request by the shareholders to be
paid in the manner so laid down. When, therefore, the company posts the
dividend warrant at the registered address of a shareholder, that being done at
the shareholder's request, the post office becomes the agent of the
shareholder, and the loss of a dividend warrant during transit thereafter is
the risk of the shareholder. In Indore
Malwa United, Mills Ltd. v. Commissioner of Income-tax this court, on a question arising whether
on the facts there payment was made in the taxable territory, held that if by an agreement, express or implied,
between the creditor and the debtor, or by a request, express or implied, by
the creditor, the debtor is authorised to pay the debt by a cheque and to send
the cheque to the creditor by post, the post office is the agent of the
creditor to receive the cheque and the creditor receives payment as soon as the
cheque is posted to him. That being the position, the place where a dividend
warrant would be posted, the post office being the agent of the shareholder, is
the place where the obligation to pay the debt is discharged—in the present
case at Delhi where the company has its registered office. It follows that the
offence under section 207 of the Act would also occur at the place where the
failure to discharge that obligation arises, namely, the failure to post the
dividend warrant within 42 days. The venue of the offence, therefore, would be
Delhi and not Meerut, and the court competent to try the offence would be that
court within whose jurisdiction the offence takes place, i.e., Delhi. This should be so both
in law and commons use, for, if held otherwise, the directors of companies can
be prosecuted at hundreds of places on an allegation by shareholders that they
have not received the warrant. That cannot be the intention of the legislature
when it enacted section 207 and made failure to pay or post a dividend warrant
within 42 days from the declaration of the dividend an offence.
This view is
also in accord with the principle laid down by Maule J. in Regina v. James Mihier that the felony of not surrendering at
a district court to a fiat in bankruptcy, under Stat. 5 and G, Viet. c. 122,
section 32, is committed at the place where the district court is situate ; and
an indictment for the offence cannot be sustained in a different county from
that in which the person was a trader or in which he committed an act of
bankruptcy. On the same principle the High Court of Calcutta has also held in Gnnanand Dhone v. Lala Sanli Prokash Nanley that it is the court within the local limits
of whose jurisdiction the accused is liable to render accounts and fails to do
so by reason of having committed a breach of trust alleged against him that has
the jurisdiction.
The offence
under section 207 is the failure to pay dividend or to post a cheque or a
warrant for the dividend amount. Since the obligation to post the warrant arose
at the registered office of the company, failure to discharge that obligation
also arose at the registered office of the company. Therefore, the alleged
offence must be held to have taken place at the place where the company's
registered office is situate and not where the dividend warrant, when posted,
would be received.
In that view,
the High Court was in error in holding that the Magistrate at Meerut had
jurisdiction to try the said complaints. The appeals must accordingly be
allowed and the High Court's orders set aside. Order accordingly.
[2002] 40 SCL 944 (AP)
HIGH
COURT OF ANDHRA PRADESH
v.
Registrar of
Companies
GOPALA KRISHNA TAMADA, J.
CRIMINAL PETITION NO. 2427 OF
1998
Section 207 of the Companies
Act, 1956 - Dividend - Penalty for failure to distribute, within prescribed
time-limit - As petitioner-company failed to pay dividend, declared in its
annual general meeting, to shareholders within 42 days as mandated under
section 207, Registrar of Companies filed a complaint against petitioner -
Petitioner’s case was that it could not pay dividends in time in view of
categorical request of its financial institutions - Whether in view of
provision in clause (e) of proviso to section 207, it could not be said that
company had voluntarily failed to pay dividend within stipulated period of 42
days as said non-payment was only in view of categorical request of its
financial institutions - Held, yes - Whether, therefore, continuance of
proceedings against petitioner was nothing but an abuse of process of court and
proceedings were liable to be quashed - Held, yes
Facts
In the annual general meeting, the company declared dividend at the rate of 30 per cent, but failed to pay the same to the shareholders within 42 days as mandated under section 207. Subsequently, the Registrar of Companies filed a complaint against the petitioner on the file of the Court of the Special Judge for Economic Offences. Instant petition was filed by the petitioner submitting that dividends could not be paid in time in view of the directions issued by the company’s financial institutions and that non-payment of dividend was protected under clause (e) of the proviso to section 207 and, therefore, the petitioner sought for quashing of the criminal proceedings.
Held
It was an undisputed fact that the company
declared dividends and had not paid the same to the shareholders within the
period of 42 days as mandated under section 207. In the light of the provisions
in clause (e) of the proviso to
section 207, it could not be said that the company had voluntarily failed to
pay the dividend within the stipulated period of 42 days as the said
non-payment was only in view of the categorical request of the financial
institutions. Therefore, the protection as envisaged under clause (e) of proviso to section 207 was very much
applicable to the petitioner-company. In view of the above, there could be no
hesitation to hold that the continuance of the proceedings against the
petitioner was nothing but an abuse of the process of the Court.
C. Praveen Kumar for the Petitioner. C.V. Ramulu for the Respondent.
Judgment
The petitioners herein who are A-1 to A-3 in S.T.C. No. 21 of 1998 on the file of the Court of the Special Judge for Economic Offences, Hyderabad, seek quashing of the said proceedings on the ground that launching of prosecution against the petitioners herein is an abuse of the process of the Court.
The case, according to the complaint filed by the Registrar of Companies, is that the first petitioner is a company represented by its managing director of which the second petitioner is one of the directors and the third petitioner is the secretary. According to the complaint, in the annual general meeting held on 27-9-1996, the company declared dividend at the rate of 30 per cent but failed to pay the same to the shareholders within 42 days as mandated under section 207 of the Companies Act.
Learned counsel for the petitioners Mr. C. Praveen Kumar contended before this court that it is true that dividend was declared by the company but the same could not be paid in time as mandated under section 207 of the Companies Act in view of the directions issued by the company’s financial institutions and in that regard, he also brought to my notice the letters addressed by (1) SICOM Ltd., dated 23-9-1996 and (2) Exim Bank Ltd., dated 18-11-1996, addressed to the first petitioner-company wherein the said financial institutions have categorically requested the company not to declare or pay the dividends unless the overdues under the loan are liquidated. Learned counsel for the petitioners therefore submits that the petitioners could not pay the dividends in time in view of the said letters only and that the non-payment by the company is protected under clause (e) of the proviso to section 207 of the Companies Act.
Heard the learned Central Government standing counsel.
In the light of the said submission, I have gone through the complaint filed by the Registrar of Companies as well as the provisions of section 207 of the Companies Act. It is an undisputed fact that the company declared dividends and did not pay the same to the shareholders within the period of 42 days as mandated under section 207 of the Act. Clause (e) of proviso to section 207 says that it is not an offence if the failure to pay the dividend within the period stipulated was not due to any default on the part of the company and the same is for some other reason. In the light of the said provision, it cannot be said that the company has voluntarily failed to pay the dividend within the stipulated period of 42 days and the said non-payment is only in view of the categorical request of the financial institutions—SICOM Ltd. and EXIM-bank. Therefore, I am in agreement with the contention raised by learned counsel for the petitioner that the protection as envisaged under clause (e) of proviso to section 207 of the Companies Act is very much applicable to the petitioners’ company. In view of the above discussion, I have no hesitation to hold that the continuance of the proceedings against the petitioners in STC No. 21 of 1998 is nothing but an abuse of the process of the court.
Accordingly, the criminal petition is allowed and the proceedings in STC No. 21 of 1998 on the file of the Court of the Special Judge for Economic Offences, Hyderabad, are hereby quashed.
[1999] 97 COMP. CAS. 500 (MAD)
v.
Register of Companies
A RAMAMURTHY J.
CRL O.P. NOS. 1114, 1119, 1120, 1121, AND 2220 OF 1999.
APRIL 30, 1999
C. Sundaram, G.R. Rajagopal and S.R. Raghunathan for
the Petitioner.
M.T. Arunan for the
Respondent.
A.
Ramamurthi J.—The
petitioners in E.O.C.C. No. 9 of 1997 on the file of the Additional Chief
Metropolitan Magistrate, Economic Offences, Egmore, have filed Crl. O.P. No.
1121 of 1999. The petitioners in E.O.C.C. No. 461 of 1998, the petitioners in
E.O.C.C. No. 455 of 1998, the petitioners in E.O.C.C. No. 301 of 1998 and the
petitioners in E.O.C.C. No. 167 of 1998 on the file of the same court have
preferred the Criminal Original Petitions Nos. 1114, 1119, 1120 and 2220 of
1999 respectively under section 482 of the Criminal Procedure Code for quashing
the proceedings pending against them.
The case in brief
for disposal of all the petitions is as follows :
The
petitioners in Crl. O.P. No. 1121 of 1999 are accused Nos. 2, 3, 4, 6 and 8 in
E.O.C.C. No. 9 of 1997. The respondent preferred a complaint against them under
section 207 of the Companies Act, 1956, on the allegation that one S.R. Gupta,
through a letter dated May 10, 1996, complained to the office of the Regional
Director, Department of Company Affairs, Madras, stating that the company had
declared dividend in the annual general body meeting held on September 19,
1995, and he has received the dividend warrant on April 15, 1996, after five
months. The company has become liable to pay the dividend to the shareholders
whose names appear in the register of members on the date of the declaration of
the dividend. The dividend warrants have to be despatched to the shareholders
within 42 days from the date of declaration. It is further stated that they had
not despatched the dividend warrants till April 25, 1996. The respondent issued
a show-cause notice on September 17, 1996. The complaint so far as the
petitioners are concerned is an abuse of the process of law and court. The
petitioners have not adopted delaying tactics and it is only due to financial
condition and for the reasons that the company has not received monies from its
debtors, the company could not make any payments of the dividends within 42
days. The petitioners have despatched the entire dividends on March 18, 1996.
The company had also approached the High Court under section 391 of the Companies
Act for a scheme for (arrangement ?) unpaid dividend and the same was approved
by the Company Law Board.
The
petitioners in Crl. O.P. No. 1114 of 1999 are accused Nos. 1 to 4 in C.C. No.
461 of 1998. The respondent preferred a complaint against them under section 17
read with section 291 of the Companies Act, on the allegation that the company
cannot carry on any activities which are not covered under the objects of its
memorandum of its association and that the company has carried on the business
of air taxi operations without necessary provisions with effect in the
memorandum of association. Section 17 of the Companies Act deals with amendment
of objects of a company. The petitioners have only carried on the business of
air taxi operations pursuant to its objects and the petitioners have not
committed any offence. In the complaint, it is alleged that they have carried
on the business of air taxi operations without necessary provisions. Section
629A of the Companies Act stipulates that in case of contravention under
provisions of the Act for which, no specific punishment is provided elsewhere
in this Act, the company and every officer of the company shall be punishable
with fine which may extend upto Rs. 500 and where the contravention is
continuing with a further fine which may extend to Rs. 50 for everyday. The
complaint itself alleged that they came to know about the alleged default only
on February 24, 1998, whereas the respondent has specifically stated that the
show-cause notice was issued on April 17, 1997. They had obtained due
permission from the respondent before approaching the public for funds for
diversifying into this operation and the prospectus had been approved by the
respondent. Only subsequent to the due clearance by the respondent, the
petitioners had diversified into this activity.
The
petitioners in Crl. O.P. No. 1119 of 1999 are also accused in C.C. No. 455 of
1998. In this case also, the respondent preferred a complaint under section 207
of the Companies Act on the allegation that S. Siva subramanian, through a
letter dated August 2, 1996, complained to the office of the Regional Director,
Department of Company Affairs, Madras, stating that the company had declared
dividend in the annual general body meeting held on April 30, 1996, and he has
received the dividend warrant on August 28, 1996, after 119 days from the date
of declaration instead of receiving the same on or before June 10, 1996.
The
petitioners in Crl. O.P. No. 1120 of 1999 are accused Nos. 1 to 3 in E.O.C.C. No.
301 of 1998. The respondent preferred a complaint under section 207 of the
Companies Act on the allegation that the dividend declared on the annual
general body meeting held on August 14, 1996, has not been received. Even in
the complaint, it is stated that the dividend warrants have to be despatched to
the shareholders within 42 days from the date of declaration. It is further
stated that they had not despatched the dividend warrant till September 26,
1996. The respondent issued a show-cause notice on September 9, 1997.
The
petitioners in Crl. O.P. No. 2220 of 1999 are accused Nos. 1 to 3 in E.O.C.C.
No. 167 of 1998. The respondent preferred a complaint against them under
section 209A of the Companies Act. According to the prosecution, the company
has become liable to pay the dividend to the shareholders whose names appear in
the register of members on the date of declaration of dividend and the dividend
warrants have to be despatched to the shareholders within 42 days from the
declaration. The complainant came to know about the default on September 8,
1997. On October 17, 1997, the accused filed a compounding application for
violation of section 205A but, for the violation of section 207, they have not
given any satisfactory reply. The complaint has been filed within the period of
limitation on the ground that the instruction to launch prosecution was
received only on September 8, 1997, from the Regional Director. On the other
hand, the Central Government has approved a scheme of arrangement and this court
had also sanctioned the scheme of arrangement. The petitioners have also
clarified that the non-payment of the dividend was due to inadvertence and was
not intentional
The
respondent filed separate counters, alleging that the petitioners have carried
out their air-taxi operations without suitably amending their articles of
association and memorandum of association. The said default was noticed on
February 24, 1998, and instruction to prosecute was given to the Registrar of
Companies. The prosecution has been launched within one year from the date of
instruction given to the Registrar of Companies and, as such, the complaint is
well within limitation. They have also filed petition for compounding admitting
their guilt and, as such, the present applications for quashing are not
maintainable. The provisions of section 207 of the Companies Act are mandatory.
Once a dividend is declared, it has to be paid within 42 days from the date of
declaration. The question is not whether the dividend warrants were despatched
before the issue of show-cause notice. The question is whether the dividend
warrants were despatched within 42 days from the date of declaration.
Heard learned
counsel for both sides.
Learned
counsel for the petitioners mainly contended that section 17 of the Companies
Act deals with alteration of the memorandum of association of companies and
this section does not provide any penalty. Section 291 of the Companies Act
deals with general powers of the board. The Registrar of Companies had
knowledge of the business carried on by the petitioners when the prospectus of
the company was filed with the Registrar of Companies and further the special
resolution dated August 21, 1993, was filed with the Registrar of Companies and
has approved the same. Mere non-compliance with a provision of the Act such as
the omission to apply to the Central Government does not constitute offence
punishable under section 629A of the Act. No case can be made out against the
petitioners. The complaint is also barred by time. The prosecution has been
launched after a period of three years from the date when the offences are
alleged to have been committed. The dividend warrants were despatched before
the show-cause notice was issued by the company. No offence under section 207
has been committed.
Learned
counsel for the petitioners contended that the respondent, Registrar of
Companies preferred complaints under section 207 of the Companies Act on the
allegation that the dividend has not been paid within a period of 42 days from
the date of declaration. The Registrar of Companies also filed another case
under section 17 read with section 291 of the Companies Act, alleging air-taxi
operation is not included in the memorandum or articles of association and
without any amendment as they have committed an offence which is punishable
under section 629A of the Companies Act.
Learned
counsel further pointed out that for the offence under section 629A of the
Companies Act the punishment is only fine and as such, the complaint, if any,
ought to have been filed within a period of six months and if not the complaint
would be barred by time. So far as the offence punishable under section 207 of
the Act, since imprisonment is also there, the complaint ought to have been
filed within a period of one year and in the absence of the same, the complaint
would be barred by time. However, learned counsel for the respondent would
contend that only from the date of the knowledge, the period of limitation will
commence and, as such, all these complaints are well within time.
There are
five complaints filed by the Registrar of Companies against the petitioners.
Crl. O.P. No. 1114 of 1999 relates to a complaint under section 17 read with
section 291 of the Companies Act punishable under section 629A of the said Act.
In other cases, the complaints filed by the respondent under section 207 of the
Companies Act. Section 17 of the Act relates to special resolution and
confirmation by the Company Law Board required for alteration of memorandum.
Section 291 of the Act relates to the general powers of the board. Section 629A
of the Act relates to penalty "where no specific penalty is provided
elsewhere in the Act". According to this section, the company and every
officer of the company who is in default or such other person shall be
punishable with fine which may extend to five hundred rupees and where the
contravention is a continuing one, with a further fine which may extend to
fifty rupees for every day after the first during which the contravention
continues.
The memorandum
and articles of association have also been filed in the case. The petitioners
also relied upon the relevant clause under the memorandum of association of the
companies, which reads as under :
"To act
as carriers, transporters, tours, travel agents and shipping clearing and
forwarding agents."
Learned
counsel further pointed out that the prospectus have been already registered
with the respondent and special resolutions have also been filed with the
Registrar of Companies. Apart from that, an annual report is sent to the
Registrar every year disclosing the air-taxi operation carried on by the said
company. The aforesaid documents would only indicate that the respondent is
well aware of the business carried on by N.E.P.C. company. This being so, the
present contention of the respondent that they came to know about it only very
late, cannot be believed. It is admitted that even according to the
complainant, the show-cause notice was issued on April 17, 1997. As adverted
to, the complaint ought to be filed within a period of six months. But,
however, the complaint has been filed only on June 23, 1998. Prima facie it is
clear that the complaint is barred by time and on this ground, the complaint
relating to C.C. No. 461 of 1998 is liable to be quashed.
As adverted
to, the other complaints relate to under section 207 of the Companies Act.
Section 207 reads as follows :
"Penalty for failure to distribute dividends within forty-two
days.-Where a dividend has been
declared by a company but it has not been paid, or the warrant in respect
thereof has not been posted, within 42 days from the date of the declaration,
to any shareholder entitled to the payment of the dividend, every director of
the company ; its managing agent or secretaries and treasurers ; and where the
managing agent is a firm or body corporate, every partner in the firm and every
director of the body corporate ; and where the secretaries and treasurers are a
firm, every partner in the firm and where they are a body corporate, every
director thereof ; shall, if he is knowingly a party to the default, be
punishable with simple imprisonment for a term which may extend to seven days
and shall also be liable to fine."
So far as the
complaint in C.C. No. 455 of 1998 is concerned, according to the respondent, there
is delay of 119 days in payment of the dividend. The show-cause notice was
issued on October 15, 1996. However, the respondent would contend that they
came to know about this omission only on December 18, 1997. The complaint was
filed into the court on March 10, 1998. As adverted to, in view of section 468
of the Criminal Procedure Code, the complaint ought to be filed within a period
of one year. Considering the fact that the show-cause notice was issued as
early as October 15, 1996, and the complaint having been filed on March 10,
1998, prima facie it is clear that the complaint is barred by time. When once
the show-cause notice has been issued, it can be easily concluded that the
respondent is well aware of the delay caused by the said company in payment of
the dividend within 42 days after the declaration. Under the circumstance, so
far as the case, viz., C.C. No. 455 of 1998 is concerned, the complaint is also
barred by time.
C.C. No. 301
of 1998 also relates to the complaint under section 207 of the Act. So far as
this case is concerned, the show-cause notice was issued by the respondent on
September 9, 1997. A perusal of the complaint indicated that the respondent
came to know about the omission only on January 2, 1998. However it may, as the
show-cause notice was issued on September 9, 1997, and the complaint was filed
on August 20, 1998, it can be said that it is filed within the period allowed
under law. No doubt, learned counsel for the petitioners attempted to explain
that the delay had been caused due to financial constraints and there was also
framing of the scheme later approved by the Company Law Board. These are
matters to be considered only at the time of the trial and they are not matters
relevant to be considered for quashing the proceedings. Considering the fact
that this complaint is filed within the period allowed under law, I am of the
view that the proceedings cannot be quashed.
The complaint
in C.C. No. 9 of 1997 also relates to section 207 of the said Act. The dividend
has not been paid within 42 days after the declaration. The show-cause notice
was issued on September 17, 1996. Learned counsel for the petitioners contended
that the scheme was approved by the Company Law Board and furthermore, the
respondent came to know about this only on August 30, 1996. The complaint was
filed before the trial court on January 17, 1997. Considering the fact that as
the complaint has been filed within a period of one year from the issuance of
show-cause notice, it cannot be said that the complaint is barred by time. In
respect of other defences, it is open to the petitioners to agitate the same
before the trial court.
C.C. No. 167
of 1998 also relates to an offence under section 207 of the said Act. It is
seen from the complaint itself, the respondent came to know about the default
on September 8, 1997. However, para. 3 of the complaint indicated that the
inspection has been done and the same was completed on January 20, 1997. Under
the circumstances, even at the time of the inspection itself, the respondent
could have been well aware of the commission of the offence by the said
company. They have caused a delay of nearly eight months intending the
show-cause notice. The delay caused by the respondent cannot be made use of to
save their complaint. The complaint was filed in the court on August 31, 1998.
Taking into consideration the fact that even according to the averments in the
complaint, the respondent had completed the inspection on January 20, 1997,
naturally the complaint ought to have been filed within a period of one year,
but according to the complaint itself, it was filed on August 31, 1998, and, as
such, it is beyond the time.
Learned
counsel for the petitioners contended that when once the court comes to the
conclusion that there is prima facie material
to infer that the claim is barred by time, no useful purpose would be served in
allowing the case to be prosecuted. The respondent is not in a position to
point out that the claim is in time. Hence, I am of the view that the
proceedings in C.C. No. 461 of 1998, C.C. No. 455 of 1998 and C.C. No. 167 of
1998 are barred by time and, as such, the proceedings are liable to be quashed.
In respect of the other two cases, viz., C.C. No. 9 of 1997 and C.C. No. 301 of
1998, the complaints have been filed in time and, hence, the proceedings cannot
be quashed. The other contentions that there was financial constraint and the
amount could not be realised by the company and, as such, the delay has
occurred, are matters to be considered by the trial court. Similarly, the other
contentions that the scheme was approved by the Company Law Board and, as such,
the delay has been caused, are matters to be considered only by the trial
court.
For the
reasons stated above, Crl. O. Ps. Nos. 1114, 1119 and 2220 of 1999 are allowed
and the proceedings in C.C. No. 461 of 1998, 455 of 1988 and 167 of 1998,
pending on the file of learned Additional Chief Metropolitan Magistrate,
Economic Offences, Egmore, Madras, are liable to be quashed and, accordingly
they are quashed. Crl. O. Ps. No. 1121 of 1999 and 1120 of 1999 are dismissed.
It is, however, open to the petitioners to agitate the very same points before
the trial court and the trial court is directed to consider the same and
dispose of the case as expeditiously as possible. Consequently, connected
criminal miscellaneous petitions are closed.