Section 268
Amendments
of provision relating to managing director
[1983] 53 COMP. CAS. 586 (ALL)
v.
D. P. AGARWAL
A.N. VERMA J.
JULY 23, 1980
JUDGMENT
Varma J.—This
is a plaintiffs' petition directed against orders passed by the courts below
refusing to grant an interim injunction to the plaintiffs restraining
respondents Nos. 1A to 12 from interfering with the right of petitioner No. 1-
to function as managing director of petitioner No. 2 company.
These are the relevant facts. Petitioner No. 2 is a
public limited company. Petitioner No. 1, Sri Pyare Lal Gupta, was appointed as
managing director of the said company on August 14, 1975, for a term of five
years. The necessary approval of the Central Govt; is also stated to have been
obtained in regard to the appointment of Sri Pyare Lal Gupta under s. 269 of
the Companies Act. It appears that on or about July 1, 1978, differences arose
between the managing director and other directors of the company. As a result
of the dispute, said to have arisen between petitioner No. 1 and other
directors, a meeting of the board of directors was called by the petitioner, on
the one hand, for July I, 1978, and allegedly by the other directors also for
July 1, 1978. The defendants' case is that a meeting was in fact held on July
1, 1978, to consider the removal of petitioner No. 1 as the managing director
of the company and at the said meeting a resolution was passed purporting to remove
Sri Pyare Lal Gupta as managing director of the company.
In the background of the aforesaid differences and
disputes the petitioners filed a suit in the court of learned Munsif,
In order to appreciate the controversy involved in
this petition, it is necessary to set out the pleadings of the parties. Shortly
stated, the plaint case was that Sri Pyare Lal Gupta had been duly appointed as
the managing director of the aforesaid company for a term of five years
beginning from August 14, 1975. The appointment was approved by the Central
Govt. under s. 269 of the Companies Act. Petitioner No. 1 had called a meeting
of the board of directors on July 1, 1978, for considering certain complaints
against some of the defendants. As a counter-blast the said defendants, some of
whom were directors of the company, also called a meeting of the board of
directors for July 1, 1978, though they had no authority to do so and in point
of fact no such meeting was either called or held. However, the defendants
asserted that such a meeting was held on July 1, 1978, and at that meeting Sri
Pyare Lal Gupta was removed from the managing directorship of the company. The
defendants' action in purporting to remove Sri Pyare Lal Gupta was entirely
unauthorised and illegal, but these defendants were interfering with the right
of Sri Pyare Lal Gupta to act as managing director of the company and hence the
suit.
The injunction application mentioned above filed by
the petitioners came up for orders on August 23, 1978. The defendants not
having been served by that date, an order was passed restraining the defendants
from holding any meeting and directing that if a meeting was held, the same
shall not be given effect to.
The case of the defendants, on the other hand, was
that there were serious charges of misappropriation against Sri Pyare Lal Gupta
giving rise to discontent among the board of directors. As a result, a meeting
of the board of directors was called for on July 1, 1978. The meeting was duly
held and at that meeting a resolution was passed by the board removing Sri
Pyare Lal Gupta from the managing directorship of the company. Subsequently, at
an extraordinary general meeting of the company held on February 23, 1979, Sri
Pyare Lal Gupta was removed even from the directorship of the company. The
defendants asserted that Sri Pyare Lal Gupta had been lawfully removed from the
managing directorship of the company and, therefore, he was not entitled to any
injunction.
In support of their cases both the parties filed
certain documents and affidavits. Both the parties filed minutes of the
meetings said to have been called by them. The defendants filed notices and agenda
of the meeting of the board of
directors held on July 1, 1978, as well as of the extraordinary general meeting
held on February 23, 1979.
Upon a consideration of the material on record the
trial court, while dismissing the application for temporary .injunction, held
that the petitioners did not have any prima facie case nor was the balance of
convenience in their favour. These findings have been affirmed by the learned
District Judge in the appeal filed by the petitioners.
The learned District Judge has held, in agreement
with the trial court, that the board of directors were at liberty to remove the
managing director who was only an agent of the board of directors to carry out
the duties assigned to him. The learned District Judge has referred to some
authorities in support of his view that the authority of a person to act as a
managing director could be lawfully revoked by the board of directors. The
learned District Judge further observed that the fact that Sri Pyare Lal Gupta
was appointed as managing director with the approval of the Central Govt. did
not derogate from the right of the board of directors to remove him from the
managing directorship.
Another important finding recorded by both the courts
below is that the present board of directors, consisting of some of the
defendants, was in effective control of the affairs and management of the
company and that consequently even from the point of balance of convenience it
was not a fit case for the issuance of an ad interim injunction.
Counsel for the petitioners first submitted that Sri
Pyare Lal Gupta having been appointed with the approval of the Central Govt.
under s. 269 of the Companies Act, he could not be removed by the board of
directors without the concurrence of the Central Govt. However, this
proposition canvassed by the learned counsel for the petitioners was not
supported by any authority or any specific provision either in the Companies
Act or in the articles of association of the company produced before me. I am
clearly of the view that the argument advanced by the learned counsel for the
petitioners cannot be accepted. The Companies Act provides for an approval of
the Central Govt. only for the appointment of a director as a managing director
of the company. There is no corresponding provision for the removal of the
managing director.
The learned District Judge has referred to some
authorities in support of his finding that the board of directors does have the
power to revoke the authority and appointment of the managing director appointed
by it. Prima facie, the view taken by the learned District Judge appears to be
correct.
Learned counsel for the petitioners placed reliance
on the provisions of s. 268 of the Companies Act which provides that no
amendment can be made relating to the appointment or reappointment of the
managing director, etc., in the memorandum or articles of association of a
company or in any agreement entered into by it or any resolution passed by the
company in a general meeting unless that amendment has been approved by the
Central Govt. Obviously, this provision can have no application to the present
situation. No amendment in the matters mentioned in s. 268 is being sought.
Consequently, there is no question of obtaining the approval of the Central
Govt.
Having considered the matter at some length I am
clearly of the view that the finding of the courts below that the petitioners
did not have a prima facie case is perfectly correct and calls for no
interference by this court.
The other finding recorded by the courts below that
the balance of convenience does not lie in favour of the petitioner is equally
unexceptionable. The courts below have adverted to circumstances which point to
the conclusion that prima facie it is the defendants who are in effective
control of the management and affairs of the company. It is the defendants who
have been operating the bank accounts and conducting other important business
of the- company. In my view these are legitimate considerations for deciding
whether interim injunction should be issued or not. At any rate, I see no
ground for disagreeing with the view of the learned District Judge on this
aspect of the matter.
There is another circumstance which needs mention. On
the own showing of the petitioners the appointment of Sri Pyare Lal Gupta was
for a term of five years which expires on August 14, 1980. That being so it is
hardly a case in which this court should interfere with the orders passed by
the courts below, in any view of the matter.
Learned counsel for the petitioners laid considerable
stress on the fact that the averments made in the petition have not been denied
by any of the respondents arrayed in the petition. I do not think there is any
substance in this objection. The matter has to be decided on the basis of the
material which was placed before the courts below and not on the basis of
allegations and counter allegations made in this court. In any case, having
regarded to the nature of the controversy involved in the present case, I do
not think that any serious objection can be taken to the fact that none of the
respondents has filed any affidavit in reply to the petition.
In view of what has been stated above this petition
fails and is dismissed. There will be no order as to costs.
[1978] 48 COMP. CAS. 267 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
S.S. SANDHAWALIA J.
COMPANY APPLICATION NO. 180 OF 1977
IN COMPANY PETITION NO. 239 OF 1977.
JANUARY 10, 1978
Des Raj
Nanda for the petitioners.
J.S. Narang
for the Respondents.
S.S.
Sandhawalia J.—This is an
application under section 151 of the Civil Procedure Code read with rule 9 of
the Companies (Court) Rules, 1959. It seeks directions to Shri N.S. Kharbanda,
the former managing director of the Chandigarh Tourist Syndicate (Pvt.)
Ltd., to hand over the records relating to the company and also the keys of the
almirahs lying in the office of the company and further to deliver the cash in
hand held by him earlier to the present managing director of the company with
the requisite details thereof.
It does not seem to be in dispute that an annual
general meeting of the company was called for the purposes of the election of
the managing director/chairman on 30th November, 1977. In the proceedings held
in the said meeting Sh. N.S. Kharbanda, who was the incumbent managing director
of the company, lost to Sh. Ajaib Singh Bachhal, the present applicant, who was
elected as the managing director thereafter. It has been averred in the
application that in the minutes book relating to the annual general meeting Sh.
N.S. Kharbanda wrote in his own hand on 30th November, 1977, that he lost the
election and Sh. Ajaib Singh Bachhal, respondent No. 2, was elected instead. It
is the applicant's case that at the end of the proceedings Sh. N.S. Kharbanda
agreed that the record and cash of the company shall be transferred within ten
days thereafter. However, the applicant alleges that Sh. N.S. Kharbanda has not
attended the office of the company at all and has not handed over the records
of the company in his possession including the keys of the almirahs, which are
lying in the premises of the company and similarly has withheld the cash in
hand of the company in his possession. It is further alleged that the whole
working of the company is hamstrung by the action of Sh. N.S. Kharbanda and it
is unable to file the passenger tax monthly returns, returns with regard to the
annual general meeting and the failure to do so would render the company liable
for heavy penalties. Similarly, the company is unable to effectively pursue the
income-tax appeal, which it has filed by producing the necessary records, which
equally may entail onerous liabilities. It is also stated that the cheque book,
stamp and receipts relating to the company are also lying in the almirahs,
without which the company cannot effectively function.
In the reply filed by Sh. N.S. Kharbanda, his
mainstay seems to be that the applicant has no locus standi to file the present
application for the custody of the records of the company. Further, the
maintainability of the present application is sought to be challenged.
The main stand on behalf of Sh. Kharbanda seems to be
as averred in para. 5 of the return that he would have no objection to hand
over the records, etc., after the decision of the Company Petition No. 239 of
1977 on merits regarding the validity of the proceedings of the annual general
meeting.
Mr. J.S. Narang, learned counsel for the applicant,
has forcefully contended that having been duly elected as the managing director
in the annual general meeting held on November 30, 1977, the applicant is
necessarily entitled to the possession in custody of the records of the company
and its other property. The minutes book pertaining to the annual general
meeting held on November 30, 1977, has been produced to show that Sh. N.S.
Kharbanda in his own hand had recorded the minutes relating to the election of
Sh. Ajaib Singh Bachhal as the managing director. It has been rightly submitted
that the very functioning of the company has been made impossible by the
absence of the requisite records and Sh. N.S. Kharbanda is abusing the process
of the court by withholding the same from the company under the garb of having
challenged the validity of the proceedings of the annual general meeting of the
company.
Apparently conscious of the total weakness of his
case on merits, the learned counsel for Sh. N.S. Kharbanda has vainly sought to
contend that the applicant has no locus standi to maintain the present
application. Neither principle nor precedent could be cited for this untenable
proposition. It is plain that the managing director of the company in his
capacity as such would be entitled to the possession and custody of the records
and property of the company on its behalf. The objection on the score of the
absence of locus standi of the applicant has, therefore, to be necessarily
rejected.
It was then submitted that the company court had no
jurisdiction to give directions for the return of the company's records and property.
Despite repeated opportunity given to the learned counsel for Sh. N.S.
Kharbanda, no judgment could be cited to the effect that a direction of the
nature sought on behalf of the applicant could not be given under section 151
of the Civil Procedure Code read with rule 9 of the Companies (Court) Rules. It
appears to be plain that the company in order to function effectively must have
an access to and the custody of its records and property and the ends of
justice, therefore, require that such a direction should issue where the former
managing director is refusing to restore the property and records of the
company to it. Merely because Sh. N.S. Kharbanda has filed a petition
challenging the validity of the annual general meeting and the consequent election
of the managing director, Sh. Ajaib Singh Bachhal, who has been duly recorded
as having been elected in the minutes book would not entitle him to withhold
the records and the assets of the company till the decision of the said
petition which inevitably would take time. Merely on the basis of having
preferred the said company petition to withhold the property and records of the
company from it would well be within the ambit of abuse of process of the
court. The directions sought for, therefore, are well within the inherent
powers spelled out in rule 9 of the Companies (Court) Rules, 1959. For the
reasons aforesaid the present application must succeed and the directions
sought for therein should issue.
Mr. D.R. Nanda on behalf of Shri N.S. Kharbanda had fairly
stated at the bar that the keys of the almirahs laying in the premises of the
company and containing its records were with his client and further cash in
hand was also lying in a small safe inside those almirahs, the key thereof was
also with his client. In order to safeguard the interests both of the company
and the parties, the learned counsel have themselves agreed that it is
necessary that an inventory of the property to be delivered over to the
applicant should be made in view of the pendency of the main petition.
The learned counsel for the applicant had himself
requested that a Commissioner may be appointed in whose presence the records,
property and cash would be taken over by the applicant. I accordingly appoint
Shri S.N. Nijjar, Barat-Law, as the Commissioner for the said purpose. Mr. N.S.
Kharbanda is directed to produce the keys of the two almirahs and also of the
safe contained therein before the Commissioner who shall open the said two
almirahs and the safe and after making an inventory of the record and the cash
and other articles therein deliver over the same to the applicant, Shri Ajaib
Singh Bachhal, the incumbent managing director of the company.
The parties shall appear before the Commissioner at
12 noon tomorrow at the registered office of the company. The respondent, Shri
N.S. Kharbanda, shall produce the keys mentioned aforesaid in order to have the
inventory, etc., made as directed above. In case the respondent, N.S Kharbanda,
does not appear or produce the keys, etc., the Commissioner is hereby
authorised to have the almirahs and the safe opened and get the necessary
inventory made. By agreement, the Commissioner's fee is fixed as Rs. 300
payable by the applicant before he undertakes the commission.
[1985] 58 Comp. Cas. 489 (Guj.)
High Court OF
Sinha Watches (
v.
S.B. Majmudar J.
Company Application No. 7 of 1982 in Company
Petition No. 10 of 1981.
April 8, 9, 1982
S.B.
Vakil and S.H. Sanjanwala for the Applicant.
G.N. Shah for
the Respondent.
Majmudar,
J.—The petitioners, M/s.
Sinha Watches (
"The opponent company has
shown no cause. It is ordered to be wound up. Provisional liquidator to be
appointed as official liquidator. Costs to come out of the assets of the
company."
By way of the present application, it has been
contended that petitioner No. 2, who is the managing director of the company,
was at the relevant time in Tihar jail and was not served on behalf of the
company and was not in the know of winding-up proceedings which were taken up
by the petitioning creditors against the company in this court. It has been
mentioned in this application that from December 4, 1980, until November 17,
1981, petitioner No. 2, managing director of the company, was in Tihar jail
under judicial custody and his wife, the second director of the company, was in
Petitioner No. 1, M/s. Sinha Watches (
It appears that petitioner No. 1 company was sought
to be served at its registered office situated in this city pursuant to the
order of this court in Company Application No. 10 of 1981 but the notice could
not be served as the registered office of the company could not be traced.
That, thereafter, by an order March 20, 1982, N.H. Bhatt, J., appointed the
official liquidator as provisional liquidator for petitioner No. 1 company and
direct, ed notice of pendency of the petition to be served by way of public
advertisement. Accordingly, a public advertisement was inserted regarding
pendency of the petition in the Gujarat Samachar, a Gujarati daily, on May 12,
1981, and in local edition of the Times of India on May 18, 1981. It is
pertinent to note that an even earlier notice of acceptance of this Company
Application No. 10 of 1981 was permitted to be published in a local newspaper
and was in fact published on April 3, 1981, in the Times of India. It is an
admitted fact that petitioner No. 2, who is the managing director of petitioner
No. 1 company, was detained in Tihar jail, Delhi, between December 4, 1980, and
November 17, 1981. Thus, at the relevant time, he could never have read the
newspaper advertisements regarding pendency of the company petition which were
published locally in this city in the aforesaid newspapers; while so far as the
wife of petitioner No. 2 is concerned, she was the other director and was a
Swiss national staying all the time in Switzerland. It is also an admitted
position that notice of pendency of the Company Petition No. 10 of 1981 was
never served on petitioner No. 2's wife in Switzerland. So far as petitioner
No. 2 is concerned, he was also not served with any notice of pendency of the
company petition at his address at Tihar jail, Delhi, where he was detained at
the relevant time. It appears that in the meanwhile, the official liquidator of
this court who was appointed as provisional liquidator, by an order of N.H.
Bhatt J. dated March 20, 1981, issued a notice dated March 26, 1981, to
petitioner No. 1 at his Switzerland address presumably being under the
impression that petitioner No. 2 was already residing in Switzerland at the
relevant time. It is the case of the petitioners of this application that the
aforesaid notice sent by the official liquidator acting as provisional
liquidator as sent to petitioner No. 2 at his Switzerland address was
redirected to Tihar jail, Delhi, where petitioner No. 2 was detained.
Petitioner No. 2 came to know about this redirected notice in Tihar jail on or
about May 5, 1981. Petitioner No. 2 thereupon instructed his Delhi advocate,
Ranjan Dwivedi, when petitioner No. 2 was being taken to court in connection
with the case for which he was detained in Tihar jail, to send a telegram to
the official liquidator of this court informing that petitioner No. 2 was
detained in Tihar jail at New Delhi. Petitioner No. 2's advocate, Ranjan
Dwivedi, accordingly sent a telegram to the official liquidator pointing out
the fact that the present petitioner No. 2 was confined in Tihar jail. The said
telegram was received by the official liquidator on May 5, 1981. Thereafter, it
appears that the official liquidator wrote a letter dated May 27, 1981, to
advocate, Ranjan Dwivedi, at Delhi informing him that his client was required
to submit statements of affairs of the company within 21 days and that he was
requested to make necessary arrangements to hand over possession of books,
records and assets of the company (in provisional liquidation) and to submit
statements of affairs forthwith. Thereafter, petitioner No. 2 appears to have
been informed by the Delhi advocate about the said letter received from the
official liquidator. In response to the same, petitioner No. 2 through his
advocate addressed a letter, dated June 10, 1981, to the official liquidator
pointing out that petitioner No. 2 was in Tihar jail in connection with a case
and so, he could not attend the office of the provisional liquidator and that
he was hoping that his trial at Delhi will be over by July 15, 1981.
Thereafter, he hoped to be free to attend the office of the provisional
liquidator and provide him with all necessary details.
It is in the background of the aforesaid facts and
events that the order passed by me on June 30, 1981, will have to be viewed. On
that day, presumably, the official liquidator who was appointed provisional
liquidator of petitioner No. 1 company was not present in court so that the
actual whereabouts of petitioner No. 2 could not be brought to my notice. If
the official liquidator had remained present, he could have specifically
pointed out the communication which he had received from the Delhi advocate of
petitioner No. 2 and the information which was sent to him by petitioner No. 2
to the effect that he was in Tihar Jail, New Delhi, at the relevant time.
Unfortunately, these facts were not placed before me by the official liquidator
who was not present on the day on which company petition was called for further
orders. So far as Mr. G.N. Shah, learned advocate for petitioning creditor No.
2, is concerned, he stated that even he did not know the aforesaid facts, otherwise,
he would have pointed out these facts to the court. The result was that these
relevant facts were not known to me when I was called upon to pass the order of
winding up. Mr. G.N. Shah for the petitioning creditors being himself ignorant
about these facts was justified in mentioning to this court that the company
could not be served of the notice regarding pendency of the company petition by
the usual mode as the company's registered office was not traceable in
Ahmedabad and that pursuant to the orders of N.H. Bhatt, J., public notices
were issued in local dailies on May 12, 1981, and May 18, 1981, and that mode
of service could be treated as a valid mode of service to the company about the
pendency of the company petition and it is on this basis that I passed the
impugned order directing winding up of the company on the basis that no cause
was shown by the company which was treated to have been duly served of the
company petition pursuant to the aforesaid public notices published in the
Gujarat Samachar and the Times of India in May, 1981. It must, therefore, be
held that the said order, which was passed by me, though not technically ex
parte was in fact and in substance, an ex parte order against petitioner No. 2
who was the person in charge being the managing director and who would be the
proper person to put forward his contentions on behalf of the company in
opposition to the company petition. It is obvious that the company, though
being a legal entity, could not have appeared by itself. It could appear
through its officer well versed in the affairs of the company. Petitioner No. 1
being the managing director was the proper person who could have appeared
before this court and could have pointed out all the relevant contentions and
submissions in opposition to the petition. But he got no opportunity to
represent his case on behalf of the company under the circumstances narrated
above. The only other person who could have appeared was the other director,
his wife, who was a Swiss national and who was away from India in Switzerland
and who was not served on behalf of the company in Company Petition No. 10 of
1981. Therefore, practically, there was no appearance on behalf of the company
as there was no one who could appear on behalf of the company on June 30, 1981.
It is in the background of these facts and circumstances, that I find the order
of winding up as passed by me on June 30, 1981, to be in substance an ex parte
order.
A few facts and events subsequent to the said order
of June 30, 1981, also deserve to be noted at this stage, so that the
circumstances in which the present application came to be filed for
cancellation of the earlier ex parte order can be better appreciated. On July
1, 1981, the official liquidator again wrote a letter to petitioner No. 2's
advocate at Delhi pointing out that he was appointed as provisional liquidator
of the company and that the registered office of the company could not be
traced at Ahmedabad address and no one could say whether such registered office
was in existence at the said address. The aforesaid letter dated July 1, 1981,
clearly shows that even the official liquidator was not in the know of the fact
that on the earlier day, i.e., June 30, 1981, I had already passed an order
directing the company to be wound up and appointing the official liquidator to
be the liquidator of the company. Even on July 1, 1981, the official liquidator
seemed to be under the impression that he had to act only as provisional
liquidator presumably pursuant to the earlier order of N.H. Bhatt J. This also
shows that the official liquidator was not present in the court on June 30,
1981, when I passed the aforesaid order. In the meanwhile, petitioner No. 2
went on corresponding with the official liquidator requesting him to get stay
of operation of the High Court's earlier order as it was not possible for him
to come down to Ahmedabad. Petitioner No. 2 also seems to have applied to the
Legal Aid Committee of this court to take necessary steps on his behalf. In
this connection, petitioner No. 2 also addressed a letter dated August 14,
1981, to the Additional Registrar of this court requesting him to move a
petition for stay order against the order of this court dated March 20, 1981,
appointing a provisional liquidator for the company. He pointed out that
petitioner No. 2 was confined in another case at Delhi and it was difficult for
him to engage a lawyer at Ahmedabad. The said letter clearly shows that even in
August, 1981, petitioner No. 2 was not knowing that any order for winding-up
was passed by this court on June 30, 1981, and he was labouring under an
impression that onlythe earlier order dated March 20, 1981, was holding the
field. Petitioner No. 2 also addressed a letter dated August 28, 1981, to the
official liquidator pointing out that as his Delhi case was likely to be
decided in the first week of September, 1981, he hoped to be free thereafter
and he would personally visit him at Ahmedabad. Thereafter, the official
liquidator wrote another letter in September, 1981, to petitioner No. 2 to the
address of his Delhi advocate, Shri S.R. Nanda, calling upon him to hand over
possession of the books, etc. Even in that letter, no intimation was sent to
him that there was already a winding-up order passed by the court on June 30,
1981. Petitioner No. 2 again wrote a letter dated September 30, 1981, to the
official liquidator reiterating his request for stay of the proceedings in the
company petition and pointing out that he was still in custody in Central jail
at Tihar. It was, thereafter, that the official liquidator wrote a letter dated
December 29, 1981, to petitioner No. 2 at his Delhi address pointing out that
the court had passed a winding-up order on June 30, 1981. When this letter
reached petitioner No. 2, he was already out of Central jail at Tihar as he was
detained in the said jail up to November, 1981. The moment petitioner No. 2
came to know about the passing of the winding-up order on June 30, 1981, he
immediately came to Ahmedabad and filed the present application on January 25,
1982, requesting this court to review and/or revoke the winding-up order dated
June 30, 1981, passed in Company Petition No. 10 of 1981 on various grounds
stated in the application.
It has been submitted that the winding-up order dated
June, 1981, is an ex parte order which was passed behind the back of petitioner
No. 2. He could not remain present before this court as he was detained in
Tihar jail at the relevant time. That there was nobody to represent his case
when the said order was passed and, hence, the said order was required to be
revoked in the interest of justice in exercise of the review powers and/ or
inherent powers of this court.
The said application was admitted by me to a final
hearing. The Deputy Manager (Law) of the Gujarat Industrial Investment Corporation
Ltd., respondent No. 2, has filed his affidavit-in-reply opposing the the
application; while petitioner No. 2 has filed his rejoinder. This application
reached final hearing before me yesterday.
Mr. S.B. Vakil, learned advocate, appearing for the
petitioners, submitted that in view of the the peculiar facts and circumstances
of this case, it is clear that the order dated June 30, 1981, was an ex parte
order in the real sense of the term, though technically it can be said that the
company was served through public advertisement. But the company being an
inanimate legal entity, it was required to be represented before this court by
any one on its behalf being fully conversant with the facts and circumstances
of the case. Petitioner No. 2, managing director of petitioner No. 1 company,
could have remained present if he was in a position to do so. But as he was
detained in Tihar jail at the relevant time, he could not come here to
represent the case of the company and, consequently, the order passed by me was
required to be cancelled in the interest of justice and the petitioners
deserved to be permitted to have their say on merits. Mr. Vakil further
contended that petitioner No. 2 never came to know about the order of winding
up till he received a letter from the official liquidator dated December 29,
1981, at Delhi which would obviously be at any time after December 29, 1981.
That in the said letter, for the first time, the official liquidator informed
petitioner No. 2 that there was an order of winding up dated June 30, 1981, in
the present case and within 30 days thereof, the present application has been
filed and consequently, there was no question of limitation involved in the
present matter and in any case, delay, if any, deserved to be condoned in the
interest of justice, and Company Petition No. 10 of 1981 deserved to be heard
afresh on merits after hearing the petitioners.
Mr. G.N. Shah for the contesting respondents,
original petitioning creditors, on the other hand, submitted that the present application
deserves to be dismissed. He raised the following contentions in opposition.
1 The present review application is not maintainable at the instance of the petitioners as petitioner No. 2, the erstwhile managing director, has no locus standi to prefer this application on behalf of the company which can now be represented before the court of law only by the official liquidator.
2 The petition is barred by limitation.
3 There was no sufficient cause for remaining absent on the day on which the impugned order of winding up was passed by me and, hence, even on this ground, the application should be dismissed.
It must be stated at the outset
that r. 6 of the Companies (Court) Rules, 1959, provides that save as provided
by the Act or by these rules, the practice and procedure of the court and the
provisions of the Code so far as applicable, shall apply to all proceedings
under the Act and the Rules. Rule 9 provides that nothing in these rules shall
be deemed to limit or otherwise affect the inherent powers of the court to give
such directions or pass such orders as may be necessary for the ends of justice
or to prevent abuse of the process of the court. It is, therefore, obvious that
sitting as a company court, I have ample jurisdiction both under the inherent
powers of this court as well as under the relevant provisions of the CPC as
applicable to the company proceedings to pass appropriate orders for setting
aside an ex parte order, if interest of justice requires me to do so. In
fairness to Mr. Shah, it must be pointed out that it was not his contention
that this court has no inherent powers or review powers for setting aside the
order in question. But, in his submission, the present case did not call for
the exercise of these powers.
It is in the background of the aforesaid legal
position that I propose to deal with the main contentions raised on behalf of
the contesting respondents opposing grant of the present application. So far as
locus standi of the petitioners is concerned, Mr. Shah relied upon ss. 445 and
446 of the Companies Act, 1956, and submitted that once a winding-up order is
passed, the erstwhile directors and officers of the company would automatically
get displaced and, thereafter, it is the official liquidator who occupies the
driver's seat. Therefore, according to him, it is only the official liquidator
who can now act on behalf of the company. Mr. Shah invited my attention to s.
445(3) of the Act in particular to submit that the order of winding up shall be
deemed to be notice of discharge to the officers and employees of the company,
except when the business of the company is continued. He then invited my
attention to the definition in s. 2(30) and submitted that the term "officer"
would include a director. In order to support his contention, Mr. Shah invited
my attention to various passages from the standard works on company law, viz.,
Gover on Company Law, 4th edition, page 727, Pennington on Company Law, page
507 and Palmer's Company Law, 22nd edition, page 701, para 81.26. Placing
reliance on the observations in the standard works on company law, Mr. Shah
contended that the legal effect of a winding-up order is that the director is
denuded of his power to act on behalf of the company. There cannot be any
quarrel with this position of law. But it is trite to say that the very order
by which such a result is brought about can, of course, be challenged by a
person who is likely to be affected by the order. I asked Mr. Shah as to
whether the impugned order of winding up can be challenged in appeal by the
erstwhile director on behalf of the company or not. He fairly stated that he
can file such an appeal, but hastened to add that in such a case, he should
obtain stay of operation of the order of winding up as passed by the concerned
company judge. In my view, whether a stay of operation of a winding-up order is
obtained or not, an appeal can be legitimately filed by an aggrieved director
challenging the winding-up order. If that is so, there is no rhyme or reason
why an application to set aside an ex parte winding-up order by way of review
cannot be filed by an aggrieved person. Various statutory provisions and the
commentaries of the learned authors on which Mr. Shah heavily relied pertain to
a situation where the winding-up order comes into operation of its own and is
found to be legally operative and in that context a question arises as to
whether an erstwhile director can thereafter act on behalf of the company or
not. Such is not the situation in the present case. It is not as if petitioner
No. 2 is trying to act as managing director de hors and independently of and
bypassing the order of winding-up. In the present proceedings, he seeks to
challenge the very winding-up order which is the sole cause of deprivation of
his powers as managing director and status as managing director. If he is
aggrieved by such order and if he can go in appeal, there is no reason why he
cannot file the present application for getting the said order cancelled on
legally permissible grounds in the review proceedings and/or under inherent
powers of this court. In fact, the preliminary objection regarding locus slandi
as raised by Mr. Shah stands answered against him by a decision of the Delhi
High Court in Anil Kumar Sachdeva v.
Four 'A ' Asbestos (P) Ltd. [1980] 50 Comp Cas 122. S. Ranganathan J.,
in the aforesaid decision, placing reliance on s. 466 of the Companies Act,
1956, and the Companies (Court) Rules, 1959, rr. 6 and 9, as well as the Code
of Civil Procedure, 1908, s. 151, O.IX. r. 13, has observed (headnote):
"Although in law a company which is ordered by
the court to be wound up is represented by the official liquidator for all
purposes, that principle will not apply where the order appointing the official
liquidator is itself under challenge. It is true that after the winding-up
order is passed, the powers of the directors cease but there are still certain
residuary powers in the directors. The former directors would certainly be
entitled to appeal against the order of winding-up. The same authority would be
available to the directors to seek the setting aside of an ex park order for
winding-up."
For arriving at the aforesaid conclusion, reliance
was placed by S. Ranganathan J. on an earlier judgment of the Delhi High Court
as well as a decision of the English Chancery Division Court in Union Accident
Insurance Co. Ltd., In re [1972] 1 All ER 1105 ; [1972] 1 WLR 640. In the
aforesaid English decision, Plowman J. made the following pertinent observations
in the context of in pari materia provisions of the English Companies Act (at
p. 1113 of [1972] 1 All ER and at pp. 641 and 642 of [1972] 1 WLR):
"The respondents' submission was that the appointment
of a provisional liquidator automatically put an end to the authority of the
company's directors to instruct solicitors and counsel to represent it and that
the solicitors purporting to act on its behalf were, therefore, liable to pay
the respondents' costs personally. It is of course well settled that on a
winding-up, the board of directors of a company becomes functus officio and its
powers are assumed by the liquidator, and my attention was drawn to In re Mawcon Ltd. [1969] 1 All ER 188 ;
[1969] 1 WLR 78 ; 39 Comp Cas 926 (Ch D), where Pennycuick J. stated in
effect that the appointment of a provisional liquidator had the same result. No
doubt that is so, but it is common ground that notwithstanding the appointment
of the provisional liquidator, the board has some residuary powers, for
example, it can unquestionably instruct solicitors and counsel to oppose the
current petition and, if a winding-up order is made to appeal against that
order."
I fully concur with the aforesaid observation of S. Ranganathan
J. in Anil Kumar's case [1980] 50 Comp Cas 122 (Delhi) based on the decision of
Chancery Court in Union Accident
Insurance Co. Ltd., In re [1972] 1 All ER 1105. The preliminary
objection about locus standi of the petitioners to prefer this application,
therefore, has got to be overruled.
That takes me to the consideration of the second
contention of Mr. Shah on behalf of the contesting respondents. He submitted
that the present application for review of the earlier order of this court is
presented long after the period of 30 days from the date of the order. In that
connection, my attention was invited to s. 3 of the Indian Limitation Act,
1963, as well as art. 124 found in the Schedule. It is true that under s. 3 it
has been the mandate by the Legislature that any application made after the
prescribed period would get dismissed although limitation might not have been
set up as a defence. It is equally true that under art. 124, a period of 30
days is provided for review of the judgment of the court other than the Supreme
Court and the time begins to run from the date of the decree or order. But in a
case in which the order under challenge is not passed in the presence- of the
party aggrieved, the question as to when the impugned order came to the knowledge
of the aggrieved party would assume importance. Mr. Vakil, learned advocate for
the petitioners, invited my attention to a judgment of the Supreme Court in
Madan Lal v. State of U.P., AIR 1975 SC 2085, wherein the Supreme Court had to
consider the question regarding the starting point of limitation for preparing
an appeal under s. 17 of the Indian Forest Act, 1927. Gupta J., speaking for
the Supreme Court, made the following observations (headnote):
"The Forest Act does not
state what would happen if the Forest Settlement Officer made an order under
section 11 without notice to the parties and in their absence. In such a case,
if the aggrieved party came to know of the order after the expiry of the time
prescribed for presenting an appeal from the order, would the remedy be lost
for no fault of his ? It would be absurd to think so. It is a fundamental
principle of justice that a party whose rights are affected by an order must
have notice of it. This principle is embodied in-0.20, r. 1 of the Code of Civil
Procedure; though the Forest Settlement Officer adjudicating on the claims
under the Act is not a court, yet the principle which is really a principle of
fair play and is applicable to all tribunals performing judicial or
quasi-judicial functions must also apply to him,"
Reliance has been placed in the above decision on an earlier decision in Raja Harish Chandra Raj Singh v. Deputy Land Acquisition Officer, AIR 1961 SC 1500. It must, therefore, be held that for the purpose of computing limitation for filing a review application, the period of 30 days will start to run from the date on which the petitioner got the knowledge of the impugned order. As I have already shown above, he came to know for the first time only after December 29, 1981, pursuant to the letter which he received from the official liquidator that a winding-up order was passed by this court on June 30, 1981. If the date of his knowledge at Delhi about the impugned order is taken to be the day following the date of the letter dated December 29, 1981, posted from Ahmedabad, even then, the present application is filed within 30 days thereof. Mr. Shah in this connection submitted that personal knowledge of petitioner No. 2 is irrelevant as he was not a party to the company petition and the only party was the company which is sought to be wound up. Mr. Shah is right to that extent. But the fact remains that the company, though being a legal entity, is not a physical personality and it has got to act through its officers and agents. Petitioner No. 2 was the only person who could have made effective representation on behalf of petitioner No. 1 company as the other director, viz., his wife, who was a Swiss national, was thousands of kilometres away in Switzerland and never knew about the pendency of the company petition. Petitioner No. 2, who was the managing director of the company, was under a physical incapacity and he could not remain present in this court as, at the relevant time, he was behind the bars in Tihar Jail, New Delhi, and the further fact remains that so far as the registered office of the company is concerned, it was not traceable and no one was there to represent the company or to receive any communication addressed to the company at its Ahmedabad office. In the peculiar facts of this case, it must, therefore, be held that only petitioner No. 2 could have acted on behalf of the company and could have taken any effective steps to oppose the company petition for winding up. Under these circumstances, knowledge of petitioner No. 2 so far as the impugned order is concerned, cannot be said to be an irrelevant consideration. In fact, it is the only germane consideration. Hence, no question of limitation really survives for consideration. But even assuming that the proceedings were filed beyond the period of limitation, there is sufficient ground for condonation of delay under s. 5 of the Limitation Act as the only person who could have taken effective steps to oppose the petition was under a physical disability and could not remain present before this court, till he was released from detention in Tihar Jail in November, 1981, and till he got the knowledge and information about the passing of the impugned order. Hence, the second contention of Mr. Shah centering round the question of limitation also does not survive and has got to be rejected.
So far as the third contention of Mr. Shah is
concerned, it must be rejected off-hand. The facts and circumstances narrated
by me above leave no room for doubt that the petitioners have made out
sufficient cause for getting the impugned order of winding up set aside. On the
day on which the order was passed by me, neither was it known to me nor to the
learned advocate for the petitioners-creditors that the managing director of
the company was under a physical disability and could not remain present before
the court as he was in judicial custody at Delhi. If that fact was known to me,
the impugned order would never have been passed by me. I would have directed a
personal service to petitioner No. 2 through the jailor, Tihar Jail, New Delhi.
It is trite to say that the public notice issued either in April, 1981, or in
May, 1981, regarding pendency of the company petition could not have been read
by petitioner No. 2 in Tihar Jail at Delhi as these notices were published in
local dailies or in local editions of The Times of India. Therefore, in all
probability, petitioner No. 2 could not have got any information regarding
pendency of these proceedings. It is true that the correspondence which ensued
between petitioner No. 2's advocate on the one hand and the official liquidator
on the other did inform petitioner No. 2 about the pendency of the company
petition. But petitioner No. 2 made it clear times without number that so long
as he was detained in Delhi jail, it was impossible for him to contest the
proceedings in this court. He had also made a faint but abortive attempt to get
proper stay proceedings filed through the legal aid committee of this court. In
view of these facts, it must be held that on the day on which the impugned
order was passed, petitioner No. 2 did not receive enough opportunity to have
his sav in opposition to the proposed order of winding up. The said order must
be said to have suffered from violation of the principles of natural justice. Hence,
this is a fit case for invocation of review powers and /or even inherent powers
of this court for vacating the impugned order and I have not the least
hesitation in doing so.
In
the result, this company application is allowed. The order passed by me on June
30, 1981, in Company Petition No. 10 of 1981 is revoked and cancelled. The
company petition shall now proceed in accordance with law from the stage at
which it stood prior to the order dated June 30, 1981. At this stage, Mr. G.N.
Shah for the contesting respondents-petitioning creditors requested me to stay
the operation of my order for a fortnight to enable him to prefer an appeal
against this order. The request, being reasonable, is granted. It is, however,
made clear that in the meanwhile, the official liquidator shall maintain the
status quo regarding the properties of the company in his possession as may be
obtaining today. It is clarified that this order will not come in the way of
the petitioners in complying with other directives issued by the official
liquidator as provisional liquidator. Rule is accordingly made absolute. In the
facts and circumstances of the case, there will be no order as to costs.
[1936] 6 COMP.
CAS. 90 (BOM.)
T.R. Pratt (
v.
E.D. Sassoon & Co. Ltd
BEAUMONT, C.J.
AND WADIA, J.
SEPTEMBER 18,
1935
Kania, J.—The first question which arises is as to the power of
the company and its directors to borrow the money from M.T. Ltd. From the
memorandum of association of the company it is clear that there is no limit to
the borrowing power of the company as such for its business. The terms of
Clause 3 (f) further authorize the company to mortgage any property or to
secure the re-payment of any money borrowed by it in any manner as the company should
think fit. As to the power of the directors to borrow money the matter has
become complicated because certain articles of association were drawn up when
the company was formed and under which the directors were given very wide and
general powers, but these articles were not filed with the Registrar, with the
result that the articles of association contained in the schedule to the Indian
Companies Act govern the company. Article 73 is the relevant article to be
considered on this point. That article runs as follows :
"The amount for the time being remaining undischarged of moneys
borrowed or raised by the directors for the purposes of the company (otherwise
than by the issue of share capital) shall not at any time exceed the issued
share capital of the company without the sanction of the company in general
meeting."
The question for consideration is what is the proper construction of this
article. It is contended on behalf of Sassoons that the words "for the
time being" mean "when the claim is made." It is contended that
whatever be the initial borrowing by the directors that is not a matter to be
inquired into by the Court. I do not think the terms of the article justify
such a narrow construction. The article in terms fixes the limit at any time
and although the validity of the claim may have to be considered in respect of
the amount claimed on the date of liquidation I am unable to consider that the
article in terms refers only to that point of time and no other.
On behalf of the claimants it is contended that the article authorizes
the directors to borrow money and the company as such has unlimited power of
borrowing. Therefore, when the directors borrow money in excess of the amount
of the issued capital the lender is entitled to presume that the necessary
formalities authorizing the directors to borrow money have been gone through,
and the question of going through such formalities is a matter of internal
management of the company. In this connection strong reliance is placed on the
decision of Royal British Bank v. Turquand. In that case the plaintiff claimed
against the defendants, a joint stock company, on a bond signed by two
directors under the seal of the company whereby the company acknowledged
themselves to be bound to the plaintiff, in £ 2,000. The plea set out the
condition which appeared to be for securing to the plaintiff, who was a banker,
such sum as the company should to the amount of £1,000 owe to the plaintiff on
the balance of the account current, from time to time and for indemnifying plaintiff
to that amount from losses incurred by reason of the account between plaintiff
and defendants. The plea further set out clauses of the registered deed of
settlement, by which it appeared that the directors were authorized, under
certain circumstances, to give bills, notes, bonds or mortgages; and one clause
provided that the directors might borrow on bonds such sums as should, from
time to time, by a general resolution of the company, be authorized to be
borrowed. The plea averred that there had been no such resolution authorizing
the making of the bond, and that it was given without the authority of the
share-holders. The replication set out the deed of settlement further, by which
it appeared that the company was formed for the purpose of carrying on mining
operations and forming a railway. On demurrers to the plea and replication the
plaintiff was held entitled to judgment, the oblige having, on the facts
alleged, a right to presume that there had been a resolution at a general
meeting, authorizing the borrowing of the money on bond. The facts set out in
the judgment show that at a general meeting of the company it was resolved that
the directors of the company should be and they were thereby authorized to
borrow on bond such sums for such periods and at such rates of interest as they
might deem expedient, in accordance with the deed of settlement and the Act of
Parliament; and the said resolution had remained unrescinded. In the judgment
Jervis, C. J., observed as follows (p. 331):
"My impression is………….that the resolution set forth in the
replication goes far enough to satisfy the requisites of the deed of
settlement. The deed allows the directors to borrow on bond such sum or sums of
money as shall from time to time, by a resolution passed at a general meeting
of the company, be authorized to be borrowed: and the replication shows a
resolution, passed at a general meeting, authorizing the directors to borrow on
bond such sums for such periods and at such rates of interest as they might
deem expedient, in accordance with the deed of settlement and the Act of
Parliament; but the resolution does not otherwise define the amount to be
borrowed. That seems to me enough. If that be so, the other question does not
arise. But whether it be so or not we need not decide; for it seems to us that
the plea, whether we consider it as a confession and avoidance or a special non
est factum, does not raise any objection to this advance as against the
company. We may now take for granted that the dealings with these companies are
not like dealings with other partnerships, and that the parties dealing with
them are bound to read the statute and the deed of settlement. But they are not
bound to do more. And the party here, on reading the deed of settlement, would
find not a prohibition from borrowing, but a permission to do so on certain
conditions. Finding that the authority might be made complete, by a resolution,
he would have a right to infer the fact of a resolution authorizing that which
on the face of the document appeared to be legitimately done."
The facts thus show that the directors could borrow on bonds such sums,
as from time to time by a general resolution of the company they may be
authorized, and a resolution having been passed, the lender was not called upon
to make any other inquiry, but would be entitled to rely on what appeared to be
done on the face of the document as legitimately done. The judgment, however,
makes clear the distinction between a case where the directors are permitted to
borrow on certain conditions as contrasted with the case of a prohibition from
borrowing contained in the article. In other words, if the article authorizing
the directors to borrow is so worded as to give them authority or permission to
borrow on certain conditions, and ostensibly those conditions were fulfilled,
the lender would be entitled to act on the footing that the necessary steps
were taken, and the way in which the authority is given is a matter of the
internal management of the company. On the other hand, as the judgment points
out, when there is an express prohibition to borrow beyond a certain limit
contained in the article itself, the lender cannot rely on the principle of
this ease but has to satisfy himself that in accordance with the terms of the
article the prohibition does not stand in the way of the directors borrowing
the money.
This distinction is made clear and accepted by the decision in
"The case of Royal British
Bank v. Turquand was decided with reference to a company registered under 7 and
8 Viet., C. 110, and Jervis, C. J., remarked that the lender, finding that the
authority might have been made complete by a resolution would have had a right
to infer the fact of a resolution authorizing that which on the face of the
document appeared to be legitimately done. In the present case, however, the
bank would have found that, by the articles of association the directors were
expressly restricted from borrowing beyond a certain amount, and they must have
known that if the general powers vested in the directors by Article 50 had been
extended or enlarged by a resolution of a general meeting of the share-holders
under the provisions of Section 31, a copy of that resolution ought, in regular
course, to have been forwarded to the Registrar of Joint Stock Companies, in
pursuance of Section 53 of the Companies Act, and would have been found amongst
his records. Their Lordships are of opinion that the learned Recorder was
correct in holding that this case is different from that of Royal British Bank
v. Turquand:
Article 73 of the articles of
association contained in Table A is similar in terms to the article in Irvine
v. Union Bank of Australia and supports the contention that when there is a
prohibition against borrowing contained in the article, it is not a case of
internal management as decided in Royal British Bank v. Turquand. Under the
circumstances, and it being common ground that no resolution at any general
meeting of the company was passed, the directors were not authorized to borrow money
beyond the amount of the issued share capital of the company. As the original
dealings giving rise to the debt were between M.T. Ltd. and the company, it
would be convenient to consider the claim of M.T. Ltd. first. Their claim is a
money claim. Relying on Irvine v. Union Batik of Australia, the liquidator contends
that if the borrowing is ultra vires the directors, no debt binding on the
company is created except when the company ratifies it. It is urged that there
is no valid ratification of the borrowing because the attention of the
shareholders was never expressly drawn to the fact that the directors having no
authority to borrow in excess, had so borrowed and at the meeting they were
called upon to confirm that unauthorized borrowing of the directors. In this
connection also the liquidator relies on the observations in Irvine v. Union
Bank of Australia to the effect that Royal British Bank v. Turquand does not
apply. The liquidator further relies on the decision in Sinclair v. Brougham in
which it was held that if a company is not authorized to borrow any money and
if money in fact is borrowed, no claim can be maintained by the lender against
the company on the footing either of debt or of money had and received. In that
case, Viscount Haldane, L.C., while considering an unauthorized borrowing by a
company which was a statutory society and had no power to borrow, observed as
follows:
"If it be outside the power of a statutory society to enter into the
relation of debtor and creditor in a particular transaction, the only possible remedy
for the person who has paid the money would, on principle, appear to be one in
rent and not in personam, a claim to follow and recover specifically any money
which could be earmarked as never having ceased to be his property. To hold
that a remedy will lie in personam against a statutory society, which by
hypothesis cannot in the case in question have become a debtor or entered into
a contract for repayment, is to strike at the root of the doctrine of ultra
vires as established in the jurisprudence of this country. That doctrine
belongs to substantive law and is the outcome of statute, and cannot be made
different by any choice of form in procedure.''
The Lord Chancellor, after examining in detail how actions for money had
and received came into existence, held that none of the underlying principles
could be invoked as an authority for the
proposition that an action for money had and received would have lain in a case
of borrowing ultra vires the company. The other Law Lords expressed concurrent
opinions on this point. On behalf of M.T. Ltd., on the other hand, it is
contended that the whole argument of the liquidator was fallacious and was
based on a misconception of the situation. The principles laid down and the
opinions pronounced in Sinclair v. Brougham are all based on the central fact
that the borrowing by the society itself was ultra vires. In my opinion the
contention of the liquidator in this connection is wrong. According to the
general principles of law when an agent borrows money for a principal, without
the authority of the principal, but if the principal takes the benefit of the
money so borrowed or when the money so borrowed has gone into the coffers of
the principal, the law implies a promise to repay. The lender has not advanced
the money as a gift but has given them as a loan, and the principal having
received the benefit of the money, the law implies a promise to re-pay. This
view is supported by the decisions in Reid v. Rigby & Co. and Bannatyne v.
MacIver. There appears to be nothing in law which makes this principle
inapplicable to the case of a joint stock company when the borrowing power of
the company itself is unlimited. The position, in my opinion, would be that the
principal (the company) through its agents (the directors or the managing
agents) had borrowed money which the principal had not authorized the agents to
borrow. However, the money having been borrowed and used for the benefit of the
principal, either in paying its debts or for its legitimate business, I do not
think the company can repudiate its liability to repay on the ground that the
agents had no authority from the company to borrow. In my opinion, when these
facts are established, a claim on the footing of money had and received would
be maintainable. The decision in Sinclair v. Brougham is clearly based on the
fundamental fact that the society was prohibited by statute from borrowing any
money and therefore any borrowing by the company, i.e,, the principal itself
would be ultra vires. The observations of Lord Haldane, L.C., apply, in my
opinion, to that set of facts alone.
I am further supported in this
view by the decision in Troup's case, where it was held that when the directors
of a company have no power to borrow, a person lending money to the
company cannot enforce payment of it against the company unless it had been
bona fide applied to the purposes of the company. In that case the directors
having no borrowing powers, being pressed for money by their contractor,
obtained for him, on credit, £2,000 at a banker's upon their guarantee. The
contractor afterwards agreed to abandon the plant, etc., to the company, on
receiving £600 and being indemnified against the banker's claim. Subsequently
to this, the secretary of the company, with the sanction of the directors,
borrowed £500 in his own name for the company, which was applied in paying the
bankers and a judgment debt of the company. The company had the benefit of the
plant, etc. It was held that the secretary could recover the amount from the
company with interest. The principle of that case was accepted and followed in
Hoare's Case. There a sum of money had been borrowed from the lender by H, the
secretary of a company, and for which three of its directors had become
sureties. The directors had no borrowing powers, but it was admitted that the
money had been applied for the benefit of the company. Judgment had been signed
against H for the debt, and he applied to prove the amount against the company
which was being wound up. It was held that money borrowed for the company and
bona fide applied for its benefit could be recovered from the company although
the directors had no borrowing powers.
In British and American Telegraph Co. v. Albion Bank, the plaintiffs, a
telegraph company, invited applications for shares, received some in the
ordinary way and allotted some on which deposits were paid. The number allotted
was, however, insufficient to procure a settling day on the stock exchange, and
some of the directors of the company, S the promoter, and C the defendants'
manager, agreed, in order that the defendants might certify to the committee of
the stock exchange the requisite amount of shares to have been subscribed, that
an account should be opened in S's name with the defendants, and another
account in the plaintiff's name; that the plaintiffs should guarantee to the
defendants the payment of any money drawn by S, and charge with such repayment
any balance in their favour; that the defendants should have a bonus of £ 600,
and C, £ 1,000; that S should get persons to apply for shares, which would be
duly allotted, and should draw on his account for, and pay into the plaintiffs'
account the requisite deposits, taking blank transfers for the pretended
allottees. This plan was carried out. Accounts were opened, that in the
plaintiff's name with £ 1,500 really paid in ; that in 5's name with a loan of
£ 1,500 from the defendants. Same applications were obtained by S and shares
allotted to them. S thereupon drew on his account, and with the proceeds paid
the requisite deposits into the plaintiffs' account. The pretended allottees,
immediately after the shares were allotted, handed blank transfers to S.
Finally the plaintiffs' account with the defendant stood with a credit of £
24,505 and odd, made up of £1,500 really paid in and the pretended deposits.
5's account stood with a debit of £24,506 and odd made up of the sums he had
drawn and the £1,500 loan. No settling day was ever granted and the plaintiffs'
company afterwards went into liquidation under a winding-up order. A suit was
filed to recover the whole amount to the credit of the plaintiffs. The
defendants paid the bonus of £ 600 into Court, and denied liability as to the
residue. It is apparent on the facts that the directors and parties were not
authorized to do the acts for the company and the same were not therefore
binding on the company. It was, however, held that the plaintiffs were entitled
to the re-payment of £ 1,500 actually paid by them to the defendants but to no
more. This case, in my opinion, is a clear authority for the proposition that
money actually received by the company and used for its business can be
recovered by the claimants. In Halsbury's Laws of England (Edn. 2,) Vol. 5, at
p. 314, this case is relied upon for the following proposition:
"Apart from ratification, the company will be answerable for any
property which has come into its possession through the unauthorized acts of
the directors."
It is argued on behalf of the liquidator that Irvine v. Union Bank of
Australia decides to the contrary. On a closer examination of the judgment in
that case, however, I am unable to agree with this contention. There, on
December 23, 1867, the directors of the O.R. Company obtained from the bank a
letter of credit, No. 150, for £ 10,000, and on September 11, 1868, a letter
No, 141 for £ 5,000, and stated those facts in their report of October 29,
1868, which was ratified at the half yearly meeting of that date. Letter No.
150 expired on March 29,1869, but was renewed. On September 9, 1869, the
directors obtained another letter of credit, No. 153, for £ 5,000, but this act
was never assented to or ratified by the shareholders. In a suit by the
respondent bank to enforce against the appellant, as the assignee of the right,
title and interest of the O.R. Company, an equitable mortgage which had been
granted by the company to secure advances made by the bank, which, with
interest, amounted to £15,296 it appeared that half of the actually paid up
capital was never more than £8,550; that at the end of 1870 the balance due to
the bank was £8; and that the sums claimed in this suit had been advanced in
February, 1871, viz., £10,000 under letter No. 150, and £ 5,000 under letter
No. 153. The trial Court passed a decree declaring a charge for £14,984-16-8,
in favour of the bank and directed a sale in default. The property; which
originally belonged to O.R. Company, was purchased by the appellant on May 31,
1872, at a sale by auction in execution of three decrees obtained by the Bank
of Bengal and others against O.R. Company. At the date of the auction sale the
title deeds of the property were held by the respondent bank as equitable
mortgagees by deposit. The question raised in the appeal was : " What is
the sum for which the respondent bank is entitled to a charge upon the
property? " The bank contended that it was entitled to a charge for the
whole amount owing to it by the O.R. Company. It was contended by the appellant
that the charge was limited to half the amount of the actually paid-up capital
of the company, because Article 50 of the articles of association prohibited
the directors from borrowing more than half the amount of paid-up capital of
the company. The whole judgment shows that the question of the liability of
O.R. Company, for the balance of the debt, which was disallowed as a charge
against the property, was not the point in issue before the Privy Council.
Towards the end of the judgment it is specifically pointed out that—
"for the above reasons
their Lordships are of the opinion that the plaintiffs are not entitled, as
against the defendant, to a charge on the property beyond the amount of one
half of £17,100 the paid-up capital of the company."
The form of the order finally made also makes this clear. It was as
allows
"Their Lordships will, therefore, further advise Her Majesty that it
be ordered that the costs of the suit in the lower Court, both of the
plaintiffs and of the defendant respectively, as taxed by the lower Court, be
paid to the said parties respectively out of the proceeds of the sale of the property
which are now in Court, and that out of the balance of such proceeds there be
paid to the plaintiffs a sum of rupees equivalent, at the rate of exchange
current between Rangoon and England at the time of filing of the suit, to the
principal sum of £8,550, with interest thereon, at the rate of 8 per cent, from
October 5, 1872 to the date of the sale of the property, together with a
proportionate part of the accumulations, if any, of the proceeds of the sale
and that the residue of the proceeds and of the accumulations thereon, if any,
be paid to the defendant appellant."
The O.R. Company, who were parties to the original suit had not appeared
before the Privy Council at all. The question of directing an inquiry as to
what portion was bona fide used for the benefit of the company is not
considered, nor is the question of a tracting order discussed. I am, therefore,
unable to consider this decision as overriding the general principle of law
under which a principal is liable for what he actually receives, when his own
powers of borrowing or receiving are not limited. In the present case the
balance sheets and the accounts put in show that the amount borrowed by the
company from M.T. Ltd. was utilized for the business of company and the results
of the dealings were submitted every year to the share holders. It is not
suggested on behalf of the liquidator that any business done by his company was
ultra vires the company. Therefore the money received by the company from M.T.
Ltd., through the directors and managing agents was bona fide utilized for the
business of the company and the company has received the benefit thereof. I,
therefore, hold that for the reasons mentioned above M.T. Ltd. are entitled to
claim from the company the balance of the amount advanced by them. It is
further urged on behalf of M.T. Ltd., that in any event the company is liable
because, however unauthorized the directors' borrowings be, the share holders
of the company were aware of this and have ratified the same by their
acquiescence. In this connection M.T. Ltd., rely on the balance-sheets prepared
by the directors and passed by the share-holders, year after year, at their
annual general meetings from 1921 onwards. As I have pointed out, these balance
sheets clearly show the amount due by the company to M.T. Ltd., from year to
year, and it is not disputed that those balance-sheets were duly passed by the
share-holders.
In In re The Magdalena Steam Navigation Co. by the deed of settlement of a
joint stock company power was given to a meeting of two-thirds in number and
value of the share-holders, to authorize the directors to borrow money upon
debentures; and at a meeting of shareholding less than two-thirds of the shares
it was resolved that the directors should be authorized to borrow money on
debentures. The directors accordingly borrowed on debentures diverse sums of
money, which were applied in discharging the debts and liabilities of the
company. The debenture debts regularly appeared in the reports of the directors
which were confirmed at the annual general meeting of the share-holders, and
interest was regularly paid, with the consent of share-holders, until the
winding up of the company, a period of 2 years. It was held that though the debentures
were clearly improperly issued, yet as the money had been raised and applied
for the benefit of the company, and the share-holders had acquiesced for two
years, it was too late to dispute their validity. The report shows that the
holders of the debentures themselves were present at the meeting of the
shareholders, which passed the resolution, and were therefore, conscious of the
irregularity of the meeting. It is" urged that this case distinctly
supports the contention of M.T. Ltd., because the balance-sheets showed the
amount from time to time due by the company to M.T. Ltd., and also showed the
amounts from time to time paid by way of interest to M.T. Ltd. in respect of
these borrowings. It is pointed out that at no time before the liquidation any
shareholder had contended that the borrowings were not binding on the company.
On behalf of the liquidator reliance is placed on the decision in Houghton
& Co. v. Nolhard, Lowe and Wills where it was held that although a person
who contracts with an individual director or servant of a company, knowing that
the board of directors had powers to delegate its authority to such an
individual, may under certain circumstances assume that that power of
delegation had been exercised and that he may safely deal with the individual
in question as representing the company, he cannot rely on the supposed
exercise of such power if he did not know of the existence of the power at the
time he made the contract. It was also held that the doctrine of constructive
notice operates adversely to a person who neglects to inquire; it does not
entitle such a person to claim for his own advantage to be treated as having
knowledge of the facts which an inquiry would have disclosed. In my opinion the
contention of M.T. Ltd. in this connection is unsound. In order to establish a
case of ratification it appears to be essential that the party ratifying should
be conscious that an act beyond the authority of the agent had been done, and
further after notice of that fact the party consciously by an overt act agreed
to be bound by it or by acquiescence in the situation arising thereafter
allowed the business to continue. It either event it appears that consciousness
of the act done by the agent without authority must be proved, and, secondly,
it should be proved that, after notice of such unauthorized act, the principal
adopted the transaction.
The question of adopting the transaction by the shareholders passing the
balance-sheets has been considered in some English cases. In Houldsworth v. Evans
the question indirectly came to be considered and Lord Cairns, L. C, in
considering this point held that the share-holders who had agreed to the scheme
had no knowledge that the scheme which they were adopting was the scheme
originally put forward. In other words that case shows that in order to
establish a case of ratification it was essential to prove in the first
instance that the alleged assent was given on proof of consciousness of the act
having been done without authority or after full knowledge of the transaction
which was being assented to. Even in the dissenting judgment of Lord Cranworih,
who held that when the directors bad exceeded their legal powers and the
share-holders took no steps in the matter but allowed the things done to remain
unimpeached for years they must be taken to have retrospectively sanctioned
what had been done, the fact that the share-holders were aware that the
directors had been exceeding their legal powers was emphasized. In In re
Railway and General Light Improvement Co., Matzetti's Case the question again
came to be considered. In that case a certain item of expenditure was included
in a larger item in the balance-sheet and that balance-sheet was passed by the
share-holders at their meeting. The item included was shown to be unauthorized
expenditure. Brett, L. J., in considering the question of ratification observed
as follows:
"But it cannot be said that the company ratified the payment by
passing it unquestioned on the balance-sheet, unless it appeared there in such a
way as to attract the attention of persons of ordinary care. There must have
been direct notice, or notice sufficient to put a person of ordinary care upon
inquiry as to the item. The mere statements on the balance-sheet in this case
would not have put such a person upon inquiry so as to lead him to the facts.
Therefore, I think there is no evidence of ratification."
In In re Republic of Bolivia Exploration Syndicate, Ltd. the question of
waiver in respect of an ultra vires payment, by receiving and adopting the
balance-sheet, came to be considered and it was observed as follows :
"After they learned at the share-holders' meeting of December 14,
1908, that the legality of these payments was questioned, the meeting was
adjourned for the purpose inter alia of inquiries being made into the matter,
and the balance-sheet and accounts were subsequently approved by the
share-holders at the adjourned meeting….."
These observations also show that in order to establish a case of
ratification it is essential to prove knowledge of the fact that the act was
unauthorized in the first instance and that after clear notice either by
acquiescence or an overt act the shareholders of the company adopted the
transaction. Irvine v. Union Bank of Australia makes the point still more
clear. Their Lordships observed as follows:
''Their Lordships think that it would be competent for a majority of the
share-holders present (though not a majority of the share-holders of the
company), at an extra-ordinary meeting convened for that object, and of which
object due notice had been given, to ratify an act previously done by the
directors in excess of their authority; and they are not prepared to say that
if a report had been circulated before a half-yearly meeting distinctly giving
notice that the directors had done an act in excess of their authority, and
that the meeting would be asked by confirming the report to ratify the act,
this might not be sufficient notice to bring the ratification within the
competency of the majority of the share-holders present at the half yearly
meeting.
The case of In re The Magdalena Steam Navigation Co. decided nothing to
the contrary. In that case also the shareholders who passed the resolution with
insufficient majority are shown to be conscious of the deed of settlement which
provided the requisite majority of two-thirds in numbers and value of the
share-holders present at the meeting. It is not a case of the directors
exceeding their authority, but a case where a company by an irregular
resolution authorized the directors to do a thing. Having regard to these
considerations, in my opinion, the contention of M.T. Ltd., that the company by
adopting the balance-sheets had ratified the borrowings, cannot be accepted.
It is next contended on behalf of the liquidator, that the claim now made
by M.T. Ltd., wholly represents the balance of unauthorized borrowings. This
contention is based on the argument that in considering the account of
borrowings and repayments the rule in Clayton's case does not apply. In this connection
reliance is placed on the decisions in Blackburn and District Benefit Building
Society v. Cunliffe, Brooks & Co. Cunliffe Brooks & Co. v. Blackburn
and District Benefit Building Society, Blackburn and District Benefit Building
Society v. Cunliffe Brooks & Co. and Sinclair v. Brougham. Having regard to
the view I have taken, it is not necessary to decide this. As, however, an
elaborate argument was addressed to me, I think I should shortly express my
opinion on the point. I do not think the liquidator's contention in this
connection is correct. The first three authorities relied upon by the
liquidator do not help him. In those cases an attempt was made by the claimant
to show that the money advanced had been applied towards the payment of debts
and liabilities of the society properly payable by it and it was held that in
making the inquiry as to what amount had been properly applied in paying the
debts of the company the claimant could not rely on the rule in Clayton's case.
In my opinion when out of the total sum advanced by the party if a portion is
authorized and the rest unauthorized according to the principles discussed in
Sinclair v. Brougham, the excess, if it is ultra vires the company, would never
cease to be the property of the lender, and, if traced, must be returned by the
borrower. The rule of law would, therefore, be that when the directors have
borrowed without any authority and then repaid money, they should be deemed to
have done the right thing, viz., return what never belonged to the company.
Viscount Haldane, L.C. has put the proposition very succinctly in the following
words: "The Society ought in my opinion, to have been regarded, in the
absence of evidence to this effect, as having simply returned to the bankers
the latter's own money."
According to the Lord Chancellor, therefore, in the absence of evidence
to the contrary, when repayments are made by the company, they should be
treated simply as returning to the lender his own money, and which in law,
having regard to the incapacity of the company to borrow had never become the
property of the company. These observations, therefore, instead of supporting
the contention of the liquidator, support the contention of M.T. Ltd. Applying
that principle to the account it should be held that the first five lacs of
rupees, borrowed by the company from M.T. Ltd., were the authorized borrowing
and the excess was unauthorized so far as the directors are concerned.
Thereafter when in the subsequent years or the same year there are repayments,
the same should be treated as repayments of the unauthorized borrowings, i.e.,
return to M.T. Ltd., of their own money. Looking at the account in that way and
having regard to the fact that the balance now claimed is only Es.
4,91,284-0-8, it is evident that, according to the principles laid down by
Viscount Haldane, L.C, the whole of the balance now claimed by M.T. Ltd.,
represents the authorized borrowing, the unauthorized borrowing having been
repaid during the interval by the directors. This contention of the liquidator,
therefore, if necessary to be considered, must also fail.
The observations and principles contained in Sinclair v. Brougham, with
regard to making a tracing order, were fully argued. Having regard to my
finding the question does not arise, and, therefore, I do not propose to
examine the cases cited on the point. It was lastly contended on behalf of the
liquidator that no further call on the shareholders should be made. That
contention is based on Sinclair v. Brougham. I do not think that case stands in
the way of M.T. Ltd. The principles there discussed were for finding how the
assets which were the outcome of a wholly ultra vires business were to be
divided between the creditors of the ultra vires business and the share-holders
of the same ultra vires business. In the present case, M.T. Ltd., claim a sum
of money payable from the company in liquidation, and if the claim is allowed,
all the liabilities of the shareholders to satisfy the claim of a person who is
entitled to the payment of a specified sum of money must follow. I shall
consider next the claim of Sassoons. It is contended on behalf of the
liquidator that the agreement of February 28, 1928, is not valid and binding on
the company because it is a suretyship transaction. It is pointed out that in
the deed itself the company is called surety. It is common ground that at the
time of the execution of the deed no money was paid and the company had
borrowed no money from Sassoons.
It is further pointed out that in spite of the deed, and all the recitals
contained therein, M.T. Ltd. continued to be the creditors of the company, and
Sassoons to be the creditors of M.T. Ltd., for the whole amount, as before. In
the books of Sassoons the company is not shown to be their debtor nor in the
books of the company are Sassoons shown to be their creditor. The result is
that the legal relations subsisting between the parties till then were not
altered and the company and Sassoons do not assume the relationship of debtor
and creditor. The right of Sassoons is only under the deed of mortgage and
there are no other relations on which the claim put forward by Sassoons could
be sustained. As regards the clause by which the company and M.T. Ltd. jointly
and severally promised to pay the Sassoons Rs. 4,50,000, it is contended that
this provision cannot override the legal relations established by the
description given to the company in the deed itself. In any event it is pointed
out that, as the liability of the surety is co-extensive, the two clauses can
be reconciled and the deed is only a deed of suretyship. It is further
contended that if the two clauses cannot be reconciled, the first must prevail
on the general principle that in construing a deed the first clause prevails.
The liquidator contends that such a transaction of suretyship is ultra vires
the directors and also the company.
In this connection reliance is placed on the decision in Crenver etc.,
Mining Co., Ltd. v. Willyams. In that case a company, which was a mining
company, after its incorporation entered into a written contract with G, an
engineer, for the construction of certain work and erection of plants,
machinery, etc., and agreed to pay £8,500 to him. The payments under the
contract to G were to be made every month on a certificate of the engineer of
the company less twenty per cent. Considerable sums of money were advanced by
bankers to G to go on with the erection, and in January 1865, he owed to the
bankers upwards of £14,000 for moneys advanced to him. The company also owed
the bankers £1,272 and was liable for £5,000 on bills discounted by the bankers
and which formed part of the £14,000 due from the contractor. In this state of
things an indenture of mortgage was executed by G of the first part, the
company of the second part and the bankers of the third part, which recited the
contract with G and that he had since erected diverse building and machinery in
pursuance of the contract. It further recited that G had received £19,578 from
the company in part-payment and that a large sum still remained due to him from
the company under the contract; that G was possessed of machinery and that he
was indebted to the bankers for money advanced for the purposes of the
contract; that the company was indebted to the bankers in £l,272 and that G had
applied to the bankers to make him further advances to enable him to carry out
the work which the bankers had agreed to do on having the re-payment of the sum
of £14,289, the balance which was due by G to the bankers, and £1,272 which was
due by the company to the bankers, and any other sum advanced by them to G
secured as mentioned in the deed.
By the indenture, G and the company covenanted to pay to the bankers
£14,239 and £1,272 with all further sums advanced to G with interest and G
assigned to the bankers all moneys due or to become due under the contract and
all engines, etc., and the company assigned to the bankers all tin, copper,
etc., to be raised out of the mines. In a suit by the bankers to enforce the
mortgage, the trial Court refused to recognise the validity of the mortgage and
dismissed the suit with costs. The matter went in appeal and the decision is
reported in Crewer & Wheal Abraham United Mining Co., Ltd. v. Willyams. The
Court upheld the contention of the company in part and gave a declaration that
the mortgage was invalid so far as it made the property of the company a
security for the debts due by G to the bankers. So far it secured the moneys
due by the company, and so far it was a mortgage by the contractor of his
property to the bankers, it was not interfered with. It is contended by the
liquidator that the position in the present case is the same. It is further
urged by the liquidator that the question of acquiescence and ratification does
not come in because in the balance-sheets of the company it is nowhere
mentioned that Sassoons were given the security. On the other hand the
balance-sheets of the company after 1927 show that M.T. Ltd. were secured
creditors. On this ground it is contended that as the transaction is ultra
vires the company and the directors, the deed is a nullity and no claim could
be created thereunder. In the alternative it is contended that if the
transaction is put forth as a new contract made between the parties on February
28, 1928, it must fail because there was no fresh consideration.
It is therefore necessary to look to the provisions of the deed itself.
After describing M.T. Ltd., as the mortgagors, the company as sureties and
Sassoons as the mortgagees, the deed recites as follows:
" And whereas the surety required money for the purpose of and in
connection with its business and requested the mortgagor to lend and advance to
it the money so required, and whereas the mortgagor requested the mortgagee to
lend and advance to it a sum of Rs. 9,00,000 (nine lacs) in order to enable it
to lend and advance to the surety the amount required by the surety and to use
the remaining portions for its own business, and whereas the mortgagee agreed
to lend and advance to the mortgagor the said sum of Rs. 9,00,000 (nine lacs)
on the mortgagor agreeing to repay the said sum with interest thereon, and to
secure re-payment of the moiety thereof by the mortgagor depositing the
title-deeds relating to………belonging to the mortgagor and to secure re payment of
the other moiety by the surety depositing with the mortgagee by way of
equitable security the title deeds relating to the said
properties………..particularly described in the first and second schedules
hereunder written, and whereas the mortgagee hath already paid ' to the
mortgagor the said sum of Rs. 9,00,000 (nine lacs) as the mortgagor doth hereby
admit and acknowledge out of which the mortgagor hath paid to the surety a sum
of over Rs. 4,50,000 (four lacs and fifty thousand) as the surety doth hereby
admit and acknowledge………And whereas the surety also hath deposited with the
mortgagee the title-deeds of the said lands……………belonging to it and whereas the
mortgagee hath called upon the mortgagor and the surety to execute these
presents evidencing the said deposit of title deeds as such security now this
indenture witnesseth that in consideration of the amount lent and advanced to
it by the mortgagor out of the said sum of Rs. 9,00,000 (nine lacs) lent and
advanced to the mortgagor by the mortgagee (the receipt of which the surety and
the mortgagor do hereby respectively admit and acknowledge) the surety hath
already deposited with the mortgagee the title-deeds mentioned in the schedule
hereunder written relating to lands belonging to the surety to the intent that
the said lands may be equitably charged with the re-payment to the mortgagee of
the sum of Rs. 4,50,000 out of the said sum of Rs. 9,00,000 lent and advanced
to the mortgagor by the mortgagee with interest on the same from July 1, 1926,
at the rate of 6 per cent……..and the mortgagor and the surety do hereby jointly
and severally agree to re-pay to the mortgagee on October 31, 1931, the said
sum of Rs. 4,50,000 with interest thereon at the rate aforesaid and do hereby
undertake that the surety shall execute at its own costs, when called upon a
proper legal mortgage of the said lands...to secure the said sum of Rs.
4,50,000 with interest."
I am unable to accept the first argument urged on behalf of the
liquidator that because in the deed the company is described as a surety they
must be treated as sureties. While taking into consideration that description
used in the deed to arrive at a correct conclusion, it is necessary to look to
the whole deed and consider the nature of the transaction between the parties.
In my opinion the principle that the first statement in the deed should prevail
is not relevant to be considered in this connection, because what the Court is
called upon in this case is not to determine the question of grant of property,
in which case that principle is held to be applicable, but to determine the
true effect of the document. The liquidator does not dispute the correctness of
the recitals in the deed and no evidence is led to challenge the truthfulness
of the statements contained therein. There is, of course, no proof of the
statements being wrong. Looking to the whole deed, the following facts appear
to be established :— (1) that on July 1, 1926, a sum of Rs. 9,00,000 had been
advanced by Sassoons to M.T. Ltd.; (2) that out of that Rs. 4,50,000 were
admitted to be advanced by M.T. Ltd. to the Company; (3) that M.T. Ltd., had
requested Sassoons to lend the said sum of Rs. 9,00,000, to them in order to
enable them to lend and advance to the company the amount required by the
company; (4) that at the time the said sum of Rs. 9,00,000 was advanced, M.T.
Ltd., had agreed to give by way of security its own property and the company's
property; (5) that the company had already deposited with Sassoons the
title-deeds of their property; (6) that Sassoons had called upon M.T. Ltd., and
the company to execute the document evidencing the deposit of the said
title-deeds as security; (7) that in consideration of the amount lent and
advanced M.T. Ltd., had already deposited the title-deeds of their property by
way of equitable mortgage for the repayment to Sassoons of the sum of Rs.
4,50,000 out of the said sum of Rs. 9,00,000; (8) that by the document M.T.
Ltd., and the company did jointly and severally agree to repay to Sassoons on
October 31,1931, the said sum of Rs. 4,50,000 with interest; and (9) that the
company agreed to execute at its own costs, when called upon, a proper legal
mortgage in favour of Sassoons of the said lands and building to secure the
said sum of Rs. 4,50,000, acknowledged to be received by the company out of the
said Rs. 9,00,000.
In order to decide whether the transaction is ultra vires the company or
not, it is necessary to have regard to these facts read along with Cl. 3 (f) of
the memorandum of association of the company. Under that clause the company
could give a promissory note to M.T. Ltd., for the amount borrowed by the
company from M.T. Ltd., It is similarly permissible for M. T. Ltd., to ask the
company to join them in passing a promissory note to borrow money, and for the company
to join accordingly. Therefore, a promissory note signed by M.T. Ltd., and the
company, making them jointly and severally liable thereunder, is not void under
Class 3(f) of the memorandum of association. As the company is empowered to
secure the repayment in such manner as it may deem expedient, it appears to be
equally clear that to secure repayment of the amount covered by the promissory
note the company could have given an equitable mortgage on its property. It is
not disputed that the company, as such, apart from the question of directors'
authority, could have secured the repayment of the money borrowed by it by the
deposit of title deeds with M.T. Ltd., or entered into an agreement of
equitable mortgage in favour of M.T. Ltd. It is further not disputed that if
such mortgage was given, M.T. Ltd. could either assign the equitable mortgage
in favour of the Sassoons or could in their turn enter into another agreement
of equitable mortgage in respect of the same property in favour of the
Sassoons. If so, is the transaction as contained in the deed of February 28,
1928, ultra vires? . In my opinion, having regard to the terms of the deed of
mortgage, it is not a document of suretyship. A contract of guarantee, which is
the same as a contract of suretyship, is defined in Section 126, Contract Act,
as "a contract to perform the promise, or discharge the liability, of a
third person in case of his default." The person who gives the guarantee
is called the "surety," the person in respect of whose default the
guarantee is given is called the "principal debtor," and the person
to whom the guarantee is given is called the "creditor." Section 128
provides that the liability of the surety is co-extensive with that of the
principal debtor. In the present case the terms of the deed of mortgage do not
provide that in default of the payment of money by M.T. Ltd., to Sassoons the
company would make good the amount. It is also not a case of admitting or
becoming liable when no money is received, but a case where the liability is
admitted and security given for that portion which has admittedly gone into the
possession and coffers of the company. It is a case where both M.T. Ltd., and
the company jointly promise to pay the Sassoons the sum of Rs. 4,50,000 because
at the initial stage M.T. Ltd. borrowed Rs. 9,00,000 from Sassoons and the
company admitted that out of that sum a sum of Rs. 4,50,000 was actually
received by them and which they were liable to make good to M.T. Ltd. when
called upon.
The difference between the position of a surety and a joint debtor is
made clear and recognized so far back as 1866 in Buck v. Hurst and Bailey. In
that case the plaintiff lent money to A upon B's promise to become surety for
its repayment, and after the money was advanced A and B signed and delivered to
the plaintiff the following memorandum: "We jointly and severally owe you
£60." It was held that this was evidence for the jury of "an account
stated by A and B jointly." In Guild & Co. v. Conrad, the defendant
orally promised the plaintiff that if he (the plaintiff) would accept certain
bills for a firm in which the defendant's son was a partner, he (the defendant)
would provide the plaintiff with funds to meet the bills. It was held that this
was not a contract of guarantee but a case where the defendant promised to be
liable on the ground of indemnity. In other words the liability of the
defendant did not arise in the event of the firm failing to pay the bills, but,
apart from that consideration, the defendant had promised to discharge the
bills if the plaintiff for the time being accommodated the party. In the same
way in the present case, as in the event of Sassoons demanding from M.T. Ltd.
payment of Rs. 4,50,000 the company could have been called upon to pay the
amount forthwith by M.T. Ltd., the company agreed to indemnity Sassoons for the
amount and gave the security mentioned in the deed of mortgage. In my opinion,
therefore, the transaction contained in the deed of mortgage is not a
suretyship transaction as argued on behalf of the liquidator. If the joint
liability is admitted, no question of reduction of debt of M.T. Ltd. arises.
Similarly no question of making entries in the books of any of the three
companies arises. The legal effect of the deed of mortgage cannot be controlled
in any event by the presence or absence of entries the parties may make or omit
to make in their books.
The case of Crenver etc. Mining Co. Ltd. v. Willyams, is quite distinct.
In that case the company had purported to mortgage its own property for the
debt due by the contractor to the banker. It was not shown that any portion of
the money borrowed by the contractor from the banker was admitted to be paid by
the contractor to the company. Merely because in respect of the work done and
materials supplied by the contractor to the company, the contractor had an
independent claim against the company, the company cannot mortgage to the
banker its property for the payment of the whole debt of the contractor and
also further moneys to be borrowed by the contractor for his contract.
Therefore, that decision does not help the liquidator.
In my opinion it is not open to the liquidator to contend that Sassoons'
money had not gone to pay the creditors of the company because Sassoons paid
the money to M.T. Ltd. and that money was advanced by M.T. Ltd. to the company,
as admitted in the deed of mortgage, and bona fide utilized for the business of
the company as shown by its books and balance sheets. Under the circumstances,
even in the absence of any extension of the directors powers and in the absence
of acquiescence or ratification, having regard to the terms of Article 73 of
the articles of association in Table A read with Clause 3(f) of the memorandum
of association, the directors had power to give security in respect of a sum
not exceeding Rs. 5,00,000. As under the deed of mortgage Rs. 4,50,000 are
shown on the face of the document to be borrowed by the company and for which
Sassoons received a security, the transaction appears to be within the
competence of the directors and is binding on the company. The borrowing in
excess by the directors from M.T. Ltd. does not touch the validity of the deed
of mortgage or the rights of Sassoons thereunder, because if the security is
treated as given for Rs. 4,50,000, out of Rs 9,00,000 it does not follow that
the security is given for the unauthorized portion of the borrowing. This is on
the ground that when a man has the power to do the right thing and does a thing
which is capable of being taken either as the right thing or in excess of his
power to do this right thing, it should be presumed the he had done the right
thing, especially when the rights of third parties would be adversely affected
on the other construction. In my opinion equity demands that it should be held
that the security so given was given in respect of the borrowing which the
directors were empowered to borrow under Article. 73. In respect of the excess,
the claim of the claimants must stand or fall on, its own merits.
The balance-sheets of the company do not show the name of Sassoons as
secured or unsecured creditors. Nor is it shown that at any stage the attention
of all the share-holders, viz., M.T. Ltd., the ten directors and Mr. F. E.
Dinshaw was drawn to the fact that the directors were doing something which
under the articles they were not authorized to do. Under the circumstances, as
I have pointed out before, no question of ratification by acquiescence arises.
On behalf of Sassoons it is contended that as M.T. Ltd. could have obtained the
deed of mortgage from the company and could in their turn have either assigned
it or executed another document of mortgage in favour of Sassoons, it is only a
question of form and not of substance, and the transaction, under the
circumstances, should be held to be binding on the company. For this contention
reliance is placed on the decision in Seligman v. Prince & Co. In that case
P assigned his business to the company and the company agreed to indemnify him
against the debts of his old business. To satisfy these debts the company
issued debentures and gave them to certain creditors of the old business of P.
It was held that the debentures were issued not for the purpose of paying the
debts of third parties but having regard to the agreement to indemnify P., the
debentures were binding on the company and the debenture-holders were entitled
to enforce their rights against the company. It is contended by the liquidator
that no such case of indemnity is proved here. In my opinion, having regard to
the express terms of the indemnity contained in that case, that decision is not
helpful to Sassoons. On the evidence on record and the recitals in the deed of
mortgage, it is difficult to find support for the contention that an agreement
of indemnity, as contemplated in that case, was entered into.
The contention of the liquidator, that if this is a fresh agreement there
was no fresh consideration and therefore it must fail, is untenable. The
recitals in the document coupled with the admission that the sum of Rs. 45,000
out of the sum of Rs. 9,00,000 borrowed by M.T. Ltd. from Sassoons was utilized
by the company shows the consideration which moved the company to execute this
document in favour of Sassoons. It should be remembered that under the Contract
Act if Sassoons give time to M.T. Ltd. to pay their debt to Sassoons, that
would be sufficient consideration in law to sustain the promise by the company
to pay to Sassoons Rs. 4,50,000 out of the sum of Rs. 9,00,000 under the
circumstances mentioned in the deed. It is next contended that the resolution
of the directors authorizing the execution of the document is bad, and in this
connection reliance is placed on Article 77 of Table A and Section 91-B,
Companies Act. It is pointed out that Mr. A. J. Raymond was a party to the
resolution and was the managing director of Sassoons and had the full powers of
the board of directors. It is further pointed out that Sassoons is a private
limited company and all the directors of M.T. Ltd. were parties, to this
resolution. It is argued that the deed of mortgage is a tripartite agreement in
which all the three companies and directors were interested and therefore there
was no independent person to vote at the meeting of the directors held on
February, 1928. Under these circumstances it is contended that the whole voting
is bad and the resolution is void. It is pointed out that the interest of a
person as a share-holder is sufficient to disqualify him for the voting under
Section 91-B, and that the transaction is of such a nature that the Court should
very minutely scrutinise the voting at the meeting.
The contention that Sassoons is a private limited company or that Mr.
Raymond as the managing director had all the powers is quite irrelevant. As
held in Salomon v. Salomon & Co. under the law, a joint stock company is a
distinct entity; and although all the shares may be practically controlled by
one person, in law a company is a distinct entity and it is not permissible or
relevant to inquire whether the directors belonged to the same family or whether
it is, as compendiously described, a "one man company." The law
having recognized joint stock companies as distinct entities, these inquiries
and suggestions are quite irrelevant to the present contention. In my opinion
the transaction is not at all unusual, because it is conceded that if two
different documents, one from the company to M.T. Ltd. and another from M.T.
Ltd. to Sassoons had been passed, it would have been a perfect business
transaction with no unusual character. A9 pointed out in the correspondence,
the attempt on the part of the three parties was to save costs of the two
documents being prepared, and merely
because the effect and result of the two documents is entered in one document,
I am unable to hold that the transaction became an unusual one. It is not a
case of one person giving security for the debt of another, because it is
admitted by the deed of mortgage that the company gave the security only in
respect of the sum of Rs. 4,50,000 admitted to be received by it out of the sum
which originally came from Sassoons.
It is contended on behalf of
Sassoons and M.T. Ltd. that the liquidator's contention in respect of the
voting at the directors' meeting is untenable because the transaction contained
in the deed of mortgage is not-of the kind suggested by the liquidator. It is a
transaction between M.T. Ltd. and the company on the one side and Sassoons on
the other side, but it is not a contract between the company and M.T. Ltd.
Under the circumstances the directors of Sassoons alone would be disqualified
to vote, but not the directors of M.T. Ltd. As against this, it is argued by
the liquidator that without there being contract between M.T. Ltd., and the
company, how can a contract, as contained in the deed of mortgage, come into
existence? In my opinion this last argument is futile. Because the contract
contained in the deed of mortgage exists between the company and M.T. Ltd. on
the one hand and Sassoons on the other hand, it is not necessary that the
arrangement or contract between M.T. Ltd, and the company must be contained in
the same document. It is further contended against the liquidator that the
interest mentioned in Article 77 and Section 91-B, Companies Act, is some
personal interest which is not in common with the other share holders. For that
purpose reliance is placed on the decision in Seligman v. Prince 6- Co., and
the remarks at p. 629 where it is pointed out that the interest should be one
not in common with the others. Reliance is also placed on behalf of the
claimants on the terms of Section 91-B.
In my opinion there is
considerable force in the contentions urged on behalf of the claimants. I do
not think, however, that it is necessary to go into this part of the argument.
It is common ground that a resolution at a meeting of the board of directors of
the company was passed and the execution of the deed was sanctioned. The
correspondence further shows that Sassoons were informed of the board
meeting having been held. Under the circumstances the contention urged on
behalf of the liquidator is a contention in respect of the internal management
of the affairs of the company and must fail. In In re Hampshire Land Co., where
there was a common officer of the company who was present when the resolution
which was sought to be challenged as irregular was passed, this principle came
to be considered. Vaughan Williams, J., in delivering judgment observed as
follows:
"They (the share-holders) had no authority in the absence of a
properly passed resolution to borrow this money. But in that state of things,
the money having been lent by the society and received by the company, the
question which I have stated (viz., who is to bear the loss?) arises. It is not
disputed that the authority of Royal British Bank v. Tarquand is such that the
society had a right to assume in a case like this that all these essentials of
internal management had been carried out by the borrowing company, and that it
is only in case the law imputes to the society knowledge of these
irregularities that the society is not to rank……as a creditor for the amount
lent."
On the facts of the case, the learned Judge held that the knowledge of
the common officer could not be imputed to the society. Apart from the fact of
Mr. Raymond being a director of Sassoons the point is completely covered by the
remarks of Lord Hatherley in Mahony v. East Holyford Mining Co., as follows:
"On the one hand, it is settled by a series of decisions, of which
Earnest v. Nicholls is one and Royal British Bank v. Tarquand a later one, that
those who deal with joint stock companies are bound to take notice of that
which I may call the external position of the company. Every joint stock
company has its memorandum and articles of association; every joint stock
company, or nearly every one, I imagine (unless it adopts the forms provided by
the statute, and that comes to the same thing) has its partnership deed under
which it acts. Those articles of association and that partnership deed are open
to all who are minded to have any dealings whatsoever with the company, and
those who so deal with them must be affected with notice of all that is
contained in those two documents".
"After that, the company entering, upon its business and dealing
with persons external to it, is supposed on its part to have all those powers
and authorities which, by its articles of association and by its deed, it
appears to possess; and all that the directors do with reference to what I may
call the indoor management of their own concern, is a thing known to them and
known to them only; subject to this observation, that no person dealing with
them has a right to suppose that anything has been or can be done that is not
permitted by the articles of association or by the deed."
It is, therefore, not permissible in a case like this to inquire whether
there was a proper quorum for holding a meeting or whether the meeting of the
directors authorizing the execution of the deed of mortgage was properly
convened. These are matters of the internal management of the company, and
under the principles contained in Royal British Bank v. Tarquand the company is
bound by the resolution, so far as outsiders are concerned. No irregularity in
the internal management would therefore vitiate the transaction so far as an
outsider creditor is concerned. In this transaction there appears to be no such
irregularity as it was the duty of Mr. Raymond to convey to Sassoons and there
is nothing by which Sassoons could be held to be aware of any irregularity. In
my opinion, therefore, this contention of the liquidator must fail. On these
grounds, the deed of February 28, 1928, when executed, was valid, and Sassoons
have a right to recover the amount mentioned therein, according to the terms of
that deed. The result, therefore, will be that their claim as secured creditors
under the deed of February 28, 1928 should be allowed."
F.J. Collman and M.L. Manekshaw, for the Appellant.
K.M. Munshi and M.C. Setdlvad, for the Respondents.
Beaumont, C. J.—This is an appeal from an order of Kania, J., made
in the liquidation of T.R. Pratt (Bombay) Ltd. The claims in question were made
by E. D. Sassoon & Co., Ltd. and M.T. Ltd. For simplicity I will refer to
the three companies as Pratts, M.T. s, and Sassoons respectively. The learned
Judge held that the claim of Sassoons was proved, as also was the claim of M.
T, s.; admittedly, they were not additional but alternative claims, and it is
really not necessary to consider the claim of M.T. s if the claim of Sassoons
is allowed. The facts are not, I think, substantially in dispute. Pratts was
incorporated in the year 1919 with a capital of rupees five lacs, divided into
preference and ordinary shares. The memorandum of association contained power
to borrow and give security for the money borrowed, but there was no power to
give security for a debt of third parties. Originally articles of association
were prepared, but by some error they were not registered, so the company was
regulated by Table A; and under Article 73 of Table A the directors' power of
borrowing is limited, the article providing that the amount for the time being
remaining undischarged of moneys borrowed by the directors shall not exceed
rupees five lacs, i.e., the capital. M.T.s was incorporated in 1920. It was
formed by Messrs. Mehta & Co., who were the managing agents of Pratts, and
by persons interested in Sassoons; and the principal object of the company was
to finance Pratts, the view being that Pratts' capital was insufficient for the
business which they were capable of doing. M.T. s acquired practically the
whole of the ordinary share capital of Pratts, but the preference shares were
held by outside parties. At the date of the liquidation of Pratts, which was
June 22, 1932, a sum of approximately Rs. 4,92,000 was due by Pratts to M.T.s.
Sassoons were in the habit of financing M.T. s., and in the years 1926 to 1928
there was a sum of approximately Rs. 9,00,000 due by M.T. s to Sassoons. It
appears from the correspondence that in the year 1926 Sassoons commenced to
press M.T.s for security for the debt. M.T.s had an immovable property known as
the Collins Building, which was a part of the building in which Pratts carried
on business and Pratts had two immovable properties; and the correspondence
shows that Sassoons wanted to get a mortgage upon all those properties both of
M.T.s and Pratts, as security for the money due to Sassoons. Originally it was
proposed that there should be two documents—one between M.T.s and Pratts and
the other between M.T.s and Sassoons' but, in order to avoid expense it was
arranged to have one. Accordingly, on February 23, 1928, resolutions were
passed by the boards, both of Pratts and
of M.T.s., for execution by the respective companies of a security deed in
favour of Sassoons, and on February 28, 1928 the security deed in question was
executed.
That document, which is Exhibit J,
was made between M.T.s (thereinafter called the mortgagor of the first part),
Pratts (thereinafter called the surety of the second part) and Sassoons
(thereinafter called the mortgage of the third part). It recites the title to
the properties which were to be mortgaged, and then it recites that Pratts
required money for the purpose of their business and requested M.T.s to lend
them money, and that M.T.s, requested Sassoons to lend them rupees nine lacs,
in order to enable them to lend money to Pratts. Then it recites that Sassoons
had already paid to M.T.s rupees nine lacs, out of which M.T.s had paid to
Pratts rupees four and a half lacs. It is argued that in fact there is no
evidence on the record that that recital is true, namely, that the money
borrowed by M.T.s from Sassoons had to any extent gone to Pratts; but I see no
reason why we should not accept that recital as correct. There is no evidence
that it is untrue, and being an admission made by Pratts under their seal and
by the other parties, I think we can accept it as true. Then the document
recites deposits of the title deeds of the immovable properties both of M.T.s
and Pratts with Sassoons, and then the witnessing part states that Pratts have
already deposited with Sassoons the title deeds of the properties therein
mentioned with intent that the properties may be equitably charged with the
repayment to Sassoons of the sum of rupees four-and-a-half lacs out of the sum
of rupees nine lacs advanced to M.T.s by Sassoons with interest. Then M.T.s and
Pratts jointly and severally covenant with Sassoons to pay the said sum of
rupees four-and-a-half lacs with interest on October 31, 1931.
Now, we had a long and elaborate
argument from Mr. Coltman on behalf of the liquidator of the Pratts to the
effect that assuming that document was validly executed by Pratts, it was not
binding upon them. The argument is that Pratts by that document in effect
became surety for M.T.s and deposited their deed as security for M.T.s debt, and
that under the memorandum of association they had no power to do that.
It is also argued that there was no consideration in the deed in favour of
Pratts. It seems tome that the argument ignores the essential fact that as
between these three companies Pratts were primarily liable to pay at least
rupees four-and-a-half lacs, and Sassoons were entitled to receive
four-and-a-half lacs. It seems to me clear that the transaction could have been
carried out, as originally suggested by two documents. Pratts could have
mortgaged their properties to M.T.s for four-and-a-half lacs, part of the
moneys owing, and M.T.s could have assigned either absolutely by way of sale,
or by way of security, that mortgage to Sassoons and the actual result brought
about by this document could have been brought about in that way by two
documents and no question could have been raised. To hold that an arrangement
which could have been carried out by two documents cannot be carried out by one
document to which all the parties interested are parties, would be to sacrifice
substance to form. I think that the case of Seligman v. Prince & Co. is an
authority for that proposition. I agree with Mr. Coltman that that case is not
on all fours with the present case. It would be on all fours if Pratts had
agreed to indemnity M.T.s against their debt to Sassoons, but it seems to me
that that distinction is not an essential one. The essence of this case is that
as between the three parties to the deed Pratts were primarily liable to pay
and Sassoons were ultimately entitled to receive the money; and that was the
position also in Seligman v. Prince & Co. It is quite true that in the
document there is no consideration expressed in favour of Pratts. The
transaction is, I think, of the nature of a novation, that is to say a
substitution of the liability of Pratts to Sassoons for the liability of Pratts
to M.T.s and M.T.s to Sassoons; but it is not a complete novation, because
there is no release of Pratts' liability to M. T's and the subsequent books of
the companies show that Pratts were treated as debtors of M.T.s after this
document had been executed, and not as debtors of Sassoons.
But it seems to me that you cannot give effect to this document without
holding that there was an implied obligation on M.T.s part not to sue for the
amount of four-and-a-half lacs for which Pratts had given security to Sassoons
as long as this mortgage stood. It seems to me plain that if M.T.s had claimed
the money from Pratts, this mortgage, to which M.T.s were a party, would have
been a defence. I think that there was sufficient consideration in favour of
Pratts, in the implied covenant not to sue on the part of M.T.s coupled with
the fact that time was actually given. I agree, therefore, with the learned
Judge in thinking that if this document was properly executed on behalf of
Pratts, it was a valid contract. It is not in my opinion, a document of
suretyship at all. There is no ground suggested for that, except the mere
definition of Pratts as surety which amounts to very little. Then the second
point argued by Mr. Coltman on behalf of the liquidator of Pratts as against
Sassoons, though logically it comes first, is that this document was never
executed in such a way as to be binding upon Pratts. The objection arises in
this way: Section 91-A Indian Companies Act, provides that a director who is
directly or indirectly concerned or interested in any contract or arrangement
entered into by or on behalf of the company shall disclose the nature of his
interest: and Section 91-B provides that no director shall, as a director, vote
on any contract or arrangement in which he is either directly or indirectly
concerned or interested; and if he does so vote, his vote shall not be counted.
Section 91-B is not taken from the English Act. The subject-matter of
Section 91-A was for the first time included in the English Companies Act by
the Act of 1929; but there is no statutory provision in England corresponding
to Section 91-B though the subject-matter of that section, namely the right of directors
to enter into contracts on behalf of the company in which they have some
personal interest is frequently dealt, with in the articles of association.
Now, the position with regard to the directors of Pratts is this. There were
always a certain number of directors common to Pratts and M.T.s and from 1922
until 1931, that is to say, during the whole of the material period, the boards
of the two companies were common. There were in all seven directors of the two
companies. One of those directors was Mr. A. J. Raymond, and another Capt. E.
V. Sassoon, both of whom were directors of Sassoons. But Mr. Raymond was more
than a director. He was the Managing Director of Sassoons, and, under a power
in their articles Sassoons had delegated to him all the powers of the
directors. The resolution to that effect is Exhibit 9. Now it is alleged that
in 1928, when this mortgage was arranged and executed, all the directors of
Pratts were concerned or interested in the matter individually, that is to say,
apart from their position as directors of Pratts, because they were directors
of M.T.s and also shareholders in that company. The qualification for directors
of M.T.s was the holding of one hundred shares, so that all the directors of
Pratts were not only directors but also shareholders in M.T.s; and I think that
the argument that they were individually concerned or interested in this
mortgage is sound. The object of Section 91-B was clearly to ensure that a
company shall have the benefit of the judgment of an entirely independent
Board; and I do not think that the Board of Pratts was independent of M.T.s in
the matter of this contract, or that the interests of the two companies were
identical.
It was vital to M.T.s that they should get for Sassoons the security
which Sassoons were asking for, which involved a mortgage of Pratts' property.
No doubt, Pratts were in a difficulty in resisting any claim by M.T.s because
they owed M.T.s money. But an independent Board theoretically might have taken
the view that it would be better that Pratts should be wound up rather than
give security for the debt, although experience shows that directors do not
usually take such a pessimistic view of the prospects of their company. But
there is practical force in the suggestion that an independent Board of Pratts
would not have agreed to a contract in the exact terms of the contract of
February 28, 1928. An independent Board might very well have said that if
Pratts were to give their property in security to Sassoons, at any rate they
must have an out-and-out release from M.T.s of a corresponding part of their
debt, and that Pratts should not be left to rely on an implied covenant not to
sue on the part of M.T.s. It seems to me impossible to say that there was no
conflict of interest in the matter of that mortgage between M.T.s and Pratts,
although to a certain extent their interests were common. In my opinion
therefore, by virtue of Section 91-B, none of the directors of Pratts was
competent to vote for the resolution to execute this mortgage in favour of
Sassoons.
Two further questions then arise: first, is it necessary to show that
Sassoons had notice of the disability arising under Section 91-B? Secondly, if
so, had Sassoons such notice? Now, it is very well settled law in the case of
English joint stock companies that people dealing with such a company are fixed
with notice of any limitations on the power of the company contained in the
statute under which it is incorporated or in the memorandum or articles of
association; but that if it is shown that a particular act was ostensibly
authorized by the statute and the memorandum or articles of association,
persons dealing with the company are not concerned to see that the company has
put itself into a position to exercise its power properly. That is the rule
recognized in Royal British Bank v. Tarquand and a great many other cases. It
is generally expressed by saying that outside parties are not concerned with
the internal management of the company. They are not, for instance, concerned
to see that there was proper quorum of directors present, or that persons who
were apparently directors of the company had in fact been validly appointed.
Those are matters of internal management: and I have no doubt if the disability
of a director to vote upon a contract in which he was personally interested
were imposed by the articles of association, the question whether he was
personally interested in, and entitled to vote upon, a particular contract
would be regarded as a matter of internal management, with which persons
dealing with the company would not be concerned.
It is argued, however, that that position does not apply in India,
because the restriction against voting is a statutory disability, and non-compliance
with a public statute can never be a matter of internal management. At first
sight there is, I think, force in that contention; but on consideration, I
agree with the argument of Mr. Munshi, that the principle of the English cases
as to internal management ought to be applied to a case of disability of
directors arising under Section 91-B. It is clear that the reason
for the rule applies as strongly in India as in England. The reason for the
rule, I take it, is that it would be disastrous in a business community if
contracts made with companies could be impeached on account of matters known to
the company but not to the other contracting party. Moreover, I think that the
distinction between the position in England, where the disability arises under
the articles, and in India, where it arises directly under the statute, is
really more apparent than real, because under Section 8, Companies Act, 1929,
and the corresponding sections in earlier Acts, the articles of association are
made the regulations of the company, so that they bind the company by virtue of
the statute, and the only real distinction between the position in England and
in India (apart, of course, from the fact that the articles can be altered by
the company whilst the statute cannot) is that in the one case the disability
of directors arises indirectly from the statute, whilst in the other it arises
directly from the statute. In my judgment, therefore, we ought to hold that if
Sassoons had no notice of the facts giving rise to the disability of the
directors of Pratts to vote on this contract, then the contract ought not to be
impeachable by reason of Section 91-B.
The question then arises whether Sassoons had notice. It is, of course,
clear that they had notice of the terms of the contract to which they were
parties, and, therefore, they had notice that there was a conflict of interest
in relation to that contract between Pratts and M.T.s; and the only real
question, is, whether they had notice that the Board of the two companies were
common, and that, therefore, all the directors of Pratts were personally
concerned or interested in the contract.
Mr. Coltman has relied on Section 87, Companies Act, which requires a
list of directors to be filed with the Registrar, and he says that Sassoons,
therefore, had notice of who the directors of Pratts and M.T.s were; but it has
never been held, as far as I know, in the English cases that people dealing
with companies have notice of the contents of all documents on the file of a
particular company; and this Court in Pudumjee & Co. v. Moos has expressed
an opinion against that view. I therefore do not rely on Section 87. Apart from
this the first point argued in favour of the view that Sassoons had notice of
the common directorship is that they had such notice through Mr. Raymond. Mr.
Munshi on behalf of Sassoons has referred us to a good many cases which
undoubtedly show that where you have a director common to two companies you
cannot impute to both those companies all matters within the private knowledge
of the director, The cases referred to are In re Marseilles Extension Railway
Co., Exparte Credit Fonder and Mobilier of England ; In re Hampshire Land Co.
and Duck v. Tower Galvanizing Co. I may take the general rule as stated in In
re Hampshire Land Co. There the headnote, which I think accurately represents
the decision says:
"Where one person is an officer of two companies his personal
knowledge is not necessarily the knowledge of both the companies. The knowledge
which he has acquired as officer of one company will not be imputed to the
other company unless he has some duty imposed on him to communicate his
knowledge to the company sought to be affected by the notice, and some duty
imposed on him by that company to receive the notice; and if the common officer
has been guilty of fraud, or even irregularity, the Court will not draw the
inference that he has fulfilled these duties."
That case was followed, as to the last portion of it, where the common director
had been guilty of fraud or irregularity, by the House of Lords in J.C.
Houghton & Co. v. Nothard Lowe and Wills and none of the learned Lords in
that case expressed any dissent from the earlier portion of the decision, so
that I think one may take that case as good law. I am unable to say in this
case that Mr. A. J. Raymond had no duty imposed upon him to communicate to
Sassoons matters within his knowledge as a director of Pratts or M.T.s. He was
more than a director of Sassoons, he was, as I have said, the managing director
with all the powers of the directors; and having regard to the relations
between the three companies, I think it is a fair inference that he was placed
on the boards of M.T.s and Pratts largely in order that he might protect their
interests, and I have not the slightest doubt that it was his duty to
communicate to Sassoons any material fact which came to his knowledge as
director of either of those companies. Whether he ever did communicate to
Sassoons, the fact that the boards of directors of the two companies were
common, I do not know. I should think probably he did. But if he omitted to do
so, it was not, I feel sure, because he considered that he owed no duty to
Sassoons to make the communication, but because he did not realize the
importance of the fact.
Moreover, apart from the notice which Sassoons acquired through Mr.
Raymond, I think they also had notice in another way. The attestation clause to
the mortgage deed of February 1928, shows that the common seals of M.T.s and of
Pratts respectively were fixed pursuant to resolutions of the respective boards
of directors passed at meetings held on February 23,1928. Sassoons were
concerned to see that those resolutions were in order, because they were the
foundation of their title, and if they had taken the trouble to look at the
resolutions, they would have seen that they were resolutions passed by the same
persons as directors of Pratts and also as directors of M.T.s. So that Sassoons
knew in that way that all the directors of Pratts who voted in favour of the
execution of the document of February 28, 1928, were also directors, and
therefore share-holders of M.T.s, and in that way had an interest conflicting
with that of the company, and that their votes therefore could not be counted
under Section 91-B. It seems to me, in the circumstances of this case,
impossible to hold otherwise than that Sassoons had notice that the votes of
the directors of Pratts in favour of the execution of this document, under
which they claim, ought not to have been counted by reason of the provisions of
Section 91-B. If that is so, the resolution of the directors of Pratts of
February 23, 1928 is void, and the execution of the mortgage in favour of
Sassoons must also be void: see In re Greymouth Point Elizabeth Railway and
Coal Co., Ltd.
It was further argued by Mr. Munshi that even if the document was void,
it had been ratified by all the shareholders of Pratts. So far as the holders
of ordinary shares were concerned, there may have been a ratification, because
all the ordinary shares were held either by M.T.s or by their directors, but
the preference shares were held by outside parties, one of whom was Mr. F.E.
Dinshaw, who alone is suggested to have had notice. It is said that Mr. F.E.
Dinshaw was informed that Pratts had mortgaged their property to Sassoons and
that he knew that the boards of Pratts and M.T.s were common ; but not only was
he not told that there was any question as to the validity of the mortgage, but
he was not told, as far as I can see, the fact that the mortgage was not made
directly to secure a debt due by Pratts to Sassoons, but to secure a debt due
by M.T.s to Sassoons. That is to say, he was not told anything to suggest that
there was any conflict of interest between Pratts and M.T.s, Or any reason why
the execution of the mortgage should be impeached under Section 91-B. That
being so, I am clearly of pinion that the view of the learned Judge was right
as to this, and there is no force in the contention that the document has been
ratified by the share-holders. In the result, therefore, the claim of Sassoons
fails. As they had no debt apart from the mortgage-deed, they have no equity to
retain the documents of title of Pratts which were deposited with them. These
will have to be returned to the liquidator.
Then the question arises as to the claim of M.T.s. As I have Said, the
power of the directors to borrow was limited by Article 73 under which the
amount borrowed by the directors for the time being remaining undischarged must
not exceed rupees five lacs, the capital of the company. I have also mentioned
that at the time of the liquidation the amount due to M.T.s was less than five
lacs. Therefore, prima facie, there seems to be no reason for challenging the
claim of M.T.s on the ground that the incurring of the debt was ultra vires.
But it appears from the accounts put in by M.T.s that in previous years the
borrowing did go beyond five iacs and reached, in the year 1922, thirteen lacs,
and it was gradually reduced, but remained over five lacs down to the year
1928. It was argued by Mr. Coltman that by the application of some of the many
equities discussed in Sinclair v. Brougham we ought to hold that the amounts
repaid were the authorized borrowing and not the unauthorized borrowing, and we
ought, therefore, to come to the conclusion that the whole amount due at the
date of the liquidation was the unauthorized borrowing. Why we should apply any
equity in favour of his clients who borrowed the money they do not wish to
re-pay, I do not know. It is quite clear that the rule in Clayton's case has no
application where the question is between moneys borrowed inira vires, and
moneys borrowed ultra vires in respect of which the relationship of debtor and
creditor never arises. It is clear also that Pratts had the benefit of all
these moneys, and as soon as the amount due came to below five lacs, the
borrowing was authorized under Article 73.1 entirely agree with the learned
Judge that, insofar as it is necessary to rely on any presumption, the
presumption would be that the moneys repaid represented in the first place
moneys borrowed ultra vires, which never became the property of the company,
but remained the property of the lenders. I am not sure that in this case it is
necessary to rely on any presumption, because at the material date, namely the
commencement of the liquidation, Article 73 had no application, because the
debt was under the limit. I agree also with the argument of Mr. Setalvad on
behalf of M.T.s that in a case where the borrowing is ultra vires the
directors, and not ultra vires the company, the money could be recovered in an
action for money had and received. As pointed out by the Lord Chancellor in
Sinclair v. Brougham where the borrowing was ultra vires the company, no action
for money had and received lies in such a case, because the action is based on
the fiction of a promise to pay, and you cannot have a fictional promise to pay
where the promisor is not competent to give an actual promise. But that
reasoning does not apply where the borrowing is only ultra vires the directors,
so that the company can ratify the borrowing and give a. valid promise to pay.
It has further been argued by Mr. Coltman in this Court, though the point
does not appear to have been taken in the Court below, nor is it directly taken
in the memorandum of appeal, that a part of the moneys due at the date of the
liquidation to M.T.s represents interest on moneys borrowed ultra vires. There
is, I think, some force in the contention that Pratts could not be charged with
interest on moneys which for the time being had not been properly borrowed, nor
I think could such interest be recovered in an action for moneys had and
received. If that point were to prevail, I think that the liquidato of Pratts
would be entitled to an account of the moneys due to M.T.s with a declaration
that nothing was to be allowed in respect of interest on moneys borrowed which
were for the time being in excess of five lacs. But, in my opinion, we ought
not to direct such an account in this case. The point, as I have said, was not
taken in the Court below, nor has it been directly taken in the memorandum of
appeal; and in the lower Court Counsel for Sassoons tendered an account of
pratts in that ledgers of M.T.s, and
Counsel for Pratts admitted the correctness of the account and no point was
raised that any particular issue in the account was wrong. No doubt it was said
that the whole amount due on the account was not properly payable because it
all represented moneys borrowed ultra vires. But no question was raised that a
part of the moneys due at the date of liquidation to M.T.s represented interest
on moneys borrowed ultra vires. I think, in view of the admission in the Court
below as to the correctness of the account, and the fact that this question as
to interest was not argued in the Court below nor taken in the memorandum of
appeal, we ought not to direct an account now.
In the result, I agree with all
the conclusions of the learned Judge in the Court below except the conclusion
that Sassoons were not fixed with notice of the disability of the directors of
Pratts to vote on the resolution for the execution of the contract in suit.
That being so, the appeal against Sassoons will be allowed, and the appeal
against M.T.s dismissed. Declared that M.T. s are entitled to a certificate
under Rule 702, as unsecured creditors for the amount of their claim. The
appeal against M.T. s is dismissed with costs, and the liquidator of Pratts
will have liberty to pay the costs out of the assets. The appeal is allowed
against Sassoons ; but having regard to the fact that they have succeeded on
certain issues in the lower Court and in this Court, they ought not to pay the
whole of the costs in both the Courts. Instead of apportioning costs, we
propose not to vary the order of the lower Court that the costs of respondent
No. 1 should come out of the assets, but we direct respondent No. 1 to pay the
whole costs of the appeal against respondent No. 1 to the appellant.
B.J. Wadia, J.—I have come to the same conclusion. The
question for decision so far as the claim of the Sassoons is concerned, centers
round the transaction contained in the deed on mortgage, dated February 28,
1928, made between M.T.s. the Pratts and the Sassoons. The claim of the
Sassoons is based on this deed, and on the deed of 1931 between the same
parties which was, however, only by way of confirmation. The claim was rejected
by the liquidator, but the grounds far rejection have not been clearly stated
in his affidavit made in these proceedings on July 13, 1933. His
Counsel, however, contended before us that the transaction was not binding on
the company and the liquidator on the grounds, (1) that the recitals in the
deed were not accurate and did not correctly represent the actual state of the
dealings and business between the parties: (2) that the transaction was really
a transaction of suretyship under which Pratts stood surety for payment of a
debt due to the Sassoons, not by themselves, but by M.T. s, and the giving of
such guarantee was ultra vires the company; (3) that the covenant under which
the Pratts and M.T.s jointly and severally promised to repay four and a half
lacs to the Sassoons and the security for the repayment of the same were
without consideration; that the deeds were executed in pursuance of resolutions
which were not valid and binding, and that therefore the deeds were void and of
no effect.
With regard to the recitals in the deed of 1928 it was argued that the
figures of nine lacs and four and a half lacs were entirely imaginary, that
there was no evidence of a direct specific loan of four and-a-half lacs from
the Sassoons to the Pratts, that there was no connection between the account
subsisting between Pratts and M.T.s on the one hand and the account between
M.T.s and the Sassoons on the other, and that therefore no relationship of
creditor and debtor had been established to justify the covenant to repay the
four and a half lacs and the security for repayment of the sum. It is common
ground that there is no account of the Sassoons in the books of Pratts showing
the Sassoons as creditors, nor any account of Pratts in the books of the
Sassoons showing Pratts as debtors. But the relationship of creditor and debtor
in respect of the four and a half lacs is created by the deed itself, which has
been formally signed and executed by all the three companies. In that document
M.T.s have acknowledged receipt of nine lacs from the Sassoons, and Pratts
acknowledged receipt of four and a half lacs out of the nine lacs advanced by Sassoons
to M. Ts. The recitals may not be literally correct in the sense that there is
nothing on the record of the companies corresponding with what is stated in
them, but they are not false in substance. To hold otherwise would be, in my
opinion, to sacrifice substance to form. There is also a plain recital that
Pratts required four and a half lacs for the purpose of their business, that
these four and a half lacs were advanced for such purpose, and there is no
evidence before us that the money which were within the authorized limit were
not used and applied bona fide for the purposes of the company. When moneys
borrowed or acknowledged to be due are within the authorized limit, there is no
obligation upon the lending company to inquire how the moneys are about to be
used nor how in fact they have been used. In my opinion, therefore, all the
parties would be bound by this transaction, if it was otherwise valid.
I agree with the learned Judge in the Court below that this is not a
suretyship transaction. The fact of Pratts having been described as
"surety" is not conclusive as to the nature of the transaction, any
more than the stamp on the document is conclusive as to what the document
really is. Our attention was drawn to certain correspondence that passed before
the deed was executed. But all previous correspondence was in the nature of
negotiations. The negotiations became merged in the deed which after execution
was the sole repository of the terms of the transaction. Under this deed the
Pratts have not guaranteed the payment of the moneys due by M. Ts. to the
Sassoons. They have acknowledged their own liability to the Sassoons for
four-and a-half lacs, and secured repayment of that sum by deposit of
title-deeds of their property. It cannot, therefore, be said that Pratts have
made their own property security for somebody-else's debt when they have
themselves acknowledged that they are debtors to the extent of four-and-a-half
lacs, and the ruling in Crewer & Wheal Abram United Mining Co., Ltd, v.
Willyams, on which Counsel for the liquidator relies, therefore, does not
apply. It was also argued that there was no novatio as to the four-and-a half
lacs, because M.T.s have not released Pratts of their liability for that
amount, nor have the Sassoons released M.T.s. It is true that there is no
express covenant in the deed that M.T.s will not sue Pratts for four-and-a-half
lacs, but such a covenant is implied in the deed, for as a result of the deed
M.T.s could not have sued Pratts for four-and-a half lacs, at least not for
three years.
The Sassoons gave time to M.T.s to pay their debt, and an implied
forbearnce to sue M.T.s is sufficient consideration in law to sustain the
promise by Pratts to pay four-and-a-half lacs, to Sassoons which is a part of
the nine lacs advanced by the; Sassoons to M.T.s. There is a
tripartite arrangement in the nature of a novatio, and it cannot be said that
an arrangement of this kind is ultra vires the company. This brings me to the
resolution of February 23, 1928. The alleged invalidity of the resolution seems
to be the only ground which has been forcibly urged by the liquidator in his
affidavit. But it is a question which really goes to the root of the whole
matter. Counsel for the liquidator relied on Section 91 B and the proviso to Article
77 of Table A, Companies Act. Sections 91-A, 91-B, 91-C and 19-D have all been
added by Act 11 of 1914. Section 14 of the English Companies Act, which was
added in the Act of 1929, corresponds in effect to Section 91-A of our Act.
There is no section in the English Act corresponding to Section 91-B. Section
91-B provides that where a director is concerned or interested directly or
indirectly in a contract or arrangement with the company; he cannot vote on
that contractor arrangement; and the proviso to Article 77 in Table A says in
effect the same thing, except that the words in the section are "contract
or arrangement" and the words in the article are 'contract or work.'
It is clear that the interest of the director in the transaction must be
personal, and either pecuniary or material. It may be direct or indirect, but
it must be adverse to the company of which he is a director. The principle on
which it is based has' been well recognized, and it is so direct and inflexible
that even the fairness or unfairness of the transaction is immaterial. For
instance, directors have been held to be incopmetent to vote on giving a
debenture security to two of themselves in consideration! of a large sum of
money owing to them : In re Greymouth Point Elizabeth Railway and Coal Co.,
Ltd. They cannot vote on an issue of debenture to secure an overdraft account
with the bank which was guaranteed by themselves personally : Victors, Ltd. v.
Linggard. A director cannot vote on an allotment of shares to himself: In Re
Hormusji A. Wadia. The reason in all these cases is that the company is
entitled to the unbiased judgment of its directors on matters affecting the
interests of the company. As pointed out by the Vice-Chancellor in Benson v.
Heathorn, the company has a right to the entire services of its directors, a
right to the voice of every director, and a right to his advice in giving his
opinion on matters which are brought before the Board for consideration.
Section 91-B, Companies Act, enforces a statutory prohibition which is somewhat
stringent and it was pointed out in argument in Guntur Cotton Jute and Paper
Mills Co., Ltd. v. Venkatachalapati at p. 128 that the case to which it should
be applied must fall strictly within its purview.
The liquidator contends that the resolution of February 23, 1928, is
invalid because the directors of Pratts were not competent to vote on a
resolution for executing the deed, having regard to their common interest in
M.T.s and that the Sassoons had notice, actual or constructive, of the facts
going to invalidate the resolution. The five directors of Pratts, who were
present at the meeting of February 23, and voted on the resolution of 5 p.m.,
passed exactly the same resolution as directors of M.T.s in the same building
at 5-15 p. m. Moreover, the directors of Pratts were interested in M.T.s.
either as share-holders or as directors of M.T.s. One of the directors of
Pratts was Mr. A. J. Raymond, who was also the managing director of the
Sassoons. Under resolution of the Sassoons of February 3,1921, he was empowered
to exercise the full powers of the entire Board of Directors of the Sassoons,
and according to the evidence given in these proceedings by the head accountant
of the Sassoons, he was in charge of the business of the Sassoons as managing
director from its inception. There was no doubt a common Board between M.T.s
and Pratts, also a common secretary and a common management. It was argued on
behalf of the liquidator that there was no independent person present to vote
on the resolution giving the security of Pratt's property to the Sassoons, and
that all the directors, were, therefore, disqualified to vote. There was no
quorum competent to transact business, and therefore, the resolution was
invalid, and the deed executed in pursuance thereof was a nullity.
On the other hand Counsel for the Sassoons argued that the question of
the disqualification of the directors of Pratts, the question whether the
meeting was properly called, the question whether there was a proper and
competent quorum qualified to vote on the resolution, are all matters of
internal or in door management of the company, and do not affect the validity
of the contract or transaction so far as outsiders are concerned, under the
ruling in Royal British Bank v. Tarquand and a company is bound by its own
resolution. A person dealing with limited liability companies is deemed to have
notice of its memorandum and articles of association, but he is not bound to
inquire into the internal management, and will not be affected by any irregularity
of which he has had no notice. He has a right to assume that nothing has been
done or permitted to be done which is not permitted by the memorandum and
articles of association or by the statute incorporating the company itself. But
actual or constructive notice of any irregularity prevents a third person
contracting with the company from obtaining the protection of the rule in Royal
British Bank v. Tarquand namely, that all matters of internal or in-door
management must be deemed by outsiders to have been duly and properly complied
with. Such notice, as I have said, may be actual or constructive. If the
outside party is put on inquiry by reason of the circumstances under which the
transaction was put through, or by the nature of the transaction itself, or by
any other surrounding circumstances, and disregards the facts which put him on
inquiry as to the irregularity, he cannot get the benefit of the rule.
The question, therefore, in this case is whether the Sassoons had notice
of the irregularity, that is, notice of the disqualification of the directors
of Pratts to vote on the resolution, under the terms of Section 91-Bof the Act.
Mr. A.J. Raymond was a common director of all the three companies but it was
said that he was present at the meeting of February 23, 1928, in his capacity
as director of Pratts only, and that he was not bound to communicate his
knowledge of any irregularity derived in that capacity to the Sassoons. It has
been laid down in numerous cases that the knowledge of the common officer of
two companies is not necessarily the knowledge of both the companies, and
Counsel contended that it did not follow that the Sassoons therefore had notice
of every fact that happened to be known to Mr. A.J. Raymond : In re Hampshire
Land Co. In re Marseilles Extension Railway Co. Ex parte Credit Foncier and
Mobilier of England. But in J.C. Houghton & Co. v. Nothard Lowe and Wills,
Viscount Dunedin points out at p. 14 that it may be assumed that the knowledge
of directors is in ordinary circumstances the knowledge of the company, and
Viscount Sumner points out in the same case at p. 19 that what a director knows
or ought in the course of his duty to know may be the knowledge or the company,
for it may be deemed to have been duly used so as to lead to the action, which
a fully informed corporation would proceed to take on the strength of it. The
position of Mr. A. J. Raymond when he sat as a director of Pratts on February
23, 1928, is of importance in this connection. The Sassoons were vitally
concerned in the equitable mortgage which Pratts were to give to them. There
was previous correspondence between the companies about it. Mr. Raymond was not
merely a common director, but he was also present there as manager of the
business of the Sassoons, and this certainly was a business transaction, not of
Mr. A. J. Raymond, personally, but of the Sassoons. He knew or must be presumed
to have known that there was a common board of Pratts and M.T.s., though he may
not have appreciated the legal significance of that fact nor thought it his
duty to communicate to the Sassoons. There were other circumstances surrounding
the transaction which were sufficient to suggest further inquiry.
The two resolutions passed on the same day are mentioned under the seals
of M.T.s and Pratts which were affixed to the deed itself. The learned Judge in
the Court below has stated that if this transaction could have been put through
by two documents, it might as well have been put through by one, and there was
nothing unusual in its nature as a business transaction. The form may not be
unusual, but the question is not one merely of form. A transaction which may be
effected by two documents may well be effected by one, but the doubt as to the
validity of the transaction as embodied either in one document or two documents
will still remain under the circumstances which I have referred to before. In
my opinion it was Mr. Raymond's duty as manager of Sassoons for all business
purposes to act not merely for the purposes of receiving information but also
for the purpose of communicating it. It is really difficult to believe that
there was a situation on February 23, when it could be said that Mr. Raymond
had notice only as a director of Pratts and had no notice as managing director
of the Sassoons and as manager of their business. The Sassoons also were bound
to inquire into the title to their mortgage, and the title to the mortgage was
based upon the validity of the resolution. There was no independent board, and
no meeting of the shareholders was called to ratify the transaction. Therefore,
under all the circumstances, the Court can impute knowledge of the irregularity
to Sassoons. Counsel for the liquidator also relied on Section 87, Companies
Act, under which the list of directors filed with the Registrar is open to
inspection, but it was pointed out in Pudumjee & Co. v. Moos that
notwithstanding Section 87 the appointment of directors was still a matter of
the internal management of the company, and an outsider could not be expected
also to search the register for the list of directors.
I do not agree with counsel for the Sassoons that the transaction was
ratified by all the shareholders of Pratts by acquiescence. There can be a
ratification either with full knowledge of the transaction or with the
intention to adopt the transaction under any circumstances. It cannot be said
that Mr. F.E. Dinshaw, and two others who were joint holders of preference
shares on behalf of the Gwalior State had full knowledge of all the
circumstances attending the transaction or were put upon inquiry. It was argued
that if he had not the knowledge, he had the means of knowledge. But a person
can only be put on inquiry if there are facts communicated to him which may
lead to a further inquiry. He was not put on inquiry merely as a shareholder.
Reference was made to two letters of February 28, and March 3, 1928, written to
him by H.M. Mehta & Co., the managing agents, on behalf of Pratts. There
was no reply to either of them; but from that it cannot be inferred that he manifested
an intention to adopt the transaction. In my opinion the letters are not
sufficient evidence on which any Court can base a finding of standing by or
acquiescence on the part of Mr. F. E. Dinshaw.
The claim of the Sassoons is based on the deeds. The deeds not being
valid and binding for the reasons above stated, they cannot have any claim
either as secured or unsecured creditors, for the debts as well as the security
are created by the deed of 1928. This brings me to the claim of M.T.s which is
really an alternative claim. It is stated in para. 7 of the affidavit of Mr.
J.M. Taleyarkhan, dated July 7, 1933, that in the event of the claim of Messrs.
E.D. Sassoon & Co., Ltd., being admitted, M.T.s will not claim the amount
over again. Article 73 of Table A has already been referred to and I need not
recite it again. It fixes the directors' limit of borrowing at five lacs. It
was, however, argued that borrowings by Pratts were far in excess of the limit
of five lacs, but in my opinion there is no ground for assuming that the claim
now made, which is below the limit, represents the balance of unauthorized
borrowings. It was further argued that the Pratts should not, in any event, be
charged with interest on that portion of the claim, which may represent interest
on their unauthorized borrowings. That contention, however, was never put
forward in the Court below. It has not been mentioned in the judgment. It is
not taken in the memorandum of appeal. Even in the affidavit of the liquidator
himself of July 13, all that is stated is as follows :
"The petitioners contend, and I am advised with reason, that as the
payments made by the company from time to time to M. T., Ltd., in liquidation
of the account would discharge the borrowings from M.T.s Ltd., in order of time,
the ultimate balance left unpaid represents that final borrowings, and
therefore the balance shown as now due in the account of M.T. Ltd., represents
the last borrowings by the management of M. T., Ltd., in excess of the powers
of the board of directors to borrow, and therefore represent unauthorized and
ultra vires borrowings by which the company is not bound."
The claim of M.T.s was disputed on principle, and not in respect of the
quantum, in the course of the hearing, and no one contended in the Court below
that an account should be taken of what was due to M.T.s in respect of their
claim. The account of the Sassoons in the ledgers of M.T.s and the account of
Pratts in the ledgers of M.T.s were put in, and their correctness was admitted.
Counsel for the liquidator argued that all that was meant by the admission was
that the accounts were not to be formally proved. If that was so, the note
taken by the learned Judge would not have been in that form. The accounts would
only have been put in by consent without proof. I therefore hold that the
liquidator is not now entitled to have any account taken of the sum due to
M.T.s in respect of their claim. The claim is within the authorized limit. The
moneys were borrowed and used according to the balance sheets of Pratts for
their business. There was, therefore, an implied promise by the Pratts to repay
all that had gone into their coffers. In my opinion no account should now be
ordered, and the account of the claim should be taken as correct. It has been
held that an account for money had and received cannot lie in the case of an
ultra vires borrowing: Sinclair v. Brougham. But the amount claimed by M.T.s is
within the limit, and Pratts are bound to repay the sum. For these reasons I
agree with the conclusion that the claim of the Sassoons should be rejected,
and the claim of M.T.s allowed. In the result the appeal would be allowed so
far as the claim of the Sassoons is concerned, and dismissed so far as the
claim of M.T.s is concerned. I agree with the order for costs made by the Chief
Justice.
[1980] 50 COMP. CAS. 722 (PAT.)
v.
State Bank of
B.P. JAH AND NAGENDRA PRASAD SINGH, JJ.
APRIL 17,
1978
R.S. Chatterjee, H.R. Das, K.D.
Chatterjee and Chunni Lal for the Appellant.
K.D. Chatterjee, Chunni Rai,
Ramnandan Prasad, Rajendra Kishore Prasad R.S. Chatterjee, H.R. Das, and K.K.
Ghosh for the Respondent.
N.P. Singh J.—The appellants in these two appeals were
defendants in a money suit which had been filed on behalf of the Bank of Bihar
Ltd. (hereinafter to be referred to as "the bank") for a decree of
Rs. 1,82,728.99 along with interest pendente lite and future.
According to the respondent-bank,
on March 5, 1947, M/s. Indian Electric Works Ltd. (hereinafter to be referred
to as "the company"), defendant No. 1, which is appellant in F.A. No.
409 of 1967, approached the bank for a loan of rupees five lakhs for the
purpose of its business and a sum of rupees five lakhs was advanced to it. The
company executed a promissory note for rupees five lakhs in favour of the bank.
The promissory note used to be renewed from time to time and the
defendent-company used to make payments towards the amount advanced to it. Shri
Binay Krishna Rohatgi, who was the father of appellants Nos. 1 to 6 and husband
of appellant No. 7 in F.A. No. 386 of 1967, guaranteed the repayment of the
aforesaid loan by executing guarantees in favour of the bank. On April 24,
1953, again a promissory note for Rs. 2,50,000 was executed by the company and
the aforesaid Shri Binay Krishna Rohatgi executed a guarantee for that amount.
On June 23,1956, the company again renewed the pronote for Rs. 1,50,000 (Ex.
1c), which was the amount due against it, and Shri Binay Krishna Rohatgi
executed a guarantee for the repayment of the said loan (Ex. 3b). Finally, on
June 23, 1959, the last pronote. was renewed by the company for an amount of
Rs. 1,62,000 (Ex. 1d), agreeing to pay interest thereon at the rate of 7½% per
cent. per annum. Shri Binay Krishna Rohatgi again executed a guarantee for that
amount in favour of the bank (Ex. 3c). This amount was, however, not paid by
the company and ultimately the bank filed the money suit in question on May 12,
1962. Till that date the total dues including interest was at Rs. 1,82,728.99.
Along with the plaint, the details of the transactions from 1947 up to 1962
were also annexed. As on the date of the suit the aforesaid Shri Binay Krishna
Rohatgi was dead, his heirs, who are appellants in F.A. No. 386 of 1967, were
impleaded as defendants Nos. 4 to 16.
Written statements were filed on behalf of the company as well as on
behalf of some of the heirs of Shri Binay Krishna Rohatgi. The defence of the
company in a nutshell appears to be that the managing director of the
defendant-company had no authority to execute the pronote (Ex. 1d), in the
absence of a resolution duly adopted by the board of directors authorising the
managing director to borrow Rs. 1,62,000, and, as such, it was not binding on
the defendant-company. The heirs of Shri Binay Krishna Rohatgi, the guarantor,
have questioned their liability in respect of the transaction in question
primarily on the ground that the said guarantee was offered by Shri Binay
Krishna Rohatgi in his individual capacity and it cannot be enforced against
his heirs who were neither party to the transaction in question nor had any
concern with the same. At the trial, parties produced documents and examined
witnesses in support of their respective contentions.
The learned subordinate judge, on a consideration of the materials on the
record, came to the conclusion that the company is liable to repay the loan in
question. He also held that Shri Binay Krishna Rohatgi had executed the letter
of guarantee (Ex. 3c), whereby on default by the principal debtor, he took upon
himself the liability to pay the sum of Rs. 1,62,000 with interest thereon and
in such a situation, his liability was co-extensive with the liability of the
principal debtor, and as such, his heirs cannot be absolved from that
liability. On that finding, he passed a decree against the company (defendant
No. 1) as well as against the heirs of Shri Binay Krishna Rohatgi, i.e.,
defendant Nos. 4 to 10 and 12 to 16. In the appeals filed before this court the
aforesaid findings have been challenged on behalf of the appellants in the two
appeals on the question of fact as well as on the question of law.
The relevant portion of the promissory note dated June 23, 1959 (Ex. 1d),
is as follows :
"On Demand we jointly and severally promise to pay the Bank of Bihar
Ltd. or order at Patna or Calcutta the sum of rupees one lakh sixty-two
thousand only for value received with interest at 3½ per cent. over the Reserve
Bank of India rate with a minimum of 7½ per cent. per annum with monthly
rests."
This was signed by the chairman of the company. It also bears the
signature of one Shri Anandi Lall Poddar as the director of the company. I
propose to first deal with the question as to whether in the facts and circumstances
of the present case the company is liable to repay the amount in question.
Learned Advocate-General appearing on behalf of the company submitted
that as the pronote (Ex. 1d) was executed by the chairman of the company
without there being a resolution of the board of directors authorising him to
execute the said pronote, the company is not liable to pay the amount in
question. In that connection, learned Advocate-General drew our attention to
the earlier pronotes which were executed on February 7, 1950 (Ex. 1), on
February 3, 1953 (Ex. 1a), on April 24, 1953 (Ex. 1b) and on June 23, 1956 (Ex.
1c), as well as to the two resolutions of the board of directors dated February
23, 1953 (Ex. 9c), and April 4, 1956 (Ex. 9b), in support of his contention
that the board of directors had passed resolutions authorising the managing
director of the company to borrow the specified sum as loan from the bank and
authorising him to execute necessary documents as required by the bank. It
appears that the resolution dated February 23, 1953, is in respect of the
aforesaid pronote which was executed on February 3, 1953 (Ex. 1a), and the
resolution dated April 4, 1956, is in respect of the pronote which was executed
on June 23, 1956 (Ex. 1c). No similar resolution has been produced in respect
of the pronote in question which was executed on June 23, 1959 (Ex. 1d). Now,
the question is as to whether, in the absence of a reselution authorising the
person who executed the pronote in question, or due to non-production of any
such resolution even if it may be in existence, it can be held that the bank is
not entitled to realise the amount in question. In this connection, learned
Advocate-General made reference to s. 292(1)(c) of the Companies Act, 1956,
hereinafter referred to as "the Companies Act", and submitted that
there must be a resolution of the board of directors authorising the managing
director to borrow any amount from the bank or any other company. Sections 291
and 292 of the Companies Act specify the power of the board of directors while
managing a company. It places certain restrictions on the power of the managing
director. In the present case, there is no dispute that the initial loan of
rupees five lakhs was taken after a resolution by the board of directors of the
company. From the account book, a copy whereof has been produced on behalf of
the bank, it appears that from time to time payments were made by the company
and after every three years a new pronote was executed for the balance amount.
On June 23, 1959, the total amount due to the bank, as shown in the account of
the bank, was about Rs. 1,62,000 and the managing director of the company
executed the pronote in question for that amount on behalf of the company. The
original pronote bears the seal of the company as well. D.W. 1, who is the law
clerk of the company, has stated that to his knowledge, there was no resolution
of the year 1959, by which Shri Anandi Lall Poddar, who has executed the
pronote in question, has been empowered to execute the same or renew it. The
minutes book containing the resolution of the board of directors of the company
for the year 1959 has not been proved and marked as an exhibit in the case.
Perhaps, it was only filed and later withdrawn from the record of the case. In
my opinion, in such a situation, on the statement of D.W. 1 only, it will not
be proper to infer that there was no resolution by the board of directors
authorising the managing director to execute the pronote in question. Even if
it is assumed that there is no resolution, in my view, the right of the bank to
realise the amount which it has advanced to the company cannot be defeated on
this ground. It is not the case of the company that Shri Poddar, its managing
director, had executed the pronote in question in his personal capacity,
rather, it is almost admitted that he had executed the pronote in question in
favour of the bank on behalf of the company. After the execution of the pronote
in question, a receipt had been granted on behalf of the company saying that it
had received from the bank a sum of Rs. 1,62,000, on account of consideration
money of pronote executed by them in favour of the bank dated June 23, 1959.
This has been marked Ex. 2a. In such a situation, it is not open to the company
to say that the managing director of the company was not duly authorised to
execute the pronote in question. Any defect, for which the company (sic) of the
bank for realisation of the amount in question. This aspect of the matter has
been considered in the cases of T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon &
Co. Ltd. [1936] 6 Comp Cas 90 (Bom) and Shri Kishan Rathi v. Mondal Brothers
and Co. (P.) Ltd. [1967] 37 Comp Cas 256 (Cal). In the former case [1936] 6
Comp Cas 90 (Bom), it was held that under the general principle of law when an
agent borrows money for a principal without the authority of the principal, but
if the principal takes benefit of the money so borrowed or when the money so
borrowed have gone into the coffers of the principal, the law implies a promise
to repay. In that connection it was further observed that there appears to be
nothing in law which makes this principle inapplicable to the case of a joint
stock company and even in cases where the directors or the managing agent had
borrowed money without there being authorisation from the company, if it has
been used for the benefit of the company, the company cannot repudiate its
liability to repay. The aforesaid view of Kania J. of the Bombay High Court
expressed in connection with a liquidation proceeding was also affirmed by a
Bench of that court, on appeal, and it was pointed out by Beaumont C.J. that
distinction has to be drawn between the cases where the borrowing is ultra
vires the directors and not ultra vires the company and in such cases the money
could be recovered in an action for money had and received. The aforesaid
judgment was also affirmed by the Privy Council in the case of T.R. Pratt
(Bombay) Ltd. v. M.T. Ltd. [1938] 8 Comp Cas 137 (PC). In the case of Shri
Kishan Rathi v. Mondal Brothers and Co. (P.) Ltd. [1967] 37 Comp Cas 256 (Cal),
s. 292 of the Companies Act was itself considered in connection with a dispute
as to whether there was a resolution by the board of directors empowering the
director to take loans. It was pointed out that in such a situation the dispute
being in respect of an internal management, the onus was on the company to
prove that the director had no authority to borrow and any such violation shall
not defeat the bona fide claim of the creditor against the company because the
creditor can assume that all requirements of internal management have been
complied with.
It was then submitted that Shri Anandi Lall Poddar, who executed the
pronote in question, had not executed the said pronote as the managing director
of the company, but only as chairman and the chairman of the company had no
such power. In my opinion, this submission is against the pleading of the
company itself. In para. 7 of its written statement it has been stated that the
managing director of the company had no authority to execute the pronote in the
absence of a resolution duly adopted by the board of directors authorising the
managing director to borrow Rs. 1,62,000. Thus, it is admitted that on the
relevant date Shri Anandi Lall Poddar was also the managing director of the
company and he executed it in that capacity. Witness No. 3 examined on behalf
of the company (D.W. 3) has stated that Binay Babu, who was the managing
director of the company, was ill in the year 1959, and, as such, Anandi Lall
Poddar, the chairman of the company, began to look after the business of the
company. In view of the statement made in the written statement, it is not open
to the company to urge that the pronote in question was not executed by the
managing director of the company. Accordingly, I hold that, in the facts and
circumstances of the case, the company is liable to pay the amount in question
which had been advanced to it by the bank and the learned subordinate judge has
rightly held that the company cannot repudiate its liability in respect of the
transaction in question.
So far as the appeal on behalf of the heirs of Shri Binay Krishna
Rohatgi, the guarantor, is concerned, learned counsel appearing for the
appellants has challenged the judgment and decree of the court below on several
grounds. While disputing the liability of the appellants in question, it was
also urged that, in the facts and circumstances of the present case, the
company itself was not liable to pay the amount in question. Learned counsel
urged that in view of s. 64 of the Negotiable Instruments Act, 1881, the
promissory note in question should have been presented to the company by the
bank for payment, and, as in the present case merely a notice was given by the
bank to the company, it will not be deemed to be a presentation within the
meaning of that section and the suit could not have been filed. Section 64 of
the Negotiable Instruments Act requires the holder of a pronote to present it
for payment to the maker thereof and it further provides that in default of
such presentment the parties thereto are not liable thereon to such holder.
But, in that very section, there is a clause in the nature of a proviso which
says that "Where authorised by agreement or usage, a presentment through
the post office by means of a registered letter is sufficient".
Admittedly, the demand was made by registered letters which have been proved
and marked as Exs. 5 series. The bank has also produced a letter dated June 23,
1959, of the company forwarding the pronote in question and waiving the right
of the presentment under the Negotiable Instruments Act. It has been marked as
Ex. 7. In view of this document by which the right of presentment was waived,
it cannot be urged that the suit was premature because the pronote was not
physically presented for payment before filing of the suit.
Learned counsel then submitted that as the guarantee (Ex. 3-c) was
without consideration, the agreement between Shri Binay Krishna Rohatgi and the
bank itself was void in view of s. 25 of the Contract Act. In this connection,
it was urged that even the pronote itself was executed without there being any
consideration for the same, and, as such, it cannot be enforced in law. Section
2(d) of the Contract Act provides that when at the desire of the promisor, a
promisee or any other person does or abstains from doing or promises to do or
abstain from doing something, such act or abstinence or promise is called a
consideration for the promise. It was submitted that although a pronote was
executed on June 23, 1959, actually no amount was paid on that day by the bank.
In my opinion, this argument is misconceived. From the copy of the ledger of
the bank it appears that about Rs. 1,62,000 was shown to have been deposited on
the basis of the pronote and then shown to have been withdrawn the same day. In
the eye of law this will amount to payment of Rs. 1,62,000 by the bank to the
company on the basis of the pronote in question. This will be deemed to be a
consideration within the meaning of s. 2(d) of the Contract Act. In the case of
Ibrahim Mallick v. Lalit Mohan Roy, AIR 1924 Cal 388 Rankin J. (as he then was)
held in a more or less similar situation that the fresh promise in respect of
the old debt would be valid and enforceable and it is not hit by s. 25 of the
Contract Act. The same will also be the consideration for the guarantee by Shri
Binay Krishna Rohatgi. Section 126 of the Contract Act provides that a contract
of guarantee is a contract to perform the promise or discharge the liability of
a third person in case of his default. Section 127 of that very Act says that
anything done, or any promise made, for the benefit of the principal debtor may
be a sufficient consideration to the surety for giving the guarantee. As it
will be deemed that the bank had advanced on that day Rs. 1,62,000 to the
company, that will be an act done for the benefit of the company and can be
held to be sufficient consideration for giving the guarantee.
Even if it is assumed that as nothing was advanced to the company at the
time of the execution of the promissory note and guarantee, the agreements in
question were in respect of a past debt, still the two agreements cannot be
held to be without consideration. Under s. 2(d) of the Contract Act not only
some act done for the promisor but even abstinence on the part of the promisee
will be deemed to be a good consideration. But for the execution of the pronote
the bank in the usual course would have filed the money suit, as the pronote
which was executed in the year 1956 was getting time-barred. In the case of
Alliance Bank Ltd. v. Broom [1864] 2 Drew. & Sra. 289 ; 62 ER (II) 631, it
was held :
"It appears to me, that when the plaintiffs demanded payment of
their debt and, in consequence of that application, the defendant agreed to give
certain security, although there was no promise on the part of the plaintiffs
to abstain for any certain time from suing for the debt, the effect was that
the plaintiffs did, in effect, give, and the defendant received, the benefit of
some degree of forbearance ; not, indeed, for any definite time, but, at all
events, some extent of forbearance. If, on the application for security being
made, the defendant had refused to give any security at all, the consequence
certainly would have been that the creditor would have demanded payment of the
debt, and have taken steps to enforce it. It is very true that, at any time
after the promise, the creditor might have insisted on payment of his debt, and
have brought an action ; but the circumstances necessarily involve the benefit
to the debtor, of a certain amount of forbearance, which he would not have
derived if he had not made the agreement."
In the case of Fullerton v.
Provincial Bank of Ireland [1903] AC 309 (HL), after making reference to
the Alliance Bank's case [1864] 2 Drew. & Sm. 289 ; 62 ER (II) 631, at page
313, it was observed that there need not be an arrangement for forbearance for
any definite or particular time ; it can be inferred from the surrounding:
circumstances that there was an implied request for forbearance for a time, and
that forbearance for a reasonable time was in fact extended to the person who
asked for it. In such a situation any document executed will be deemed to be
for consideration, the consideration being abstinence on the part of the
creditor. In the case of Glegg v. Bromley [1912] 3 KB 474 (CA), at page 491, it
was observed :
"I think that where a creditor asks for and obtains a security for
an existing debt the inference is that, but for obtaining the security, he
would have taken action which he forbears to take on the strength of the
security, and I cannot think that this inference is rebutted by the fact that
the reason why he asks for further security is his desire to obtain a benefit
for himself at the expense of another creditor who may shortly be in a position
to take the subject-matter of the proposed security in execution."
The same view was expressed in the case of Miles v. New Zealand Alford
Estate Company [1885] 32 Ch D 266 (CA) and in the case of Anant Krishna Modak v. Sarasvatibai Padmanabh
Shetti, AIR 1928 Bom 316. On behalf of the appellants, however, reliance
was placed on the cases of Pestonji Manekji Mody v. Bai Meherbai, AIR 1928 Bom
539, and Prem Singh v. State of Rajasthan, AIR 1964 Raj 75. In my opinion, the
aforesaid two cases are of no help to the appellants. In the facts and
circumstances of the case, it has to be held that the pronote was executed by
the company for consideration. If the pronote was executed for consideration,
then, in view of s. 127 of the Contract Act, the letter of guarantee will also
be deemed to have been executed for consideration, because anything done for
the benefit of the principal debtor, shall be sufficient consideration to the
surety for giving the guarantee (Kali Charan v. Abdul Rahman, AIR 1918 PC 226;
50 IC 651).
Learned counsel then urged that the bank has filed the suit in question
basing its claim on the aforesaid promissory note dated June 23, 1959, and Sri
Binay Krishna Rohatgi had never guaranteed repayment of the amount covered by
that promissory note ; by his letter of guarantee dated June 23, 1959 (Ex. 3c),
he had only guaranteed repayment of any amount which may be found to be due on
the basis of the account of the company with the bank. In the plaint it has
been stated in detail as to how the company opened its account in the year 1947
and a sum of rupees five lakhs was advanced and a pronote was executed by it in
favour of the bank for that amount. It has been further stated as to how from
time to time some payments were made and roughly after every three years a
fresh pronote was executed on behalf of the company for sums standing due on
that date and fresh letters of guarantee were executed by Shri Binay Krishna
Rohatgi and as to how ultimately, the pronote and letter of guarantee in
question were executed. In my opinion, the suit is for the realisation of the
amount which had been advanced by the bank as loan to the company. The
pro-notes were executed from time to time by the company making itself liable
to repay the amount shown as dues in the account of the bank. Apart from that
it is not correct to urge that Shri Binay Krishna Rohatgi had only guaranteed
to discharge the liability of the company in respect of the amount which had
been withdrawn by it from the account of the bank. He had guaranteed to
discharge the liability of the company in respect of the amount which had been
advanced to it through the account or on the basis of a pronote. The relevant
portion of the letter of guarantee is as follows :
"1. That on default of the constituent to discharge or pay you on
demand all his/their liabilities or moneys already advanced or to be advanced
paid or incurred by you on such account, or at any time or from time to time
advanced paid or incurred to or for the use or accommodation of or on the
credit of the constituent (whether on current, cash credit, pronote and/or
overdraft or letters of credit accounts, or for bills discount or in the form
of liabilities against bills, bills of exchange, promissory notes and/or other
negotiable securities drawn, accepted or endorsed by him or otherwise
howsoever) I/we shall pay you on demand and discharge all such moneys and
liabilities together with all interest, discount, commissions and other banking
charges, law and other costs, charges and expenses, which may be or become
payable in connection therewith, and my/our liability to pay and discharge the
same shall, on such default of the constituent, be co-extensive with that of
the constituent provided nevertheless that my/our liability on this guarantee
shall not exceed in the whole the sum of Rs. 1,62,000 (Rs. one lakh sixty-two
thousand) which you will be entitled to realise from me/us with interest at the
rate of 7½ per cent. per annum from the date on which demand for payment shall
have been made by you upon me/us."
From a bare reference to para. 1 of the letter of guarantee (Ex. 3c) it
is obvious that the guarantor had guaranteed on default of the constituent to
discharge or pay the bank the liabilities of the company, advanced to it at any
time whether on current, cash credit, pronote or overdraft or in the form of
liabilities against bills, promissory notes or other negotiable securities,
drawn, accepted or enforced by the company.
It was also submitted that the pronote (Ex. 1d) as well as the letter of
guarantee (Ex. 3c) have not been proved in accordance with law. In that
connection, our attention was drawn to the evidence of witness No. 3 examined
on behalf of the plaintiff (P.W.3), who has proved the two documents, saying
that they bear the signature of Shri Anandi Lall Poddar and Shri Binay Krishna
Rohagti, respectively. About the pronote, he has stated that it was executed in
his presence. It was submitted that this witness had no occasion to be familiar
with the signature of Shri Binay Krishna Rohatgi as he was a clerk in the bank
at Patna. There is no merit in this submission. P.W. 3 has stated in his
evidence that he had seen Shri Binay Krishna Rohatgi executing the earlier
pronotes of the years 1953 and 1956, as managing director of the company, which
have been proved by him and have been marked as Exs. 1a, 1b and 1c. As such, he
was a competent witness to prove the signature of Shri Binay Krishna Rohatgi
over the letter of guarantee (Ex. 3c). Apart from that, both the documents,
i.e., the pronote (Ex. 1d) and the letter of guarantee (Ex 3-c) have been
exhibited without objection. This was checked up with reference to the list of
exhibits of the court below. Having not raised an objection in the court below
it is not open to the appellants to challenge the mode of proof of these
documents before this court.
Learned counsel then urged that the bank has simply annexed a copy of the
accounts for the period from 1947 up to the year 1962, along with the plaint
and none has proved the entries in the ledger of the bank in accordance with
the requirement of s. 34 of the Evidence Act which requires that every entry in
the books of account regularly kept in the course of business to be proved
before a claim can be based on the basis of those entries. It is settled law
that if the claim against a defendant is based on the entries in the books of
account maintained by the plaintiff, it has to be proved that such books of
account were kept in the regular course of business and then the relevant
entries have to be proved on behalf of the plaintiff. But that procedure is not
to be followed in the case of banking companies for whom there is a special law
of evidence known as the Bankers' Books Evidence Act, 1891. Section 4 of that
Act is as follows :
"Subject to the provisions of this Act, a certified copy of any
entry in a banker's book shall in all legal proceedings be received as prima
facie evidence of the existence of such entry, and shall be admitted as
evidence of the matters, transactions and accounts therein recorded in every
case where, and to the same extent as, the original entry itself is now by law
admissible, but not further or otherwise."
In the instant case, this formality has been complied with. A certified
copy of the ledger of the bank containing the relevant entries for the period
between 1947 and 1962, certified to be a true copy of the transaction by the
manager of the bank has been filed. It has been marked as Ex. 8. It may be
mentioned that this document has also been marked as an exhibit without
objection.
According to the appellants merely on the basis of these entries no
liability can be saddled against the company or the guarantor, Shri Binay
Krishna Rohatgi because s. 34 of the Evidence Act says in unmistakable terms
that such entries by themselves shall not be sufficient evidence to charge any
person with liability. But, in the instant case, the entries are not the only
evidence on behalf of the bank. I have already pointed out that on behalf of
the bank, apart from the entries in its account book, reliance has been placed
on the pronote (Ex. 1d) which was executed on behalf of the company, as well as
on the receipt for Rs. 1,62,000 (Ex. 2a), which was granted on behalf of the
company, saying that the aforesaid amount has been received from the bank. The
witnesses examined on behalf of the bank have also stated about the advance of
the amount to the company and about its having operated the account in
question. Accordingly, I hold that the liability of the company for repayment
of the loan in question and in case of default by the company the liability of
Shri Binay Krishna Rohatgi for repayment of the loan is established.
Now, another question which is important for the purpose of the appeal
filed on behalf of the heirs of Shri Binay Krishna Rohatgi is as to whether the
liability of Shri Binay Krishna Rohatgi can be enforced even against his heirs
who have been impleaded as defendants to the suit after his death. Learned
counsel appearing for those heirs, however, did not challenge that the
liability which had been undertaken by Shri Binay Krishna Rohatgi, will amount
to a debt in the eye of law. But he made reference to art. 290 of Mullet's
Principles of Hindu Law and submitted that in the instant case there is no evidence
or allegations that Shri Binay Krishna Rohatgi had incurred the liability in
the nature of a debt either for family purposes or for his own personal
benefit, so as to pass on the liability to his heirs even after his death. In
my opinion, whatever may be said about following the property which were joint
family properties at the time of the death of Shri Binay Krishna Rohatgi, there
cannot be any doubt that the properties which have passed on his death to his
heirs can certainly be followed while enforcing the liability under the
guarantee. Apart from that, so far as the present case is concerned, Shri Binay
Krishna Rohatgi in para. 2 of the letter of guarantee (Ex. 3c) had stated:
"in the event of my dying or becoming under disability the liability of my
executors, administrators or legal personal representatives and of my estate
shall continue until the expiration of three calendar months' notice in writing
given to you by such legal personal representatives to determine this
guarantee". In that view of the matter the bank can enforce the guarantee
given by Shri Binay Krishna Rohatgi against the properties which have devolved
after his death on his heirs. It cannot be enforced either against the personal
properties of his heirs or their shares in the joint family properties in view
of the clear and unambiguous terms of the letter of guarantee itself. Learned
subordinate judge had not dealt with this aspect of the matter and has passed a
decree jointly against the company as well as the heirs of Shri Binay Krishna
Rohatgi.
Lastly, it was urged that the learned subordinate judge could not have
passed a decree for Rs. 1,82,728.99, the amount claimed in the plaint, so far
as these appellants are concerned. This amount includes Rs. 1,62,000 plus the
interest in respect of that amount since the date of the execution of the
pronote and till the filing of the suit. According to the appellants, Shri
Binay Krishna Rohatgi had undertaken by the guarantee to pay in the event of
default by the company an amount not exceeding in whole the sum of Rs. 1,62,000
with interest at the rate of 7½ per cent. per annum "from the date on
which demand for payment shall have been made" by the bank to him. From
the plaint it appears that on some of the heirs of Shri Binay Krishna Rohatgi
notices of demand were served in 1960-61, on different dates ; about some it is
the admitted position that it was not served at all. In such a situation, the
liability to pay interest shall arise only if it is proved that demand for
payment had been made on them so as to make them liable to pay interest. As in
the present case no demand has been made on some of the heirs, and demand has
been made on different dates on the remaining heirs which may lead to a lot of
complications, I direct that under the terms of the guarantee the demand will
be deemed to have been made against all the heirs of Shri Rohatgi since the
date of the filing of the suit. The stipulated rate of interest shall run from
this date. In that view of the matter, they shall not be liable to pay interest
for the period from the date of the execution of the pronote to that of filing
of the suit. Learned counsel appearing for the bank had to concede that under
the terms of the guarantee Shri Binay Krishna Rohatgi or his heirs cannot be made
liable to pay interest prior to the demand having been made on them for
repayment of the amount which was payable by the company and for this period
only the company will be liable in terms of the pronote itself. Accordingly,
while affirming the judgment and decree of the learned subordinate judge so far
as the company is concerned, I modify the said judgment and decree in respect
of the appellants in F.A. No. 386 of 1967 on two points. Firstly, the heirs of
Shri Binay Krishna Rohatgi shall be liable to pay in accordance with the terms
and conditions of guarantee an amount of Rs. 1,62,000 along with interest with
effect from the date of the filing of the suit, and secondly, that in execution
of the decree only such properties can be followed which have devolved upon
these appellants after the death of Shri Binay Krishna Rohatgi.
In the result, F.A. No. 409 of 1967, filed on behalf of the company is dismissed, whereas F.A. No. 386 of 1967, filed on behalf of the heirs of Shri Binay Krishna Rohatgi is allowed in part to the extent as indicated above. The parties shall bear their own costs.
Jha J.—I agrees.
Section
269
Appointment
of director/managing director
[1991] 71 Comp. Cas. 265 (KEr.)
v.
Government of
K.P. Radhakrishna Menon J.
October 30, 1990
K.P.
Dandapani for the Petitioner.
K.B.
Subhagamoni and
K.P.
Radhakrishna Menon J.—The orders
of the Central Government, the first respondent, refusing to approve the
appointment of the petitioner in O.P. No. 112 of 1986 as the managing director
of the company, the petitioner in the other original petition, namely, the one
dismissing the application seeking approval and the other dismissing the
petition seeking review of the first mentioned order are under challenge in
these original petitions.
The
application seeking approval of the appointment of the petitioner in O. P. No.
112 of 1986 as the managing director of the company for the period from January
31, 1990, to January 30, 1985, was filed on March 21, 1980. To the show-cause
notice calling upon the company to show cause why the request for approval
shall not be rejected, the company gave its explanation in time, as is seen
from exhibit P-2 marked in O.P. No. 4759 of 1985. The first respondent was not
prepared to accept the explanation and, consequently, the request was rejected
by the order, the review of which was sought for by the petitioner by filing a
separate petition. This petition for review was rejected by the order which was
served on the company on March 28, 1985.
From the
facts stated above, it is clear that the final order rejecting the application
of the company seeking approval of the order appointing the petitioner in O.P.
No. 112 of 1986 as the managing director of the company was served on the
company after the expiry of the period for which the petitioner in O.P. No. 112
of 1986 was appointed as the managing director. The order which was sought to
be reviewed no doubt had been served on the company on May 10, 1984.
Learned
counsel for the petitioners argues that the orders under challenge are of no
consequence at all and that that is the position in law can be seen from the
provisions contained in section 269 of the Companies Act as it stood at the
relevant time. Relevant parts of this section I shall read now :
"269.
Appointment or reappointment of managing or whole-time director to require
Government approval in certain cases.—(1) In the case of a public company or a
private company which is a subsidiary of a public company, whether such public
company or private company is an existing company or not, the appointment of a
person as a managing or whole-time director shall not have any effect unless
approved by the Central Government ....
(5) If the appointment of a
person as a managing or whole-time director is not approved by the Central
Government, the person so appointed shall vacate his office as such managing or
whole-time director on the date on which the decision of the Central Government
is communicated to the company, and if he omits or fails to do so he shall be
punishable with fine which may extend to five hundred rupees for every day
during which he omits or fails to vacate such office".
Sub-section (1) provides that,
in the case of a public company or a private company which is a subsidiary of a
public company, whether such public company or private company is an existing
company or not, the appointment of a person as a managing or whole-time
director shall not have any effect unless approved by the Central Government.
This sub-section thus suggests that the order appointing a person as the
managing or whole-time director will have effect only if the same is approved
by the Central Government. But, at the same time, sub-section (5) provides
that, if the appointment of a person as a managing or whole-time director is
not approved by the Central Government, the person so appointed shall vacate
his office on the date on which the decision of the Central Government is
communicated to the company and, in case he omits or fails to do so, he shall
be punishable with fine which may extend to five hundred rupees for every day
during which he omits or fails to vacate such office. The last limb of
sub-section (5) would indicate that the refusal to grant approval is of no
consequence at all and the person appointed as managing or whole-time director,
at the risk of his being punished, can continue in office even after the date
on which the order rejecting approval is communicated to the company. In other
words, even after the said date, the person can continue as managing or
whole-time director provided he pays the fine.
It can be
seen from the above discussion that there is an apparent conflict between the
two sub-sections. Under such circumstances, how to find out the intention of
the legislature is the question before us. We should, in this connection, keep
in mind the well-established canons of interpretation of statutes, namely: (1)
to ascertain the meaning of a section, it is not permissible to omit any part
of it ; the whole section must be read together and an attempt should be made
to reconcile both the parts ; (2) when reconciliation, however, is not
possible, we have to determine which is the leading provision and which is the
subordinate provision and which must give way to the other. (See Institute of
Patent Agents v. Lockwood [1894] AC 347 (HL) at page 360 ; and (3) if the
second method also is not possible then, we shall have resort to yet another
well-established rule, namely, if two sections are repugnant, the known rule is
that the last must prevail (See Wood v. Riley [1867] 3 CP 26 per Keating J. and
K.M. Nanavati v. State of Bombay, AIR 1961 SC 112, 137). Reading these two
sub-sections side by side, I am of the opinion that, not only are these two
sub-sections is irreconcilable but it is also not possible to determine which
is the leading provision and which is the subordinate provision so as to say
which should give way to the other. That means sub-section (5) shall prevail.
These provisions, to my mind, therefore, are not capable of making any order
appointing a person as the managing or whole-time director ineffective for any
period. That means, whether approval is granted or not, the order appointing a
person as managing or whole-time director will be valid within the meaning of
the Companies Act.
Learned
counsel for the petitioners further contended that the irregularities pointed
out in the show-cause notice at best can be said to be irregularities committed
by the subsidiary companies. Assuming that these irregularities were committed
by the company, even then these are irregularities which can be dealt with
under provisions other than section 269 of the Companies Act. No such
proceedings, however, have so far been initiated either against the company or
the subsidiary company, is the submission of learned counsel for the
petitioner. If that be so, the finding based on such irregularities is liable
to be vacated, counsel submits. It is relevant, in this context, to note that
these matters are being agitated in the proceedings now pending before the
Supreme Court, namely, SLP Nos. 7634, 7635 and 7636 of 1983. On going through
the records, I am of the opinion that learned counsel is well-founded in this
argument.
In the light
of the above discussion, there will be a declaration that the petitioner in
O.P. No. 112 of 1986 has validly been appointed as the managing director of the
company and hence he is entitled to draw his salary for the period in dispute.
The original
petitions for the reasons stated above are allowed to the extent indicated
above. Accordingly, exhibits P-3 and P-5 (in both the original petitions) are
quashed.
Issue photostat copy on usual
terms.
[2004]
51 scl 169 (mad.)
HIGH COURT OF
v.
Union of
V.S.
SIRPURKAR AND N. KANNADAsAN, JJ.
AND
CMP NO. 5088 OF 1999
DECEMBER
5, 2003
It cannot be said that
adequate profit made in any of four
preceding years of preceding year in which
appointment is made is sufficient to take
company out of mischief of section 269(2)
Section 269 of the Companies Act, 1956 -
Managing director - Appointment of managing or whole-time director or manager
to require Government approval - A resolution came to be passed in annual
general meeting of company re-appointing appellant as chairman and managing
director of company - As per amended provision of section 269, an application
was made for approval before Central Government - Government issued a
show-cause notice wherein it was stated that appellant had appointed one ‘T’
enterprises as commission agent wherein appellant, his wife and son were
partners, and had received huge amount of commission from company - Moreover,
huge amount of money was also given as advance to a concern called ‘M’
fabricators wherein wife of appellant was a majority shareholder - Hence, it
was opined that appellant had misused his fiduciary capacity - Thereupon,
feeling dissatisfied with replies of appellant on said notice, Central
Government rejected application seeking its approval - Petition filed against
said order was dismissed by Single Judge - Hence, instant appeal was filed on
two grounds, firstly approval of Central Government under section 269 was not
necessary, secondly, order passed by Central Government refusing to grant
approval was bereft of reasons and, thus, it was to be struck down - Whether in
view of fact that company had not made adequate profits in three years out of
four years immediately preceding year of appointment, it could not have claimed
exemption of approval contemplated in section 269 - Held, yes - Whether since
language of show-cause notice issued by Central Government clearly suggested a
detailed investigation into affairs of company and facts stated in said notice
had also not been controverted at all, it was established that appellant had
misused his fiduciary position as managing director and chairman of company -
Held, yes - Whether, therefore, appellant did not appear to be fit and proper
person to be re-appointed - Held, yes - Whether in such circumstances, order
passed by Central Government did not suffer from any infirmity and it was to be
upheld - Held, yes
Facts
A resolution
came to be passed in the annual general meeting of the company re-appointing
the appellant as the chairman and managing director for a period of four years.
As per the amended provisions of section 269, an application came to be made to
the Central Government. The Government issued a show-cause notice as to why the
proposal for re-appointment of the appellant as chairman and managing director
should not be rejected. In said notice it was stated that one ‘T’ enterprises
wherein the appellant, his wife and son were the partners, was appointed as the
commission agent and they had received huge commissions. Moreover, the advances
were given of huge amounts to a concern called ‘M’ fabricators wherein the wife
of the appellant was holding 55 per cent shares; hence, the appellant had
misused the fiduciary capacity. It was urged that while making application for
re-appointment the appellant had concealed aforesaid facts which amounted to
mis-statement under section 628. The Government, therefore, rejected the
application and held that the appellant was not a fit and proper person to be
appointed as the chairman and managing director. The appellant challenged the
said order before the Single Judge. The Single Judge, however, dismissed the
petition. Against the said order the instant appeal was filed mainly on two
grounds, firstly, the approval of the Government was not at all necessary, and
secondly, the order passed by the Central Government refusing to grant the
approval did not mention any reason and, therefore, it was liable to be struck
down.
Held
Firstly,
section 269 makes it clear that if the case of the appellant that the approval
was not necessary had to be accepted, then it would be for the appellant to
show that the appointment was made in accordance with the conditions specified
in Part I and Part II of Schedule XIII which parts are also subject to the
provisions of Part IV of that Schedule. [
The appellant
further pointed out that the appointment was in the year 1988 and the previous
year of that appointment would be 1987 during which the company had earned
adequate profits. According to the appellant even if the company had made
adequate profits in any one of the four preceding years contemplated in clause
(f) of item 1 of Part I of the Schedule XIII, the company would not require the
approval of the Central Government. [
On plain
reading of the language of the Schedule XIII, such an argument could not be
accepted. In order that there has to be an exemption, it must be proved that the
company has not suffered loss or has inadequate profits during the year
previous to the year in which the appointment is made. In the instant case, the
appointment having been made in the year 1988, the company should not have
suffered loss or should not have earned inadequate profits during the year 1987
and it was clearly suggested that in the year 1987 the profits earned by the
company were not adequate as per the rules. So also, it must be established
that it had not suffered loss or generated inadequate profits during any of the
three financial years in the four financial years immediately preceding the
said year of 1987. The material on record clearly suggested that it had
suffered loss in two years, i.e., 1984 and 1985, and had generated inadequate
profits in the year 1983. It was only in the year 1986 that the company had
made adequate profits. [
It was urged
that even if the company had earned adequate profits in any of the four
preceding years of the year of appointment, Schedule XIII will not apply and
necessarily, the appointment will not come within the mischief of section 269.
As per clause (b) of Part I and the Illustration (2), on which heavy reliance
was placed, the requirement of earning adequate profits in any of the three
financial years is a must for taking the company out of the mischief of section
269(2). Perhaps, what was being done was the word ‘one’ was being read into the
second illustration after the opening words ‘in any’. That was simply not
possible. The company not having made adequate profits in three years out of
the four years immediately preceding the year of appointment could not have
claimed the exemption of approval contemplated in section 269. The argument,
therefore, was clearly incorrect.
If the argument
that the adequate profit made in any of the four preceding years of the
preceding year in which the appointment is made is sufficient to take the
company out of the mischief of section 269(2) is accepted, the Court would be
doing violence to the language of clause 1(f) of Part I of Schedule XIII. The
argument was, therefore, rejected and it was to be held that the Central
Government was right in holding that the approval of the Central Government was
essential for the appointment of the appellant. [Paras 17 & 18]
As regards the
appellant’s contention that the impugned order gave no reason and as such
amounted to an arbitrary order, it could be said that it was an admitted
position that after the application was made by the company for re-appointment
of the appellant as the chairman and managing director of the company, the
Central Government thoroughly investigated the affairs of the company and it
was only thereafter that the show-cause notice was issued. The very language of
the show-cause notice suggested that a proper investigation was made into the
affairs of the company by the Central Government and its officers because,
otherwise, it would not have been possible to frame those six reasons in the
nature of findings which were to be found in the communication. In its counter
before the Single Judge, the Central Government pointed out that the
representation of the appellant was not only considered but his advocate
representative was also allowed to make a representation in writing on the
question of the necessity of the approval. It was reiterated that the facts
stated in the show-cause notice had not been controverted at all and as such,
it was established that the appellant had misused his fiduciary position as the
managing director of the company and, therefore, did not appear to be a fit and
proper person to be re-appointed. [
Having examined
the replies given by the appellant, it could be seen that there was no denial
of the facts asserted regarding the transactions entered into by the company
with ‘T’ Ltd. and ‘M’ Fabricators. What was tried to be done in the reply was
only the justification for those transactions and it had been asserted that the
company was benefited because of those transactions. If that was so, then, if
the Central Government made a specific reference in the order to the reasons
given and the replies there- to and came to the conclusion that it was not
satisfied with those allegations, it could be said adequate reasons had been
given and the order could not be criticized that it was bereft of the reasons.
Meticulous care had been taken to inform the appellant about the reasons for
which the approval was being contemplated to be refused. The Central Government
also took into account the precise defence raised, which was not in the nature
of the refusal of the facts stated in the notice but was in justification of
those transactions and recorded that the explanations were not satisfactory.
Nothing more could have been required to be done in the circumstances of the
case. The nature of the allegations was such that the company entered into that
transaction with the firms in which the appellant’s wife and son were partners.
Those partnership firms also not being manufacturing firms, were given the
contracts and in turn, entered into agreements with another concern, majority
shares of which were also owned by the wife of the appellant. It was also
suggested that huge amounts were paid by way of commission to the firms in
which the appellant himself was a partner. Huge advances were given to a firm
called ‘M’ Fabricators in which the wife of the appellant was holding 55 per
cent shares and thereby the said firm made huge profits in the years 1987-88
when the second respondent-company itself went into loss. Huge amounts were
sanctioned to foot the bills of
Having
carefully seen the reply which did not in any manner dispute any of said facts
but merely justified the same on the ground that firstly, it was made known to
the shareholders and secondly, it was necessary in the interests of the company
and that the company was benefited thereby. If the Central Government
specifically recorded that it was not satisfied with the said explanations, no
other reason, was required to be given. Therefore, the instant order passed the
tests of reasonableness and judiciousness wherein the affected persons, i.e.,
the appellant, knew the reasons on the basis of which the decision had been
taken. He also had been given a complete and full opportunity to defend himself
inasmuch as his explanations were also taken into account which explanations
were in the nature of admissions of the factum of the unauthorised expenditure
and the shady transactions and all that had been done in a bona fide manner as
it was nobody’s case that the Central Government or any of its officers had
acted in a mala fide manner. Therefore, the order was not such which could be
quashed on the grounds urged by the appellant. [Para 26]
The appeal,
therefore, had no merits, and it was to be dismissed. [Para 27]
Cases referred to
Cibatul Ltd. v.
Union of India [1980] 50 Comp. Cas. 437 (Guj.) (para 19) and Rampur Distillery
& Chemical Co. Ltd. v. CLB AIR 1970 SC 1789 (para 19).
Harikrishnan
and Srinath Sridevan for the Appellant. T. Arunan, Dulip Singh
and N.G.R. Prasad for the Respondent.
Order
V.S.
Sirpurkar, J. - The appellant/petitioner challenges the judgment of the
learned Single Judge, dismissing the writ petition, challenging the order dated
21-6-1990 passed by the Union of India, first respondent herein, (in short the
“Government”) whereby the Government refused to grant approval to the
appointment of the appellant as the Chairman and Managing Director of the
second respondent company (in short “the company”).
2. On 2-6-1988, a
resolution came to be passed in the Annual General Meeting of the company,
appointing the appellant as the Chairman and Managing Director with effect from
14-7-1988 upto 13-7-1992, i.e., for a period of four years. He was to get the
remuneration of Rs. 7,500 per month in addition to 1% commission on the net
profits of the company and other perquisites. As per the amended provisions of
section 269 of the Companies Act, which amendment came into force from
1-6-1988, an application dated 19-7-1988 came to be made for approval under
that section.
2.1 The Government called for
some particulars from the company, which were duly furnished. Thereafter, by
communication dated 19-3-1990, the company as also the appellant were called
upon to show cause within thirty days as to why the proposal of the company for
re-appointment of the appellant as the Chairman and Managing Director should
not be rejected.
2.2 In this detailed
show-cause notice, it was, inter alia, contended that one M/s. Tambraparani
Enterprises, wherein the appellant, his wife and son were the partners, was
appointed as the Commission Agent under an agreement dated 10-7-1986 and has
received huge commissions in the years 1986, 1987 and 1988. It was urged that
while making an application for re-appointment, the appellant had failed to
disclose his own interest in the aforesaid partnership firm against item No. 7
in Form 25A and this amounted to a mis-statement, punishable under section 628
of the Companies Act. By way of second reason, it was stated that the Managing
Director had misused his fiduciary capacity in respect of the contracts with
M/s. Tambraparani Enterprises which in turn had entered into a contract with
M/s. Tambraparani Distempers for the manufacturing of distempers since the
company parted with its machinery, technical know- how and the research. It was
alleged that the sale of assets of the company to M/s. Tambraparani
Enterprises, which was only a trading concern, was not above board. It was also
suggested that advances were given of huge amounts to a concern called M/s.
Madras Fabricators wherein the wife of the appellant was holding 55% shares
and, therefore, the appellant had misused his fiduciary capacity. Fourthly, it
was stated that the expenses of the trip of the son of the appellant to
Singapore were unjustifiably borne by the company. It was also stated that the
Colour Television and Video Cassette Recorded, imported in 1982, belonging to
the company were installed at the residence of the appellant and it was lastly
suggested that he had incurred expenditure on account of gas and electricity
consumption amounting to approximately Rs. 13,000, which was in excess of the
limits prescribed in the approval letter dated 29-4-1985 of the Government.
2.3 On these counts, it was
suggested that the Government was satisfied that the appellant was not a fit
and proper person to be appointed as the Chairman and Managing Director of the
company.
3. A detailed reply is
claimed to have been given by the appellant to this show-cause notice on
16-4-1990. In this reply, the appellant claimed that there was no need for the
approval of the Government and the application for approval was being
withdrawn. Yet it seems the appellant had supplemented his reply by another
communication dated 23-4-1990 and also appeared in person before the Joint
Secretary for a personal hearing. It seems that these communications of the
appellant were sent by the Government to the company for its comments because
obviously these two communications were sent not by the company but by the
appellant himself. On 24-5-1990, the company wrote to the Government and
requested further three months’ time to offer its comments.
4. The Government passed
the order on 21-6-1990, rejecting the application. In that, the Government
firstly came to the conclusion that the appellant was not a fit and proper
person to be appointed as the Chairman and Managing Director. It also came to
the conclusion that the contention of the appellant that the approval was not
at all necessary was also not correct. In that, it was pointed out that the
company had suffered a loss in the previous years and had also suffered the
loss in two years of the three previous years thereto; that as per the
company’s letter dated 24-5-1990, the company had adequate profits either in
the year 1987 or in any of the three years out of the four financial years
immediately preceding the financial years and as such condition (f) of Schedule
XIII i.e. adequate profits test was not satisfied.
5. This was challenged
before the learned Single Judge, who initially allowed the petition on the
ground that the order was a non-speaking order. However, the petition was again
posted at the instance of the third respondent. Association and ultimately the
petition was dismissed by the impugned judgment. It will be pertinent to note
that by the order dated 23-4-1991 on WMP No. 26872 of 1990, the third
respondent Association was allowed to be impleaded as a party to the writ
petition.
6. While assailing the
impugned order passed by the learned Single Judge, confirming the order dated
21-6-1990 passed by the Government, the learned senior counsel, Shri
Harikrishnan, for the appellant firstly submitted that the approval of the
Government was not at all necessary and, therefore, the order passed by the
Government, refusing the approval was wholly without jurisdiction and a non est
order.
6.1 The second limb of the
argument was that even if the approval was found necessary, the Government had
passed a bald order, without considering the contentions raised by the
appellant in his detailed reply wherein, he had answered every charge with the
help of the documents. Learned counsel very heavily came down upon the said
order as being arbitrary and bereft of any reasons. According to the learned
counsel, this was a judicial or, as the case may be, quasi-judicial function on
the part of the Government and as such it was obliged in law to consider the
issue of approval objectively and give the reasons in support of its finding
that the appellant was not a fit and proper person.
6.2 Learned counsel also
suggested that this finding brought stigma to the appellant apart from the fact
that he might be required to suffer financially as he might be required to
return all the monetary benefits which he had received during the period of his
appointment as the Chairman and Managing Director of the company.
7. As against this, Mr. T.
Arunan, learned Additional Central Government Standing Counsel, appearing for
the first respondent, argued that on a proper interpretation of Schedule XIII
of the Companies Act, the approval of the Government is a must. He pointed out
that under the amended provisions of section 269 of the Companies Act, any
company in order to be exempted from the ritual of getting approval from the
Government had to strictly comply with the conditions of that section and, in
this case, the Schedule XIII test was not passed by the company since it had
not made profits either in the previous years of the appointment or in any of
the three years of the four years prior to that year.
7.1 As regards the second
limb of the argument of Shri Harikrishnan, the learned standing counsel
suggested that this was not a judicial or quasi-judicial function but was in
administrative function on the part of the Government as it is the duty of the
Government to act as the watchdog of the interests of the shareholders of the
Government. He further pointed out that before taking the decision of refusing
the approval, the Government had made a thorough investigation and had gone to
the extent of even affording the personal hearing to the appellant.
8. Shri Dulip Singh,
learned counsel appearing on behalf of the company, supplemented the arguments
of Shri Arunan by pointing out that the interpretation sought to be put on
section 269 of the Companies Act and Schedule XIII thereto by the appellant was
not correct and that in reality the approval was a must. He also pointed out
that the misuse of the financial powers and the shaddy financial transactions
were apparent on the face of the record and was almost an admitted position. He
also reiterated that the function under section 269 for granting of the
approval was not a judicial or quasi-judicial function and that the procedure
adopted by the Government for giving the findings that it did was extremely
fair.
9. Shri Prasad, learned
counsel appearing on behalf of the third respondent association, also
reiterated that the appellant had tried to drain the finances of the company
and siphon them into the concerns in which he was personally interested and
thereby the whole company was made a financial wreck. He pointed out that the
decisions taken by the appellant as Managing Director of the company were
against the interests of the company and thereby the employees of the company
had also to suffer.
10. In the beginning of the
debate, learned senior counsel for the appellant made a grievance of the fact
that though the learned Single Judge had dictated the judgment in the open
Court and thereby allowed the petition holding the impugned order dated
21-6-1990 to be an order without reasons, the learned Judge then decided to
re-hear the petition that too, at the instance of the third respondent
association which had no say in the matter. The learned Judge therefore erred
in re-hearing the matter and deciding the same.
11. We do not agree with
this contention for the simple reason that it was an admitted position that the
third respondent was impleaded as a party and it is also an admitted position
that during the first hearing the third respondent was not heard at all as
perhaps, there was no notice to the third respondent of the hearing. The
impleadment order was not challenged further and that order became final
between the parties. Therefore, the third respondent was bound to be given a
reasonable opportunity of being heard. This is apart from the fact that before
the learned Judge no grievance seems to have been made regarding the course adopted
by the learned Single Judge of re-hearing the matter. We do not see any such
grievance at least from the order. We will, therefore, not accept the argument
by the learned senior counsel for the appellant that the learned Single Judge
erred in re-hearing the matter and deciding it afresh.
12. On
the rival contentions raised by the parties, the questions to be decided would
be :
1. Whether under the
amended provisions of section 269 of the Companies Act, the approval of the
Central Government for the appointment of the appellant as the Chairman and
Managing Director of the company was necessary?
2. If the answer the
first question is in affirmative, whether the approval was rightly rejected in
that whether any prejudice has been suffered by the appellant on account of the
absence of the reasons in the order ?
13. We must first put on
record that it was not seriously disputed that it is only the amended
provisions of section 269 of the Companies Act which are applicable to the
present controversy because the amendments have been made applicable with
effect from 1-6-1988 and the resolution appointing the appellant was passed on
2-6-1988. We will, therefore, proceed on the basis that is the amended
provisions of the Act which are applicable. Learned senior counsel urged that
the requirement of approval and the procedure therefor was felt cumbersome and,
therefore, section 269 of the Companies Act was extensively amended.
Sub-section (1) of section 269 provides that on the commencement of the
Amendment Act, 1988, every public company, or a private company which is a
subsidiary of a public company, having a paid-up share capital of a particular
level would have a managing or whole-time director or a manager. Sub-section
(2) of section 269 read as under :
“On and from the commencement of the Companies
(Amendment) Act, 1988, no appointment of a person as a managing or whole-time
director or a manager in a public company or a private company which is a
subsidiary of a public company shall be made except with the approval of the
Central Government unless such appointment is made in accordance with the
conditions specified in Parts I and II of Schedule XIII (the said Parts being
subject to the provisions of Part III of the Schedule) and a return in the
prescribed form is filed within ninety days from the date of such appointment.”
Sub-section
(3) provides that such application seeking the approval shall be made within
ninety days of such appointment while sub-section (4) provides that the Central
Government shall not accord such approval if:
“(a) the managing or whole-time director or the manager appointed is,
in its opinion, not a fit and proper person to be appointed as such or such
appointment is not in the public interest; or
(b) the terms and conditions of the appointment of managing or
whole-time director or the manager are not fair and reasonable.”
Sub-section (6)
provides that if the appointment is not approved, the person so appointed shall
vacate the office on the date on which he is communicated the decision by the
Central Government. Sub-section (7) gives a suo motu power to the Central
Government if it receives the information and on that basis is of the prima
facie opinion that any appointment made under sub-section (2) without the
approval of the Central Government has been made in contravention of the
requirements of Schedule XIII, it shall be competent for the Central Government
to refer the matter to the Company Law Board for the decision. Sub-sections
(8), (9) and (10) speak about the powers of the Company Law Board while
deciding such reference.
14. From the reading of the
aforesaid section, it is, therefore, necessary that if the case of the
appellant that the approval was not necessary has to be accepted then, it would
be for the appellant to show that the appointment is made in accordance with
the conditions specified in Part I and Part II of Schedule XIII which parts are
also subject to the provisions of Part IV of that schedule. It will, therefore,
be necessary for us to consider the said Schedule.
15. Part I of Schedule XIII
contains six clauses, viz., (a) to (f). We are concerned only with clause (f).
For the sake of convenience, we will quote the provisions :
“Schedule XIII
(See sections 198, 269, 310 and
311)
Conditions
to be fulfilled for the appointment of a managing or whole-time director or a
manager without the approval of the Central Government
Part I
Appointments
1.
No person shall be eligible for appointment as a managing or whole-time
director or manager of a company unless he satisfies the following conditions,
namely :—
(a)
to (e)** ** **
(f) if the company had [not] suffered loss or had inadequate
profits during the financial year immediately preceding the financial year in
which the appointment is made (hereinafter referred to as the preceding
financial year) or in any of the three financial years, in the four financial
years immediately preceding the preceding financial year.”
It is this clause
which is very heavily relied upon by the learned counsel to suggest that the
approval was not necessary. Learned counsel invited our attention to a document
on record, which is a letter dated 24-5-1990, sent by the company to the
Central Government in response to the Central Government letter dated 14th/15th
May, 1990. Learned counsel points out that in that letter, the Government had
provided the details of the loss or adequate profits furnished by the company
under section 198. The position relied upon by the learned senior counsel is
being re-produced here :
|
Year ended |
Book Profit |
198 Profit* |
Remuneration |
|
|
Rs. |
Rs. |
Rs. |
|
31-12-1987 |
452733 |
235456 |
93922 Minimum |
|
31-12-1986 |
2065032 |
2218714 |
110936 Minimum |
|
31-12-1985 |
2095601 |
34366
L |
89404 Minimum |
|
31-12-1984 |
2737992 L |
2738897
L |
89897 Minimum |
|
31-12-1983 |
792906 |
430347 |
|
(*This is even after adjusting the sitting fees)
16. From this, learned
counsel points out that since the appointment was in the year 1988, the previous
year of that appointment would be 1987 during which the company had earned
adequate profits. Learned counsel further points out that the four preceding
years would be 1983, 1984, 1985 and 1986. He points out that the company had
not made adequate profits either in the year 1987 or in any of the three years
out of the four financial years immediately preceding the financial year i.e.,
1983 to 1986. He points out further that there is a clear-cut assertion in this
letter that the company had made adequate profits in the year 1986. According
to the learned counsel even if the company had made the adequate profits in any
one of the four preceding years contemplated in clause (f) the company would
not require the approval of the Central Government.
17. On a plain reading of
the language, we do not see as to how such an argument can be accepted. In
order that there has to be an exemption, it must be proved that the company had
not suffered loss or had adequate profits during the previous year to the year in
which the appointment is made. In the present case, the appointment having been
made in the year 1988, the company should not have suffered loss or should not
have earned inadequate profits during the year 1987 and it is clearly suggested
that in the year 1987, the profits earned by the company were not adequate as
per the rules. So also, it must be established that it had not suffered loss or
generated inadequate profits during any of the three financial years in the
four financial years immediately preceding the said year of 1987. The table
clearly suggests that it had suffered loss in two years i.e., 1984 and 1985 and
had generated inadequate profits in the year 1983. It is only in the year 1986
that the company had made the adequate profits. However, the learned counsel
urges that even if the company had earned adequate profits in any of the four
preceding years of the year of appointment, Schedule XIII will not apply and
necessarily, the appointment will not come within the mischief of section 269. For
this purpose, learned counsel invites our attention to the Company Law Board
Circular No. 3 of 1989, dated 13-4-1989. Our attention is more particularly
drawn to clause (1) which deals with the appointment and remuneration of the
managerial personnel vide sub-section (1) of section 269. Learned counsel then
relied upon the following text :
“(b)Insofar as clause (f) is
concerned, the company has to ensure at the time of appointment of its
managerial personnel that it had not suffered loss or had adequate profits
during the financial year immediately preceding the financial year in which the
appointment is made or in any of the three financial years in the four
financial years immediately preceding the financial year in which the
appointment is made.
In other words, the company must have earned
adequate net profits computed in the manner laid down in sections 349, 350 and
351 either during financial year immediately preceding the year of appointment
or during any of the three financial years out of four financial years
immediately preceding the preceding financial year.
Illustration
Where the appointment is made during the
financial year 1990, approval of the Central Government is not necessary if the
profits were adequate—
(1) during the financial year 1989, being the financial year
immediately preceding the financial year in which appointment is made; or
(2) in any of the three financial years out of four financial years,
namely 1985, 1986, 1987 and 1988 (being the four financial years immediately
preceding the “preceding financial year”).”
From this the
learned counsel says that, relying on the second illustration, since the profit
was adequate in the year 1986, there would be no application of Schedule XIII.
18. We fail to follow the argument
because even as per clause (b) of Part I and the Illustration (2), on
which heavy reliance is placed, the requirement of earning the adequate profits
in any of the three financial years is a must for taking the company out of
mischief of section 269(2). Perhaps, what is being done is the word “one” is
being read into the second illustration after the opening words “in any”. That
is simply not possible. The company not having made the adequate profits in
three years out of the four years immediately preceding the preceding year of
appointment could not have claimed the exemption of approval contemplated in
section 269. The argument, therefore, is clearly incorrect. The subsequent
argument of the learned counsel that the original application was withdrawn
and, therefore, the Central Government should not have acted upon the
application made and the notice issued by the Central Government, has to be
rejected. In our opinion, the learned Single Judge has correctly interpreted
the provisions though the learned Single Judge was not armed with the
subsequent circular to which we have adverted earlier. If we accept the
argument that the adequate profits made in any of the four preceding years of
the preceding year in which the appointment is made is sufficient to take out
the company out of the mischief of section 269(2), we would be doing violence
to the language of clause 1(f) of Schedule XIII. The argument is, therefore,
rejected and it is held that the Central Government was right in holding that
the approval of the Central Government essential for the appointment of the
appellant. We answer the first question accordingly.
19. Learned counsel then
urged that even if that be so, the order was clearly bad as it is bereft of
reasons. For this learned counsel urged that the act of approval as required
under section 269 is a judicial or at any rate quasi-judicial act. In support
of his proposition, learned counsel relied on the Division Bench judgment of
the Gujarat High Court in Cibatul Ltd. v. Union of India [1980] 50 Comp. Cas.
437. Learned counsel suggested that the power under section 269 has been held
in the nature of quasi-judicial power and, therefore, it must be shown before
such an order is passed that the relevant facts have been taken into consideration,
a fair and proper opportunity is given, there has been an active consideration
of all the facts before the authority, which have also been brought by the
concerned parties; lastly, such consideration must be writ large by way of
reasons in the order. Learned counsel was at pains to point out that in the
aforementioned judgment, the Division Bench has relied on the reported decision
of the Supreme Court in Rampur Distillery & Chemical Co. Ltd. v. CLB AIR
1970 SC 1789 where section 326 of the Companies Act fell for consideration. It
is pointed out that the language of section 326 of the Act, as it then stood,
is almost pari materia with the provisions of section 269 inasmuch as
sub-section (2) of the section 326 read as under :
“(2)The Central Government shall not accord its approval under sub-section (1) in any case, unless it is satisfied—
(a) that it is not against the public interest to allow the company
to have a managing agent;
(b) that the managing agent proposed is, in its opinion, a fit and
proper person to be appointed or reappointed as such, and that the conditions
of the managing agency agreement proposed are fair and reasonable; and”
It is pointed
out by the learned Counsel very painstakingly that the Supreme Court had
observed therein in the following words :
“Investment of power in the Central Government
under section 326 carries with it a duty to act judicially; i.e., to hold an
enquiry in a manner consistent with the rules of natural justice, to consider
all relevant matters, to ignore irrelevant matters, and to reach a conclusion
without bias, without predilection and without prejudice. The satisfaction
contemplated by section 326 must, therefore, be the result of an objective
appraisal of the relevant materials. The recital about satisfaction may be
displaced by showing that the conditions did not exist, or that no reasonable
body of persons properly versed in law could have reached the decision that
they did.” (p. 1789)
20. In the aforementioned
Division Bench judgment, the learned Judges ultimately went on to hold that
this power is a quasi-judicial power and not administrative power. It,
therefore, went on to observe further on facts :
“...The question whether a particular officer
acted in a quasi-judicial manner or not could be seen from the manner in which
the order is passed. ... In fact, advocate for the petitioner No. 2 approached
the officer to pass a speaking order and he refused to do so. It is well
settled that when any person, in a quasi-judicial matter, passes an order
without stating the reasoning by which he had come to that particular finding,
the order itself is arbitrary on the face of it. The person against whom the
order is passed is entitled to know as of right as to under what circumstances
and for what reasons his prayer was being rejected. As soon as one tells in
that his prayer is rejected and that he is not bound to give reasons, the order
passed is an order which is arbitrary and is required to be set aside. That
order can never be sustained in a State where the citizens are governed by law.
Even a citizen who approaches any authority who has a power to act judicially
and he acts in a quasi-judicial manner where he is bound to take objective
facts into consideration, the person against whom the order is passed is entitled
to know that only the relevant factors were considered objectively, that
irrelevant factors were never entered the field, that the mind was applied and
that with a proper reasoning the order was passed. It is quite likely that
another person may take a different view, but that is entirely a different
matter. If the Court has no power of appeal over a quasi-judicial officer, the
Court may not exercise that power but the Court has certainly a power to
examine as to whether the person had a power, whether the person exercised that
power judicially, whether the power that was exercised was not exercised
arbitrarily and it was in a judicial manner in the sense it was made known that
all relevant factors were considered and irrelevant factors were never considered.
This would be the essence as to how a quasi-judicial officer is expected to
behave and act. The order passed on the face of it should show that the order
was passed after taking into consideration all the relevant objective facts.
This is only possible if the order is a speaking order. If on the face of it
the order does not show any reason the arbitrariness is writ large on it....”
(p. 453)
The Court further observed in the same paragraph :
“...In this case it is more than clear that
the officer who revised the proposal in regard to the reappointment of
petitioner No. 2 not only did not state any reasons but he refused to pass a
speaking order when he was requested to do it. We are, therefore, satisfied
that the order passed is required to be struck down.” (p. 455)
21. When we look at the
facts involved in the case, it is apparent that a request was made for
re-appointment of a person as Managing Director for a period of five years on
the settled terms. However, the Government of India sanctioned and gave
approval for a period of two years and the terms and conditions, which was set
out by the company, were also revised to a great extent, as regards the
duration of appointment, the salary structure, as was proposed, and also
substantial reduction was made in the payment of commission. Even the other
terms of appointment were revised perhaps owing to the guidelines which were
then in existence. The Court ultimately held that those guidelines were illegal
and we are not concerned with that aspect of the matter. The Court, however,
noted that the manner in which the impugned order was passed granting the
approval, that too on the basis of the revised terms and conditions of service,
was ultimately incorrect inasmuch as the Central Government had not acted in a
judicious manner. It was specifically noted that the advocate, who was
representing the concerned appointee, had requested specifically the concerned
officer to pass a speaking order. However, that was not done and a bald order
came to be passed, revising the terms and conditions. Therefore, the learned
counsel suggested that the order passed by the Central Government, refusing the
approval has to be struck down. According to the learned counsel the order
gives no reason and as such amounts to an arbitrary order.
22. We will therefore test
the impugned order on these lines. It is an admitted position that after the
application was made by the company for re-appointment of the appellant as the
Chairman and Managing Director of the company, the Central Government
thoroughly investigated the affairs of the company. It is clear that a thorough
investigation was made into the affairs of the company and it is only
thereafter that the show-cause notice came to be issued. The very language of
the show-cause notice suggests that a proper investigation was made into the
affairs of the company by the Central Government and its officers because,
otherwise, it would not have been possible to frame those six reasons in the
nature of findings which are to be found in the communication dated 19-3-1990.
In its counter before the learned Single Judge, the Central Government points
out in paragraph 3 that the representation of the appellant was not only
considered but his advocate representative was also allowed to make a representation
in writing on the question of the necessity of the approval. It is reiterated
that the facts stated in the show-cause notice had not been controverted at all
and as such, it was established that the appellant had misused his fiduciary
position as the Managing Director of the company and, therefore, did not appear
to be a fit and proper person to be re-appointed. In paragraph 8, it is
specifically averred as under :
“It is wrong to suggest that the petitioner
has given details to show that grounds relied by the respondent were factually
incorrect. On the other hand, nothing on fact was denied, only a bald and
general statement was made that charges made are not sustainable in law as in
equity but that is the work of certain disgruntled employees who had engineered
certain motivated and malicious allegations.”
It is pointed
out in paragraph 9 that the representation of the appellant to the show-cause
notice was heard by the Central Government by giving a hearing to the
appellant-petitioner and his advocate. Again in paragraph 9, it is asserted
that the facts stated in the show-cause notice were not controverted.
23. We have already
explained earlier that after the proposal was sent to the Central Government a
thorough and complete investigation went on at the instance of the Central
Government and queries were put to the company regarding the financial
transactions and the records were also examined. We find all this in the
counters of the Central Government as also the second respondent company, which
claim has remained unchallenged. It is clear that only on that basis, the
Central Government went to the extent of formulating its reasons as to why it
was prima facie satisfied about the fact that the appellant was not a fit and
proper person to be appointed as the Managing Director on the terms and
conditions suggested in the resolution. Even the language of the said
show-cause notice would suggest that the Central Government was satisfied that
the proposed Chairman and Managing Director is not a fit and proper person to
be appointed. Six reasons in the minute details were given and lastly, the
company as also the appellant were called upon to show cause. It is also very
important to note that it is precisely against those reasons that the appellant
gave his reply by his communication dated 16-4-1990 and also the subsequent
communication. It is also pertinent to note that from reply it was deduced by
the Central Government and in our opinion correctly that all those facts and
figures were practically admitted by the appellant. Therefore, the Central
Government had formulated the reasons on the basis of its investigation and the
earlier correspondence and thereafter the notice dated 9-3-1990 came to be
issued, giving a complete idea of the reasons probably with the sole idea to
give an opportunity to the appellant to dispute the correctness or otherwise of
the facts stated therein. Not only this but, even the appellant was heard in
person and was allowed to be represented by an advocate. It is on this backdrop
that we will have to examine the order passed to see whether it meets the
requirement of the Supreme Court decision.
24. The impugned order is in
the nature of a communication. In the opening portion, it refers to the correspondence
and specifically mentions the letter dated 24-5-1990, which was sent by the
appellant after his letter dated 16-4-1990 by way of supplementing that letter.
The order then specifically mentions the facts as detailed in the show-cause
notice of even number dated 9-3-1990 as also the regulations/submissions made
by the proposed appointee in the letters dated 16-4-1990 and 24-5-1990. It also
makes a reference to the explanations furnished and suggests that those
explanations have not been found to be satisfactory. Then the letter records
that the Central Government is not satisfied that the appellant is not a fit
and proper person to be appointed and as such his appointment will not be in
the public interest. The second part of the communication deals with the
objections raised by the appellant that no approval of the Central Government
is required. It refutes the claims raised by the appellant.
25. Now it is, therefore,
certain that the communication informs the appellant the material that it was
taken into account as also the replies given by the appellant of the reasons
(factual assertions) by the Central Government. We have already seen that those
allegations are laced with the minutest possible details. We have already
pointed out in the earlier part of this judgment those reasons. We also
examined the replies given by the appellant and we find that there is no denial
to the facts asserted regarding the transactions entered into by the company
with M/s. Tambraparani Enterprises, Tambraparani Distempers and Madras
Fabricators. What is tried to be done in the reply is only the justification
for those transactions and it has been asserted that the company was benefited
because of those transactions. If this is so, then, in our opinion, if the Central
Government makes a specific reference in the order to the reasons given and the
replies thereto and comes to the conclusion that it is not satisfied with those
allegations, in our opinion, the adequate reasons have been given and the order
cannot be criticised that it is bereft of the reasons. Meticulous care had been
taken to inform the appellant the reasons for which the approval was being
contemplated to be refused. The Central Government also took into account the
precise defence raised, which was not in the nature of the refusal of the facts
stated in the notice dated 9-3-1990 but was justification of those transactions
and recorded that explanations are not satisfactory. In our opinion, nothing
more could have been required to be done in the circumstances of the case. The
nature of the allegations was such that the company entered into that
transactions with the firms in which the appellant’s wife and son were
partners. Those partnership firms also not being a manufacturing firms, were
given the contracts and in its turn, entered into agreements with another
concern, majority shares of which also owned by the wife of the appellant. It
is also suggested that huge amounts were paid by way of commissions to the
firms in which the appellant himself was a partner. Huge advances were given to
a firm called Madras Fabricators in which the wife of the appellant was holding
55% shares and thereby the said firm made huge profits in the year 1987-88 when
the second respondent company itself went in loss. Huge amounts were sanctioned
to foot the bills of Singapore trip of the son of the appellant, properties of
the company, viz. Colour Television and Video Cassette Recorder were enjoyed by
the appellant not in the company’s premises but at his residence. So also, unauthorised
expenditure were made on account of gas and electricity consumption charges
during the period 1984-85 in excess of the limits prescribed by the approval
letter.
26. We have carefully seen
the reply which does not in any manner dispute any of these facts but, merely
justifies the same on the ground that firstly, it was made known to the
shareholders and secondly, that it was necessary in the interests of the
company and that the company was benefited thereby. If the Central Government
specifically records that it was not satisfied with these explanations, we do
not think that anything more, by way of reasons, was required to be given.
Therefore, this order passes the tests of reasonableness and judiciousness
wherein the affected person, i.e. the appellant knows the reasons on which the
decision has been taken. He also has been given a complete and full opportunity
to defend himself inasmuch as his explanations are also taken into account,
which explanations are in the nature of admissions of the factum of the
unauthorised expenditure and the shaddy transactions and all this has been done
in a bona fide manner as it is nobody’s case that the Central Government or any
of its officers have acted in mala fide manner. We are, therefore, satisfied
that the order is not such which can be quashed on the grounds urged by the
appellant. This is apart from the fact all this does not seem to have been
addressed before the learned Single Judge. We have carefully seen the order of
the learned Single Judge and we see no fault in it. Nor do we find any fault
with the order passed by the Central Government.
27. The appeal has no
merits. It is dismissed with the costs of Rs. 5,000. Connected CMP is
closed.
Section 270
Share qualification
[1957] 27 COMP. CAS. 634 (BOM.)
v.
Dr. D. R. Banaji.
CHAGLA C.J. AND DESAI J.
OCJ Appeal No. 80 of 1956
IC Petition No. 227 of 1951
MARCH 20, 1957
CHAGLA C.J. - An interesting and important question
relating to company law arises on this appeal, and the facts that have to be
considered are few and simple. The appellants were appointed on June 30, 1951,
as additional directors of the company in liquidation of which the respondent
is the official liquidator. The appellants attended two meetings of the board
of directors on July 3, 1951, and August 24, 1951. On August 24, 1951, a
petition was presented for winding up of the company and ultimately an order
for winding up was made. On June 27, 1952, the list of contributories was
settled and a certificate to that effect was issued on February 4, 1953. On
July 6, 1956, the respondent liquidator applied to the learned Judge for
placing the appellants on the list of contributories. The learned Judge acceded
to that application and the appellants have come in appeal.
Under article
100 of the company, the qualification of a director is laid down, and that
qualification is the holding of ordinary shares of the nominal value of Rs.
10,000 and the article goes on to state :
“A director
may act before acquiring such qualification but that in any case (unless he is
a special director) acquire the same within two months from his appointment.”
Article 104
deals with the vacating of the office of a director and clause (a) provides
that the office of the director shall ipso facto be vacated if he fails to
obtain within the time specified in article 100, or any time thereafter ceases
to hold, the share qualification necessary for his appointment. The provisions
in the Companies Act correspond to these two articles. We are concerned with
the old Companies Act, and section 85(1) provides :
“Without
prejudice to the restrictions imposed by section 84, it shall be the duty of
every director who is by the articles required to hold a specified share
qualification, and who is not already qualified, to obtain his qualification
within two months after his appointment, or such shorter time as may be fixed
by the articles.”
And section
86-I provides that the office of a director shall be vacated if - (a) he fails
to obtain within the time specified in sub-section (1) of section 85 or at any
time thereafter ceases to hold, the share qualification, if any, necessary for
his appointment. Therefore, treating this matter as one of first impression and
construing the articles of association and the corresponding provisions in the
Companies Act, the position clearly in this. A director can act for two months
without possessing the qualification required under the articles. If he wants
to continue after that period, he must have the requisite qualification. If
after the period of two months he does not possess the requisite qualification,
he automatically vacates office. Therefore, two months’ locus penitential seems
to have been given to a director to acquire the necessary qualification. It is
difficult to understand how from these articles and this provision in the
Companies Act it is possible to submit that there is a contract between a
director and the company that as soon as he is appointed he shall acquire the
necessary shares, and that if he does not acquire the shares, the company will
allot those shares to him and put him on the register. It would have been
possible to take such a view if a director could have acted without the
qualification and if he had not automatically vacated office. Then it could
have been said that inasmuch as the articles require a particular
qualification, and the director has acted without that qualification, in law he
must he deemed to have contracted with the company that he would acquire the
necessary qualification. But as the articles of the company provide for the
vacation of the office of a director acting without qualification, there seems
to be no scope for implying a contract on the part of the director to acquire
the necessary shares. If article 104 was not there and if section 86-I did not
find a place in the Companies Act and if there was no automatic vacating of
office and if the director had continued in office although he did not acquire
the necessary shares within the time limited by article 100, then there would
have been considerable force in the contention that after the period of two
months it must be assumed that there was a contract as between the director and
the company that he would buy the necessary shares and acquire the requisite
qualification.
Now, having
dealt with our first impression, let us turn to the authorities and see what
they have to say about it. We will first turn to Palmer’s Company Precedents,
but before we deal with this learned author it is necessary to state that prior
to the English Companies Act of 1900 there was no provision in the Act for a
director who did not acquire the qualification shares to vacate his office. It
was only in 1900 that, the English Companies Act made this provision which
corresponds to the provision in our Act. With this background we will see what
Palmer has got to say on this question. At page 579 Palmer sets out a clause of
model articles of association which is 84a, and that clause is very significant
:
“A director
may act before acquiring his qualification, but shall in any case acquire the
same within one month from his appointment : and unless he shall do so, he
shall be deemed to have agreed to take shares sufficient to make up his
qualification from the company, and the same shall be forthwith allotted to him
accordingly.”
Therefore, an
implied contract is incorporated by this clause itself, and having stated what
the old law was in relation to a clause similar to the one set out, viz., 84,
the learned author goes on to say at page 579 :
“But the Act
of 1900 materially affected the operation of the clause, for in specifying one
month as the time within which the director must acquire his qualification the
clause fixes within the meaning of section 3 of that Act a ‘shorter time’ than
two months, and, accordingly, at the end of the month, the director, if he has
not obtained his qualification, vacates office. Now it may be that
notwithstanding this the company might act on the clause, and allot him his
qualification - that is to say, the shares which he agreed to take. But if no
allotment is made prior to a winding up, it would seem that the ex-director
should not be held liable in a winding up to be placed on the list of
contributories for the shares, for, the company not having accepted the offer
whilst it was a going concern, it is not just and equitable to place him on the
list of contributories in the winding up.”
Therefore, it
is rather significant that even when Palmer is discussing the new Act in the
observations just made by him he assumes that the articles contained a clause
like 84a and in view of that article he expresses the opinion that
notwithstanding the new provision in the Act with regard to the automatic
vacating of office, the company may allot shares to the director under this
clause. But even there he makes it clear that it is only on the allotting of
the shares that the company is deemed to have accepted the offer made by the
director accepting office under a clause similar to 84a, and therefore he says
that if there is no allotment and a winding up takes place, the director cannot
be placed upon the register.
Now let us see
what the facts here are in the light of these observations. The appellants were
appointed directors on 30th June, 1951. Admittedly no shares were ever allotted
to them and the company was wound up within two months of their appointment. It
is possible to take the view that they ceased to be directors or they ceased to
function as directors on 24th August, 1951, which was less than the period of
two months permissible under article 100, and they having ceased to be
directors on 24th August, 1951, there was no obligation upon them to acquire
the shares required by article 100. If the other view for which Mr. Mathalone
contends is accepted, viz., that notwithstanding the winding up the appellants
continued to be directors although shorn of all their powers, even so two
months after 30th June, 1951, they would cease to hold office by reason of
article 104, and having ceased to hold office it is difficult to understand how
it could be urged that there was any express or implied contract under which
they were bound to take the qualifying shares. Even if we were to assume - an
assumption which is difficult to make - that some element of contract has been
introduced by reason of article 100, the utmost that one can go to, as said by
Palmer, is that article 100 constitutes an offer by the directors, which offer
can only result in a concluded contract provided the offer is accepted by the
company allotting the shares. So even from this point of view there was never a
contract between the company and the directors, the company never having
allotted any shares to the directors at any material time.
We might also
look at the other learned author on company law, viz., Buckley. At page 61
Buckley deals with the decisions under the old law where there was no provision
for the vacation of office of a director, and the learned author disagrees with
the principle enunciated under those decisions even under the old law, and this
is what the learned author says :
“The principle
involved in the above decisions, namely, that a director who might originally
have obtained his qualification shares where he pleased, came after a
reasonable time under a contract to take them from the company, is not easy to
follow. It would seem to confound duty with contract.”
With regard to
the present law this learned author is more emphatic and categoric :
“The question,
however, is now of little importance, as section 182, post, which applies to
all companies, whether formed before or after the 1st January, 1901, prescribes
the consequences of a director failing to qualify within a specified time, and
such consequences appear to be wholly inconsistent with any implication of an
agreement by the director to subscribe his qualification shares.”
Therefore, the
view of the learned author is - with which we entirely agree - that where we
find in the law a consequence prescribed for not acquiring the qualifying shares,
it is impossible to imply that there was a contract to acquire those shares.
Mr. Mathalone
has relied on two English decisions. One is Molineaux v. London, Birmingham and
Manchester Insurance Co. and Mr. Mathalone tells us that that is the only case
he has come across which has dealt with the position arising under the law
after the English Companies Act of 1900 was passed. It is rather necessary
carefully to look at the facts of that case. The plaintiff had the necessary
qualifying shares, which were 50 shares. A subsequent resolution was passed
increasing the qualification to 250 shares. After the resolution was passed the
plaintiff acted as a director and he actually signed a copy of the share
prospectus in which his name appeared as a director. Subsequently he resigned,
and the court held that the plaintiff had not vacated his office within the
meaning of section 3, sub-section (2), of the Companies Act, 1900, which
provided for the vacating of office. In other words, although he had ceased to possess
the additional qualification required by the resolution of the company, he did
not vacate office. In other words, he continued to act as a director without
acquiring the additional shares which was the qualification necessary in order
to enable him to act as such, and it is in the light of these facts that we
must look at the observations of Lord Justice COZENS-HARDY on which reliance is
placed :
“On principle,
and apart from authority, it seems to us that a person who accepts and
appointment as director, knowing that the holding of a certain number of shares
is a necessary qualification, and acts as director, must be held to have
contracted with the company that he will, within a reasonable time, obtain the
requisite shares either by transfer from existing shareholders or directly from
the company.”
Therefore, the
observations apply to the case of a director acting as such without the
necessary qualification and it is by reason of that conduct that Lord Justice
COZENS-HARDY said that an inference may be drawn that he has contracted with
the company to buy the shares. But these observations cannot possibly apply to
a case where the director does not act without qualification. In fact he
cannot, because he vacates office. Lord Justice COZENS-HARDY was dealing with a
case where in fact the director acted without qualification and did not vacate
office, and, with respect the principle is clearly intelligible. If the law
does not provide for vacating of office and a director knowing that certain
qualification is necessary in order to enable him to act as a director does act
without acquiring the qualification, then the law would presume that there was
an implied contract between him and the company to acquire that qualification.
Now, in the
case before us the appellants have acted as directors without the qualification
shares because in law qualification shares were not necessary and they were
authorised to act in law for a period of two months without the necessary
qualification. This case would have applied to the facts of our case if the
appellants had acted as directors after two months without acquiring the
qualification shares. But that case could never have applied to our case
because after two months automatically by reason of the law they would have vacated
office and they could not have continued to act as directors. There is rather a
significant sentence in the judgment of Lord Justice COZENS-HARDY at page 596
where he says :
“His position
(that is, the position of the plaintiff in the case) is is not the same as it
would be if his name were not on the register, and the liquidator were seeking
to make him a contributory.”
Therefore, the
other distinguishing feature which Lord Justice COZENS-HARDY has emphasised is
that he was dealing with a director who was already a member of the company,
his name being on the register, and he is at pains to point out that his
position might have been different if for the first time the liquidator was
seeking to put a director on the register. This is exactly the case before us.
The appellants are not on the register of the company and the liquidator is
seeking to place them on the register.
The second
case to which our attention has been drawn is an earlier case which was decided
under the old law, reported in Salisbury-Jones and Dale’s case, and the
question that fell to be considered was whether a director who resigned before
the qualifying period was under an obligation to take the qualification shares
from the company, and the Court of Appeal, Lord Justice LINDLEY dissenting,
held that he was under no obligation. Now, it is very instructive to note that
this decision was arrived at although there was a clause in the articles of
association of the company to the effect :
“A director
may act before acquiring his qualification, but shall in any case acquire the
same within three months from his appointment, and unless he shall do so he
shall be deemed to have agreed to take the said shares from the company, and
the same shall be forthwith allotted to him accordingly.”
LORD HERSCHELL
L.C. and Lord Justice DAVEY make it quite clear that but for these last words
in the clause just set out there would be no question of the director being
under any obligation to acquire the shares, and therefore, what the court had
to consider was whether the last clause applied and because of the last clause
there was an obligation upon the director to acquire the shares. Therefore,
when the court’ considered as to whether there was a contract or not, it did so
only when there was an express provision in the article that the director shall
be deemed to have agreed to take the shares under certain circumstances. Mr.
Mathalone has relied on the dissenting judgment of Lord Justice LINDLEY.
Undoubtedly Lord Justice LINDLEY is a very famous name in English judicial
history, but even famous Judges sometimes find themselves in a minority and
their mere fame does not entitle the court to overlook the judgment of the
majority. But even turning to the judgment of Lord Justice LINDLEY, it is clear
that all that that learned Lord Justice was doing was to construe the
particular article to which reference has been made, and where he dissented
from the majority was that while the majority thought that the director having
resigned before three months the provision in the clause that he shall be
deemed to have agreed to take the shares did not come into operation, Lord
Justice LINDLEY thought that the more natural and less forced meaning of the
article was that once he accepted a directorship, whether he resigned
thereafter or not, he should be deemed to have agreed to take the shares from
the company. Therefore, neither the judgment of the majority, nor the
dissenting judgment of Lord Justice LINDLEY is of much assistance to the
contention of the respondent that the appellants should be put on the list of
contributories.
The result,
therefore, is that we must differ from the view taken by the learned Judge. The
appeal will, therefore, be allowed with costs and the order passed by the
learned Judge will be set aside. The order for costs passed by the learned
Judge will also be set aside and the respondent will be ordered to pay to the
appellants the sum of Rs. 120 being costs of the chamber summons. The order for
costs against the liquidator is limited to the assets of the company in his
hands.
Appeal
allowed.
Section 274
Disqualification of directors
Companies
act
[2004] 55
scl 146 (
v.
Arindam
Mukherjee
KALYAN
JYOTI SEN GUPTA, J.
G.A.
APPEAL NOS. 2107 AND 3889
and
C.S. NO. 236 OF 2002
MAY 20,
2003
On date of
commencement of amending section 274(1) of
Companies Act, 1956, if any person has been director
in a defaulting company, he will be affected
by section 274(1)(g)
Section 274 of the Companies Act, 1956 -
Directors - Disqualification of - Whether in view of language mentioned in
clause (g) incorporated in section 274(1) on 13‑12‑2000, it is clear
that on date of commencement of amended section 274(1), if any person has been
director in a defaulting company, he will be affected by section 274(1)(g) -
Held, yes - Whether not only shareholders of a particular company in which
tainted directors are sought to be appointed from a defaulting company, but any
person as member of public who is interested to transact with that limited
company can also come in and question appointment of tainted directors - Held,
yes - Defendant Nos. 1 and 2 had been directors of defendant No. 7 company
which had accepted deposits from public - Having failed in repaying said
deposits defendant No. 7 approached Company Law Board which allowed
reschedulement of repayment of deposits - Even thereafter defendant No. 7
failed to repay and in meantime defendant Nos. 1 and 2 allegedly resigned from
defendant No. 7 and were sought to be appointed as directors in defendant No. 3
company - Petitioners, who were equity shareholders of defendant No. 3 , filed
suit contending that defendant Nos. 1 and 2 had become disqualified to be
directors in defendant No. 3 in view of section 274(1)(g) - In that suit,
company court granted an ad interim order of status quo which was sought to be
vacated by defendant Nos. 1 and 2 in instant appeal - Whether petitioners had
locus standi to maintain suit - Held, yes - Whether, on facts, defendant Nos. 1
and 2 were disqualified to be appointed as director in defendant No. 3 and,
therefore, order of status quo passed by company court would continue till disposal
of suit - Held, yes - Whether, therefore application for vacating interim order
was liable to be dismissed - Held, yes
Facts
The
plaintiffs/petitioners were holders of equity shares in defendant No.
3-company. Defendant Nos. 1 and 2 had been the directors of defendant No.
7-Company, which had accepted deposits from public under various schemes.
Defendant Nos. 1 and 2 were appointed as directors of defendant No. 7 on
28-6-1999 and 26-6-1998 respectively and remained in that position till
15-10-2001 and 26-9-2001 respectively, when, they were said to have resigned
from the office of the director of defendant No. 7. Thereafter, the said two
persons were sought to be appointed as directors in defendant No. 3. During
their tenure of directorship, defendant No. 7 had defaulted in repaying the
amount of deposit together with interest to the public upon maturity. So,
defendant No. 7 approached the Company Law Board for suitable order for
reschedulement of repayment under the Act. The Company Law Board by an order in
August, 2000, pursuant to the scheme submitted by defendant No. 7, allowed
reschedulement of repayment of the deposits to the respective depositors.
Subsequently
the company court, in a suit filed by the petitioners against the defendants, granted
an ad interim order of status quo holding that defendant Nos. 1 and 2 had
become disqualified to be directors in defendant No. 3- company in view of the
provisions of section 274(1)(g).
On application
by defendant Nos. 1 and 2 for vacating interim order :
Held
Clause (g) of
sub-section 1 of section 274 as inserted in Act on 13-12-2000 is a punitive
measure for the benefit and protection of the deposit holders against failure,
either wilful or otherwise in repayment of the deposit on due date. Not only
the shareholder of a particular company in which tainted directors are sought
to be appointed from a defaulting company but any person as the member of the
public who is interested to transact with that limited company can also come in
and question the appointment of the tainted directors. This section intends to
identify those directors under whose management the default has occurred. So
the plaintiff/petitioners had locus standi to maintain the suit. [
On the factual
score, it appeared that, had there been no order of the Company Law Board then
due date of maturity of all the deposits would have been, for the various slabs
of the deposits from 31st December, 1998 till 30th June, 2000. However, the
date of repayment had been rescheduled by the order of the Company Law Board
and it appeared that this had been done for all slabs of deposits. [
The Company Law
Board had accepted and approved the scheme for reschedulement of repayment proposed
by defendant No. 7. The Company Law Board has been conferred with jurisdiction
to approve the scheme by rescheduling dates of repayment which has fallen due
under section 45QA of the Reserve Bank of India Act, 1934 (1934 Act). [
It was very
clear from section 45QA of the 1934 Act that on application being made upon
notice to the deposit holders, the Company Law Board hearing all the persons
interested, accepts and/or approves the scheme. So, the adjudicating process
under the aforesaid section is a conciliatory one and is having the effect of
an agreement in the shape of an order, unless the same is set aside by the
appropriate forum. It is true that due date for repayment is fixed in terms of
the certificate of deposit by the agreement between the parties and such due
date cannot be changed and/or modified without the consent of both the parties.
[
It appeared
from the order of the Company Law Board that deposit holders appeared and they
participated in the hearing, after hearing them, the Company Law Board passed
order. So the order had got the effect of consent as it had not been challenged
nor set aside. When the parties themselves, namely, company and shareholders
had agreed mutually to reschedule the payment with the mode of instalment, due
date initially fixed had been changed and/or varied. [
In the instant
case, in consonance with the provision of section 45QA of the 1934 Act, upon
hearing deposit holders and company and other persons and upon proper
publication, the Company Law Board had rescheduled the date of repayment of
deposits for various categories of depositors. No appeal had been preferred
against this order. As such, the same was binding upon all the persons
concerned regardless of the contractual provision. [
It could not be
accepted that by the order of the Company Law Board, the due date did not stand
changed and/or modified for the purpose of section 274. When the date of
repayment was rescheduled, due date automatically stood extended and/or varied.
The beneficial part of the legislation should be given to all the persons
without any discrimination. [
Therefore, due
date for computing one year or more to repay was to be reckoned from
rescheduled dates as fixed by the Company Law Board in respect of all
categories of deposits. [
The date of the
order of the Company Law Board was 30-6-2000. Therefore, in terms of the
aforesaid order, the time given therein had to be reckoned from the date of the
order, as the date of maturity in respect of all categories of deposits were
earlier than the date of the order. [
Defendant Nos.
1 and 2 were appointed as directors on 28-6-1999 and 26-6-1998 respectively in
defendant No. 7-company and they were said to have resigned on 15-10-2001 and
26-9-2001 respectively. [
Therefore,
factually it had to be ascertained as to whether during the aforesaid period,
defendant No. 7 failed to repay the amount of deposit with interest within the
rescheduled date or not. The repayment was to be made within 30-10-2000 as far
as deposit of Rs. 5,000 was concerned. Similarly, 50 per cent of the amount in
the category of deposit of Rs. 5001-15000 was to be made within 3 months from
the date of the order, that was to say, by 30-9-2000. As regards category of
deposit of Rs. 15001-25000, the first 50 per cent was to be repaid by
30-10-2000 and all the other deposits were to be repaid by latest 30-10-2002. [
From the
affidavit-in-opposition of defendant Nos. 1 and 2 or for that matter defendant
No. 4, there was nothing to show that such repayment had been made within the
rescheduled date. Rather it was an admitted position that the repayment had not
been made. [
The modern rule
of construction or interpretation should be as follows :
(i) Unless the statute expressly
provides for retrospective operation in case of creation or taking away of any
substantive right and further creating any liability, such operation cannot be
given or be read, for it is the absolute domain and prerogative of the Legislature
to give effect retrospectively or prospectively. Courts shall not venture to
give any mode of operation different from the apparent intention of the
Legislature. If it is attempted to be done, then that will be an act of excess
to power of judiciary which is strictly prohibited under the Constitution of
India.
(ii)The plain and grammatical meaning of the language and words are to be
given and while doing so, if the object of the Legislature is fulfilled then no
other thought should come in the mind of the court and the court will instantly
accept such meaning; however, if while giving plain and grammatical meaning of
the words and sentence of a section or any part thereof, the very intention and
object of the Act is defeated certainly, the court must find out the object and
purpose of the Act to give the meaningful workability of the section or Act.
The court must also see while constructing statute or any section thereof, if
express intention is not apparent, there shall not be any absurdity.
If it is found
that the plain grammatical meaning of the language employed in the section
suggests retrospective operation then in that case, such operation should be
given although one may be affected. [
The language
mentioned in clause (g) of section 274(1) clearly suggests that on the date of
commencement of the aforesaid Amending Act if any person has been director in a
defaulting company, he will be affected by this sub-section. The words ‘is
already director’ suggest that who has been continuing to be director till the
date of commencement of the Act. This is supported by the words ‘has failed to
repay its deposit’. The plain grammatical position of these letter “few words”
is present perfect tense and these suggest that the failure has started even before
the commence-ment of the Act. If the operation of this language is intended by
the Legislature to mean for future event or occurrence then the words ‘has
failed to deposit’ or ‘is already a director’ would not have been employed in
the sub-section. If the meaning as explored is given, then this would not lead
to any absurdity as the Amending Act is framed, no doubt, basically to protect
interest of deposit holders by prohibiting entry of tainted directors against
possible act of misappropriation and/or breach of trust meaning thereby, to
curb the wrong deeds, misdeeds to be perpetrated by wrongful act or omission by
the same directors. To check and prevent public wrong, the moment discovered,
is part of good governance in any form of Government by legislative or
executive action. [
On the other
hand, if the aforesaid words are treated to be for future occurrence then, the
position would emerge that the aforesaid amending portion cannot be given any
effect at all for a period of at least one year. One year is the minimum period
for default in order to take the advantage of the aforesaid sub-section. This
Amending Act, on the contrary, had been given effect on and from the date of
the notification itself. It is an absurd thought that after an Act having been
notified cannot be given effect immediately. The operation of the Act cannot be
suspended for a period of one year unless of course it is provided expressly,
at least by giving interpretation of the words and language of the section
itself. [
Therefore, the
said provision would be applicable against defendant Nos. 1 and 2. From the
records, it was found that even after rescheduling of date of repayment of the
deposit, defendant No. 7-company had failed to repay within one year or more.
The company was obliged to repay on or before 30-10-2000 as far as deposit
holders of Rs. 5,000 were concerned and even after filing of the suit, the
default continued. [
Therefore, it
was clear that default of defendant No. 7-company had been continuing.
Defendant No. 1 had been a director from 28-6-1999 till 15-10-2001 when he was
said to have resigned from the office of directorship of defendant No. 7.
However, there was no document in the affidavit-in- opposition of any of the
defendants to show that defendant No. 1 had resigned. [
Therefore,
defendant No. 1 was disqualified to be appointed as a director in defendant No.
3. [
In case of
defendant No. 2 as he was appointed as, director on 26-6-1998 and remained till
26-9-2001 in defendant No. 7 when the default of the company continued for one
year or more. In that case also, likewise the defendant No. 1, there was not
any document to show that he had tendered his resignation nor any document to
show that such resignation had been accepted not to speak of furnishing any
copy of statement, in Form 32. So, he would be deemed to have been continuing
as director. [
Accordingly,
the order of status quo passed by the
Cases referred to
Union of India
v. Madan Gopal Kabra AIR 1954 SC 158 (para 7), Rafiquennessa v. Lal Bahadur
Chetri AIR 1964 SC 1511 (para 7), Bashiruddin Ashraf v. Bihar Subai Sunni Majlis-Awaqf
AIR 1965 SC 1206 (para 7), T.K. Lakshmana Iyer v. State of Madras AIR 1968 SC
1489 (para 7), A Solicitor’s Clerk, In re [1957] 3 All ER 617 (para 7), Mansif
Jahan v. Rajendra Prasad AIR 1946 Oudh 226 (para 9), Jagir Kaur v. Jaswant
Singh AIR 1963 SC 1521 (para 13), Kanai Lal Sur v. Paramnidhi Sadhukhan AIR
1957 SC 907 (para 13), State of Maharashtra v. Nanded-Parbhan Z.L.B.M.V.
Operator Sangh AIR 2000 SC 725 (para 13), Harbhajan Singh v. Press Council of
India AIR 2002 SC 1351 (para 13), Pakala Narayana Swami v. Emperor AIR 1939 PC
47 (para 13), Rananjaya Singh v. Baijnath Singh AIR 1954 SC 749 (para 13),
Nelson Motis v. Union of India [1992] 4 SCC 711 (para 13), Mahadeolal Kanodia
v. Administrator General of West Bengal AIR 1960 SC 936 (para 13), Ganesh Wire
Industries v. CESC Ltd. AIR 2003 Cal. 138 (para 13), Films Raver International
Ltd. v. Cannon Film Sales Ltd. [1986] 3 All ER 772 (para 13), Luke v. IRC
[1963] AC 557 (para 13) and Sussese Peerage [1844] 11 Cl and Fin 85 (para 39).
P.C. Sen,
P.K. Roy, Hirak Mitra, Joyanta Mitra and Sudipta Sarkar for the
Appearing Parties.
Order
1. In this motion the
petitioner succeeded in obtaining an ad interim order of status quo, passed by
this Court in a declaratory action for holding the defendant Nos. 1 and 2 have
become disqualified to be Directors in defendant No. 3 company in view of the
provision of section 274 sub-section (1)(g) of the Companies Act, 1956. The
defendant Nos. 1 and 2 applied for vacating of the aforesaid order of status
quo. However, this application has not been disposed of separately and the same
has been treated to be an affidavit in opposition to the petition of this
motion for convenience sake.
2. Short narration of the
fact in this case would be relevant in order to find out prima facie, as to
whether the plaintiffs/petitioners are entitled to continuation of interim
order till the disposal of the suit or not. The plaintiffs/petitioners are
holders of equity shares in the defendant No. 3. Yule Financing and Leasing
(hereinafter referred to as Yule) being the defendant No. 7 was floated in the
year 1981 by Andrue Yule and Company (the fourth defendant). The defendant Nos.
1 and 2 had been the Directors of Yule who had accepted deposits from public
under various schemes but failed to repay on their respective dates on
maturity.
3. They were appointed
Directors on 28th June, 1999 and 26th June, 1998 respectively and had been till
15th of October, 2001 and 26th September, 2001 respectively, when, the
aforesaid two persons are said to have been resigned from the Office of the
Director of the defendant No. 7. Now these two persons are sought to be
appointed Directors in the defendant No. 3. It appears that during their tenure
of directorship the defendant No. 7 is alleged to have defaulted in repaying
the amount of deposit together with interest to the public upon maturity. So,
the defendant No. 7 approached Company Law Board for suitable order for
reschedulement of repayment under the Companies Act, 1956.
4. By an order in August
2000 pursuant to the scheme submitted by defendant No. 7 reschedulement of
repayment of the deposits to the respective depositors was allowed. During the
tenure of the Directorship of the defendant Nos. 1 and 2 sub-section (1) of
section 274 of the Corporate Laws was amended on 13th December, 2000 by
incorporating in sub-section (1), Clause G (A and B). Therefore, the aforesaid
section as amended are set out hereunder :
“274. Disqualifications of Directors.—(1) A
person shall not be capable of being appointed a Director of a company, if—
(a) to (f)** ** **
(g) such person is already a director of a
public company, which,—
(A) has not filed the annual accounts and annual returns for any
continuous three financial years the commencing on and after the first day of
April 1999; or
(B) has failed to repay its deposit or interest thereon on due
date or redeem its debentures on due date or pay dividend and such failure
continus for one year or more:
Provided
that such person shall not be eligible to be appointed as a director of any
other public company for a period of five years from the date on which such
public company, in which he is a director, failed to file annual accounts and
annual returns, under sub-clause (a) or has failed to repay its deposit or interest
or redeem its debentures on due date or pay dividend referred to in clause
(B).”
5. Learned Counsel for
both the parties have argued and agreed that any Act cannot have any
retrospective operation and the law is very well settled that unless expressly
it is intended by the legislature, retrospective operation cannot be thought of
and it is always prospective.
6. In this amending Act
there is no such expressed intention. Both the parties have cited the various
authorities in support of their respective submissions.
7. Mr. P.C. Sen learned
Senior Counsel in support of the petition submits that it is true the aforesaid
principle of interpretation of statute is applicable generally but there may be
certain cases where the language of the section itself may work in
retrospection. He submits that ordinary grammatical meaning of the wordings
shall be given. When the ordinary grammatical meaning is clear and unambiguous,
no further aid and assistance from the object and reason of the Act should be
taken. In this case the aforesaid provision will be applicable if a person who
is already a Director on the date of commencement of the Act, is associated
with any defaulting company, he would be inviting this disqualification. In
support of his aforesaid submission he has relied on number of decisions of the
Supreme Court in Union of India v. Madan Gopal Kabra AIR 1954 SC 158,
Rafiquennessa v. Lal Bahadur Chetri AIR 1964 SC 1511, Bashiruddin Ashraf v.
Bihar Subai Sunni Majlis-Awaqf AIR 1965 SC 1206 and T.K. Lakshmana Iyer v.
State of Madras AIR 1968 SC 1489 and an English decision in A Solicitor’s
Clerk, In re [1957] 3 All ER 617.
8. He contends that the
aforesaid amending Act namely section 132, which is a relevant one, came into force
on 14th December, 2000. In this case even assuming the defendant Nos. 1 and 2
having retired on 21st May, 2002 and 11th September, 2002 have been Director of
the defendant No. 7 on the date of commencement of the aforesaid Act.
Admittedly, the defendant No. 7 fails to repay the deposit amount to the
respective depositors for a period of one year or more on and from the date of
notification. The respective fixed deposits became matured on 31st December,
1999. As such, there is clear default on part of the defendant No. 7.
9. He submits that the
order of the Company Law Board rescheduling the date of repayment does not
change the due date as expressed in the aforesaid section. The effect of the
order of the Company Law Board is mere postponement of payment but deposit
becoming due to be repaid is not diluted. He wants to make a distinction
between the word “Due” and “payable”. He submits on strength of Oudh High Court
judgment in Mansif Jahan v. Rajendra Prasad AIR 1946
10. Even if the order of the
Company Law Board is taken into consideration, still then, there is default in
paying the amount of the deposit, so far as it relates to the deposit holders
of Rs. 5,000, there has been a defaulter for one year.
11. Mr. P.K. Roy learned
Senior Counsel whose clients have sought to come into this proceedings for
being added as a party, supports the argument of Mr. Sen and he submits the
aforesaid amendment is intended to protect the deposit holder and the public at
large. So, this has to be construed strictly and the language employed in the
said section is intended to mean the person who is already Director meaning
thereby in essence, because of the language used therein, it has retrospective
operation.
12. Mr. Hirak Mitra learned
Senior Counsel while opposing this application contends that the language of
the section is very clear. There is no provision either expressed or by
necessary implication that the said section is intended to give a retrospective
operation. A portion of the said amended section has been expressly given
retrospective operation from 1st April, 1999, whereas the other portion has not
been mentioned specifically. So, it is clear that it will have the prospective
operation. Therefore, upon careful reading of the said section it will appear
that defaulting period of one year or more and holding office of director will
be counted on and from 13th December, 2000. In terms of above section one year
is the minimum time. Before expiry of one year the defendant Nos. 1 and 2 have
resigned admittedly. Therefore, they do not come within the mischief of the
aforesaid section.
13. Mr. Joyanta Mitra
learned Senior Counsel also opposes this application and has advanced the same argument
and in support to their arguments they relied on the following decisions of the
Supreme Court and other Courts :
Jagir Kaur v.
Jaswant Singh AIR 1963 SC 1521, Kanai Lal Sur v. Paramnidhi Sadhukhan AIR 1957
SC 907, State of Maharashtra v. Nanded-Parbhan Z.L.B.M.V. Operator Sangh AIR
2000 SC 725, Harbhajan Singh v. Press Council of India AIR 2002 SC 1351, Pakala
Narayana Swami v. Emperor AIR 1939 PC 47, Rananjaya Singh v. Baijnath Singh AIR
1954 SC 749, Nelson Motis v. Union of India [1992] 4 SCC 711, Mahadeolal
Kanodia v. Administrator General of West Bengal AIR 1960 SC 936, Ganesh Wire
Industries v. CESC Ltd. AIR 2003 Cal. 138, Films Raver International Ltd. v.
Cannon Film Sales Ltd. [1986] 3 All ER 772, Luke v. IRC [1963] AC 557 and
(1884) 13 QBD 337 (sic).
14. Mr. Joyanta Mitra adds
that the aforesaid section operates for disqualification and has got civil
consequences. So, the construction of the section should be very restrictive
and the clear and literal meaning should be given.
15. Mr. Sudipta Sarkar
learned Senior Counsel submits that in view of the order passed by the Company
Law Board no question of disqualification within the section is applied as the
due date for payment of the deposits has been rescheduled and therefore, the
minimum period of one year is not fulfilled. As such the suit as well as the
application are frivolous one and interim order should be vacated.
16. Of course, Mr. Hirak
Mitra at the very outset contended that the plaintiff/petitioner have no locus
standi to maintain the suit, as the shareholder are not concerned with the
management of the company they are interested only in the dividend of shares.
17. Before I advert to the
main issues I think I should decide the question of locus standi first. I am
unable to accept the argument of Mr. Hirak Mitra that the plaintiff/petitioner
being the shareholder and the clients of Mr. P.K. Roy, who are also the
shareholder, have no locus standi. The shareholders are vitally interested in
the proper and lawful management of company, inasmuch as they are represented
by the Directors, and obviously they must see that company is managed and
controlled by the competent and untainted person to protect their interest if a
company mans the office of director with disqualified persons, it certainly
brings disrepute to the company itself and it may have adverse effect in the
business of the company.
18. The aforesaid amended
portion of section 274 is in my view, punitive measure for the benefit and
protection of the deposit holders against failure, either wilful or otherwise
in repayment of deposit on due date. In my view not only the shareholder of a
particular company in which tainted directors are sought to be appointed from a
defaulting company, any person in the member of the public who is interested to
transact with that Limited Company can also come in and question the
appointment of the tainted directors. This section intends to identify those
directors under whose management the default has occurred. So, I hold that the
plaintiff/petitioner and the clients of Mr. Roy have locus standi.
19. Going by the prayers of
the petition I am of the view the prayers (a), (b) and (c) cannot be granted
and this can only be granted by passing a decree. The prayer (d) is not clear.
However, since the order of status quo has been passed initially, it has to be
considered in totality of the facts and circumstances of this case and without
resorting to technicality, whether this can be maintained till the disposal of
the suit or not.
20. The moot question in
this case is, on the facts and circumstances of this case whether this section
has retrospective operation or prospective operation. Even if it is made
prospective operation, then, because of the language employed therein the
effect thereof can be given for the failure of the company that has already
taken place on the date of commencement of the Act or not. I think argument of
Mr. Sarkar has to be considered first, as to whether the aforesaid section can
be applied in view of the order passed by the Company Law Board, rescheduling
the date of repayment.
21. On the factual score it
appear that had there been no order of the Company Law Board then due date of
maturity of all the deposits would have been for the various slabs of the
deposits from 31st December, 1998 till 30th June, 2000. However, these dates of
repayment have been rescheduled by the order of the Company Law Board and it
appears that this has been done for all slabs of deposits.
22. Mr. P.C. Sen argues that
the effect of the order of the Company Law Board is the postponement of date of
repayment but the original due date cannot be altered as this has been fixed in
terms of the agreement between the defaulting company and the deposit holders
as there was failure to make payment on due date and that is why a scheme had
to be filed for repayment. The Company Law Board has accepted and approved such
scheme. In this case point for consideration is, whether there is failure to
make payment on due date and such failure continues for a period of one year or
more, and further, whether, defaulting company can get any advantage of the
order of Company Law Board. So I feel that the effect of the order of Company
Law Board has to be seen. The Company Law Board has been conferred with
jurisdiction to approve the scheme by rescheduling dates of repayment which has
fallen due under section 45QA of the Reserve Bank of India Act, 1934. So, the
aforesaid section is set out hereunder.
“45-QA. Power of Company Law Board to order
repayment of deposit.— (1) Every deposit accepted by a non-banking financial
company, unless renewed, shall be repaid in accordance with the terms and
conditions of such deposit.
(2) Where a non-banking financial company has failed to repay and
deposit or part thereof in accordance with the terms and conditions of such
deposit, the Company Law Board constituted under section 10E of the Companies
Act, 1956 may, if it is satisfied, either on its own motion or on an
application of the depositor, that it is necessary so to do to safeguard the interests
of the company, the depositors or in the public interest, direct, by order, the
non-banking financial company to make repayment of such deposit or part thereof
forthwith or within such time and subject to such conditions as may be
specified in the order:
Provided that the Company Law Board may, before making any order under this
sub-section, give a reasonable opportunity of being heard to the non-banking
financial company and the other persons interested in the matter.”
23. It will be very clear from
the aforesaid section that on application being made upon notice to the deposit
holder the Company Law Board, hearing all the person interested, accepts and/or
approve the scheme. So, the adjudicating process under the aforesaid section in
my view is a conciliatory one and is having the effect of an agreement in the
shape of an order, unless the same is set aside by the appropriate forum. It is
true that due date for repayment is fixed in terms of the certificate of
deposit by the agreement between the parties and such due date cannot be
changed and/or modified without the consent of both the parties.
24. It appears to me from
the order of the Company Law Board that deposit holder appeared and they
participated in the hearing, after hearing them the Company Law Board passed
order. So, this order had got the effect of consent as it has not been
challenged nor set aside. When the parties themselves, namely company and
shareholders have agreed mutually to reschedule the payment with the mode of
instalment, in my view due date initially fixed has been changed and/or varied.
25. The Oudh High Court case
cited by Mr. Sen is not applicable in this case as in that case on fact the
case proceeded in a different footing.
26. The provision of section
45QA, sub-section (2) of the Reserve Bank of India Act is intended to provide
measure in case of default in repayment of the deposits on maturity to the
depositors and it subserves two purposes—(i) when the company deliberately
fails and neglects to make repayment to give relief to the depositors for
passing appropriate order and (ii) for any unforeseen circumstances or
situation beyond the control of the company to give relief to the company by
extending time for repayment of the deposits with interest.
27. In either of the case
the effect is that upon intervention of Company Law Board the contractual
terms, as regard date of repayment stands modified. I am unable to accept the
submission of Mr. P.C. Sen that the order of the Company Law Board under
section 45QA, sub-section (2) of the RBI Act cannot vary the contractual terms
between the company and the depositors. Such an argument, in my view, is
absolutely contrary to basic principle of equity and good sense. It is settled
position of the law, contractual terms cannot always be adhered to and in
adverse situation arising beyond control of the defaulting parties to give
relief to the party affected, Court has every power to vary the contractual
terms. In this case I find, in consonance with the provision of the aforesaid
section of RBI Act upon hearing deposit holders and company and other person
and upon proper publication, the Company Law Board has rescheduled the date of
repayment of deposits for various categories of depositors. No appeal has been
preferred against this order. As such the same is binding upon all the persons
concerned, regardless of the contractual provision.
28. I cannot accept the
argument of Mr. Sen that by this order the due date does not stand changed and/or
modified for the purpose of aforesaid section 274 sub-section, clause g(B)
(sic). When the date of repayment is rescheduled, due date automatically stands
extended and/or varied. The beneficial part of legislation should be given to
all persons without any discrimination. When company is getting benefit of the
aforesaid order and it is saved from the evil consequences for failure to make
payment on maturity, why the director(s) concerned should not get such benefit
of extension as the failure of the company in making payment within due date is
correlated to the legal disqualification of the Directors.
29. Therefore I am of the
view that due date for computing one year or more to repay is to be reckoned
from rescheduled dates as fixed by the Company Law Board in respect of all
categories of deposits.
30. In the order of the
Company Law Board the rescheduled date of repayment for various categories of
deposits are stated hereunder :
|
Categories of Deposits |
Schedule of Repayment of Deposits
|
|
Up to Rs. 5,000 |
One instalment within 4(four)
months from the date of maturity or the date of the order, whichever is
later. |
|
Rs. 5,001 to Rs. 15,000 |
Two equal instalments within 6(six)
months, commencing from the date of maturity or the date of the order,
whichever is later in the manner - 50% within 3(three) months and the balance
50% within next 3(three) months. |
|
Rs. 15,001 to Rs. 25,000 |
Two equal instalments within
8(eight) months, commencing from the date of maturity or the date of the
order, whichever is later in the manner - 50% within 4(four) months and the
balance 50% within next 4(four) months. |
|
Rs. 25,001 to Rs. 50,000 |
Three instalments within
12(twelve) months, commencing from the date of maturity or the date of the
order, whichever is later in the manner - 30% within 4(four) months, 35%
within next 4 (four) months and the balance 35% within 4(four) months
thereafter. |
|
Rs. 50,001 and above |
Four equal instalments within
16(sixteen) months, commencing from the date of maturity or the date of the
order, whichever is later in the manner - 25% each in every 4(four) months. |
31. The date of the order of
the Company Law Board is 30th June, 2000. Therefore, in terms of the aforesaid
order the time given therein has to be reckoned from the date of the order as
the date of maturity in respect of all categories of deposits were earlier than
the date of the order.
32. The defendant Nos. 1 and
2 were appointed directors on 28th June, 1999 and 26th June, 1998 respectively
in the defendant No. 4-company and they are said to have resigned on 15th
October, 2001 and 26th September, 2001 respectively.
33. Therefore factually it
has to be ascertained as to whether during the aforesaid period defendant No. 4
fails to repay the amount of deposit with interest within the rescheduled date
or not. The repayment was to be made within 30th October, 2000 as far as
deposit of Rs. 5,000 is concerned. Similarly, 50 per cent of the amount in the
category of deposit of Rs. 5,001-15,000 was to be made within 3 months from the
date of the order that is to say by 30th September, 2000. As regard category of
deposit of Rs. 15,001-25,000 the first 50 per cent is to be repaid by 30th of
October, 2000 and in all other deposits are to be repaid by latest 30th of
October, 2002.
34. From the
affidavit-in-opposition of the defendant Nos. 1 and 2 or for that matter
defendant No. 4, I do not find anything to show that such repayment has been
made within the rescheduled date. Rather it is an admitted position the
repayment has not been made.
35. Now on the aforesaid
background it is to be examined whether the aforesaid amended provision of the
Companies Act, 1956 will have any applicability to disqualify the defendant
Nos. 1 and 2 or not.
36. The law Courts of our
country as well as
The first and primary
rule and canon of construction is that intention of the Legislature must be
found in the words used by the Legislature itself. If the words used are
capable of one construction only then it would not be open for the Courts to
adopt another hypothetical construction on the ground that such hypothetical
construction is more consistent with the alleged object and policy of the Act.
The words used in the material provision of the statute must be interpreted in
their plain grammatical meaning, and it is only when such words are capable of
true construction the question of giving effect to the policy or object of the
Act can legitimately arise. When the material words are capable of two
constructions, one of which is likely to defeat or impair the policy of the
Act, whilst the other construction is likely to assist the achievement of the
said policy, then the Courts prefer to adopt the latter construction. It is
only in such cases that it is relevant to consider the mischief and defect
which the Act purports to remedy and correct.
37. The Supreme Court in the
case of Kanai Lal Sur (supra) while dealing with the interpretation of section
5(1) of the Calcutta Thika Tenancy Act (2 of 1949) (as amended by Act 6 of
1953) has applied and further laid down the aforesaid principle.
38. Later in a decision of
the recent past of the Supreme Court in case of Nanded-Parbhan Z.L.B.M.V.
Operator Sangh (supra) has held amongst other than “When the language of a
statute is fairly and reasonably clear, the inconvenience or hardships are no
considerations for refusing to give effect that meaning.”
39. The Supreme Court while
observing as above has accepted the rule of construction laid down in an
English case in Sussese Peerage [1844] 11 Cl and Fin 85, 143 18 ER 1034 (HL) and
has laid down as follows : “If the words of the statute are in themselves
precise and unambiguous, then no more can be necessary than to expound those
words in their natural and ordinary sense. The words themselves do alone in
such case best declare the intent of the lawgiver.”
40. Again in paragraph 11 in
the said judgment it has been concluded that “Intention of the Legislature is
required to be gathered from the language used and, therefore, a construction,
which requires for its support an additional substitution of words or which
results in rejection of words as meaningless has to be avoided.”
41. In a fairly recent
decision in case of Harbhajan Singh (supra) the Supreme Court while
interpreting section 6, sub-section (7) of the Press Council Act has followed
that “....... ordinary, grammatical and natural meaning, as it was found the
language used therein was plain and simple. Their Lordships without any
hesitation followed the aforesaid established rule of interpretation as stated
hereinabove.”
42. In the illustrious
decision of the Privy Council in case of Pakala Narayana Swami (supra) while
construing section 162 of the Criminal Procedure Code, 1898 (since repealed)
has laid down the aforesaid rule at page 51 column 2 amongst others that “when
the meaning of words is plain it is not the duty of the Courts to busy
themselves with supposed intention.”
43. An old decision of the
Supreme Court in case of Rananjaya Singh (supra) it has been held amongst
others in paragraph 3 at page 752 amongst others that “The spirit of law may
well be an elusive and unsafe guide and the supposed spirit can certainly not
be given effect to in opposition to the plain language of the sections of the
Act and the rules made thereunder. If all that can be said of these statutory
provisions is that construed according to the ordinary, grammatical and natural
meaning of their language they work injustice by placing the poorer candidates
at a disadvantage the appeal must be to Parliament and not to this Court.”
44. In the case of Nelson
Motis (supra) the Supreme Court has reiterated in paragraph 8 that “.........if
the words of a statute are clear and free from any vagueness and are,
therefore, reasonably susceptible to only one meaning, it must be construed by
giving effect to that meaning, irrespective of consequences.”
45. In case of Mahadeolal
Kanodia (supra) the Supreme Court has laid down the rule of interpretation of
statutory provision in the manner as follows : “The principles that have to be
applied for interpretation of statutory provisions of this nature are well
established. The first of these is that statutory provisions creating,
substantive rights or taking away substantive rights are ordinarily
prospective; they are retrospective only if by express words or by necessary
implication the Legislature had made them retrospective; and the retrospective
operation will be limited only to the extent to which it has been so made by
express words, or necessary implication. The second rule is that the intention
of the Legislature has always to be gathered from the words used by it, giving
to the words their plain, normal, grammatical meaning. The third rule is that
if in any legislation, the general object of which is to benefit a particular
class of persons, any provision is ambiguous so that it is capable of two
meanings, one which would preserve the benefit and another which would take it
away, the meaning which preserves it should be adopted. The fourth rule is that
if the strict grammatical interpretation gives rise to an absurdity or
inconsistency such interpretation should be discarded and an interpretation
which will give effect to the purpose the Legislature may reasonably be
considered to have had will be put on the words, if necessary even by
modification of the language used.”
46. The learned single Judge
of this Court in case Ganesh Wire Industries (supra) while examining the words
and language of section 49(B) as amended in the Electricity (Supply) West
Bengal Amendment Act, 1994 has followed the aforesaid rule of construction
though not referring to the above Supreme Court decision but referring to other
Supreme Court decisions. In that case by section 49(B) a liability was sought
to be created so it was held that the aforesaid Amendment Act is not intended
by the Legislature to give retrospective operation as the liability sought to
be created. So, it was held that operation of the Act must be prospective not
retrospective.
In an English
decision rendered in case of Luke (supra) House of Lords observed that “The
general principle is well settled. It is only where the words are absolutely
incapable of a construction which will accord with the apparent intention of
the provision and will avoid a wholly unreasonable result, that the words of
the enactment must prevail.”
47. In the case of Madan
Gopal Kabra (supra) the Supreme Court observed in paragraph 13 amongst others
as follows :
“While it is true that the Constitution has no
retrospective operation, except where a different intention clearly appears, it
is not correct to say that in bringing into existence new Legislatures and
conferring on them certain powers of legislation, the Constitution operated
retrospectively. The legislative powers conferred upon Parliament under Article
245 and Article 246 read with List I of the Seventh Schedule could obviously be
exercised only after the Constitution came into force and no retrospective
operation of the Constitution is involved in the conferment of those powers.
But it is different thing to say that Parliament in exercising the powers thus
acquired is precluded from making a retroactive law. The question must depend
upon the scope of the powers conferred, and that must be determined with
reference to the terms of the instrument by which affirmatively, the
legislative powers were created and by which negatively, they were restricted.”
48. Again in paragraph 14 it
is observed “It could not be assumed that such a Legislature had the power of
making a law having retrospective operation in relation to a period to its
birth unless the Constitution itself clearly and explicitly conferred such
power.”
49. In the case of
Rafiquennessa (supra) it has been held in paragraph 9 amongst others that “In
order to make the statement of the law relating to relevant rule dealing with
the effect of statutory provisions in this connection, we ought to add that
retrospective operation of a statutory provision can be inferred even in cases
where such retroactive operation appears to be clearly implicitly in the
provision construed in the context where it occurs. In other words, a statutory
provision is held to be retroactive either when it is so declared by express
terms, or the intention to make it retroactive clearly follows from the
relevant words and the context in which they occur.”
50. In an English decision
In re A Solicitor’s Clerk (supra) it has been observed “In all editions of
Maxwell on the Interpretation of Statutes it is stated that it is a fundamental
rule of English law that no statute should be construed to have retrospective operation
unless such a constitution appears very clearly in the terms of the Act or
arises by a necessary or distinct implication.......It would be retrospective
if the Act provided that anything done before the Act came into force....”
51. The ratio laid down in
the aforementioned authorities it appears to me that the modern rule of
construction or interpretation should be as follows :
(i) Unless the statute
expressly provides for retrospective operation in case of creation or taking
away of any substantive right and further creating any liability such operation
cannot be given or be read, for it is the absolute domain and prerogative of
the Legislature to give effect retrospectively or prospectively. Courts shall
not venture to give any mode of operation different from the apparent intention
of the Legislature. If it is attempted to be done then that will be an act of
excess to power of judiciary which is strictly prohibited under the
Constitution of India.
(ii) The plain and
grammatical meaning of the language and words are to be given and while doing
so if the object of the Legislature is fulfilled then no other thought should
come in the mind of the Court and the Court will instantly accept such meaning,
however, if while giving plain and grammatical meaning of the words and
sentence of a section or any part thereof the very intention and object of the
Act is defeated certainly the Court must find out the object and purpose of the
Act to give the meaningful workability of the section or Act. The Court must
also see while constructing statute or any section thereof if express intention
is not apparent, there shall not be any absurdity.
If it is found on
plain grammatical meaning of the language employed in the section suggests
retrospective operation then in that case such operation should be given
although one may be affected as it is held by the
52. In the background of the
aforesaid analysis of the position of the law now it has to be examined in
which way section 274, sub-section (1), Clause G(A and B) is to be operated.
The said section as amended is reproduced below :
“274. Disqualification of Directors.—(1) A
person shall not be capable of being appointed a Director of a company. If......
(G) such person is already a director of a public company, which, (A) Has not
filed the annual accounts and annual returns for any continuous three financial
years the commencement on or after the date of April, 1999 or—
(B) Has failed to repay its deposit or
interest thereon on due date or redeem its debentures on due date or any
dividend and such failure continues for one year or more.
Provided that such person shall not be eligible to be appointed as a director of
any other public company for a period of 5 years from the date on which such
public company, in which he is a director, fail to file annual accounts and
annual returns, under sub-clause (A) or has failed to pay its deposit or
interest or redeem its debentures on due date or pay dividend referred to in
Clause (B).”
It appears to me the governing language of the
aforesaid section is “such person is already a director..............” and
“such company has failed to repay its deposit or interest. . . .”
53. The language mentioned
in clause (g) such person is already a Director in my view on giving literal,
plain and grammatical meaning clearly suggests that on the date of commencement
of the aforesaid amending Act if any person has been Director in a defaulting
company he will be affected by this sub-section. It is true that the
Legislature has not made any retrospective operation expressly but the language
employed therein contextually, makes it implicit that Legislature intends
retrospective operation [See Rafiquennessa’s case (supra) para 9]. The words
“is already Director” suggest that who has been continuing to be Director till
the date of commencement of the Act. This is supported by the words “has failed
to repay its deposits.” The plain grammatical position of these letter “few
words” is present perfect tense and these suggest that the failure has been
started even before commencement of the Act. If the operation of this language
is intended by the Legislature to mean for future event or occurrence, then the
words “has failed to deposit” or “is already a Director” would not have been
employed in the sub-section. If the meaning as explored by me is given then
this will not lead to any absurdity as the Amending Act is framed no doubt
basically to protect interest of deposit holders by prohibiting entry of
tainted directors against possible act of misappropriation and/or breach of
trust meaning thereby to curb the wrong deeds misdeeds to be perpetrated by
wrongful act or omission by the same Directors. To check and prevent public
wrong the moment discovered, is part of good governance in any form of
Government by legislative or executive action.
54. On the other hand, if
the aforesaid words are treated to be for future occurrence then, the position
will emerge that the aforesaid amending portion cannot be given any effect at
all for a period of at least one year. One year is the minimum period for
default in order to take the advantage of the aforesaid sub-section. This
Amending Act on the contrary has been given effect on and from the date of
notification itself. It is an absurd thought after an Act having been notified
cannot be given effect immediately. The operation of this Act cannot be
suspended for a period of one year unless of course it is provided expressly at
least by giving interpretation of the words and language of the section itself.
The aforesaid Supreme Court decisions as referred to above has clearly held
that interpretation of the words of any statute cannot be given effect to
frustrate or defeat the object of the Act or to lead to an absurdity [see
Mahadeolal Kanodia’s case (supra)].
55. So, I think in this case
this provision will be applicable against the respondent Nos. 1 and 2. From the
records I find prima facie that even after rescheduling of date of repayment of
the deposit the company has failed to repay within one year or more. The
company was obliged to repay on or before 30th October, 2000 as far as deposit
holders of Rs. 5,000 are concerned and even after filing of the suit this
default continues as in the affidavit-in-opposition of the defendant No. 7 nor
in the affidavit-in-opposition of the defendant Nos. 1 and 2 have stated that
repayment has been affected even after order of the Company Law Board. I do not
find any statement or averment whether any instalment has been paid with regard
to other category of deposits.
56. Therefore, it is clear
that default of the company has been continuing. The defendant No. 1 has been a
Director from 28th June, 1999 till 15th October, 2001 when he said to have
resigned from the office of directorship of the defendant No. 7. Though I do
not find any document in the affidavit in opposition of any of the defendants
that the defendant No. 1 has resigned. No copy of the resignation letter has
been disclosed nor annexed nor any resolution of the board of the company has
been annexed showing acceptance of resignation. It is the special knowledge of
the defendant Nos. 1 and 2 and for that matter the defendant No. 7 to produce
this document by way of evidence to establish the resignation was tendered and
it has been accepted under the provision of the Companies Act, 1956 or it has
been legalized under the provision of the Companies Act, 1956 by the Registrar
of Companies. It is legal requirement to be complied before resignation is held
operative, lawful and valid. It is true that the petitioner in its petition has
admitted the fact of resignation. In my view admission of the petitioner in
this case does not matter as against the provision of law. I hold that the
respondent Nos. 1 and 2 in absence of those documents are said to have been
technically continuing director for the purpose of applying the aforesaid
provision.
57. In my view the aforesaid
findings at this interlocutory stage are prima facie, and to hold that the
defendant No. 1 is disqualified to be appointed as a director in the defendant
No. 3.
58. In case of the defendant
No. 2 he was appointed director on 26th June, 1998 and remained till 26th
September, 2001 in defendant No. 7 when the default of the company continued
for one year or more. In his case also likewise the defendant No. 1 do not find
any document that he has tendered in resignation nor any document to show such
resignation had been accepted not to speak of furnishing any copy of statement
in Form 32. So, he is deemed to have been continuing as Director.
59. Accordingly, I am of the
view that order of status quo passed by this Court shall continue till the
disposal of the suit as I do not find any reason either on fact or in law to
vacate the same. The application for vacating interim order is thus dismissed.
Costs of this application will be cost in the cause.
60. However, I expedite the
hearing of the suit. Let the written statement be filed by the
defendants/respondents within a period of fortnight from date. Service of writ
of summons is not required to be served as it would be an academic formality.
Since copies of the plaints have already been received by the parties as it
appears from the interlocutory proceedings if not received then copies thereof
shall be served upon the learned Advocates on records of the respective
defendants/respondents. There will be cross order for discovery, within
fortnight thereof. Inspection forthwith. Parties would be at liberty to pray
for earlier hearing of the suit before appropriate Bench.
[2005]
60 scl 50 (bom.)
v.
Union of
Dalveer
Bhandari, CJ.
and
Dr. D.Y. Chandrachud, J.
September
24, 2004
Section 274(1)(g) of the Companies Act, 1956,
read with articles 14, 19 and 21 of the Constitution of India - Directors -
Disqualifications of - Whether amendment to section 274(1)(g), which debars a
person from being appointed as director of any other public company, if he is
director of a public company which fails to repay deposits or interest thereon
on due date; or to redeem debentures on due date, has been made to protect large
number of investors who had invested their lifetime savings with those
companies and in majority of cases, neither principal amount nor interest is
paid - Held, yes - Whether amendment has been carried out primarily to ensure
that directors of company should discharge their obligation properly; it does
not violate fundamental rights or any other right of directors of company -
Held, yes
Facts
The company had collected huge deposits from small
and poor investors and had failed to repay either the principal or interest on
said amount. The respondent-Union of
Held
In view of the statement of objects and
reasons of enactment of section 274(1)(g), it is abundantly clear that
amendment has been incorporated for better corporate governance and protection
of the investment of the depositors. In the instant case, the company had
collected huge deposits from small and poor investors, who had deposited their
lifetime savings with the company in the hope of getting reasonable interest on
their deposits. Such amendment would ensure transparency in the functioning of
the company and would lead to the protection of the investment of investors and
better corporate governance. According to the wisdom of the Legislature, this
can be achieved by enhancing penalty/punishment for contravention so as to
ensure better compliance with the provisions of the Act. [
Article 21 of the Constitution was not at all
attracted in the instant case and, therefore, challenge of the petitioner on
that ground was without any merit. Article 21 would have been attracted if the
submission was made on behalf of the small investors, who had deposited their
lifetime savings with the petitioners and similar other companies where these
small investors do not receive either the principal or interest and,
consequently, their children may not be provided education and/or medical
treatment affecting their families’ fundamental rights guaranteed under article
21. Therefore, if at all there was violation of article 21, it was the
violation of fundamental right under article 21 of the children and their
parents. [
Similarly, it was not clear as to how the
amendment of section 274(1)(g) violated the petitioners’ fundamental rights
guaranteed under article 19(1)(g). The amendment did not debar the petitioners
from carrying on any business, trade or occupation, only that the persons had
been rendered incapable of becoming directors in other companies. Perhaps,
amendment became imperative in view of a large number of companies becoming
defaulters. It is a matter of common knowledge that millions of small
investors, who had deposited their life-time savings with these companies, in
order to get reasonable returns, have been totally ruined. In most cases, they
neither receive the principal amount nor any interest. A number of such
petitions are pending in various Courts of the Country. Therefore, there was no
merit in the submission of the petitioners that the amendment, in any manner,
violated their fundamental rights guaranteed under article 19(1)(g) of the
Constitution. [
Similarly, there was no merit in the
petitioners’ submission that said amendment, in any manner, violated the rules
of natural justice. Once the company failed to repay the interest or the
principal amount, there was nothing required, but surely, when fact was not
disputed by the company, the challenge that this amendment being violative of
rules of natural justice becomes hollow and without any merit. [
Section 274(1)(g) does not penalise the
company; it is only the directors that are rendered incapable of functioning as
directors for certain period. The amendment has been carried out primarily to
ensure that directors of the company should discharge their obligation
properly. They should be more vigilant and careful and ensure that investors do
not lose their lifetime savings. [
This would also, to some extent, ensure that
the directors should not take loan and see that no loan, more than their
ability to repay is taken. [
Once any person becomes a director, it is his
primary duty to ensure that there is proper governance and investors’ money is
protected. [
Further, there was no merit in the submission
of the petitioners that the amendment is violative of article 14. The provision
of section 274(1)(g) does not make distinction between the Government nominated
directors and other directors. The Government of India, Ministry of Law,
Justice and Company Affairs has interpreted the composite effect of the
non obstante clause in the statute of public financial institutions like
Industrial Development Bank of India, Life Insurance Corporation of India, Unit
Trust of India, etc., and gave an opinion that the directors appointed by these
institutions cannot be disqualified as appointment as directors is by virtue of
section 274(1)(g) and also directors appointed on the boards of assisted
companies, etc. [Para 18]
Regarding the grievance of the petitioners
that the name of the disqualified directors are given on the website, it is
desirable for the public to know the names of some defaulting directors of the
other companies, so that they would be wary of such persons who are directors
of such companies. This can also be justified in the large public interest. [
Hence, the amendment of section 274(1)(g) has
been made primarily in larger public interest. This amendment became absolutely
imperative to protect large number of investors, particularly small and poor
investors, who had invested their lifetime savings with these companies and in
majority of cases, neither the principal amount nor interest is paid. There was
no merit in any of the submission of the petitioners and said amendments did
not violate the petitioners’ fundamental rights or any other right in any
manner. [
The petition, being wholly devoid of merit
was, accordingly, dismissed.
Cases referred to
Duncan Industries Ltd. [Writ Petition No. 199
of 2003 (
Satish Shah and Anil D’Souza for the Petitioner. B.A. Desai, S.S. Pakale
and R.C. Master for the Respondent.
Judgment
Dalveer Bhandari, C.J. - The petitioners have challenged the
constitutional validity of section 274(1)(g) of the Companies Act, 1956, as
amended with effect from December 13, 2000, by the Companies (Amendment) Act,
2000. The petitioners pray that section 274(1)(g) be declared illegal, invalid,
null, void and unenforceable.
2. The brief facts necessary to dispose of this
petition are recapitulated as under:
The first petitioner is engaged in the
manufacture and sale, inter alia, of cement based paints, brazing paste and
plastic emulsion paints. The first petitioner was a profit-making company till
2000-01. It is incorporated in the petition that the petitioners have started
facing a serious shortage of working capital and they were compelled to borrow
monies from banks and financial institutions. It is further incorporated that
at present, there are a total of 1085 fixed deposits outstanding for repayment,
totalling Rs. 2.63 crores. It is stated that for deposits up to Rs. 25,000, the
petitioners had repaid two-thirds of the principal amount and the entire
outstanding interest. It is also incorporated that the petitioners have faced
financial difficulties because of non-receipt of Rs. 134 crores from its
foreign buyers. It is stated that the petitioners are likely to make further
repayments of maturing fixed deposits in the near future.
3. The petitioners
state that section 274 of the Companies Act, 1956, provides grounds on which a
director is disqualified from being appointed. New clause (g) was added to
sub-section (1) of section 274 by the Companies (Amendment) Act, 2000, with
effect from December 13, 2000. Section 274 reads as under:
“Disqualifications of directors.—(1) A person
shall not be capable of being appointed director of a company, if—
(a) he has been found to be of unsound mind by a Court of competent
jurisdiction and the finding is in force;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an
insolvent and his application is pending;
(d) he has been convicted by a Court of any offence involving moral
turpitude and sentenced in respect thereof to imprisonment for not less than
six months, and a period of five years has not elapsed from the date of expiry
of the sentence;
(e) he has not paid any call in respect of shares of the company
held by him, whether alone or jointly with others and six months have elapsed
from the last day fixed for the payment of the call; or
(f) an order disqualifying him for appointment as director has
been passed by a Court in pursuance of section 203 and is in force, unless the
leave of the Court has been obtained for his appointment in pursuance of that
section;
(g) such person is already a director of a
public company which,—
(A) has not filed the annual accounts and annual returns for any
continuous three financial years commencing on and after the first day of
April, 1999; or
(B) has failed to repay its deposit or interest thereon on due
date or redeem its debenture on due date or pay dividend and such failure continue
for one year or more :
Provided
that such person shall not be eligible to be appointed as a director of any
other public company for a period of five years from the date on which such
public company, in which he is a director, failed to file annual accounts and
annual returns under sub-clause (A) or has failed to repay its deposit or
interest or redeem its debentures on due date or pay dividend referred to in
clause (B).
(2) The Central Government may, by
notification in the Official Gazette, remove—
(a) the disqualification incurred by any person in virtue of clause
(d) of sub-section (1), either generally or in relation to any company or
companies specified in the notification; or
(b) the disqualification incurred by any
person in virtue of clause (e) of sub-section (1)
(3) A
private company which is not subsidiary of a public company may, by its
articles provide that a person shall be disqualified for appointment as a
director on any grounds in addition to those specified in sub-section (1).”
According to the newly amended Act, a person
shall not be capable of being appointed director of a company, if such person
is already a director of a public company which has not filed the annual
accounts and annual returns for any continuous three financial years commencing
on and after the first day of April, 1999; or has failed to repay its deposit
or interest thereon on due date or redeem its debentures on due date or pay
dividend and such failure continue for one year or more :
“Provided that such person shall not be
eligible to be appointed as a director of any other public company for a period
of five years from the date on which such public company, in which he is a
director, failed to file annual accounts and annual returns under sub-clause
(a) or has failed to repay its deposit or interest or redeem its debentures on
due date or pay dividend referred to in clause (B).”
4. The petitioners
are aggrieved by the said newly added amendment and have prayed that the
provisions of section 274(1)(g) of the Companies Act, 1956, are ultra vires the
Constitution and be declared illegal, invalid, null, void and unenforceable.
The petitioners have also prayed that it be declared that the Companies
(Disqualification of Directors under section 274(1)(g) of the Companies Act,
1956) Rules, 2003 are also ultra vires the rule-making power of the Central
Government and consequently, are, therefore, null and void.
5. The petitioners
have also prayed that this Court be pleased to issue writ of mandamus directing the first and fourth respondents to
withdraw and cancel the impugned Circular No. 8 dated March 22, 2002, and
impugned Circular No. 5 of 2003, dated January 14, 2003. The petitioners have
also prayed that the first to fourth respondents, their officers, servants and
agents be restrained by an injunction from declaring that the first petitioner
is a defaulter under section 274(1)(g) of the Companies Act, 1956, and
declaring that the second to fourth petitioners or fifth to seventh respondents
have or any of them has incurred any disqualification under section 274(1)(g)
of the Companies Act, 1956.
6. In the Statement
of Objects and Reasons, it is enumerated that the above amendment will ensure
proper governance of companies, transparency in working of companies and also
ensure more effective enforcement. The impugned section 274(1)(g) has been
enacted with the intention and purpose of:
(i) disqualifying errant directors;
(ii) protecting the investors from
mismanagement;
(iii) ensuring compliance and filing of annual accounts and
annual returns which are the means of disclosure to all stakeholders;
(iv) increasing compliance rate of filing
statutory documents; and
(v) infusing good corporate governance
in the regulation of corporate affairs.
7. According to
the petitioners, section 274(1)(g), being highly arbitrary, unreasonable and
unintelligible, therefore violative of article 14 of the Constitution and would
also be violative of the second, third and fourth respondents’ fundamental
rights guaranteed under articles 19(1)(g) and 21 of the Constitution.
8. It is further
incorporated that the irrationality and complete arbitrariness in the enactment
of section 274(1)(g) is further demonstrated by virtue of the fact that section
274(1)(g)(B) talks about debarring a person from being appointed as director of
any other public company, if he is a director of a public company, which fails
to repay deposits or interest therein on the due date; to redeem debenture on
due date; or pay dividend and such failure continues for one year or more. It
is also incorporated in the petition that in so far as the failure to repay
deposits or interest due or the failure to redeem debentures on the due date is
concerned, the impugned provision does not make any distinction whatsoever
between a wilful failure and a failure which is beyond the means or capacity of
the company.
9. It is also
submitted that as far as failure to pay dividend is concerned, the same cannot
be clubbed along with the failure to pay deposit or interest thereon or failure
to redeem debenture on due date, inasmuch as the obligation of the company to
pay dividend arises only when the same is declared.
10. It is further
submitted by the petitioners that where the failure to repay deposit or
interest thereon or repay debenture arises out of the incapacity or inability
of the company to do so, it would be highly arbitrary, unreasonable, harsh and
burdensome to penalise the directors of such public limited companies and visit
them with the penalty of disqualification not only of that company but also of
all other public limited companies for a period of five years.
11. It is clear that
this amendment has been carried out in the case of a public company, which does
not file annual accounts and annual returns for any continuous three financial
years, and the director of such company will be debarred from becoming a
director of any other public company for a period of five years from the date
on which such public company, in which he is a director, failed to file annual
accounts and annual returns or has failed to repay its deposit or interest or
redeem its debentures on due date or pay dividend.
12. We have heard learned counsel for the parties
at some length regarding validity and legality of the said amendment. In view
of the Statement of Objects and Reasons of enactment of section 274(1)(g) of
the Act, it is abundantly clear that this amendment has been incorporated for
better corporate governance and protection of the investment of the depositors.
In the instant case, the company has collected huge deposits from small and
poor investors, who had deposited their lifetime savings with this company, in
the hope of getting reasonable interest on their deposits. It is expected that
such amendment would ensure transparency in the functioning of the company and
would lead to the protection of the investment of investors and better
corporate governance. According to the wisdom of the Legislature, this can be
achieved by enhancing penalty/punishment for contravention so as to ensure
better compliance with the provisions of the Companies Act, 1956.
13. We fail to
appreciate how article 21 of the Constitution is attracted, which refers to
right to live. The challenge seems to be totally without any merit. We would
appreciate if the submission is made on behalf of the small investors, who had
deposited their lifetime savings with the petitioners and similar other
companies where these small investors do not receive either the principal or
interest and consequently, their children may not be provided education and/or
medical treatment affecting their families’ fundamental rights guaranteed under
article 21 of the Constitution. Therefore, if at all there is violation of
article 21, it is the violation of fundamental right under article 21 of the
children and their parents.
14. Similarly, we are
unable to comprehend how the amendment of section 274(1)(g) violates the
petitioners’ fundamental rights guaranteed under article 19(1)(g) of the
Constitution. This amendment does not debar the petitioners from carrying on
any business, trade or occupation, only that the persons have been rendered
incapable of becoming directors in other companies. Perhaps, this amendment
became imperative in view of a large number of companies becoming defaulters.
It is a matter of common knowledge that millions of small investors, who had
deposited their lifetime savings with these companies, in order to get
reasonable returns, have been totally ruined. In most cases, they neither
receive the principal amount nor any interest. A number of such petitions are
pending in various Courts of the country. We find no merit in the submission of
the petitioners that this amendment, in any manner, violates the petitioners’
fundamental rights guaranteed under article 19(1)(g) of the Constitution.
15. We do not see any
merit in the petitioners’ submission that this amendment, in any manner,
violates the rules of natural justice. Once the company failed to repay the
interest or the principal amount, there is nothing required but surely, when
this fact is not disputed by the company, the challenge that this amendment
being violative of rules of natural justice becomes hollow and without any
merit.
16. The petitioners’
submission is that no distinction is made between its failure and failure
beyond the means of the directors of the company. It is pertinent to note that
section 274(1)(g) does not penalise the company; it is only the directors that
are rendered incapable of functioning as directors for certain period. The
amendment has been carried out primarily to ensure that directors of the
company should discharge their obligation properly. They should be more
vigilant and careful and ensure that investors do not lose their lifetime
savings.
This would also, to some extent, ensure that
the directors should not take loan and see that no loan, more than their
liability to repay, is taken.
17. We see no force
in the submission of the petitioners that the section does not make any discrimination
between director and non-director or executive and non-executive director. Once
any person becomes a director, it is his primary duty to ensure that there is
proper governance and investors’ money is protected.
18. We find no merit
in the submission of the petitioners that this amendment is violative of
article 14 of the Constitution. The provision of section 274(1)(g) does not
make distinction between the Government-nominated directors and other
directors. The Government of India, Ministry of Law, Justice and Company
Affairs, letter dated March 22, 2003, has interpreted the composite effect of
the non obstante clause in the statute of public financial institutions like
Industrial Development Bank of India, Life Insurance Corporation of India, Unit
Trust of India, etc., and gave an opinion that the directors appointed by these
institutions cannot be disqualified as appointment as directors is by virtue of
section 274(1)(g) and also directors appointed on the boards of assisted
companies, etc.
19. Regarding the
grievance of the petitioners that the name of the disqualified directors are
given on the website, it is desirable for the public to know the names of some
defaulting directors of the other companies, so that they would be wary of such
persons who are directors of such companies. This can also be justified in the
large public interest.
20. The petitioners
have placed reliance on the judgment of the Calcutta High Court in Writ
Petition No. 199 of 2003 in Duncan Industries Ltd. The Court passed ad interim
order because the bondholders gave their consent for re-structuring of the
repayment schedule and the Ministry of Finance also gave their approval for
restructuring the repayment schedule and extended time to make payment to the
bondholders till December 31, 2010. The facts of that case are not applicable
to the facts of the present case.
21. It may be
pertinent to mention that this Court in Cricket Club of India Ltd. v. Madhav L.
Apte [1975] 45 Comp. Cas. 574, by the judgment dated August 30, 1974, had
upheld the provisions of section 274(3) of the Companies Act, 1956.
22. In our considered
opinion, this amendment of section 274(1)(g) of the Companies Act, 1956, has
been made primarily in larger public interest. This amendment became absolutely
imperative to protect large number of investors, particularly small and poor
investors, who had invested their lifetime savings with these companies, and in
majority of cases, neither the principal amount nor interest is repaid. We find
no merit in any of the submissions of the petitioners. We do not find that the
said amendment violates the petitioners’ fundamental rights or any other right
in any manner.
23. The petition, being wholly devoid of merit, is accordingly dismissed.
Companies Act
[2005]
60 scl 50 (bom.)
HIGH
COURT OF
v.
Union of
Dalveer
Bhandari, CJ.
and
Dr. D.Y. Chandrachud, J.
September
24, 2004
Section 274(1)(g) of the Companies Act, 1956,
read with articles 14, 19 and 21 of the Constitution of India - Directors -
Disqualifications of - Whether amendment to section 274(1)(g), which debars a
person from being appointed as director of any other public company, if he is
director of a public company which fails to repay deposits or interest thereon
on due date; or to redeem debentures on due date, has been made to protect
large number of investors who had invested their lifetime savings with those
companies and in majority of cases, neither principal amount nor interest is
paid - Held, yes - Whether amendment has been carried out primarily to ensure
that directors of company should discharge their obligation properly; it does
not violate fundamental rights or any other right of directors of company -
Held, yes
Facts
The company had collected huge deposits from
small and poor investors and had failed to repay either the principal or
interest on said amount. The respondent-Union of
Held
In view of the statement of objects and
reasons of enactment of section 274(1)(g), it is abundantly clear that
amendment has been incorporated for better corporate governance and protection
of the investment of the depositors. In the instant case, the company had
collected huge deposits from small and poor investors, who had deposited their
lifetime savings with the company in the hope of getting reasonable interest on
their deposits. Such amendment would ensure transparency in the functioning of
the company and would lead to the protection of the investment of investors and
better corporate governance. According to the wisdom of the Legislature, this
can be achieved by enhancing penalty/punishment for contravention so as to
ensure better compliance with the provisions of the Act. [
Article 21 of the Constitution was not at all
attracted in the instant case and, therefore, challenge of the petitioner on that
ground was without any merit. Article 21 would have been attracted if the
submission was made on behalf of the small investors, who had deposited their
lifetime savings with the petitioners and similar other companies where these
small investors do not receive either the principal or interest and,
consequently, their children may not be provided education and/or medical
treatment affecting their families’ fundamental rights guaranteed under article
21. Therefore, if at all there was violation of article 21, it was the
violation of fundamental right under article 21 of the children and their
parents. [
Similarly, it was not clear as to how the
amendment of section 274(1)(g) violated the petitioners’ fundamental rights
guaranteed under article 19(1)(g). The amendment did not debar the petitioners
from carrying on any business, trade or occupation, only that the persons had
been rendered incapable of becoming directors in other companies. Perhaps,
amendment became imperative in view of a large number of companies becoming
defaulters. It is a matter of common knowledge that millions of small
investors, who had deposited their life-time savings with these companies, in
order to get reasonable returns, have been totally ruined. In most cases, they
neither receive the principal amount nor any interest. A number of such
petitions are pending in various Courts of the Country. Therefore, there was no
merit in the submission of the petitioners that the amendment, in any manner,
violated their fundamental rights guaranteed under article 19(1)(g) of the
Constitution. [
Similarly, there was no merit in the
petitioners’ submission that said amendment, in any manner, violated the rules
of natural justice. Once the company failed to repay the interest or the principal
amount, there was nothing required, but surely, when fact was not disputed by
the company, the challenge that this amendment being violative of rules of
natural justice becomes hollow and without any merit. [
Section 274(1)(g) does not penalise the
company; it is only the directors that are rendered incapable of functioning as
directors for certain period. The amendment has been carried out primarily to
ensure that directors of the company should discharge their obligation
properly. They should be more vigilant and careful and ensure that investors do
not lose their lifetime savings. [
This would also, to some extent, ensure that
the directors should not take loan and see that no loan, more than their
ability to repay is taken. [
Once any person becomes a director, it is his
primary duty to ensure that there is proper governance and investors’ money is
protected. [
Further, there was no merit in the submission
of the petitioners that the amendment is violative of article 14. The provision
of section 274(1)(g) does not make distinction between the Government nominated
directors and other directors. The Government of India, Ministry of Law,
Justice and Company Affairs has interpreted the composite effect of the non
obstante clause in the statute of public financial institutions like Industrial
Development Bank of India, Life Insurance Corporation of India, Unit Trust of
India, etc., and gave an opinion that the directors appointed by these
institutions cannot be disqualified as appointment as directors is by virtue of
section 274(1)(g) and also directors appointed on the boards of assisted
companies, etc. [Para 18]
Regarding the grievance of the petitioners
that the name of the disqualified directors are given on the website, it is
desirable for the public to know the names of some defaulting directors of the
other companies, so that they would be wary of such persons who are directors
of such companies. This can also be justified in the large public interest. [
Hence, the amendment of section 274(1)(g) has
been made primarily in larger public interest. This amendment became absolutely
imperative to protect large number of investors, particularly small and poor
investors, who had invested their lifetime savings with these companies and in
majority of cases, neither the principal amount nor interest is paid. There was
no merit in any of the submission of the petitioners and said amendments did
not violate the petitioners’ fundamental rights or any other right in any manner.
[
The petition, being wholly devoid of merit
was, accordingly, dismissed.
Cases referred to
Duncan Industries Ltd. [Writ Petition No. 199
of 2003 (
Satish Shah and Anil D’Souza for the Petitioner. B.A. Desai, S.S. Pakale
and R.C. Master for the Respondent.
Judgment
Dalveer Bhandari, C.J. - The petitioners have challenged the
constitutional validity of section 274(1)(g) of the Companies Act, 1956, as
amended with effect from December 13, 2000, by the Companies (Amendment) Act,
2000. The petitioners pray that section 274(1)(g) be declared illegal, invalid,
null, void and unenforceable.
2. The brief facts necessary to dispose of this
petition are recapitulated as under:
The first petitioner is engaged in the
manufacture and sale, inter alia, of cement based paints, brazing paste and
plastic emulsion paints. The first petitioner was a profit-making company till
2000-01. It is incorporated in the petition that the petitioners have started
facing a serious shortage of working capital and they were compelled to borrow
monies from banks and financial institutions. It is further incorporated that
at present, there are a total of 1085 fixed deposits outstanding for repayment,
totalling Rs. 2.63 crores. It is stated that for deposits up to Rs. 25,000, the
petitioners had repaid two-thirds of the principal amount and the entire
outstanding interest. It is also incorporated that the petitioners have faced
financial difficulties because of non-receipt of Rs. 134 crores from its
foreign buyers. It is stated that the petitioners are likely to make further
repayments of maturing fixed deposits in the near future.
3. The petitioners
state that section 274 of the Companies Act, 1956, provides grounds on which a
director is disqualified from being appointed. New clause (g) was added to
sub-section (1) of section 274 by the Companies (Amendment) Act, 2000, with
effect from December 13, 2000. Section 274 reads as under:
“Disqualifications of directors.—(1) A person
shall not be capable of being appointed director of a company, if—
(a) he has been found to be of unsound mind by a Court of competent
jurisdiction and the finding is in force;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an
insolvent and his application is pending;
(d) he has been convicted by a Court of any offence involving moral
turpitude and sentenced in respect thereof to imprisonment for not less than six
months, and a period of five years has not elapsed from the date of expiry of
the sentence;
(e) he has not paid any call in respect of shares of the company
held by him, whether alone or jointly with others and six months have elapsed
from the last day fixed for the payment of the call; or
(f) an order disqualifying him for appointment as director has
been passed by a Court in pursuance of section 203 and is in force, unless the
leave of the Court has been obtained for his appointment in pursuance of that
section;
(g) such person is already a director of a
public company which,—
(A) has not filed the annual accounts and annual returns for any
continuous three financial years commencing on and after the first day of
April, 1999; or
(B) has failed to repay its deposit or interest thereon on due
date or redeem its debenture on due date or pay dividend and such failure
continue for one year or more :
Provided
that such person shall not be eligible to be appointed as a director of any
other public company for a period of five years from the date on which such
public company, in which he is a director, failed to file annual accounts and
annual returns under sub-clause (A) or has failed to repay its deposit or
interest or redeem its debentures on due date or pay dividend referred to in
clause (B).
(2) The Central Government may, by
notification in the Official Gazette, remove—
(a) the disqualification incurred by any person in virtue of clause
(d) of sub-section (1), either generally or in relation to any company or
companies specified in the notification; or
(b) the disqualification incurred by any person in virtue of clause
(e) of sub-section (1)
(3) A private company which is not subsidiary of
a public company may, by its articles provide that a person shall be
disqualified for appointment as a director on any grounds in addition to those
specified in sub-section (1).”
According to the newly amended Act, a person
shall not be capable of being appointed director of a company, if such person
is already a director of a public company which has not filed the annual
accounts and annual returns for any continuous three financial years commencing
on and after the first day of April, 1999; or has failed to repay its deposit
or interest thereon on due date or redeem its debentures on due date or pay
dividend and such failure continue for one year or more :
“Provided that such person shall not be
eligible to be appointed as a director of any other public company for a period
of five years from the date on which such public company, in which he is a
director, failed to file annual accounts and annual returns under sub-clause
(a) or has failed to repay its deposit or interest or redeem its debentures on
due date or pay dividend referred to in clause (B).”
4. The petitioners
are aggrieved by the said newly added amendment and have prayed that the
provisions of section 274(1)(g) of the Companies Act, 1956, are ultra vires the
Constitution and be declared illegal, invalid, null, void and unenforceable.
The petitioners have also prayed that it be declared that the Companies
(Disqualification of Directors under section 274(1)(g) of the Companies Act,
1956) Rules, 2003 are also ultra vires the rule-making power of the Central
Government and consequently, are, therefore, null and void.
5. The petitioners
have also prayed that this Court be pleased to issue writ of mandamus directing the first and fourth respondents to
withdraw and cancel the impugned Circular No. 8 dated March 22, 2002, and impugned
Circular No. 5 of 2003, dated January 14, 2003. The petitioners have also
prayed that the first to fourth respondents, their officers, servants and
agents be restrained by an injunction from declaring that the first petitioner
is a defaulter under section 274(1)(g) of the Companies Act, 1956, and
declaring that the second to fourth petitioners or fifth to seventh respondents
have or any of them has incurred any disqualification under section 274(1)(g)
of the Companies Act, 1956.
6. In the Statement
of Objects and Reasons, it is enumerated that the above amendment will ensure
proper governance of companies, transparency in working of companies and also
ensure more effective enforcement. The impugned section 274(1)(g) has been
enacted with the intention and purpose of:
(i) disqualifying errant directors;
(ii) protecting the investors from
mismanagement;
(iii) ensuring compliance and filing of annual accounts and
annual returns which are the means of disclosure to all stakeholders;
(iv) increasing compliance rate of filing
statutory documents; and
(v) infusing good corporate governance
in the regulation of corporate affairs.
7. According to
the petitioners, section 274(1)(g), being highly arbitrary, unreasonable and
unintelligible, therefore violative of article 14 of the Constitution and would
also be violative of the second, third and fourth respondents’ fundamental
rights guaranteed under articles 19(1)(g) and 21 of the Constitution.
8. It is further
incorporated that the irrationality and complete arbitrariness in the enactment
of section 274(1)(g) is further demonstrated by virtue of the fact that section
274(1)(g)(B) talks about debarring a person from being appointed as director of
any other public company, if he is a director of a public company, which fails
to repay deposits or interest therein on the due date; to redeem debenture on
due date; or pay dividend and such failure continues for one year or more. It
is also incorporated in the petition that in so far as the failure to repay deposits
or interest due or the failure to redeem debentures on the due date is
concerned, the impugned provision does not make any distinction whatsoever
between a wilful failure and a failure which is beyond the means or capacity of
the company.
9. It is also
submitted that as far as failure to pay dividend is concerned, the same cannot
be clubbed along with the failure to pay deposit or interest thereon or failure
to redeem debenture on due date, inasmuch as the obligation of the company to
pay dividend arises only when the same is declared.
10. It is further
submitted by the petitioners that where the failure to repay deposit or
interest thereon or repay debenture arises out of the incapacity or inability
of the company to do so, it would be highly arbitrary, unreasonable, harsh and
burdensome to penalise the directors of such public limited companies and visit
them with the penalty of disqualification not only of that company but also of
all other public limited companies for a period of five years.
11. It is clear that
this amendment has been carried out in the case of a public company, which does
not file annual accounts and annual returns for any continuous three financial
years, and the director of such company will be debarred from becoming a
director of any other public company for a period of five years from the date
on which such public company, in which he is a director, failed to file annual
accounts and annual returns or has failed to repay its deposit or interest or
redeem its debentures on due date or pay dividend.
12. We have heard
learned counsel for the parties at some length regarding validity and legality
of the said amendment. In view of the Statement of Objects and Reasons of
enactment of section 274(1)(g) of the Act, it is abundantly clear that this
amendment has been incorporated for better corporate governance and protection
of the investment of the depositors. In the instant case, the company has
collected huge deposits from small and poor investors, who had deposited their
lifetime savings with this company, in the hope of getting reasonable interest
on their deposits. It is expected that such amendment would ensure transparency
in the functioning of the company and would lead to the protection of the
investment of investors and better corporate governance. According to the
wisdom of the Legislature, this can be achieved by enhancing penalty/punishment
for contravention so as to ensure better compliance with the provisions of the
Companies Act, 1956.
13. We fail to
appreciate how article 21 of the Constitution is attracted, which refers to
right to live. The challenge seems to be totally without any merit. We would
appreciate if the submission is made on behalf of the small investors, who had
deposited their lifetime savings with the petitioners and similar other
companies where these small investors do not receive either the principal or
interest and consequently, their children may not be provided education and/or
medical treatment affecting their families’ fundamental rights guaranteed under
article 21 of the Constitution. Therefore, if at all there is violation of
article 21, it is the violation of fundamental right under article 21 of the
children and their parents.
14. Similarly, we are
unable to comprehend how the amendment of section 274(1)(g) violates the
petitioners’ fundamental rights guaranteed under article 19(1)(g) of the
Constitution. This amendment does not debar the petitioners from carrying on
any business, trade or occupation, only that the persons have been rendered incapable
of becoming directors in other companies. Perhaps, this amendment became
imperative in view of a large number of companies becoming defaulters. It is a
matter of common knowledge that millions of small investors, who had deposited
their lifetime savings with these companies, in order to get reasonable
returns, have been totally ruined. In most cases, they neither receive the
principal amount nor any interest. A number of such petitions are pending in
various Courts of the country. We find no merit in the submission of the
petitioners that this amendment, in any manner, violates the petitioners’
fundamental rights guaranteed under article 19(1)(g) of the Constitution.
15. We do not see any
merit in the petitioners’ submission that this amendment, in any manner,
violates the rules of natural justice. Once the company failed to repay the
interest or the principal amount, there is nothing required but surely, when
this fact is not disputed by the company, the challenge that this amendment
being violative of rules of natural justice becomes hollow and without any
merit.
16. The petitioners’
submission is that no distinction is made between its failure and failure
beyond the means of the directors of the company. It is pertinent to note that
section 274(1)(g) does not penalise the company; it is only the directors that
are rendered incapable of functioning as directors for certain period. The
amendment has been carried out primarily to ensure that directors of the
company should discharge their obligation properly. They should be more
vigilant and careful and ensure that investors do not lose their lifetime
savings.
This would also, to some extent, ensure that
the directors should not take loan and see that no loan, more than their
liability to repay, is taken.
17. We see no force
in the submission of the petitioners that the section does not make any
discrimination between director and non-director or executive and non-executive
director. Once any person becomes a director, it is his primary duty to ensure that
there is proper governance and investors’ money is protected.
18. We find no merit
in the submission of the petitioners that this amendment is violative of
article 14 of the Constitution. The provision of section 274(1)(g) does not
make distinction between the Government-nominated directors and other
directors. The Government of India, Ministry of Law, Justice and Company
Affairs, letter dated March 22, 2003, has interpreted the composite effect of
the non obstante clause in the statute of public financial institutions like
Industrial Development Bank of India, Life Insurance Corporation of India, Unit
Trust of India, etc., and gave an opinion that the directors appointed by these
institutions cannot be disqualified as appointment as directors is by virtue of
section 274(1)(g) and also directors appointed on the boards of assisted
companies, etc.
19. Regarding the
grievance of the petitioners that the name of the disqualified directors are
given on the website, it is desirable for the public to know the names of some
defaulting directors of the other companies, so that they would be wary of such
persons who are directors of such companies. This can also be justified in the
large public interest.
20. The petitioners
have placed reliance on the judgment of the Calcutta High Court in Writ
Petition No. 199 of 2003 in Duncan Industries Ltd. The Court passed ad interim
order because the bondholders gave their consent for re-structuring of the
repayment schedule and the Ministry of Finance also gave their approval for
restructuring the repayment schedule and extended time to make payment to the
bondholders till December 31, 2010. The facts of that case are not applicable
to the facts of the present case.
21. It may be pertinent
to mention that this Court in Cricket Club of India Ltd. v. Madhav L. Apte
[1975] 45 Comp. Cas. 574, by the judgment dated August 30, 1974, had upheld the
provisions of section 274(3) of the Companies Act, 1956.
22. In our considered
opinion, this amendment of section 274(1)(g) of the Companies Act, 1956, has
been made primarily in larger public interest. This amendment became absolutely
imperative to protect large number of investors, particularly small and poor
investors, who had invested their lifetime savings with these companies, and in
majority of cases, neither the principal amount nor interest is repaid. We find
no merit in any of the submissions of the petitioners. We do not find that the
said amendment violates the petitioners’ fundamental rights or any other right
in any manner.
23. The petition, being wholly devoid of merit, is accordingly dismissed.
COMPANIES ACT
[2005] 62 SCL 610 (
HIGH COURT OF
v.
Hindusthan Club Ltd.
KALYAN JYOTI SENGUPTA, J.
GA NO. 4408 IN CS NO. 326 OF 2004
APRIL 29, 2005
Section 274 of the Companies Act, 1956 - Directors - Disqualification
of - Whether in view of non-filing of declaration prescribed in statutory form
[vide section 274(1)(g)] by any of directors seeking appointment and
reappointment, said director is not automatically disqualified; before a person
is declared to be disqualified by auditor or any other person, a view has to be
formed whether grounds mentioned in section 274 have been proved without any doubt
- Held, yes
Section 274 of the Companies Act, 1956 - Directors - Disqualification
of - Plaintiffs were members of defendant-club which invited nomination of
members for election of office bearers and executive committee members from
amongst them - Plaintiffs and other members filed their nominations but
election officer held all of them to be invalid on ground that same were not
accompanied by mandatory declaration under section 274(1)(g) - Whether since
rules for election of office bearers and members of executive committee of
defendant-club were framed when provisions of Act were not in existence,
decision of club for cancellation of nominations on ground of non-filing of
statutory declaration under section 274(1)(g), in prescribed form, was not in
accordance with rules of club - Held, yes - Whether however, since club was in
real sense a limited company and there were members, who were also directors of
other public limited companies, declaration was required to be filed by any of
members, who was appointed by an election of club, immediately after having
been appointed and in default, his election would be illegal - Held, yes
Section 227 of the Companies Act, 1956 - Auditors - Powers and duties
of - Whether auditor cannot submit a report about disqualification of directors
under section 274(1)(g) on basis of statement supplied by company alone; he has
to examine and even he has to make an independent enquiry about collected
materials from other sources to submit such report - Held, yes
FACTS
The plaintiffs were members of defendant No. 1-club, which issued a notice of annual general meeting in terms of its rules and regulations to conduct certain business including holding of election for its office bearers and executive committee members from amongst its members. It, accordingly, invited nominations for the same. Printed copies of the annual accounts along with the auditors’ report were circulated amongst the members. In the said report, it was stated that none of the committee members was disqualified from being appointed as committee member in terms of section 274(1)(g). The plaintiffs, accordingly, filed their nomination papers along with other candidates. After scrutiny, certain nominations, including those of the plaintiffs, were found valid and their names were published on the club’s notice board. However, thereafter, all of a sudden, an undated erratum was put up on the notice-board stating that there had been an omission in some clause of the auditor’s report and such omission purported to show that the nomination of some members including that of plaintiffs were declared invalid. The election officer reported to the president/honorary secretary and the candidates of the club that as all the nominations received by the club were not accompanied by the mandatory declaration under section 274(1)(g), all the nominations were invalid.
On writ, the plaintiffs challenged the aforesaid decision of the election officer contending that section 274(1)(g) came into being subsequently in the statute book whereas the election rules were framed long time back and, as such, the same had no application in respect of the club. The defendant, contested suit contending, inter alia, that the Court had no territorial jurisdiction to entertain the suit as entire cause of action had arisen outside the territorial jurisdiction of the Court.
HELD
The contention of the plaintiffs that section 274(1)(g) came into being
subsequently in the statute book whereas the election rules were framed long
time back and as such, the same had no application in respect of the club could
not be accepted, for any statutory amendment is to take effect and to be
applied the moment it is given effect to or retrospectively as the intention of
the Legislature will command. [
Moreover, that any rules or bye-laws of any club are always subject to
the laws framed by the sovereign authority, is the basic principle of good
governance. Therefore, the provision of the said section was applicable to the
defendant-club. [
As regards the jurisdiction of the Court, it appeared that the suit had
been filed on obtaining the leave under clause 12 of the letters patent. No
application had been made for revocation of leave under clause 12 on the
letters patent. However, it cannot be the law that unless such an application
is made, the Court will not examine the question of jurisdiction; rather it is
the duty of the Court to examine at the threshold, if such plea has been raised
by the contesting party. [
According to the plaintiffs, their rights had been affected because the
auditors’ report was prepared and furnished and the same was done within the
territorial jurisdiction of the Court. A part of the cause of action was
certainly related to furnishing of the report by the auditors and the remaining
part of the cause of action was related to the decision of the club authority
whereby the plaintiffs’ rights were denied. Therefore, if the bundle of facts
constituting the cause of action was deeply considered, then the publication of
report by the auditor was certainly one part of the cause of action. [
Therefore, the High Court had jurisdiction to entertain, try and
determine the suit as leave under clause 12 of the letters patent had been
granted and so long such leave was not revoked subsequently by the Court,
jurisdiction to try the instant suit would remain with the Court. [
From a careful examination of the rules for election of office bearers
and members of executive committee, it appeared that in order to hold the
nomination papers filed by the members valid, the filing of the declaration in
the prescribed form under the Companies Act, read with Companies
[Disqualification of Directors under section 274(1)(g) of the Companies Act,
1956] Rules, 2003, was not required. Those rules were framed when the
provisions of the Act were not in existence. Hence, validity of a nomination
had to be adjudged in the context and in reference to the said rules which
prescribed the eligibility criteria for filing a nomination. A member, who had
paid his or her dues to the club for the bills sent to him or her prior to the
date of circular inviting nominations, was treated to be eligible to file and
in case of default, the nominations should be held to be invalid. Another
aspect to be noted was that a member could not file any nomination for
more than one post of the office bearer or of executive committee member. [
At the time of filing of the nominations, only the said conditions were
required to be examined by the election officers and/or club authority and no
other matter was required to be looked into. [
Accordingly, the decision of the club for cancellation of the nomination on the ground of non-filing of the statutory declaration in the prescribed form was not in accordance with the rules of the club. There was no warrant to declare the same being invalid on that ground. [Para 22]
As regards the question as to whether the declaration form under the provisions of rule 9 of the Rules read with the Act was required to be filed or not, admittedly the club was in the real sense a limited company and admittedly, there were members who were also the directors of other public limited companies. Therefore, at the time of the appointment or reappointment whether by election or otherwise of the members of the Executive Committee or the office bearers, filing of the declaration in the prescribed form was a must. The language of section 274(1), read with the Rules in that regard, is mandatory and one cannot escape from those provisions. Accordingly, any of the members, who was appointed by an election of the club immediately after being elected, would file the said declaration. It was not necessary that at the time of filing of nomination, such declaration was required to be furnished but that must be done immediately after having been elected and in default, his election would be illegal and he could not be appointed under the law. [Para 23]
As regards the question of the correctness of the auditors’ report, it is the duty of the auditors to submit a report amongst others about disqualification of any of the directors or members under the provisions of section 227(3)(f). [Para 24]
In the instant case, the auditor had submitted the report by way of correction subsequently. It seemed that he had submitted the report on the basis of the statement and information supplied by the secretary of the club. From a careful perusal of section 227, which provides for the power and duties of the auditors, it appears that the auditor cannot submit a report on the basis of the statement supplied by the company alone. He has to examine and even he has to make an independent enquiry about the collected materials from other sources to submit a report regarding clause (f) of sub-section (3) about the disqualification of the directors under section 274(1)(g). One cannot conclusively come to a decision of fact finding that in view of non-filing of declaration prescribed in the statutory form by any of the directors seeking appointment and reappointment, the said director is automatically disqualified. Section 274 provides the grounds when a director can be said to be disqualified. Before a person is declared to be a disqualified by an auditor or any other person, it has to be found whether the grounds mentioned in section 274 have been proved without any doubt. Naturally, the auditor concerned has to collect materials. In the instant case, no such materials had been collected. Moreover, before reporting a particular person as being disqualified, an auditor must seek for the views and/or representation of the director concerned or any of the persons as to whether he was a director of the defaulting company as mentioned in section 274. Auditor’s report really affects a particular person’s right as his civil right or status is necessarily declared in a negative way by the auditor by his fact finding. The rules of natural justice demand that before a person’s right is affected, he/she should be given opportunity to explain his or her position. [Para 26]
In the instant case, the auditor initially had not followed the said procedure. However, at the same time, procedure is nowhere provided in the Act or the Rules. He had proceeded bona fide and according to his own interpretation and judgment; it could not be held that the auditor had done any mala fide act in the matter. [Para 27]
Therefore, decisions of the club authority cancelling the nomination and deferring the annual general meeting as well as the election was not valid and not in consonance with the club rules. Therefore, the club authority was to be directed to proceed with the holding of annual general meeting and election on the basis of the nominations, which had already been filed. However, immediately after election, it had to be ascertained whether the declaration in the prescribed statutory forms had been furnished by the elected candidates or not. [Para 28]
Bhaskar Sen, Debal Banerjee, P.C. Sen and S.B. Mukherjee for the Appearing Parties.
JUDGMENT
1. This motion has been taken out for interlocutory relief of order of prohibitory injunction restraining the defendants and each of them and/or by their servants and agents or assigns or otherwise from denying, the plaintiffs or any of them the right as nominees and to contest election for the post of Executive Committee members at the AGM [Annual General Meeting] of the company scheduled to be held on 18 December 2004, and for mandatory injunction commanding the defendants to permit the plaintiffs and each of them to contest the election for the posts of the Executive Committee members of the company to be held on 18 December, 2004 and also for appointment of an independent person to conduct or supervise or oversee the annual general meeting of the defendant No. 1 to be held on 18 December, 2004. This application has arisen out of a suit for declaration that the plaintiffs are, and each of them is entitled to be, eligible for contesting the election for the post of Executive Committee member of the company at the AGM of the company scheduled to be held on 18 December, 2004 and for other appropriate consequential reliefs.
1.1 The short facts of the case are stated hereunder. The plaintiffs and each of them are undisputedly permanent members of the defendant No. 1, club. In terms of the rules and regulations of the club - each and every year annual general meeting and the election of the Executive Committees are held, and from and amongst them office bearers of the club for the next year are selected. By notice dated 9 November, 2004 -annual general meeting of the defendant No. 1 was convened and to be held on 18 December, 2004 to transact the following business :
"(i) To receive, consider and adopt the audited balance sheet as at 31st March 2004 and the profit and loss account for year ended on the date and reports of the Committee and auditors thereon.
(ii) To appoint auditors for the year 2004-05 and fix their remuneration.
(iii) Election and balloting.
(iv) To announce the results of the election of the office bearers and Committee Members.
On the same date, a circular was issued inviting proposals/nominations for election of the office bearers and the Executive Committee members for the year, 2004-05. In terms of the club Executive Committee appoint honorary Election Officer for conducting election. In terms of the notice, the nominations were to reach at the office of the club at 7 p.m. on 26th November, 2004 and the last date of withdrawal was up to 7 p.m. on 29 November, 2004. On the same date printed copies of the annual accounts of the club along with the auditors’ report were circulated amongst the members of the club. In the auditors’ report accompanying the circular, it was stated that none of the Committee members is disqualified as on 31 March, 2004 from being appointed as Committee members in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956. Plaintiffs duly filed their nomination papers for contesting the election along with other candidates. After scrutiny, 36 nominations including those of the plaintiffs for election as Committee members for the above year were found valid - and such names were published on the notice board of the club. After declaring the nominations to be valid all of a sudden on 7 December, 2004 an undated erratum was put up on the notice board of the club stating that there has been an omission in clause 4(e) of the auditors’ report and such omission purported to show that the nomination of 12 members including the plaintiffs were declared invalid. This erratum was not considered at any meeting of the Committee members nor was it placed at any meeting of the Committee members. On 13 December, 2004—all the plaintiffs filed Form DD-A and obtained receipts of the same. In spite of the aforesaid fact and compliance of all the requirements—the Election Officer reported to the President/honorary Secretary and the candidates of the club that as all the nominations received by the club up to 26 November, 2004 were not accompanied by the mandatory declaration under section 274(1)(g) of the Companies Act, all the nominations were invalid."
2. In the body of the plaint and petition, I find the plaintiffs have challenged the aforesaid decision of the Election Officer.
3. At the interim stage, the plaintiffs obtained an interim order on 17 December, 2004 passed by the Hon’ble Justice Subhro Kamal Mukherjee staying the operation of the decision of the Election Officer dated 15 December, 2004 rejecting the nomination papers of the candidates for election of the office bearers at the annual general meeting and restrained the club from holding election of office bearers until further orders.
3.1 This interim order was not appealed against and the same is still valid and subsisting.
4. Mr. S.B. Mukherjee, learned senior counsel appearing for the plaintiffs/petitioners, contends that the subsequent decision of the Election Officer is illegal, invalid and arbitrary as after scrutinising all the nomination papers including those of the plaintiffs and after having found the same being valid, it was not open to them to cancel the same on the plea as mentioned in the subsequent notice. In the relevant Rules, nowhere it provides that each and every candidate has to file declaration in Form DD-A under the provision of section 274, sub-section (1), of the Companies Act, 1956. The relevant clause only says that nomination papers are to be scrutinised and validity has to be ascertained and nothing else. The aforesaid section 274, sub-section (1), clause (g), of the Companies Act, 1956 came into being subsequently in the statute book whereas the election rules were framed long time back, as such, he contends the same has no application in this club. I am unable to accept this contention of Mr. S.B. Mukherjee as this provision will not be applicable in this club for any statutory amendment is to take effect and to be applied the moment it is given effect to or retrospectively as the intention of the Legislature will command.
5. Moreover, that any rules or bye-laws of any club are always subject to the laws framed by the sovereign authority is the basic principle of good government. Therefore, I hold that this provision of this section is applicable in this club.
6. His next contention is that the subsequent erratum of the auditors in its report is a manipulated one and the same will appear from the following facts, viz., the report is dated 9 November, 2004. The auditor is certifying that none of the Committee members was disqualified as on 31st March, 2004 of the aforesaid section. The nominations were invited to be filed by a circular letter issued by the Committee on 9 November, 2004 by 26 November, 2004. Therefore, on 9 November, 2004, which is the date of the Auditors’ report, the nominations had not been filed. The ground for rejection of the nomination papers was that the same was not accompanied by declaration under section 274(1)(g). In this background, it is difficult to imagine how could the auditors on 9 November, 2004, say, that these members were disqualified when the nomination papers had not been filed at all. In other words, he contends, the first portion of the Auditors’ report does not tally with the latter portion because the disqualification requires a certificate from the auditor as of the last date of the financial year, that is to say, on 31 March, 2004. Moreover, even on 29 November, 2004—the nomination for election was found to be valid and the purported rejection was on 15 December, 2004. He further submits that filing of declaration in the above form is one thing and holding directors’ disqualification under the aforesaid section is another thing.
7. In any view of the matter—when the requisite declaration in Form DD-A was filed long before holding of the meeting on 18 December, 2004 — it was not open for the Election Officer to cancel all the nominations. Such a decision smacks of something other than bona fides and lawful decision. He contends that requirement of filing declaration in the above form is applicable to those directors who are the directors of the public company. Under such circumstances, he submits that this decision should be set aside and the club should be directed to hold the annual general meeting which has been suspended and to hold election by appointing an independent person as an Election Officer and to observe and supervise the same.
8. Mr. P.C. Sen, learned senior counsel appearing for the defendant Nos. 1, 2 and 3, submits, firstly, that this court has no territorial jurisdiction to entertain, try and determine the instant suit in view of the fact that the entire cause of action as pleaded in the plaint has arisen outside the territorial jurisdiction of this court. The respondent No. 1 club, is situated at 4/1, Sarat Bose Road, Calcutta-700020 outside the territorial jurisdiction of this Court. He contends that the nominations filed by the respective candidates, including the plaintiffs, have lawfully and rightly been rejected by the Election Officer. He contends that in order to contest the election, a candidate must file a valid nomination under the club rules. According to him, the validity pertains also to compliance of the provisions of section 274(1)(g) of the Companies Act, 1956 read with rule 9 of the Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003. Under this provision, it is obligatory for every director in a public company registered under the Companies Act, 1956, to file Form DD-A as prescribed under the rules before he is appointed or reappointed as a director of the company. The defendant club is a company and the office bearers and the members of the Executive Committees are in real sense directors of the company. None of the plaintiffs has filed such declaration form as reported by the auditor as on 31 March, 2004. The eligibility or other qualification for the election has to be determined as on the last date of nominations, i.e., 26 November, 2004, as it is the cut off date for determination of valid nominations under section 274(1)(g) of the Companies Act, 1956 read with the said Rules. Those members who have fulfilled above criteria are only eligible to offer themselves for reappointment as directors. Hence, their nominations were clearly invalid and the plaintiffs/petitioners having failed to comply with the statutory mandatory Rules are disqualified themselves for reappointment as directors.
9. As regard the publication of list of valid nomination on the notice board on 26 November, 2004 is concerned, he submits that this list was published inadvertently. No vested right has accrued to the plaintiffs/petitioners by reason of this publication of list inasmuch as there cannot be any estoppel against the statute. So the plaintiffs cannot take advantage of the legal wrong. The majority of the plaintiffs/petitioners in particular, the plaintiffs/petitioner Nos. 1, 2, 3, 4, 9 and 10 are directors in other several public/private limited companies, and as such, it is expected of them to have knowledge of requirements of various important provisions of Companies Act, 1956. Most of the plaintiffs/petitioners have been serving in the Executive Committee of the club for last several years. So, it is expected that each of them is aware of the need of compliance of various provisions of the Companies Act, 1956 including section 274(1)(g) thereof. When the plaintiffs/petitioners failed to give their declarations under section 274(1)(g) of the Companies Act, 1956, they forfeited their right for nomination for reappointment as directors and/or to continue any further. Lastly, he argued that this application and the suit filed by the plaintiffs/petitioners are mala fide as they have not made eight candidates, viz., Sri Hari Prasad Kanoria, Sri Vinit Mehta, Sri Vijay Kumar Chandak, Sri Mahabir Prasad Saraf, Sri Radheshyam Banka, Sri Radheshyam Tulsian, Sri Subir Poddar and Sri Suryakant M. Damani parties to the suit, although they had filed declaration and had qualified to be valid candidates.
10. Mr. Sen submits that, apart from deciding the issue raised in the application, for future guidance, this court should give a declaration and/or opinion as to whether the plaintiffs/petitioners are entitled to be nominated as elected Executive Committee members of the club in view of the violation/non-compliance of section 274(1)(g) of the Companies Act, 1956 read with rule 9 of the Companies [Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956] Rules, 2003 on/or before the cut-off date for filing nominations dated 26 November, 2004.
11. Mr. Debal Banerjee, learned senior counsel appearing for the defendant No. 4, Mr. Bijoy Kumar Sharma, being the auditor contends that the allegation made against this defendant by the plaintiff is not only baseless and unjust vilification but the same is also unfortunate as this defendant for a long time while working as auditor in various organizations has acquired a great reputation. As a professional man, his client has bona fide made audit under the provision of section 227 of the Companies Act, 1956. He is obliged to submit a report faithfully amongst others whether any of the directors has been qualified under clause (g) of sub-section (1) of section 274 of the said Act or not. He submitted the audit report and this was placed in the 19th meeting of the Executive Committee for the year, 2003-04 on 9 November, 2004 in which the plaintiff No. 1 amongst others was a participant. In this meeting, all the members of the Executive Committee duly accepted correctness of the report filed by this defendant. Upon scrutiny, this defendant found that there has been no filing of the statutory declaration in a prescribed form by the plaintiffs or any of them as on 31 March, 2004; so, under the statute, he is duty bound to report and inform the members of the company. If he does not do so, then as a professional man he would be committing legal misconduct. Therefore, his client is entitled to be compensated for the damages done to his reputation and mind. Therefore, complaint against him shall be expunged and this petition shall be dismissed as against his client.
12. Mr. Bhaskar Sen, learned senior counsel appearing on behalf of the some of the candidates, who have filed nominations have made application for addition of party. Such application should be dealt with before the application is heard out and judgment is rendered for his clients’ interests are also seriously affected by the decision of the club authority cancelling the nominations. He claims that his clients duly filed the nominations along with the declaration in the statutory form. Therefore, there was no justification going by the club’s policy and rules to cancel the nomination of his clients. He, therefore, submits that the club authority should be directed to proceed with the election immediately.
13. I have heard the learned counsel for the parties and I have gone through the petitions and other materials placed before me. In this interlocutory application, the first point has been taken regarding jurisdiction of this court. I have examined the copy of the plaint filed in the suit. It appears that the suit has been filed on obtaining the leave under clause 12 of the letters patent. No application has been made for revocation of leave under clause 12 on the letters patent. However, it cannot be the law unless such application is made, the court will not examine the question of jurisdiction, rather it is the duty of the court to examine at the threshold, if such plea has been raised by the contesting party. But at this stage, this plea is to be examined only looking at the plaint unless the defendant, raising question of jurisdiction, has supplied an unimpeachable document and materials for rendering a decision on this issue.
14. Here, Mr. Sen merely raises the point that no part of the cause of action has arisen within the territorial jurisdiction of this court, even going by the disclosure of the jurisdictional fact in the plaint. I have seen the plaint. The plaintiff has pleaded in paragraph 5 that the Auditors’ report to the members included in such annual general report is made over to the company on/or about 9 November, 2004. Such Auditors’ report is stated to have been prepared at 6, Old Post Office Street, Calcutta-700001 within the aforesaid jurisdiction. In the suit, the plaintiffs have claimed declaration that they are eligible for contesting the election for the post of Executive Committee members of the company at the annual general meeting of the company. According to the plaintiffs, their rights have been affected because of the auditors’ report prepared and furnished and the same was done at 6, Old Post Office Street, Calcutta within the aforesaid jurisdiction. So, in my view, the part of cause of action is certainly related to furnishing of the report by the auditors and the remaining part of the cause of action is related to the decision of the club authority whereby the plaintiffs’ rights were denied. Therefore, if this bundle of facts constituting the cause of action are deeply considered, then I think the aforesaid publication of report by the auditor is certainly one part of the cause of action.
15. I, therefore, hold that this court has jurisdiction to entertain, try and determine the suit as leave under clause 12 of the letters patent having been granted and so long such leave is not revoked subsequently by the court, jurisdiction to try this suit remains with the court.
16. On merit, the points involved in this matter are that, firstly, whether the Election Officers going by the provisions of the election rules have lawfully cancelled all the nominations or not; secondly, whether non-filing of the statutory declaration in the Form DD-A in terms of rule 9 renders the members of the club ineligible to contest the election for formation of the Executive Committee or not; thirdly, whether the report furnished by the auditors subsequently by way of erratum is correct or acceptable on the facts and circumstances of this case.
17. Mr. Mukherjee contends that in the election rule, nowhere it is provided that a candidate has to file a declaration in the prescribed form to contest the election by filing nomination. I think in this context, it is necessary to set out the relevant portion of the rules for election of the office bearers and members of the Executive Committee of the club;
"2. A permanent member who has paid his or her dues to the club for bills sent to him/her prior to the date of circular inviting nomination will, only be entitled to propose or second or to offer himself or herself as a candidate. All such payments should be made before exercising such rights.
3. A permanent member may send one or more nominations but the same candidate cannot stand for more than one post of the office bearers or Executive Committee member.
5.(a) Scrutiny of proposals : The Election Officer shall scrutinise the nominations received as a list of valid nominations will be displayed on the notice board of the club, at least before two weeks of the date of annual general meeting;
(b) If the number of the candidates for the office bearers and the members of the Executive Committees is equal to the office bearers and members to be elected, the ballot papers will not be issued and those candidates would be considered having duly been elected;
(c) If the number of candidates for the post of any office bearer and/or members of the Executive Committees exceed the number of the elected members, then election shall be held by ballot only for such post for which the numbers so exceed."
18. From careful examination of the aforesaid rules, it appears to me, as right submitted by Mr. Mukherjee, that in order to hold the nomination papers filed by the members being valid, the filing of the declaration in the prescribed Form DD-A under the Companies Act, read with rules, is not required. These rules were framed when the provision of the aforesaid Companies Act, and rules above were not in existence. According to me, validity of a nomination has to be adjudged in the context and in reference to the rules 2 and 3. The rule prescribes the eligibility criteria for filing nomination. A member who has paid his or her dues to the club for the bills sent to him or her prior to the date of circular inviting nominations is treated to be eligible to file and in case of default, the nominations should be held to be invalid. Another aspect is that a member cannot file any nomination intending to stand for more than one post of the office bearers of Executive Committee member.
19. At the time of filing of the nominations only the aforesaid conditions are required to be examined by the Election Officers and/or club authority and no other thing is required to be looked into.
20. Unlike the appointment and re-appointment of the directors in the limited company under the companies laws, here, the appointment is not made under the provisions of the Companies Act. It is done by the election. If a particular candidate is not elected by the members, question of the appointment or re-appointment does not and cannot arise if such appointment is to be made within clause (c) of rule 5. However, in the event of the members or the office bearers are deemed to have been elected by virtue of the provision of rule 5(b)—then on the date of filing of nomination such declaration form may be necessary.
21. It appears to me from the records that the number of candidates who filed nominations far exceeds the number of the members of the Executive Committee and the office bearers. Therefore, election was and still is required to be held.
22. Accordingly, I hold that the decision of the club for cancellation of the nomination on the ground of non-filing of the statutory declaration in the prescribed Form is not in accordance with the rules of the club. There was no warrant to declare the same being invalid on that ground.
23. Now the question comes whether the Declaration Form under the provisions of rules 9 read with the said Act is required to be filed or not. Admittedly, this club is in real sense a limited company and admittedly, as it appears that there are members who are also the directors of other public limited companies. Therefore, at the time of the appointment or re-appointment whether by election or otherwise of the members of the Executive Committee or the office bearers, filing of the declaration in the prescribed form is a must. The language of section 274, sub-section (1), read with the rules in this regard, are mandatory and one cannot escape from these provisions. Accordingly, I hold agreeing with the argument of Mr. Sen that any of the members who is appointed by an election of this club immediately after being elected shall file the aforesaid declaration. It is not necessary that at the time of filing of nomination, such declaration is required to be furnished but this must be done immediately after having been elected, in default, his election will be illegal and he cannot be appointed under the law.
24. Now coming to the question of the correctness of the Auditors’ report I am of the view that it is the duty of the auditors to submit a report amongst others about disqualification of any of the directors or members under the provision of section 227, sub-section (3), clause (f).
25. As rightly argued by Mr. Banerjee, it is statutory duty of the auditor to submit such report. The auditor being the chartered accountant cannot ignore the aforesaid mandatory provision of law.
26. In this case, I find the auditor has submitted the report by way of correction subsequently. It seems to me that he has submitted report on the basis of the statement and information supplied by the Secretary of the club. From the careful perusal of section 227 of the said Act which provides the power and duties of the auditors, it appears to me that the auditor cannot submit a report on the basis of the statement supplied by the company alone. He has to examine and even he has to make an independent enquiry about the collected materials from other sources to submit a report regarding clause (f) of sub-section (3) about the disqualification of the directors under section 274(1)(g). In my view, one cannot conclusively come to a decision of fact finding that in view of non-filing of declaration prescribed in the statutory Form by any of the directors seeking appointment and reappointment, the said director is automatically disqualified. Section 274 provides the grounds when a director can be said to be disqualified. Before a person is declared to be a disqualified by auditor or any other person—it [a view] has to be formed whether the grounds mentioned in section 274 have been proved without any doubt. Naturally, the auditor concerned has to collect materials. In this case I do not find any such materials having been collected. Moreover, I think, before reporting a particular person being disqualified—an auditor must seek for the views and/or representation of the director concerned or any of the persons as to whether he was a director of the defaulting company as mentioned in section 274. In my considered opinion, Auditor’s reports really affect a particular person’s right as his civil right or status is necessarily declared in a negative way by the auditor by its fact finding. The rules of natural justice demand that before a person’s right is affected he/she should be given to explain his or her position.
27. In this case, I find the auditor initially has not followed the aforesaid procedure. However, at the same time, I observe this procedure is nowhere provided in the Act or Rules. He has proceeded bona fide and according to his own interpretation and judgment I cannot hold that the auditor has done any mala fide act in this matter. It appears that Mr. Mukherjee’s client has already filed the declaration in the prescribed statutory form after the cut off date but long before election.
28. Under such circumstances, I am of the prima facie view that decisions of the club authority cancelling the nomination and deferring the annual general meeting as well as the election is not valid and not in consonance with the club rules. Therefore, I direct the club authority to proceed with the holding of annual general meeting and election on the basis of the nominations, which have already been filed. However, immediately after election, it has to be ascertained whether the declaration in the prescribed statutory Forms have been furnished by the elected candidates or not. It will be open for the club to update the election rule in consonance with the company laws and Rules framed thereunder.
29. In order to ensure fair and free election before holding annual general meeting, I appoint Mr. Samit Pani Brahmachari, Advocate, IB, Old Post Office Street, Calcutta, as a Special Officer who is to supervise the election and will see the annual general meeting and elections are held in accordance with the club rules and observation made by me. After election and annual general meeting are held — the Special Officer shall stand discharged. He shall be paid initial remuneration of 600 GMs. by the defendant club. He shall submit a report of compliance of the aforesaid orders to this court.
30. Cost, costs in the cause.
Calcutta
High Court
Companies
act
[2004]
55 scl 146 (
HIGH
COURT OF
v.
KALYAN
JYOTI SEN GUPTA, J.
G.A.
APPEAL NOS. 2107 AND 3889
and
C.S. NO. 236 OF 2002
MAY 20,
2003
On date of
commencement of amending section 274(1) of
Companies Act, 1956, if any person has been director
in a defaulting company, he will be affected
by section 274(1)(g)
Section 274 of the Companies Act, 1956 -
Directors - Disqualification of - Whether in view of language mentioned in
clause (g) incorporated in section 274(1) on 13‑12‑2000, it is
clear that on date of commencement of amended section 274(1), if any person has
been director in a defaulting company, he will be affected by section 274(1)(g)
- Held, yes - Whether not only shareholders of a particular company in which
tainted directors are sought to be appointed from a defaulting company, but any
person as member of public who is interested to transact with that limited
company can also come in and question appointment of tainted directors - Held,
yes - Defendant Nos. 1 and 2 had been directors of defendant No. 7 company
which had accepted deposits from public - Having failed in repaying said
deposits defendant No. 7 approached Company Law Board which allowed
reschedulement of repayment of deposits - Even thereafter defendant No. 7
failed to repay and in meantime defendant Nos. 1 and 2 allegedly resigned from
defendant No. 7 and were sought to be appointed as directors in defendant No. 3
company - Petitioners, who were equity shareholders of defendant No. 3 , filed
suit contending that defendant Nos. 1 and 2 had become disqualified to be
directors in defendant No. 3 in view of section 274(1)(g) - In that suit,
company court granted an ad interim order of status quo which was sought to be
vacated by defendant Nos. 1 and 2 in instant appeal - Whether petitioners had
locus standi to maintain suit - Held, yes - Whether, on facts, defendant Nos. 1
and 2 were disqualified to be appointed as director in defendant No. 3 and,
therefore, order of status quo passed by company court would continue till
disposal of suit - Held, yes - Whether, therefore application for vacating
interim order was liable to be dismissed - Held, yes
Facts
The
plaintiffs/petitioners were holders of equity shares in defendant No. 3-company.
Defendant Nos. 1 and 2 had been the directors of defendant No. 7-Company, which
had accepted deposits from public under various schemes. Defendant Nos. 1 and 2
were appointed as directors of defendant No. 7 on 28-6-1999 and 26-6-1998
respectively and remained in that position till 15-10-2001 and 26-9-2001
respectively, when, they were said to have resigned from the office of the
director of defendant No. 7. Thereafter, the said two persons were sought to be
appointed as directors in defendant No. 3. During their tenure of directorship,
defendant No. 7 had defaulted in repaying the amount of deposit together with
interest to the public upon maturity. So, defendant No. 7 approached the
Company Law Board for suitable order for reschedulement of repayment under the
Act. The Company Law Board by an order in August, 2000, pursuant to the scheme
submitted by defendant No. 7, allowed reschedulement of repayment of the
deposits to the respective depositors.
Subsequently
the company court, in a suit filed by the petitioners against the defendants,
granted an ad interim order of status quo holding that defendant Nos. 1 and 2
had become disqualified to be directors in defendant No. 3- company in view of
the provisions of section 274(1)(g).
On application
by defendant Nos. 1 and 2 for vacating interim order :
Held
Clause (g) of
sub-section 1 of section 274 as inserted in Act on 13-12-2000 is a punitive
measure for the benefit and protection of the deposit holders against failure,
either wilful or otherwise in repayment of the deposit on due date. Not only
the shareholder of a particular company in which tainted directors are sought
to be appointed from a defaulting company but any person as the member of the
public who is interested to transact with that limited company can also come in
and question the appointment of the tainted directors. This section intends to
identify those directors under whose management the default has occurred. So
the plaintiff/petitioners had locus standi to maintain the suit. [
On the factual
score, it appeared that, had there been no order of the Company Law Board then
due date of maturity of all the deposits would have been, for the various slabs
of the deposits from 31st December, 1998 till 30th June, 2000. However, the
date of repayment had been rescheduled by the order of the Company Law Board
and it appeared that this had been done for all slabs of deposits. [
The Company Law
Board had accepted and approved the scheme for reschedulement of repayment
proposed by defendant No. 7. The Company Law Board has been conferred with
jurisdiction to approve the scheme by rescheduling dates of repayment which has
fallen due under section 45QA of the Reserve Bank of India Act, 1934 (1934
Act). [
It was very
clear from section 45QA of the 1934 Act that on application being made upon
notice to the deposit holders, the Company Law Board hearing all the persons
interested, accepts and/or approves the scheme. So, the adjudicating process
under the aforesaid section is a conciliatory one and is having the effect of
an agreement in the shape of an order, unless the same is set aside by the
appropriate forum. It is true that due date for repayment is fixed in terms of
the certificate of deposit by the agreement between the parties and such due
date cannot be changed and/or modified without the consent of both the parties.
[
It appeared
from the order of the Company Law Board that deposit holders appeared and they
participated in the hearing, after hearing them, the Company Law Board passed
order. So the order had got the effect of consent as it had not been challenged
nor set aside. When the parties themselves, namely, company and shareholders
had agreed mutually to reschedule the payment with the mode of instalment, due
date initially fixed had been changed and/or varied. [
In the instant
case, in consonance with the provision of section 45QA of the 1934 Act, upon
hearing deposit holders and company and other persons and upon proper
publication, the Company Law Board had rescheduled the date of repayment of
deposits for various categories of depositors. No appeal had been preferred
against this order. As such, the same was binding upon all the persons
concerned regardless of the contractual provision. [Para 27]
It could not be
accepted that by the order of the Company Law Board, the due date did not stand
changed and/or modified for the purpose of section 274. When the date of
repayment was rescheduled, due date automatically stood extended and/or varied.
The beneficial part of the legislation should be given to all the persons
without any discrimination. [Para 28]
Therefore, due
date for computing one year or more to repay was to be reckoned from
rescheduled dates as fixed by the Company Law Board in respect of all
categories of deposits. [Para 29]
The date of the
order of the Company Law Board was 30-6-2000. Therefore, in terms of the
aforesaid order, the time given therein had to be reckoned from the date of the
order, as the date of maturity in respect of all categories of deposits were
earlier than the date of the order. [Para 31]
Defendant Nos.
1 and 2 were appointed as directors on 28-6-1999 and 26-6-1998 respectively in
defendant No. 7-company and they were said to have resigned on 15-10-2001 and
26-9-2001 respectively. [Para 32]
Therefore,
factually it had to be ascertained as to whether during the aforesaid period,
defendant No. 7 failed to repay the amount of deposit with interest within the
rescheduled date or not. The repayment was to be made within 30-10-2000 as far as
deposit of Rs. 5,000 was concerned. Similarly, 50 per cent of the amount in the
category of deposit of Rs. 5001-15000 was to be made within 3 months from the
date of the order, that was to say, by 30-9-2000. As regards category of
deposit of Rs. 15001-25000, the first 50 per cent was to be repaid by
30-10-2000 and all the other deposits were to be repaid by latest 30-10-2002.
[Para 33]
From the
affidavit-in-opposition of defendant Nos. 1 and 2 or for that matter defendant
No. 4, there was nothing to show that such repayment had been made within the
rescheduled date. Rather it was an admitted position that the repayment had not
been made. [Para 34]
The modern rule
of construction or interpretation should be as follows :
(i) Unless the statute expressly
provides for retrospective operation in case of creation or taking away of any
substantive right and further creating any liability, such operation cannot be
given or be read, for it is the absolute domain and prerogative of the
Legislature to give effect retrospectively or prospectively. Courts shall not
venture to give any mode of operation different from the apparent intention of
the Legislature. If it is attempted to be done, then that will be an act of
excess to power of judiciary which is strictly prohibited under the
Constitution of India.
(ii) The plain and
grammatical meaning of the language and words are to be given and while doing
so, if the object of the Legislature is fulfilled then no other thought should
come in the mind of the court and the court will instantly accept such meaning;
however, if while giving plain and grammatical meaning of the words and
sentence of a section or any part thereof, the very intention and object of the
Act is defeated certainly, the court must find out the object and purpose of
the Act to give the meaningful workability of the section or Act. The court
must also see while constructing statute or any section thereof, if express
intention is not apparent, there shall not be any absurdity.
If it is found
that the plain grammatical meaning of the language employed in the section
suggests retrospective operation then in that case, such operation should be
given although one may be affected. [Para 51]
The language
mentioned in clause (g) of section 274(1) clearly suggests that on the date of
commencement of the aforesaid Amending Act if any person has been director in a
defaulting company, he will be affected by this sub-section. The words ‘is
already director’ suggest that who has been continuing to be director till the
date of commencement of the Act. This is supported by the words ‘has failed to
repay its deposit’. The plain grammatical position of these letter “few words”
is present perfect tense and these suggest that the failure has started even
before the commence-ment of the Act. If the operation of this language is
intended by the Legislature to mean for future event or occurrence then the
words ‘has failed to deposit’ or ‘is already a director’ would not have been
employed in the sub-section. If the meaning as explored is given, then this
would not lead to any absurdity as the Amending Act is framed, no doubt,
basically to protect interest of deposit holders by prohibiting entry of
tainted directors against possible act of misappropriation and/or breach of trust
meaning thereby, to curb the wrong deeds, misdeeds to be perpetrated by
wrongful act or omission by the same directors. To check and prevent public
wrong, the moment discovered, is part of good governance in any form of
Government by legislative or executive action. [Para 53]
On the other
hand, if the aforesaid words are treated to be for future occurrence then, the
position would emerge that the aforesaid amending portion cannot be given any
effect at all for a period of at least one year. One year is the minimum period
for default in order to take the advantage of the aforesaid sub-section. This
Amending Act, on the contrary, had been given effect on and from the date of
the notification itself. It is an absurd thought that after an Act having been
notified cannot be given effect immediately. The operation of the Act cannot be
suspended for a period of one year unless of course it is provided expressly,
at least by giving interpretation of the words and language of the section
itself. [Para 54]
Therefore, the
said provision would be applicable against defendant Nos. 1 and 2. From the
records, it was found that even after rescheduling of date of repayment of the
deposit, defendant No. 7-company had failed to repay within one year or more.
The company was obliged to repay on or before 30-10-2000 as far as deposit
holders of Rs. 5,000 were concerned and even after filing of the suit, the
default continued. [Para 55]
Therefore, it
was clear that default of defendant No. 7-company had been continuing. Defendant
No. 1 had been a director from 28-6-1999 till 15-10-2001 when he was said to
have resigned from the office of directorship of defendant No. 7. However,
there was no document in the affidavit-in- opposition of any of the defendants
to show that defendant No. 1 had resigned. [Para 56]
Therefore,
defendant No. 1 was disqualified to be appointed as a director in defendant No.
3. [Para 57]
In case of
defendant No. 2 as he was appointed as, director on 26-6-1998 and remained till
26-9-2001 in defendant No. 7 when the default of the company continued for one
year or more. In that case also, likewise the defendant No. 1, there was not
any document to show that he had tendered his resignation nor any document to
show that such resignation had been accepted not to speak of furnishing any
copy of statement, in Form 32. So, he would be deemed to have been continuing
as director. [Para 58]
Accordingly,
the order of status quo passed by the Company Court would continue till the
disposal of the suit. The instant application for vacating interim order was,
thus, dismissed. [Para 59]
Cases referred to
Union of India
v. Madan Gopal Kabra AIR 1954 SC 158 (para 7), Rafiquennessa v. Lal Bahadur
Chetri AIR 1964 SC 1511 (para 7), Bashiruddin Ashraf v. Bihar Subai Sunni Majlis-Awaqf
AIR 1965 SC 1206 (para 7), T.K. Lakshmana Iyer v. State of Madras AIR 1968 SC
1489 (para 7), A Solicitor’s Clerk, In re [1957] 3 All ER 617 (para 7), Mansif
Jahan v. Rajendra Prasad AIR 1946 Oudh 226 (para 9), Jagir Kaur v. Jaswant
Singh AIR 1963 SC 1521 (para 13), Kanai Lal Sur v. Paramnidhi Sadhukhan AIR
1957 SC 907 (para 13), State of Maharashtra v. Nanded-Parbhan Z.L.B.M.V.
Operator Sangh AIR 2000 SC 725 (para 13), Harbhajan Singh v. Press Council of
India AIR 2002 SC 1351 (para 13), Pakala Narayana Swami v. Emperor AIR 1939 PC
47 (para 13), Rananjaya Singh v. Baijnath Singh AIR 1954 SC 749 (para 13),
Nelson Motis v. Union of India [1992] 4 SCC 711 (para 13), Mahadeolal Kanodia
v. Administrator General of West Bengal AIR 1960 SC 936 (para 13), Ganesh Wire
Industries v. CESC Ltd. AIR 2003 Cal. 138 (para 13), Films Raver International
Ltd. v. Cannon Film Sales Ltd. [1986] 3 All ER 772 (para 13), Luke v. IRC
[1963] AC 557 (para 13) and Sussese Peerage [1844] 11 Cl and Fin 85 (para 39).
P.C. Sen,
P.K. Roy, Hirak Mitra, Joyanta Mitra and Sudipta Sarkar for the
Appearing Parties.
Order
1. In this motion the
petitioner succeeded in obtaining an ad interim order of status quo, passed by
this Court in a declaratory action for holding the defendant Nos. 1 and 2 have
become disqualified to be Directors in defendant No. 3 company in view of the
provision of section 274 sub-section (1)(g) of the Companies Act, 1956. The
defendant Nos. 1 and 2 applied for vacating of the aforesaid order of status
quo. However, this application has not been disposed of separately and the same
has been treated to be an affidavit in opposition to the petition of this
motion for convenience sake.
2. Short narration of the
fact in this case would be relevant in order to find out prima facie, as to
whether the plaintiffs/petitioners are entitled to continuation of interim
order till the disposal of the suit or not. The plaintiffs/petitioners are
holders of equity shares in the defendant No. 3. Yule Financing and Leasing
(hereinafter referred to as Yule) being the defendant No. 7 was floated in the
year 1981 by Andrue Yule and Company (the fourth defendant). The defendant Nos.
1 and 2 had been the Directors of Yule who had accepted deposits from public
under various schemes but failed to repay on their respective dates on
maturity.
3. They were appointed
Directors on 28th June, 1999 and 26th June, 1998 respectively and had been till
15th of October, 2001 and 26th September, 2001 respectively, when, the
aforesaid two persons are said to have been resigned from the Office of the
Director of the defendant No. 7. Now these two persons are sought to be
appointed Directors in the defendant No. 3. It appears that during their tenure
of directorship the defendant No. 7 is alleged to have defaulted in repaying
the amount of deposit together with interest to the public upon maturity. So,
the defendant No. 7 approached Company Law Board for suitable order for
reschedulement of repayment under the Companies Act, 1956.
4. By an order in August
2000 pursuant to the scheme submitted by defendant No. 7 reschedulement of
repayment of the deposits to the respective depositors was allowed. During the
tenure of the Directorship of the defendant Nos. 1 and 2 sub-section (1) of
section 274 of the Corporate Laws was amended on 13th December, 2000 by
incorporating in sub-section (1), Clause G (A and B). Therefore, the aforesaid
section as amended are set out hereunder :
“274. Disqualifications of Directors.—(1) A
person shall not be capable of being appointed a Director of a company, if—
(a) to (f)** ** **
(g) such person is already a director of a
public company, which,—
(A) has not filed the annual accounts and annual returns for any
continuous three financial years the commencing on and after the first day of
April 1999; or
(B) has failed to repay its deposit or interest thereon on due
date or redeem its debentures on due date or pay dividend and such failure
continus for one year or more:
Provided
that such person shall not be eligible to be appointed as a director of any
other public company for a period of five years from the date on which such
public company, in which he is a director, failed to file annual accounts and
annual returns, under sub-clause (a) or has failed to repay its deposit or
interest or redeem its debentures on due date or pay dividend referred to in
clause (B).”
5. Learned Counsel for
both the parties have argued and agreed that any Act cannot have any retrospective
operation and the law is very well settled that unless expressly it is intended
by the legislature, retrospective operation cannot be thought of and it is
always prospective.
6. In this amending Act
there is no such expressed intention. Both the parties have cited the various
authorities in support of their respective submissions.
7. Mr. P.C. Sen learned
Senior Counsel in support of the petition submits that it is true the aforesaid
principle of interpretation of statute is applicable generally but there may be
certain cases where the language of the section itself may work in
retrospection. He submits that ordinary grammatical meaning of the wordings
shall be given. When the ordinary grammatical meaning is clear and unambiguous,
no further aid and assistance from the object and reason of the Act should be
taken. In this case the aforesaid provision will be applicable if a person who
is already a Director on the date of commencement of the Act, is associated
with any defaulting company, he would be inviting this disqualification. In
support of his aforesaid submission he has relied on number of decisions of the
Supreme Court in Union of India v. Madan Gopal Kabra AIR 1954 SC 158,
Rafiquennessa v. Lal Bahadur Chetri AIR 1964 SC 1511, Bashiruddin Ashraf v.
Bihar Subai Sunni Majlis-Awaqf AIR 1965 SC 1206 and T.K. Lakshmana Iyer v.
State of Madras AIR 1968 SC 1489 and an English decision in A Solicitor’s
Clerk, In re [1957] 3 All ER 617.
8. He contends that the
aforesaid amending Act namely section 132, which is a relevant one, came into
force on 14th December, 2000. In this case even assuming the defendant Nos. 1
and 2 having retired on 21st May, 2002 and 11th September, 2002 have been
Director of the defendant No. 7 on the date of commencement of the aforesaid
Act. Admittedly, the defendant No. 7 fails to repay the deposit amount to the
respective depositors for a period of one year or more on and from the date of
notification. The respective fixed deposits became matured on 31st December,
1999. As such, there is clear default on part of the defendant No. 7.
9. He submits that the
order of the Company Law Board rescheduling the date of repayment does not
change the due date as expressed in the aforesaid section. The effect of the
order of the Company Law Board is mere postponement of payment but deposit
becoming due to be repaid is not diluted. He wants to make a distinction
between the word “Due” and “payable”. He submits on strength of Oudh High Court
judgment in Mansif Jahan v. Rajendra Prasad AIR 1946 Oudh 226 that the words
due and payable are not convertible terms. A debt is said to be due in the
instant case that it has existed as a debt, though it may be payable on future
time. In this case the repayment has become due on 31st December, 1999 and even
before their resignation the aforesaid amount were not paid.
10. Even if the order of the
Company Law Board is taken into consideration, still then, there is default in
paying the amount of the deposit, so far as it relates to the deposit holders
of Rs. 5,000, there has been a defaulter for one year.
11. Mr. P.K. Roy learned
Senior Counsel whose clients have sought to come into this proceedings for
being added as a party, supports the argument of Mr. Sen and he submits the
aforesaid amendment is intended to protect the deposit holder and the public at
large. So, this has to be construed strictly and the language employed in the
said section is intended to mean the person who is already Director meaning
thereby in essence, because of the language used therein, it has retrospective
operation.
12. Mr. Hirak Mitra learned
Senior Counsel while opposing this application contends that the language of
the section is very clear. There is no provision either expressed or by
necessary implication that the said section is intended to give a retrospective
operation. A portion of the said amended section has been expressly given
retrospective operation from 1st April, 1999, whereas the other portion has not
been mentioned specifically. So, it is clear that it will have the prospective
operation. Therefore, upon careful reading of the said section it will appear
that defaulting period of one year or more and holding office of director will
be counted on and from 13th December, 2000. In terms of above section one year
is the minimum time. Before expiry of one year the defendant Nos. 1 and 2 have
resigned admittedly. Therefore, they do not come within the mischief of the
aforesaid section.
13. Mr. Joyanta Mitra
learned Senior Counsel also opposes this application and has advanced the same
argument and in support to their arguments they relied on the following
decisions of the Supreme Court and other Courts :
Jagir Kaur v.
Jaswant Singh AIR 1963 SC 1521, Kanai Lal Sur v. Paramnidhi Sadhukhan AIR 1957
SC 907, State of Maharashtra v. Nanded-Parbhan Z.L.B.M.V. Operator Sangh AIR
2000 SC 725, Harbhajan Singh v. Press Council of India AIR 2002 SC 1351, Pakala
Narayana Swami v. Emperor AIR 1939 PC 47, Rananjaya Singh v. Baijnath Singh AIR
1954 SC 749, Nelson Motis v. Union of India [1992] 4 SCC 711, Mahadeolal
Kanodia v. Administrator General of West Bengal AIR 1960 SC 936, Ganesh Wire
Industries v. CESC Ltd. AIR 2003 Cal. 138, Films Raver International Ltd. v.
Cannon Film Sales Ltd. [1986] 3 All ER 772, Luke v. IRC [1963] AC 557 and
(1884) 13 QBD 337 (sic).
14. Mr. Joyanta Mitra adds
that the aforesaid section operates for disqualification and has got civil
consequences. So, the construction of the section should be very restrictive
and the clear and literal meaning should be given.
15. Mr. Sudipta Sarkar
learned Senior Counsel submits that in view of the order passed by the Company
Law Board no question of disqualification within the section is applied as the
due date for payment of the deposits has been rescheduled and therefore, the
minimum period of one year is not fulfilled. As such the suit as well as the
application are frivolous one and interim order should be vacated.
16. Of course, Mr. Hirak
Mitra at the very outset contended that the plaintiff/petitioner have no locus
standi to maintain the suit, as the shareholder are not concerned with the
management of the company they are interested only in the dividend of shares.
17. Before I advert to the
main issues I think I should decide the question of locus standi first. I am unable
to accept the argument of Mr. Hirak Mitra that the plaintiff/petitioner being
the shareholder and the clients of Mr. P.K. Roy, who are also the shareholder,
have no locus standi. The shareholders are vitally interested in the proper and
lawful management of company, inasmuch as they are represented by the
Directors, and obviously they must see that company is managed and controlled
by the competent and untainted person to protect their interest if a company
mans the office of director with disqualified persons, it certainly brings
disrepute to the company itself and it may have adverse effect in the business
of the company.
18. The aforesaid amended
portion of section 274 is in my view, punitive measure for the benefit and
protection of the deposit holders against failure, either wilful or otherwise
in repayment of deposit on due date. In my view not only the shareholder of a
particular company in which tainted directors are sought to be appointed from a
defaulting company, any person in the member of the public who is interested to
transact with that Limited Company can also come in and question the
appointment of the tainted directors. This section intends to identify those
directors under whose management the default has occurred. So, I hold that the
plaintiff/petitioner and the clients of Mr. Roy have locus standi.
19. Going by the prayers of
the petition I am of the view the prayers (a), (b) and (c) cannot be granted
and this can only be granted by passing a decree. The prayer (d) is not clear.
However, since the order of status quo has been passed initially, it has to be
considered in totality of the facts and circumstances of this case and without
resorting to technicality, whether this can be maintained till the disposal of
the suit or not.
20. The moot question in
this case is, on the facts and circumstances of this case whether this section
has retrospective operation or prospective operation. Even if it is made
prospective operation, then, because of the language employed therein the
effect thereof can be given for the failure of the company that has already
taken place on the date of commencement of the Act or not. I think argument of
Mr. Sarkar has to be considered first, as to whether the aforesaid section can
be applied in view of the order passed by the Company Law Board, rescheduling
the date of repayment.
21. On the factual score it
appear that had there been no order of the Company Law Board then due date of
maturity of all the deposits would have been for the various slabs of the deposits
from 31st December, 1998 till 30th June, 2000. However, these dates of
repayment have been rescheduled by the order of the Company Law Board and it
appears that this has been done for all slabs of deposits.
22. Mr. P.C. Sen argues that
the effect of the order of the Company Law Board is the postponement of date of
repayment but the original due date cannot be altered as this has been fixed in
terms of the agreement between the defaulting company and the deposit holders
as there was failure to make payment on due date and that is why a scheme had
to be filed for repayment. The Company Law Board has accepted and approved such
scheme. In this case point for consideration is, whether there is failure to
make payment on due date and such failure continues for a period of one year or
more, and further, whether, defaulting company can get any advantage of the
order of Company Law Board. So I feel that the effect of the order of Company
Law Board has to be seen. The Company Law Board has been conferred with
jurisdiction to approve the scheme by rescheduling dates of repayment which has
fallen due under section 45QA of the Reserve Bank of India Act, 1934. So, the
aforesaid section is set out hereunder.
“45-QA. Power of Company Law Board to order
repayment of deposit.— (1) Every deposit accepted by a non-banking financial
company, unless renewed, shall be repaid in accordance with the terms and
conditions of such deposit.
(2) Where a non-banking financial company has
failed to repay and deposit or part thereof in accordance with the terms and
conditions of such deposit, the Company Law Board constituted under section 10E
of the Companies Act, 1956 may, if it is satisfied, either on its own motion or
on an application of the depositor, that it is necessary so to do to safeguard
the interests of the company, the depositors or in the public interest, direct,
by order, the non-banking financial company to make repayment of such deposit
or part thereof forthwith or within such time and subject to such conditions as
may be specified in the order:
Provided that the Company Law Board may, before making any order under this
sub-section, give a reasonable opportunity of being heard to the non-banking
financial company and the other persons interested in the matter.”
23. It will be very clear
from the aforesaid section that on application being made upon notice to the
deposit holder the Company Law Board, hearing all the person interested,
accepts and/or approve the scheme. So, the adjudicating process under the
aforesaid section in my view is a conciliatory one and is having the effect of
an agreement in the shape of an order, unless the same is set aside by the
appropriate forum. It is true that due date for repayment is fixed in terms of
the certificate of deposit by the agreement between the parties and such due
date cannot be changed and/or modified without the consent of both the parties.
24. It appears to me from
the order of the Company Law Board that deposit holder appeared and they
participated in the hearing, after hearing them the Company Law Board passed
order. So, this order had got the effect of consent as it has not been
challenged nor set aside. When the parties themselves, namely company and
shareholders have agreed mutually to reschedule the payment with the mode of
instalment, in my view due date initially fixed has been changed and/or varied.
25. The Oudh High Court case
cited by Mr. Sen is not applicable in this case as in that case on fact the
case proceeded in a different footing.
26. The provision of section
45QA, sub-section (2) of the Reserve Bank of India Act is intended to provide
measure in case of default in repayment of the deposits on maturity to the
depositors and it subserves two purposes—(i) when the company deliberately fails
and neglects to make repayment to give relief to the depositors for passing
appropriate order and (ii) for any unforeseen circumstances or situation beyond
the control of the company to give relief to the company by extending time for
repayment of the deposits with interest.
27. In either of the case
the effect is that upon intervention of Company Law Board the contractual
terms, as regard date of repayment stands modified. I am unable to accept the
submission of Mr. P.C. Sen that the order of the Company Law Board under
section 45QA, sub-section (2) of the RBI Act cannot vary the contractual terms
between the company and the depositors. Such an argument, in my view, is
absolutely contrary to basic principle of equity and good sense. It is settled
position of the law, contractual terms cannot always be adhered to and in
adverse situation arising beyond control of the defaulting parties to give
relief to the party affected, Court has every power to vary the contractual
terms. In this case I find, in consonance with the provision of the aforesaid
section of RBI Act upon hearing deposit holders and company and other person
and upon proper publication, the Company Law Board has rescheduled the date of
repayment of deposits for various categories of depositors. No appeal has been
preferred against this order. As such the same is binding upon all the persons
concerned, regardless of the contractual provision.
28. I cannot accept the
argument of Mr. Sen that by this order the due date does not stand changed
and/or modified for the purpose of aforesaid section 274 sub-section, clause
g(B) (sic). When the date of repayment is rescheduled, due date automatically
stands extended and/or varied. The beneficial part of legislation should be
given to all persons without any discrimination. When company is getting
benefit of the aforesaid order and it is saved from the evil consequences for
failure to make payment on maturity, why the director(s) concerned should not
get such benefit of extension as the failure of the company in making payment
within due date is correlated to the legal disqualification of the Directors.
29. Therefore I am of the
view that due date for computing one year or more to repay is to be reckoned
from rescheduled dates as fixed by the Company Law Board in respect of all
categories of deposits.
30. In the order of the
Company Law Board the rescheduled date of repayment for various categories of
deposits are stated hereunder :
|
Categories of Deposits |
Schedule of Repayment of Deposits
|
|
Up to Rs. 5,000 |
One instalment within 4(four)
months from the date of maturity or the date of the order, whichever is
later. |
|
Rs. 5,001 to Rs. 15,000 |
Two equal instalments within
6(six) months, commencing from the date of maturity or the date of the order,
whichever is later in the manner - 50% within 3(three) months and the balance
50% within next 3(three) months. |
|
Rs. 15,001 to Rs. 25,000 |
Two equal instalments within
8(eight) months, commencing from the date of maturity or the date of the
order, whichever is later in the manner - 50% within 4(four) months and the
balance 50% within next 4(four) months. |
|
Rs. 25,001 to Rs. 50,000 |
Three instalments within
12(twelve) months, commencing from the date of maturity or the date of the
order, whichever is later in the manner - 30% within 4(four) months, 35%
within next 4 (four) months and the balance 35% within 4(four) months
thereafter. |
|
Rs. 50,001 and above |
Four equal instalments within
16(sixteen) months, commencing from the date of maturity or the date of the
order, whichever is later in the manner - 25% each in every 4(four) months. |
31. The date of the order of
the Company Law Board is 30th June, 2000. Therefore, in terms of the aforesaid order
the time given therein has to be reckoned from the date of the order as the
date of maturity in respect of all categories of deposits were earlier than the
date of the order.
32. The defendant Nos. 1 and
2 were appointed directors on 28th June, 1999 and 26th June, 1998 respectively
in the defendant No. 4-company and they are said to have resigned on 15th
October, 2001 and 26th September, 2001 respectively.
33. Therefore factually it
has to be ascertained as to whether during the aforesaid period defendant No. 4
fails to repay the amount of deposit with interest within the rescheduled date
or not. The repayment was to be made within 30th October, 2000 as far as
deposit of Rs. 5,000 is concerned. Similarly, 50 per cent of the amount in the
category of deposit of Rs. 5,001-15,000 was to be made within 3 months from the
date of the order that is to say by 30th September, 2000. As regard category of
deposit of Rs. 15,001-25,000 the first 50 per cent is to be repaid by 30th of
October, 2000 and in all other deposits are to be repaid by latest 30th of
October, 2002.
34. From the
affidavit-in-opposition of the defendant Nos. 1 and 2 or for that matter
defendant No. 4, I do not find anything to show that such repayment has been
made within the rescheduled date. Rather it is an admitted position the
repayment has not been made.
35. Now on the aforesaid
background it is to be examined whether the aforesaid amended provision of the
Companies Act, 1956 will have any applicability to disqualify the defendant
Nos. 1 and 2 or not.
36. The law Courts of our
country as well as English Court consistently laid down the rules of
construction of a statute basically as follows:
The first and
primary rule and canon of construction is that intention of the Legislature
must be found in the words used by the Legislature itself. If the words used
are capable of one construction only then it would not be open for the Courts
to adopt another hypothetical construction on the ground that such hypothetical
construction is more consistent with the alleged object and policy of the Act.
The words used in the material provision of the statute must be interpreted in
their plain grammatical meaning, and it is only when such words are capable of
true construction the question of giving effect to the policy or object of the
Act can legitimately arise. When the material words are capable of two
constructions, one of which is likely to defeat or impair the policy of the
Act, whilst the other construction is likely to assist the achievement of the
said policy, then the Courts prefer to adopt the latter construction. It is
only in such cases that it is relevant to consider the mischief and defect
which the Act purports to remedy and correct.
37. The Supreme Court in the
case of Kanai Lal Sur (supra) while dealing with the interpretation of section
5(1) of the Calcutta Thika Tenancy Act (2 of 1949) (as amended by Act 6 of
1953) has applied and further laid down the aforesaid principle.
38. Later in a decision of
the recent past of the Supreme Court in case of Nanded-Parbhan Z.L.B.M.V.
Operator Sangh (supra) has held amongst other than “When the language of a
statute is fairly and reasonably clear, the inconvenience or hardships are no
considerations for refusing to give effect that meaning.”
39. The Supreme Court while
observing as above has accepted the rule of construction laid down in an
English case in Sussese Peerage [1844] 11 Cl and Fin 85, 143 18 ER 1034 (HL)
and has laid down as follows : “If the words of the statute are in themselves
precise and unambiguous, then no more can be necessary than to expound those
words in their natural and ordinary sense. The words themselves do alone in
such case best declare the intent of the lawgiver.”
40. Again in paragraph 11 in
the said judgment it has been concluded that “Intention of the Legislature is
required to be gathered from the language used and, therefore, a construction,
which requires for its support an additional substitution of words or which
results in rejection of words as meaningless has to be avoided.”
41. In a fairly recent
decision in case of Harbhajan Singh (supra) the Supreme Court while
interpreting section 6, sub-section (7) of the Press Council Act has followed
that “....... ordinary, grammatical and natural meaning, as it was found the
language used therein was plain and simple. Their Lordships without any
hesitation followed the aforesaid established rule of interpretation as stated
hereinabove.”
42. In the illustrious
decision of the Privy Council in case of Pakala Narayana Swami (supra) while
construing section 162 of the Criminal Procedure Code, 1898 (since repealed)
has laid down the aforesaid rule at page 51 column 2 amongst others that “when
the meaning of words is plain it is not the duty of the Courts to busy
themselves with supposed intention.”
43. An old decision of the
Supreme Court in case of Rananjaya Singh (supra) it has been held amongst
others in paragraph 3 at page 752 amongst others that “The spirit of law may
well be an elusive and unsafe guide and the supposed spirit can certainly not
be given effect to in opposition to the plain language of the sections of the
Act and the rules made thereunder. If all that can be said of these statutory
provisions is that construed according to the ordinary, grammatical and natural
meaning of their language they work injustice by placing the poorer candidates
at a disadvantage the appeal must be to Parliament and not to this Court.”
44. In the case of Nelson
Motis (supra) the Supreme Court has reiterated in paragraph 8 that “.........if
the words of a statute are clear and free from any vagueness and are,
therefore, reasonably susceptible to only one meaning, it must be construed by
giving effect to that meaning, irrespective of consequences.”
45. In case of Mahadeolal Kanodia
(supra) the Supreme Court has laid down the rule of interpretation of statutory
provision in the manner as follows : “The principles that have to be applied
for interpretation of statutory provisions of this nature are well established.
The first of these is that statutory provisions creating, substantive rights or
taking away substantive rights are ordinarily prospective; they are
retrospective only if by express words or by necessary implication the
Legislature had made them retrospective; and the retrospective operation will
be limited only to the extent to which it has been so made by express words, or
necessary implication. The second rule is that the intention of the Legislature
has always to be gathered from the words used by it, giving to the words their
plain, normal, grammatical meaning. The third rule is that if in any
legislation, the general object of which is to benefit a particular class of
persons, any provision is ambiguous so that it is capable of two meanings, one
which would preserve the benefit and another which would take it away, the
meaning which preserves it should be adopted. The fourth rule is that if the
strict grammatical interpretation gives rise to an absurdity or inconsistency
such interpretation should be discarded and an interpretation which will give
effect to the purpose the Legislature may reasonably be considered to have had
will be put on the words, if necessary even by modification of the language
used.”
46. The learned single Judge
of this Court in case Ganesh Wire Industries (supra) while examining the words
and language of section 49(B) as amended in the Electricity (Supply) West
Bengal Amendment Act, 1994 has followed the aforesaid rule of construction
though not referring to the above Supreme Court decision but referring to other
Supreme Court decisions. In that case by section 49(B) a liability was sought
to be created so it was held that the aforesaid Amendment Act is not intended
by the Legislature to give retrospective operation as the liability sought to be
created. So, it was held that operation of the Act must be prospective not
retrospective.
In an English
decision rendered in case of Luke (supra) House of Lords observed that “The
general principle is well settled. It is only where the words are absolutely
incapable of a construction which will accord with the apparent intention of
the provision and will avoid a wholly unreasonable result, that the words of
the enactment must prevail.”
47. In the case of Madan
Gopal Kabra (supra) the Supreme Court observed in paragraph 13 amongst others
as follows :
“While it is true that the Constitution has no
retrospective operation, except where a different intention clearly appears, it
is not correct to say that in bringing into existence new Legislatures and conferring
on them certain powers of legislation, the Constitution operated
retrospectively. The legislative powers conferred upon Parliament under Article
245 and Article 246 read with List I of the Seventh Schedule could obviously be
exercised only after the Constitution came into force and no retrospective
operation of the Constitution is involved in the conferment of those powers.
But it is different thing to say that Parliament in exercising the powers thus
acquired is precluded from making a retroactive law. The question must depend
upon the scope of the powers conferred, and that must be determined with
reference to the terms of the instrument by which affirmatively, the
legislative powers were created and by which negatively, they were restricted.”
48. Again in paragraph 14 it
is observed “It could not be assumed that such a Legislature had the power of
making a law having retrospective operation in relation to a period to its
birth unless the Constitution itself clearly and explicitly conferred such
power.”
49. In the case of
Rafiquennessa (supra) it has been held in paragraph 9 amongst others that “In
order to make the statement of the law relating to relevant rule dealing with
the effect of statutory provisions in this connection, we ought to add that
retrospective operation of a statutory provision can be inferred even in cases
where such retroactive operation appears to be clearly implicitly in the
provision construed in the context where it occurs. In other words, a statutory
provision is held to be retroactive either when it is so declared by express
terms, or the intention to make it retroactive clearly follows from the
relevant words and the context in which they occur.”
50. In an English decision
In re A Solicitor’s Clerk (supra) it has been observed “In all editions of
Maxwell on the Interpretation of Statutes it is stated that it is a fundamental
rule of English law that no statute should be construed to have retrospective
operation unless such a constitution appears very clearly in the terms of the
Act or arises by a necessary or distinct implication.......It would be
retrospective if the Act provided that anything done before the Act came into
force....”
51. The ratio laid down in
the aforementioned authorities it appears to me that the modern rule of
construction or interpretation should be as follows :
(i) Unless the statute expressly
provides for retrospective operation in case of creation or taking away of any
substantive right and further creating any liability such operation cannot be
given or be read, for it is the absolute domain and prerogative of the
Legislature to give effect retrospectively or prospectively. Courts shall not
venture to give any mode of operation different from the apparent intention of
the Legislature. If it is attempted to be done then that will be an act of
excess to power of judiciary which is strictly prohibited under the
Constitution of India.
(ii)The plain and grammatical meaning of the language and words are to be
given and while doing so if the object of the Legislature is fulfilled then no
other thought should come in the mind of the Court and the Court will instantly
accept such meaning, however, if while giving plain and grammatical meaning of
the words and sentence of a section or any part thereof the very intention and
object of the Act is defeated certainly the Court must find out the object and
purpose of the Act to give the meaningful workability of the section or Act.
The Court must also see while constructing statute or any section thereof if express
intention is not apparent, there shall not be any absurdity.
If it is found on
plain grammatical meaning of the language employed in the section suggests
retrospective operation then in that case such operation should be given
although one may be affected as it is held by the Apex Court in Nanded-Parbhan
Z.L.B.M.V. Operator Sangh’s case (supra).
52. In the background of the
aforesaid analysis of the position of the law now it has to be examined in
which way section 274, sub-section (1), Clause G(A and B) is to be operated.
The said section as amended is reproduced below :
“274. Disqualification of Directors.—(1) A
person shall not be capable of being appointed a Director of a company.
If...... (G) such person is already a director of a public company, which, (A)
Has not filed the annual accounts and annual returns for any continuous three
financial years the commencement on or after the date of April, 1999 or—
(B) Has failed to repay its deposit or
interest thereon on due date or redeem its debentures on due date or any
dividend and such failure continues for one year or more.
Provided that such person shall not be eligible to be appointed as a director of
any other public company for a period of 5 years from the date on which such
public company, in which he is a director, fail to file annual accounts and
annual returns, under sub-clause (A) or has failed to pay its deposit or
interest or redeem its debentures on due date or pay dividend referred to in
Clause (B).”
It appears to me the governing language of the
aforesaid section is “such person is already a director..............” and
“such company has failed to repay its deposit or interest. . . .”
53. The language mentioned
in clause (g) such person is already a Director in my view on giving literal,
plain and grammatical meaning clearly suggests that on the date of commencement
of the aforesaid amending Act if any person has been Director in a defaulting
company he will be affected by this sub-section. It is true that the
Legislature has not made any retrospective operation expressly but the language
employed therein contextually, makes it implicit that Legislature intends
retrospective operation [See Rafiquennessa’s case (supra) para 9]. The words
“is already Director” suggest that who has been continuing to be Director till
the date of commencement of the Act. This is supported by the words “has failed
to repay its deposits.” The plain grammatical position of these letter “few
words” is present perfect tense and these suggest that the failure has been started
even before commencement of the Act. If the operation of this language is
intended by the Legislature to mean for future event or occurrence, then the
words “has failed to deposit” or “is already a Director” would not have been
employed in the sub-section. If the meaning as explored by me is given then
this will not lead to any absurdity as the Amending Act is framed no doubt
basically to protect interest of deposit holders by prohibiting entry of
tainted directors against possible act of misappropriation and/or breach of
trust meaning thereby to curb the wrong deeds misdeeds to be perpetrated by
wrongful act or omission by the same Directors. To check and prevent public
wrong the moment discovered, is part of good governance in any form of Government
by legislative or executive action.
54. On the other hand, if
the aforesaid words are treated to be for future occurrence then, the position
will emerge that the aforesaid amending portion cannot be given any effect at
all for a period of at least one year. One year is the minimum period for
default in order to take the advantage of the aforesaid sub-section. This
Amending Act on the contrary has been given effect on and from the date of
notification itself. It is an absurd thought after an Act having been notified
cannot be given effect immediately. The operation of this Act cannot be
suspended for a period of one year unless of course it is provided expressly at
least by giving interpretation of the words and language of the section itself.
The aforesaid Supreme Court decisions as referred to above has clearly held
that interpretation of the words of any statute cannot be given effect to
frustrate or defeat the object of the Act or to lead to an absurdity [see
Mahadeolal Kanodia’s case (supra)].
55. So, I think in this case
this provision will be applicable against the respondent Nos. 1 and 2. From the
records I find prima facie that even after rescheduling of date of repayment of
the deposit the company has failed to repay within one year or more. The company
was obliged to repay on or before 30th October, 2000 as far as deposit holders
of Rs. 5,000 are concerned and even after filing of the suit this default
continues as in the affidavit-in-opposition of the defendant No. 7 nor in the
affidavit-in-opposition of the defendant Nos. 1 and 2 have stated that
repayment has been affected even after order of the Company Law Board. I do not
find any statement or averment whether any instalment has been paid with regard
to other category of deposits.
56. Therefore, it is clear
that default of the company has been continuing. The defendant No. 1 has been a
Director from 28th June, 1999 till 15th October, 2001 when he said to have
resigned from the office of directorship of the defendant No. 7. Though I do
not find any document in the affidavit in opposition of any of the defendants
that the defendant No. 1 has resigned. No copy of the resignation letter has
been disclosed nor annexed nor any resolution of the board of the company has
been annexed showing acceptance of resignation. It is the special knowledge of
the defendant Nos. 1 and 2 and for that matter the defendant No. 7 to produce
this document by way of evidence to establish the resignation was tendered and
it has been accepted under the provision of the Companies Act, 1956 or it has
been legalized under the provision of the Companies Act, 1956 by the Registrar
of Companies. It is legal requirement to be complied before resignation is held
operative, lawful and valid. It is true that the petitioner in its petition has
admitted the fact of resignation. In my view admission of the petitioner in
this case does not matter as against the provision of law. I hold that the
respondent Nos. 1 and 2 in absence of those documents are said to have been
technically continuing director for the purpose of applying the aforesaid
provision.
57. In my view the aforesaid
findings at this interlocutory stage are prima facie, and to hold that the
defendant No. 1 is disqualified to be appointed as a director in the defendant
No. 3.
58. In case of the defendant
No. 2 he was appointed director on 26th June, 1998 and remained till 26th
September, 2001 in defendant No. 7 when the default of the company continued
for one year or more. In his case also likewise the defendant No. 1 do not find
any document that he has tendered in resignation nor any document to show such
resignation had been accepted not to speak of furnishing any copy of statement
in Form 32. So, he is deemed to have been continuing as Director.
59. Accordingly, I am of the
view that order of status quo passed by this Court shall continue till the
disposal of the suit as I do not find any reason either on fact or in law to
vacate the same. The application for vacating interim order is thus dismissed.
Costs of this application will be cost in the cause.
60. However, I expedite the
hearing of the suit. Let the written statement be filed by the
defendants/respondents within a period of fortnight from date. Service of writ
of summons is not required to be served as it would be an academic formality.
Since copies of the plaints have already been received by the parties as it
appears from the interlocutory proceedings if not received then copies thereof
shall be served upon the learned Advocates on records of the respective defendants/respondents.
There will be cross order for discovery, within fortnight thereof. Inspection
forthwith. Parties would be at liberty to pray for earlier hearing of the suit
before appropriate Bench.
[1975] 45 COMP. CAS. 574 (BOM)
HIGH COURT OF
v.
Madhav L. Apte
S.K. DESAI, J.
AUGUST 30, 1974
S.J.
Sorabjee and V.R. Chhatrapati for the Plaintiff.
A.B. Diwan,
K.S. Cooper and J.B. Chinai for the Defendant.
S.K.
Desai, J.—This is a special
case filed for the opinion of this court under the provisions of order 36 of
the Civil Procedure Code. Three questions have been asked at the end of the
special case ; but before referring to them or discussing them, the facts which
are not in dispute may be briefly stated.
The 1st plaintiff to the
special case is a sports and social club (hereinafter referred to as the
"Cricket Club" for the sake of brevity), registered as a company
limited by guarantee, having no share capital. It is incorporated under the
provisions of the Indian Companies Act, 1913, and today functions under the
provisions of the Companies Act, 1956. Plaintiffs Nos. 2 to 17 have been
described as members of the executive committee of the 1st plaintiff, and the
powers and functions of this executive committee are admittedly analogous to
those of the board of directors of a company under the Companies Act, 1956.
Articles 69
to 92 of the articles of association of the Cricket Club provide for the
executive committee and article 74 of these articles provides for the
retirement from office of one-third members of the executive committee at the
annual general meeting of the Cricket Club, excluding the nominated and
ex-officio members who are not subject to retirement under the articles. There
is provision in the said article to the effect that a member retiring at any
such meeting shall be eligible for re-election and and shall retain office as a
member of the executive committee until the close of the meeting at which he
retires.
On 3rd
August, 1973, the Cricket Club received from 591 of its members, including the
defendants to the special case, a requisition, dated 3rd August, 1973
(hereinafter referred to as "the requisition" for the sake of
brevity). By the requisition the requisitionists desired the convening of an
extraordinary general meeting of the Cricket Club to consider and, if thought
fit, to amend its articles of association by passing a resolution, which may be
fully set out:
"Resolved that article 74 of the articles of
association be amended as follows by adding the following at the end of the
words 'he retires':
Provided however that a member shall not be eligible
to stand for re-election to the office of the executive committee if he has
been a member of the executive committee for a continuous period of six years.
Provided further that a member who has been a member
of the executive committee for a continuous period of six years may seek
election after the expiry of a period of three years from the date of the six
years' period as mentioned in this article.
For the purpose of this article, a member of the
executive committee who retires or otherwise ceases to be a member of the
committee at any time after being such a member for a continuous period of five
years shall be deemed to have been a member of the executive committee for a
continuous period of six years".
After receipt of the requisition the same was
considered by the executive committee of the Cricket Club at its meeting held
on 9th August, 1973, and after some discussion the said committee resolved to
obtain opinion thereon of counsel on the validity and legality of the
resolution proposed to be considered and passed at the requisitioned meeting
under the requisition. It appears that pursuant to the said resolution of the
executive committee, the attorneys for the Cricket Club obtained opinion of two
counsel who independently opined that the resolution, for consideration of
which the requisition had been received, would not be valid in law and,
further, that the requisition was not a valid requisition. On the other hand,
the defendants, presumably acting on behalf of the requisitionists, obtained
opinion of three other counsel who arrived at a contrary conclusion. In view of
the conflicting opinions expressed by counsel on points on which their advice
had been sought, the executive committee of the Cricket Club and the
requisitionists mutually agreed to submit a special case and the present
special case arises from the mutual agreement as aforesaid.
Very briefly stated, according to the plaintiffs, the
resolution proposed for consideration by the requisition would be hit by the
provisions of section 274 read with section 9 of the Companies Act, 1956, and
any such amendment of the articles contemplated would be invalid. Further,
according to the executive committee, section 169(6) only comes into operation
on the deposit of a valid requisition and (lie requisition proposing for
consideration a resolution which would be illegal and invalid if carried, would not be a valid requisition within the
contemplation of the said subsection. According to them, therefore, the
executive committee is not bound to call an extraordinary general meeting,
which has been described by the plaintiffs as an "exercise in futility".
The
defendants, on the other hand, have contended that the said requisition is a
valid requisition on several different footings. According to them, in the
first place, the rule of construction by necessary implication which is a basic
premise of the conclusions regarding illegality and invalidity of the proposed
resolution does not apply in the present case. It is submitted that what has
been suggested by the proposed amendment to article 74 does not and cannot
amount to a disqualification for the office of the executive committee.
Secondly, it has been urged that the language of section 274 does not warrant
the invocation of the rule of construction or interpretation by necessarry
implication. Finally, it has been urged that in order to make a provision in the
articles of a company void by reason of the provisions contained in section 9
of the Companies Act, 1956, the provision must be repugnant to some express
provisions in the Companies Act, and that the provisions of section 9 would not
be attracted where something has to be read in any provision of the Companies
Act by applying the rule of necessary implication. These, very briefly stated,
are the rival contentions which were explained and justified in greater detail
during the course of arguments, which arguments I propose to deal with later on
in this judgment.
The following
three questions have been posed on which the opinion of the court is sought:
"(a) Whether amendment of article 74 proposed by
the resolution contained in the requisition would be invalid as being repugnant
to section 274 of the Companies Act or any other provision of the said Act, or
whether the same would be valid ?
(b) Whether
the requisition is a valid requisition ?
(c) Whether the executive committee of the
plaintiffs, viz., plaintiffs Nos. 2 to 17, are bound and liable to call an
extraordinary general meeting of the
members of the plaintiffs to consider and, if thought fit, to pass the said
resolution as a special resolution by the requisite majority ?"
As I see the
position, the question posed in prayer (a) would require consideration of the
provisions of sections 9 and 274 of the Companies Act, 1956, and the questions
posed in prayers (b) and (c) involve only the consideration of section 165,
although it may be indicated that these sections perhaps cannot be considered
in isolation and effect has to be given as far as possible on a consideration
of the scheme of the Companies Act in its entirety.
Section 274
of the Companies Act deals, as the marginal note indicates, with the disqualification
of directors. Sub-section (1) of the said section provides for six
disqualifying conditions, and sub-section (3) thereof goes on to provide as
follows :
"(3) A private company which
is not a subsidiary of a public company may, by its articles, provide that a
person shall be disqualified for appointment as a director on any grounds in
addition to those specified in subsection (7)".
According to
the plaintiffs, the doctrine of necessary implication or the rule of
construction by necessary implication is brought into play or attracted by the
wording of sub section (3). Before, however, I proceed to consider the rival
stands on this sub-section, reference may be made to an allied section of the
Companies Act, the concerned section being section 283 which provides for
vacation of office by a director. Under sub-section (1) of section 283 we have
provision of 12 situations in which the office of a director shall become
vacant, and sub-section (3) of the said section provides as follows :
"283.
(3) A private company which is not a subsidiary of a public company may, by its
articles, provide, that the office of director shall be vacated on any grounds
in addition to those specified in sub-section (1)".
I have
supplied certain underlining
to both the sub-sections, viz., section 274(3) and section 283(3), and it can
be seen that the underlined
portions in both the sub-sections are in identical phraseology.
During the
course of arguments both sides have referred me to the previous legislative
history and, therefore, at the outset, reference may be made to analogous provisions
under the Indian Companies Act, 1913.
The Indian
Companies Act, 1913, as originally enacted did not contain analogous
provisions. But in 1936 by the Indian Companies (Amendment) Act, XXII of 1936,
section 86-I was introduced. The marginal note of that section indicated that
it contained provision concerning vacation of office of directors. There was,
however, significant difference between the provisions of that section and the
two sections with which we are now dealing, and that was to be found in sub-section
(2) which reads as follows:
"86-I. (2) Nothing contained in this section shall be
deemed to preclude a company from providing by its articles that the office of
director shall be vacated on grounds additional to those specified in this
section".
Thus, under
an express provision of section 86-I, any company, private or public, was
empowered to provide by its articles additional grounds for vacation of office.
It cannot be denied that there is considerable difference between such a
provision and the provisions to be found in subsection (3) of the two sections
of the Companies Act, 1956, which we are considering, viz., sections 274 and
283.
During the course of arguments I was referred to the
report of the Company Law Committee, 1952 (Bhabha Committee) as also to certain
statements to be found in the Statement of Objects and Reasons and the Notes on
Clauses to Bill No. 46 of 1953. Before setting out the relevant extracts from
the Bhabha Committee Report and from the Notes on Clauses, I may refer to two
Supreme Court decisions which have indicated the principle to be applied and
the course to be adopted when the question of making such reference arises.
During the course of arguments I was referred to
Madanlal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Ltd.,
where the majority judgment refers to certain amendments made in 1960 as a
result of the recommendation of the Committee appointed in that behalf, as also
to the extracts of the report of the Committee. The court was dealing with the
provisions of the very Act which we are dealing with, i.e., the Companies Act,
1956.
In a fairly recent decision of the Supreme Court in
State of Mysore v. R.V. Bidap the Supreme Court seems to have approved of a
passage from Crawjord on Statutory Construction, which is in the following
terms :
"The judicial opinion on this point is certainly
not quite uniform and there are American decisions to the effect that the
general history of a statute and the various steps leading up to an enactment
including amendments or modifications of the original bill and reports of
legislative committees can be looked at for ascertaining the intention of the
legislature where it is in doubt; but they hold definitely that the legislative
history is inadmissible when there is no obscurity in the meaning of the
statute".
Krishna Iyer J., speaking for the court (at page
2558), in the above report proceeds to sound a rule of caution that such
extrinsic material, although admissible, should not be regarded as decisive and
that resort may be had to such sources with great caution and only when
incongruities and ambiguities are to be resolved.
Bearing in mind these words of caution, I think
reference may now be made to the extracts from the Bhabha Committee's Report
and the Notes on Clauses which were brought to my attention during the course
of arguments.
Paragraphs 92, 93 and 94 of the Bhabha Committee's
Report deal with its recommendations vis-a-vis the existing section 86-I of the
Indian Companies Act, 1913, and in paragraph 93 is to be found the view of the
said Committee which is to the effect that the enabling provision of
sub-section (2) should be restricted to
private companies excluding those which are subsidiaries of public companies.
We are not really concerned with the basis for the recommendations which is
also to be found explained in paragraph 93.
We now turn
to Bill No. 46 of 1953. The Statement of Objects and Reasons of that Bill
indicate that the Bill was largely based on the recommendations of the Company Law
Committee, modified in a few respects. Clause 252 of the said Bill provided for
disqualification of directors, the provision being analogous with the present
section 273 ; and clause 261 of the Bill contained the provision concerning
vacation of office by directors, the said clause being comparable to the
present section 283. Sub-clause (4) of section 252 had provisions identical
with sub-section (3) of the present section 274, and sub-clause (3) of clause
261 had provisions identical with sub-section (3) of section 283.
The Notes on
Clauses on clauses 252 and 261 may now be set out:
"252.
This lays down initial disqualifications corresponding to the disqualifications
which, under section 86-I of the existing Act, entail the vacation of office by
a director. Sub-clause (2) takes power to remove any disqualification arising
from conviction or from failure to pay calls. Sub-clause (4) corresponds to
section 86-I(2) of the existing Act. It is considered necessary to confine the
power of a company to add to the disqualifications imposed by the Bill to
private companies which are not subsidiaries of public companies.
261. This is
based on section 86-I of the existing Act. See paragraphs 92 and 93 of the
Company Law Committee's Report and the summary at page 265. Power has been
given to the company to remove the director by an ordinary resolution as in
section 184(1) of the English Act. Sub-clause (2) is a consequential provision,
which seems to be clearly necessary. Sub-clause (3) corresponds to sub-section
(2) of the existing section 86-I but confines the operation of the sub-section
to private companies which are not subsidiaries of public companies. Compare
clause 252(4) ante."
It may be mentioned, as this
aspect was emphasised during arguments by learned counsel for the defendants,
that in its report the Bhabha Committee had not considered grounds of
disqualification as distinguished from grounds of vacation of office by a
director ; and the recommendation to be found in paragraph 93 of the said
report was restricted to additional grounds of vacation, and its opinion was
that the public companies and private companies which are subsidiaries of
public companies ought not to be allowed to have articles of association
containing additional grounds of vacation of office by directors.
As stated earlier, the three questions posed for the
consideration of the court fall into two parts ; the first dealing with
the interpretation and construction of section 274 primarily, and the second
with the interpretation and construction of section 169. As the latter point
is, in my opinion, one which is fairly easy to answer and does not admit of
detailed arguments, I propose to deal with the provisions of that section first
and express my views on questions (b) and (c) of the special case, which are
based on the provisions of section 169. After this is done, I propose to revert
to the somewhat difficult question of construction of section 274.
Under the Indian Companies Act, 1913, the
provisions as regards calling of extraordinary general meetings on requisition
were to be found contained in section 78 of the said Act. Under those
provisions the directors of a company which has a share capital were enjoined
on the requisition of the holders of not less than one-tenth of the issued share
capital of the company, upon which all calls had been paid, to call an
extraordinary general meeting of the company. The scheme was substantially
similar to the scheme of section 169 of the Companies Act, 1956. Sub-section
(2) of section 78 provided for the contents of the requisition and the mode of
its deposit ; and sub-sections (3) to (5) provided for calling of a meeting by
the requisitionists on failure by the directors to cause a meeting to be called
for after deposit of a requisition. In sub-section (3) of section 78, however,
the words used were "date of the requisition being so deposited".
Under section 169(6) of the Companies Act, 1956, one finds a change in the
terminology, the provision being that the requisitionists may themselves call a
meeting (subject to other provisions, with which we are not concerned) if the
board does not call a meeting "within twenty-one days from the date of
deposit of a valid requisition" (underlining
supplied). Now, it was urged by learned counsel for the plaintiffs that the
additional word "valid" indicated clearly that the requisition which
was made must be valid and lawful; in other words, that a requisition which was
for consideration of something which would be illegal or invalid could not per
se be considered to be a valid requisition, and if such requisition was
deposited with the directors of a company the directors were not required to
call a general meeting although the numerical requirement provided for in the
earlier part of the said section was satisfied. Now, it may be pointed out that
whereas under section 78 of the Indian Companies Act, 1913, the power to call
an extraordinary general meeting was restricted to companies having a share
capital, under section 169 of the Companies Act, 1956, such power can be
exercised by the members of the company having a share capital as also by
members of a company not having a share capital, and the requirements in the latter
case are to be found in clause (b) of sub-section (4). Other requirements of a
proper requisition have also been spelt out in greater detail in section 169 ;
and, in my opinion, it would be proper to understand the word "valid"
used in sub-section (6) of section 169 as having reference to the provisions of
the earlier five sub-sections of that section rather than indicating compliance
with any other requirements or provisions of the Companies Act. In other words,
to put it shortly, all that is required to be seen before the provisions of
sub-section (6) of section 169 become applicable would be to consider whether
the requisition deposited was in accordance with the provisions of section 169
as to its contents, the number of signatories and similar matters, and it would
not be open to the board of directors of a company to refuse to act on a
requisition on the ground that, although such requisition was in accordance
with the requirements of section 169, it was otherwise invalid. This conclusion
receives support when one peruses subsection (5) of section 169, where also the
use of the word "valid" is perceived. The learned counsel for the
plaintiffs emphasised the mischief that in his opinion would be caused by an
otherwise invalid requisition being made which would put the company to
considerable financial loss for what he called would be an exercise in
futility. On the other hand, the question to be considered would be whether the
board of directors of a company can be allowed to ignore a requisition which
complies with all the requirements laid down in section 169 of the Companies
Act, 1956, on the ground that the object of the requisition was illegal or
otherwise invalid and, therefore, the requisition was not a valid requisition
which ground may ultimately be found to be unsustainable. In my view, the word
or the adjective "valid" in section 169 has no reference to the
object of the requisition but rather to the requirements in that section
itself. If these requirements indicated in the earlier part of the section are
satisfied, then the requisition deposited with the company must be regarded as
a valid requisition on which the directors of a company must act. If the
directors fail to act within the period specified by sub-section (6), then, in
my opinion, the requisitionists would be entitled to proceed under the later
provisions of that sub-section and the other sub-sections of section 169.
Before I proceed to express my view on sub-section
(3) of section 274, as ultimately the conclusion on question (a) must turn on
the correct interpretation of that sub-section, I may proceed to dispose of one
argument based on the provisions of section 9 of the Companies Act, 1956, to
which I have already referred whilst indicating briefly the rival contentions.
Section 9 of the Companies Act, 1956, reads as under :
"9. 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".
It has been urged on behalf of the defendants in the
statement of case and it was also urged in the course of arguments that section
9 would render articles or resolution invalid only if there was conflict with
an express provision under the Companies Act, 1956, and unless there was such
express provision no question of repugnancy could arise. In other words, it was
submitted that the terminology employed in section 9 was such as to exclude any
provision in the articles being rendered invalid by what was not expressly
provided in the Companies Act or in any of its provisions, but which had to be
read in the same provision by necessary implication. In my opinion, this
submission is not one which can be accepted. It is impossible to read the
expression "provisions of this Act" in section 9 as indicative merely
of the express provisions and exclude the meanings which have to be read in the
provisions of the Act by the rule of necessary implication. In my view, any
meaning which has to be read in any section of the Act by the rule or principle
of necessary implication is as much a provision of the Act as something
expressly provided. In this view of the matter any provision contained in the
memorandum, articles, agreement or resolution of a company which is repugnant
to any provision of the Act, whether such provision be expressly found in any
section or is to be read in the said section by necessary implication, would be
clearly void.
I may also dispose of, since it is not a matter
capable of any great elaboration, the argument that what was intended by the
requisitionists was not addition of a ground of disqualification at all, but
what was expressed in the argument as non-qualification. The learned counsel
for the defendants urged that the several grounds of disqualification to be
found in sub-section (1) of section 274 had an aspect of unfitness, defect or
blemish connected therewith and what was sought to be done by the proposed
amendment of article 74 of the articles of association of the Cricket Club had
no such incidence inasmuch as it was sought to be specifically provided that
the person concerned may seek re-election after the expiry of a period of three
years from the date of the six-year period as mentioned in the article (after
amendment). In connection with this branch of the argument I was referred to
the meanings given to the word "disqualification" and
"disqualified" in dictionaries such as Murray's and Random House
Dictionaries, as also to some judgments which were under the Representation of
the People Act, 1951. In my opinion, it is not possible to accept this
submission made by learned counsel for the defendants. Having considered the
various meanings in the dictionaries which were cited and which meanings are
unnecessary to set out in this judgment, the word "disqualified" used
in sub-section (3) of section 274 must be understood in its plain natural
meaning, which in the context would be "not qualified" and not in the
limited sense in which the learned counsel for the defendants has wished me to
understand it, viz., as restricted to some incapacity as a result of defect,
unfitness or blemish. A person may be unfit for a particular office not only by
reason of any defect or blemish but also because he is not qualified for that
office, and in that sense any requirement which non-qualifies a person, although
for a limited period of three years only, must be regarded as a
disqualification within the meaning of that expression. And a ground of
disqualification would be a ground to disqualify the person within the meaning
of sub-section (3) of section 274.
The question which remains for consideration and to
which an answer must now be given is whether there is prohibition on public
companies and private companies which are subsidiaries of public companies
against their adopting an article containing additional grounds of
disqualification other than those found in sub-section (1) of section 274.
It is clear that the provisions to be found in
sub-section (3) of section 274 are not couched in a happy or direct language.
There would not have been any occasion to resort to the doctrine of necessary
implication if sub-section (3) of section 274 had been framed as containing an
express prohibition to operate directly against the companies which were sought
to be prohibited from having additional grounds rather than in the form of an
enabling provision, which, surely, is not an example of good legislative
draftsmanship. Merely by way of interest I had been referred by learned counsel
to observations of this court in D.B. Godbole v. Kunwar Rajnath (?) where Chagla C.J. had occasion to refer to
certain other provisions of the Companies Act, 1956, which were similarly
couched in unhappy and imprecise language. It is with this handicap that I must
now proceed to give some meaning, if at all a meaning can be given, to the
provisions of sub-section (3) of section 274. Here, it may be stated that it is
not necessary for the court to give some meaning to a legislative provision
although it would be normal to presume that the legislature did intend to
provide for something when it enacted the sub-section. It can be that there was
some intention of the legislature, but that intention has not been given effect
to by reason of the unhappy or defective terminology employed in the
legislative provision. It is the terminology which has to be construed and
given effect to and not the intention of the legislature which, one may assume,
is indicated in the Notes on Clauses. It may be mentioned here that it was
submitted—and there is some force in the argument—that the Notes on Clauses
need not necessarily indicate the intention of the legislature but merely
explain what these draftsmen of the legislative provision had in mind.
As stated earlier, the question, very shortly put but
which may require elaborate consideration, is whether the apparently enabling
provision in sub-section (3) of section 274 in favour of private companies is
required to be construed as a prohibition on public companies and private
companies which are subsidiaries of public companies by the rule or principle
of necessary implication.
It has been urged on behalf of the plaintiffs that
the provisions of subsection (3) of section 274, although expressed in
affirmative language, must be construed as having a negative implication. In
this connection I was referred to the observations to be found in Crates on
Statute Law, 7th edition, at pages 264 to 266. The entire passage from Craies
may be usefully set out:
"(v)Inferences from affirmative language.—Statutory enactments, although
expressed in affirmative language, are sometimes treated as having a negative
implied, and that their provisions, 'though', as Lord O'Hagan said in R. v. All
Saints, Wigan (Churchwardens) .
'affirmative in words, are not necessarily so, if they are absolute, explicit
and peremptory'. In Viner's Abr. Tit. Negative, A. PI. 2, the following rule is
laid down:
Every statute limiting anything to be in one form,
although it bespoke in the affirmative, yet includes in itself a negative; and
in Bacon's Abr. Tit. Statute G., the rule given is that 'if an affirmative
statute which is introductive of a new law direct a thing to be done in a
certain way, that thing shall not, even if there be no negative words, be done
in any other way'."
This rule is borne out by the
following cases :
"In Stradling v. Morgan ,
the question was whether an action founded upon a statute could be commenced
elsewhere than before the justices of Glamorgan, at their sessions, for by the
laws in Wales Act, 1542, it was enacted that 'all actions founded upon any statute
shall be sued by original writ, to be obtained and sealed with the said
original seal returnable before the justices at their sessions, within the
limits of their authorities, in manner and form before declared'. It was
contended that these words had a negative meaning, that is to say, that the
statute appoints the place, order and form of such suits, and that the
plaintiff cannot sue in any other place or form, and, therefore, that this
action, founded upon a statute, which is appointed to be returned before the
justices of Glamorgan, at their sessions, cannot be sued or returned, elsewhere
or before any other justices. And so it was decided by the court, and a verdict
which had been found for the plaintiff was set aside. In Amy Towsend's case ,
the question was whether the Statute of Uses, ss. 1, 2, which was expressed
affirmatively, contained an implied negative. By this statute it was enacted
that persons entitled to a use of lands should have the same estate, both
according to quantity and quality, in the lands as they had in the use. It was
argued that these words contained in themselves a negative, i.e., that the
cestui que use had an estate in no other quantity or quality than they had in
the use, and the reason given was that there is a diversity between a statute
which makes an ordinance by affirmative words touching a thing which was before
at the common law, and a statute which makes an ordinance by affirmative words
touching a thing which was not before at the common law, and that where, as
here, a statute appoints the manner of a thing which was not before at the
common law, then, although it be expressed in the affirmative, it implies a
negative. This argument the court adopted, and decided that the enactment must
be strictly adhered to. In Trott v. Hughes,
Lord Cranworth held that where rules, framed by virtue of a statute for the
regulation of benefit building societies, provided that any dispute which might
arise between the society and any of its members should be referred to and
decided by the directors of the society, the provision was equivalent to
enacting that no such dispute was to be made the subject of litigation in a
court of law, and consequently he dismissed a suit which arose out of such a
dispute. (This view was adopted in Municipal Permanent Investment Building
Society v. Kent ).
In Ex. p. Stephens ,
the question was whether a mere word or distinctive combination of letters was
a trade mark within the meaning of the Trade Marks Registration Act, 1875. By
section 10 of that Act it was enacted that a trade mark might consist of (among
other things) 'any special and distinctive word or words or combination of
figures or letters used as a trade mark before the passing of this Act'. It was
thus held that a word which had not been used as a trade mark before the
passing of the Act could not be used as a trade mark after the passing of the
Act. 'Otherwise' said Jessel M.R., 'it would be contravening the well-known
rule, that when there is a special affirmative power given which would not be
required because there is a general power, it is always read to import the
negative, and that nothing else can be done. Therefore, the power to use as a
trade mark a word used before the passing of the Act clearly negatives the
conclusion that a distinctive word can be so used if the word was not so used
before the passing of the Act'."
I was also referred in this connection to Stroud's
Judicial Dictionary (4th edition), at page 1739, where the expression
"necessary implication" and "necessary intendment" are
dealt with. I was also referred to several authorities cited in Stroud's
Judicial Dictionary for a clearer exposition of these two expressions. It is
obvious that the expression "necessary" means something stronger than
"possible" and the implication must be one which is so strong and
irresistible that the alternative is not one that would appeal to a rational
mind.
In Cork County
Council and Richard Burke v. Commissioners of Public Works in Eyre, The
Minister for Finance and the Attorney-General ,
there are observations as to the phrase "necessary
implication" which may be quoted :
"But what is 'necessary implication' in the
construction of a statute ? I may cite the words of Lord Eldon in Wilkinson v.
Adam,
where, after stating that in construing a will, a particular intention must
appear by necessary implication upon the will itself, he continues : 'With
regard to that expression "necessary implication", I will repeat what
I have before stated from a Note of Lord Hardwick's judgment in Coriton v.
Hellier, that in construing a will, conjecture must not be taken for
implication, but necessary implication means not natural necessity, but so
strong a probability of intention, that an intention contrary to that which is
imputed to the testator cannot be supposed'".
In William
Hill and W.C. Simmons v. Alice Sarah Crook and Earnest William Crook,
the same passage from Wilkinson v. Adam
is set out with approval, and although the passage deals with the construction
of a will the sentiments expressed are, in my opinion, equally apposite in the
construction of a statute. The material passage (which has already been quoted
as part of a passage from an Irish case—supra) reads :
"In construing a will, conjecture must not be
taken for implication, but necessary implication means, not natural necessity,
but so strong a probability of intention that an intention contrary to that
which is imputed to the testator cannot be supposed".
As stated earlier, in my opinion, the passage would
be quite appropriate and applicable to the facts in our case, if for the word
"testator" the word "legislature" was substituted in the
same.
On the other hand, on behalf of the defendants, it
was urged that the principle or rule of interpretation by necessary implication
ought not to be lightly applied in the instant case, and the following
principles of inter-pretation were
submitted for the consideration of the court. These principles may be briefly
referred to :
(1) There is a presumption against the
alteration of well-settled law by implication and such a change should be
either by explicit or express words or only if such inference of alteration is
irresistible.
(2) If the matter is evenly balanced or fairly
arguable on either side, then that interpretation should be preferred which
would involve the least alteration of the existing law.
(3) If one of the two possible
constructions would lead to startling or bizzare results, or to any absurd or
harsh consequences, then that construction is one which ought not to be
preferred and is one which ought to be avoided.
(4) The intention of the legislature is
primarily to be gathered from the actual words used and not from any words not
to be found in the statute, but which are required to be added to make the
statute clear and to bring out the policy intention.
A number of
authorities were cited at the Bar in connection with these propositions. These
will be referred to, if necessary, when these submissions are discussed in
somewhat greater detail as I propose to do. The first two propositions
submitted by learned counsel for the defendants were obviously based on the
position of the previously existing law, viz., the Indian Companies Act, 1913,
as this was the law in existence prior to the Companies Act, 1956. As seen
earlier, under section 86-I, additional grounds (of vacation of office by
directors) could be adopted by all companies, and it was submitted that if that
was the state of the existing law, a change in that law ought not to be lightly
inferred unless the words of the statute were clear. In Murugiah v. Jainuddin
the Privy Council has spoken approvingly of a passage in Maxwell's
Interpretation of Statutes (10th edition), at page 81, entitled
"presumption against implicit alteration of law". The said passage in
the Privy Council's judgment reads as follows:
"'One of
these presumptions is that the legislature does not intend to make any
substantial alteration in the law beyond what it explicitly declares, either in
express terms or by clear implication, or, in other words, beyond the immediate
scope and object of the statute. In all general matters outside those limits
the law remains undisturbed. It is in the last degree improbable that the
legislature would overthrow fundamental principles, infringe rights, or depart
from the general system of law, without expressing its intention with
irresistible clearness.'
Their
Lordships agree that the law is correctly stated in the passage cited".
Similarly, in National Assistance Board v. Wilkinson
it was stated :
"............but it may be presumed that the
legislature does not intend to make a substantial alteration in the law beyond
what it expressly declares".
Similar are the observations to be found in George
Wimpey & Co. Ltd. v. British Overseas Airways Corporation.
It was observed in that case by Lord Reid :
"This is, therefore, an example of the not
uncommon situation where language not calculated to deal with an unforeseen
case must nevertheless be so interpreted as to apply to it. In such cases, it
is, I think, right to hold that, if the arguments are fairly evenly balanced,
that interpretation should be chosen
which involves the least alteration of the existing law." (Underlining
supplied).
It may be mentioned at this juncture that the Privy
Council authority and Wilkinson's case and the passage from Maxwell have been
referred to with approval by our Supreme Court in M.K. Ranganathan v.
Government of Madras .
Similar sentiments are to be found expressed in
Halsbury's Laws of England (third edition), volume 36, para. 625. According to
Halsbury:
"Statutes which limit or extend common law
rights must be expressed in clear unambiguous language ; but, if the language
is clear, there is no reason why such statutes should be construed differently
from other statutes. Except in so far as they are clearly and unambiguously
intended to do so, statutes should not be construed so as to make any
alteration in the common law or to change any established principle of law, or
to alter completely the character of the principal law contained in statutes
which they merely amend".
There is a similar passage in Craies on Statute Law
(7th edition) to be found on pages 112 and 121; it is, however, not necessary
to set it out.
In connection with these principles of interpretation
certain further submissions were made. It was urged that the enabling provision
in subsection (3) must not be regarded as barring by implication the companies
other than the companies mentioned in the enabling provision. I was referred to
the enabling provision contained in section 86-I(2) of the Indian Companies
Act, 1913, and it was argued that such a provision was enacted for abundant
caution and not because without it the companies would have been precluded from
having an additional ground of vacation of office of directors by adopting
suitable articles. In the same vein, it was urged, the enabling provision to be
found in sub-section (3) has to be similarly construed, and there is no warrant
for reading any prohibition or bar in the said enabling provision.
In connection with the Report of the Company Law
Committee (the Bhabha Committee) it was obvious that the said report only dealt
with the grounds of vacation of office, and the said Committee had not applied
its mind to grounds of disqualification or the desirability or otherwise of
adding to such grounds. Bearing this in mind, it was submitted that the
interpretation of, or the inference sought to be drawn from, sub-section (3) of
section 274 ought not to be governed by the principle of mischief sought to be
avoided by the legislature. In connection with the Notes on Clauses to be found
in the Bill presented to Parliament and which Notes have been referred to
earlier, it was submitted that such notes may, at the highest, represent the
intention of the draftsmen of the legislative measure and such intention must
not be assumed to be the intention of the legislature.
I was, therefore, taken through the various articles
of the Cricket Club and arguments were based on these articles, in particular
on articles 24(c) and 84(a). It was submitted that if it was held that
additional grounds of disqualification could not be adopted by a club such as
the Cricket Club, peculiar if not bizzare results would follow. In this
connection I need not refer to the several articles to which reference was made
at the Bar, save to state that the arguments proceeded both on consideration of
sub-section (3) of section 274 and of section 283. It was contended that if
these two sub-sections were construed to restrict the right of public
companies, including clubs such as the Cricket Club, some of the provisions
contained in these articles may be hit and this would lead to unfortunate
results. The submission was that unless the language of the sub-sections was
clear and the inference is irresistible, that inference which was sought to be
given to these sub-sections by the plaintiffs ought not to be given, as in the
case of the Cricket Club and similar institutions unfortunate results might
occur and some of the articles of such clubs and similar institutions which may
be desirable and even absolutely necessary might be rendered invalid. In
connection with this argument various illustrations were given of different
types of bodies which may require some qualifications—special
qualifications—for the members of their executive committees. According to the
submission, if these qualifications are regarded as disqualifications, then,
since such qualifications were absolutely necessary, in the view of the learned
counsel for the defendants the two sub-sections ought not to be interpreted in
a manner which would render such provisions or such rules imposing such
qualifications as invalid in law. Apart from the specific articles of the
Cricket Club which may require reconsideration, I found some of the instances
given to be far-fetched, and the contingency submitted for the court's
consideration by learned counsel for the defendants did not appeal to me as a
reasonable and probable contingency which ought to affect the interpretation of
the statutory provisions with which we are concerned.
Similarly, arguments were based on the principle to
be found enunciated in sections 29, 31 and 36 of the Companies Act, which
statutory provisions would seem to indicate the rights of the members of a
company to adopt such articles as they wish to adopt, subject to the general
principle that the articles or changes in the existing articles should be made
bona fide. It was submitted—and there is considerable force in the
submission—that such power of the members ought not to be restricted or deemed
restricted unless such curtailment or restriction was provided for in express
language or such language from which only one irresistible inference could be
drawn. In other words, the argument was that by reason of the various points
which had been made, the attempt of the legislature to prevent the mischief,
even assuming there was such an attempt and that the mischief was one which was
sought to be prevented, had clearly misfired and it should be so held by the
court. Great stress was laid by learned counsel in this connection on the
terminology employed in sub-section (3) of sections 274 and 283. In the first place,
it was submitted that if the legislature had sought to restrict the rights of
the members to have additional grounds of disqualifications and vacation of
office, the proper way to provide for the same would have been by addition of
the words "and only if" in sub-section (1) and it was pointed out
that similar words are to be found in several other provisions of the Companies
Act, 1956 ; reference may be made only to sections 2(3), 2(4) and 6.
Alternatively, it was submitted that if sub-section (3) was intended to prevent
additional grounds from being adopted by a public company, the language of the
sub-section ought to have clearly indicated that only the companies mentioned
in sub-section (3) were entitled to have the articles adding to the grounds set
out in sub-section (1). It is true that the two sections—and I think the
provisions of section 274 cannot be read in isolation from the provisions to be
found in section 283—are not artistically or even properly drafted. There is
much to be said in the submission made as to the language of these sections by
learned counsel for the defendants. I was not much impressed by the argument at
the Bar in connection with harsh or bizzare consequences. But, on the other
hand, arguments which were advanced based on the language of the two
sub-sections as also on the principles of interpretation to which reference has
been made earlier (particularly based on the principles dealing with the change
in the existing law which need not be lightly inferred) were quite reasonable
and fairly appealing.
As stated earlier, in my opinion, the provisions
contained in section 274 would be required to be considered in juxtaposition
with the provisions to be found in section 283, and we have already seen how
the phraseology employed in the two sub-sections with which we are concerned
(both being sub-section (3) to the two sections) is identical.
In this connection reference will now be required to
be made to a judgment of this court on which great reliance was placed by
learned counsel for the plaintiffs. That was not a final judgment but an order
at an interlocutory stage. It did not deal with the provisions of section 274
but proceeded upon a construction of section 283 of the Companies Act, 1956.
But nevertheless, in my opinion, it would have a great bearing on the matter
canvassed before me. Reference may immediately be made to this judgment.
The said judgment was given by Vimadalal J. on 10th
October, 1968, in his order made on the plaintiffs' Notice of Motion dated 30th
August, 1968, in Suit No. 552 of 1968
(Atul Drug House Ltd. v. K.M. Chandaria). The Notice of Motion taken out
by the plaintiffs in that suit (hereinafter referred to as "Atul Drug
House") was for an injunction restraining the 1st defendant, one
Chandaria, from acting as a director and/or managing director of the 1st
plaintiff-company, viz., Atul Drug House, and it was, inter alia, contended in
the motion that the 1st defendant had vacated his office as a director by
virtue of the provisions of article 163 of the articles of the said company. In
the order the said article has been fully set out, but we are only concerned
with the proviso, which is in the following words:
"Provided, however, that such Director shall
vacate office if and when the East African Match Company Ltd., and/or its
nominees, Messrs. Bhagwanji & Co., and/or Messrs. Premchand Brothers Ltd.,
cease to hold less than two-thirds of the equity share capital in the company.
Shri Maganlal P. Chandaria referred to in article 142 shall be deemed to be the
first director appointed by the East African Match Company Ltd., in pursuance
hereof".
The plaintiffs' case was that the 2nd defendant,
i.e., the East African Match Company Ltd., had ceased to hold 66-2/3 per cent,
of the issued share capital of Atul Drug House which had resulted in
Chandaria's vacation of office as a director. It was argued before the learned
judge that the provisions of article 163 relating to the vacation of office of
director nominated on behalf of the 2nd defendant was contrary to the provisions
contained in section 283 of the Companies Act, 1956, and the said article was,
therefore, void by reason of section 9(b) of the said Act. As the said judgment
and order clearly indicate, learned counsel on both sides argued this point in
great detail, and after considering the arguments the learned judge expressed his view in rather emphatic terms that the
provisions of section 283(3) by clear implication that a company other than a
private company could not by its articles provide for any other cases for
determination of the office of a director prior to its normal tenure in any
case not provided for in section 283(1). In this connection the relevant
passage from the order may be fully set out:
"The tenure
of office of a director is determined in accordance with the provisions of
section 255(1) of the Companies Act or by the articles of the company
concerned. Section 255(2) provides only for the mode of appointment of
directors whose tenure does not fall within section 255(1) of the Companies Act
but is fixed by the articles of the company. It does not itself have anything
to do with the tenure of office of a director as such, as Mr. Thakkar has
sought to contend. Section 283(1) of the Companies Act lays down that the
office of a director 'shall become vacant' in certain contingencies listed
therein, and sub-section (3) of that section enacts that a private company
(which is not a subsidiary of a public company) could, however, by its articles
provide that the office of director shall be vacated on any grounds in addition
to those specified in sub-section (1). There can, in my opinion, be no doubt
that section 283 deals with the vacating of the office of a director before the
normal term of tenure of his appointment has expired, or in other words, that
it provides for the earlier determination of his tenure on the happening of the
events specified therein. It is the contention of Mr. Amin for the defendants
that it is not open to a public company like the 1st plaintiff-company to
provide, as it has sought to do by article 163 of its articles, for the earlier
determination of the office of a director in any case which does not fall
within section 283(1) of the Companies Act, and that it is only a private company
which is not a subsidiary of a public company that can by its articles make any
such provision by virtue of the express provision contained in subsection (3)
of section 283. In answer to that contention of Mr. Amin, it was sought to be
contended by Mr. Thakkar on behalf of the plaintiffs that section 283 is not
exhaustive of all cases in which a director's office stands vacated before its
normal tenure, and that it was open to a company to provide by its articles for
other cases of the earlier determination of that office, and he sought to refer
to some of the other sections of the Act in support of that argument. That
argument of Mr. Thakkar is, in my opinion, clearly unsustainable and Mr.
Thakkar cannot be said to have even a prima facie case in regard to the same in
view of the provisions of section 283(3) which leave no room for doubt and
enact by clear implication that a company other than a private company cannot
by its articles provide for any other cases for the determination of the office
of a director prior to its normal tenure, in any case not provided for in
section 283(1). A reference to section 86-I of the old Companies Act of
1913 lends emphatic support to this view in so far as the provisions contained
in subsection (2) of the said section 86. I -permitted all companies, whether
public or private, to provide by their articles for the earlier determination
of the office of a director in cases other than those provided for in
subsection (1) of the said section. It may be mentioned that in the present Act
there is a deliberate departure from the provisions of sub-section (2) of the
old section 86-I, in so far as under sub-section (3) of section 283 it is
permissible to private companies only to contain any provision in their
articles for the earlier determination of the office of director in cases other
than those provided for in sub-section (1) of section 283. Mr. Thakkar's
argument that section 283(1) is not exhaustive must, therefore, be rejected.
The reference to the other sections of the Act cannot help Mr. Thakkar for the
simple reason that even if there are other provisions in the Act itself which
deal with the vacating of the office of director in certain contingencies, that
cannot possibly lead to the conclusion that such a provision can be made in the
articles of association notwithstanding the provisions of section 283 of the
Companies Act, particularly in view of sub-section (3) thereof. In view of the
provisions of section 9(b) of that Act, any provision in the articles of a
company shall be void to the extent to which it is repugnant to any of the
provisions of the Companies Act.
"There can, therefore, be no doubt that if
article 163 does provide for determination of the office of director of the 1st
plaintiff-company earlier than his normal tenure, it would be void.....".
We are not really concerned with the remaining
observations in the order, though it is material to point out that the learned
judge in the said order made it quite clear that his views as to the
construction of article 163 were prima facie views, whereas no such reservation
was made in so far as his views on section 283(3) were concerned. I am making
this observation in view of the submission made by the learned counsel for the
defendants as to the weight to be given to the observations of Vimadalal J. to
be found in the relevant passage in the said order, which passage has been
fully set out by me.
The learned counsel for the defendants submitted that
these were the views at the Notice of Motion stage and that the views or
observations made at such interlocutory stage ought not to be given that
binding effect as the views expressed in a final judgment. Now, even in an
interlocutory proceeding, the court may be called upon or required, for the
purposes of passing an appropriate interlocutory order, to construe a statutory
provision or to apply the same to a given set of facts. At that stage the
observations made would, in my opinion, normally be regarded as observations
made on a proper and adequate consideration of the question, unless the court
were to qualify the observations by saying that the court has had not the
benefit of a full argument or that the views expressed were only prima facie
views subject to reconsideration at a subsequent stage which is sometimes done
by using the phrase "as at present advised". Now, in the order the
learned judge has indicated quite clearly and categorically that his views as
to construction of article 163 were prima facie views and, therefore, the
observations of Vimadalal J. as to the construction of that article would have
only limited persuasive authority. The same would not be true about the views
expressed by the learned judge as to the implication of sub-section (3) of
section 283 of the Companies Act with which section he was concerned in the
said judgment. It has been indicated that the views expressed have been arrived
at after full arguments, and having had the benefit of such full arguments, the
opinion of the court is found expressed in rather emphatic terms, the court holding
that the argument of Mr. Thakkar that it was open to a public company to
provide by its articles for other cases of the earlier determination of the
office of director was "clearly unsustainable". In my opinion, it
would not be permissible nor proper to tone down the effect of these
observations on the somewhat specious plea that the observations were made
during the course of a judgment on a Notice of Motion and not in the course of
a judgment after the final determination of a suit. Bearing in mind the tenor
of these observations and the emphatic language in which these observations are
couched, these observations must be given the same weight as observations made
in the course of a final judgment.
It is certainly true that these observations have been
made with reference to sub-section (3) of section 283 and not with reference to
subsection (3) of section 274. As far as section 283 is concerned, it has been
submitted that the legislature had intended to curb a mischief which was
brought to its attention by the Bhabha Committee and that in view of that
circumstance it would be, perhaps, appropriate to give to sub-section (3) of
that section the necessary implication which Vimadalal J. had chosen to give.
On the other hand, it was emphasised that there was no previous legislation
dealing with the disqualifications of directors as such, nor was there any
recommendation in that behalf by the Bhabha Committee, so that it would not be
possible to say that sub-section (3) of section 274 was enacted to prevent the
type of mischief which might be presumed to be in the contemplation of the
legislature when it enacted sub-section (3) of section 283. In other words, I
was asked, if I regarded the observations of Vimadalal J. as having substantial
persuasive authority to restrict them to sub-section (3) of section 283 and not
to follow them in a case where the construction of sub-section (3) of section
274 was concerned. This approach was sought to be supported on the basis of the
reasoning which had been earlier referred to and set out, part of which, as I
have already expressed, cannot be considered to be devoid of substance,
although there is some part which has not appealed to me. The difficulty in
adopting this approach arises from the fact that the operative wordings of the
two subsections are identical. As indicated earlier, in my opinion, it would be
appropriate to consider these two sub-sections in juxtaposition and not in
isolation from one another. If that is done, it would not be proper nor
appropriate to give to sub-section (3) of section 283 the construction given to
it by Vimadalal J. and to deny to sub-section (3) of section 274 the same
construction. This line of interpretation to read in sub-section (3) of section
283 the prohibition of public companies by necessary implication and to deny
that prohibition to sub-section (3) of section 274 on the ground of the
reasoning suggested by learned counsel for the defendants would, in my opinion,
be a totally impermissible course. It is possible to argue—and argue quite
attractively and persuasively—that the language of subsection (3) of section
274, which is also the language of sub-section (3) of section 283, would not
warrant or justify the reading of the prohibition by the process of necessary
implication. This would amount to rejecting the line of reasoning which
appealed to Vimadalal J. and differing from him. The distinction which has been
suggested which can be made by me does not appeal to me, nor am I prepared,
although the arguments advanced have to be described as persuasive and not
unattractive, to persuade myself to the extent of differing from the
observations of Vimadalal J. In this view of the matter, I think I must hold
that sub-section (3) of section 274 by necessary implication prohibits public
companies and private companies which are subsidiaries of public companies from
adopting by their articles additional grounds of disqualification, i.e.,
grounds other than those specified by sub-section (1) of that section.
In this view of the matter, the questions are
answered as follows :
Question (a):
In my opinion, the amendment of article 74 proposed
by the resolution contained in the requisition would be invalid as being
repugnant to section 274 of the Companies Act, 1956. No other provision of the
said Act has been brought to my attention which would render such resolution
invalid.
Questions (b)
& (c):
Inasmuch as it has been conceded that the requisition
satisfied the procedural and numerical' requirements postulated by section 169
of the Companies Act, 1956, the requisition must be considered to be a valid
requisition within the meaning of sub-section (6) of section 169. Accordingly,
the executive committee of the Cricket Club would appear to be bound and liable
to call the meeting as provided by the said section. I do not wish to express
any opinion as to the course to be adopted by the requisitionists or by the
chairman of such meeting at the meeting. This course would depend upon the
answer to question (a) which I have indicated earlier.
Mr. Chinai applies for costs.
It is agreed that the defendants' costs, quantified
at Rs. 3,000, will be paid by the 1st plaintiff-club. Order accordingly.
[1975] 45 COMP. CAS. 574 (BOM)
HIGH COURT OF
v.
Madhav L. Apte
S.K. DESAI, J.
AUGUST 30, 1974
S.J. Sorabjee
and V.R. Chhatrapati for the Plaintiff.
A.B. Diwan,
K.S. Cooper and J.B. Chinai for the Defendant.
S.K.
Desai, J.—This is a special case
filed for the opinion of this court under the provisions of order 36 of the
Civil Procedure Code. Three questions have been asked at the end of the special
case ; but before referring to them or discussing them, the facts which are not
in dispute may be briefly stated.
The 1st plaintiff to the
special case is a sports and social club (hereinafter referred to as the
"Cricket Club" for the sake of brevity), registered as a company
limited by guarantee, having no share capital. It is incorporated under the
provisions of the Indian Companies Act, 1913, and today functions under the
provisions of the Companies Act, 1956. Plaintiffs Nos. 2 to 17 have been
described as members of the executive committee of the 1st plaintiff, and the
powers and functions of this executive committee are admittedly analogous to
those of the board of directors of a company under the Companies Act, 1956.
Articles 69
to 92 of the articles of association of the Cricket Club provide for the
executive committee and article 74 of these articles provides for the
retirement from office of one-third members of the executive committee at the
annual general meeting of the Cricket Club, excluding the nominated and
ex-officio members who are not subject to retirement under the articles. There is
provision in the said article to the effect that a member retiring at any such
meeting shall be eligible for re-election and and shall retain office as a
member of the executive committee until the close of the meeting at which he
retires.
On 3rd
August, 1973, the Cricket Club received from 591 of its members, including the
defendants to the special case, a requisition, dated 3rd August, 1973
(hereinafter referred to as "the requisition" for the sake of
brevity). By the requisition the requisitionists desired the convening of an
extraordinary general meeting of the Cricket Club to consider and, if thought
fit, to amend its articles of association by passing a resolution, which may be
fully set out:
"Resolved that article 74 of the articles of
association be amended as follows by adding the following at the end of the
words 'he retires':
Provided however that a member shall not be eligible
to stand for re-election to the office of the executive committee if he has
been a member of the executive committee for a continuous period of six years.
Provided further that a member who has been a member
of the executive committee for a continuous period of six years may seek
election after the expiry of a period of three years from the date of the six
years' period as mentioned in this article.
For the purpose of this article, a member of the
executive committee who retires or otherwise ceases to be a member of the
committee at any time after being such a member for a continuous period of five
years shall be deemed to have been a member of the executive committee for a
continuous period of six years".
After receipt of the requisition the same was
considered by the executive committee of the Cricket Club at its meeting held
on 9th August, 1973, and after some discussion the said committee resolved to
obtain opinion thereon of counsel on the validity and legality of the
resolution proposed to be considered and passed at the requisitioned meeting
under the requisition. It appears that pursuant to the said resolution of the executive
committee, the attorneys for the Cricket Club obtained opinion of two counsel
who independently opined that the resolution, for consideration of which the
requisition had been received, would not be valid in law and, further, that the
requisition was not a valid requisition. On the other hand, the defendants,
presumably acting on behalf of the requisitionists, obtained opinion of three
other counsel who arrived at a contrary conclusion. In view of the conflicting
opinions expressed by counsel on points on which their advice had been sought,
the executive committee of the Cricket Club and the requisitionists mutually
agreed to submit a special case and the present special case arises from the
mutual agreement as aforesaid.
Very briefly stated, according to the plaintiffs, the
resolution proposed for consideration by the requisition would be hit by the
provisions of section 274 read with section 9 of the Companies Act, 1956, and
any such amendment of the articles contemplated would be invalid. Further, according
to the executive committee, section 169(6) only comes into operation on the
deposit of a valid requisition and (lie requisition proposing for consideration
a resolution which would be illegal and invalid if carried, would not be a valid requisition within the
contemplation of the said subsection. According to them, therefore, the
executive committee is not bound to call an extraordinary general meeting,
which has been described by the plaintiffs as an "exercise in
futility".
The
defendants, on the other hand, have contended that the said requisition is a
valid requisition on several different footings. According to them, in the
first place, the rule of construction by necessary implication which is a basic
premise of the conclusions regarding illegality and invalidity of the proposed
resolution does not apply in the present case. It is submitted that what has
been suggested by the proposed amendment to article 74 does not and cannot
amount to a disqualification for the office of the executive committee.
Secondly, it has been urged that the language of section 274 does not warrant
the invocation of the rule of construction or interpretation by necessarry
implication. Finally, it has been urged that in order to make a provision in
the articles of a company void by reason of the provisions contained in section
9 of the Companies Act, 1956, the provision must be repugnant to some express
provisions in the Companies Act, and that the provisions of section 9 would not
be attracted where something has to be read in any provision of the Companies
Act by applying the rule of necessary implication. These, very briefly stated,
are the rival contentions which were explained and justified in greater detail
during the course of arguments, which arguments I propose to deal with later on
in this judgment.
The following
three questions have been posed on which the opinion of the court is sought:
"(a) Whether amendment of article 74 proposed by
the resolution contained in the requisition would be invalid as being repugnant
to section 274 of the Companies Act or any other provision of the said Act, or
whether the same would be valid ?
(b) Whether
the requisition is a valid requisition ?
(c) Whether the executive committee of the plaintiffs,
viz., plaintiffs Nos. 2 to 17, are bound and liable to call an extraordinary
general meeting of the members of the
plaintiffs to consider and, if thought fit, to pass the said resolution as a
special resolution by the requisite majority ?"
As I see the
position, the question posed in prayer (a) would require consideration of the
provisions of sections 9 and 274 of the Companies Act, 1956, and the questions
posed in prayers (b) and (c) involve only the consideration of section 165,
although it may be indicated that these sections perhaps cannot be considered
in isolation and effect has to be given as far as possible on a consideration
of the scheme of the Companies Act in its entirety.
Section 274
of the Companies Act deals, as the marginal note indicates, with the
disqualification of directors. Sub-section (1) of the said section provides for
six disqualifying conditions, and sub-section (3) thereof goes on to provide as
follows :
"(3) A private company which
is not a subsidiary of a public company may, by its articles, provide that a
person shall be disqualified for appointment as a director on any grounds in
addition to those specified in subsection (7)".
According to
the plaintiffs, the doctrine of necessary implication or the rule of construction
by necessary implication is brought into play or attracted by the wording of
sub section (3). Before, however, I proceed to consider the rival stands on
this sub-section, reference may be made to an allied section of the Companies
Act, the concerned section being section 283 which provides for vacation of
office by a director. Under sub-section (1) of section 283 we have provision of
12 situations in which the office of a director shall become vacant, and
sub-section (3) of the said section provides as follows :
"283.
(3) A private company which is not a subsidiary of a public company may, by its
articles, provide, that the office of director shall be vacated on any grounds
in addition to those specified in sub-section (1)".
I have
supplied certain underlining
to both the sub-sections, viz., section 274(3) and section 283(3), and it can
be seen that the underlined
portions in both the sub-sections are in identical phraseology.
During the
course of arguments both sides have referred me to the previous legislative
history and, therefore, at the outset, reference may be made to analogous
provisions under the Indian Companies Act, 1913.
The Indian
Companies Act, 1913, as originally enacted did not contain analogous
provisions. But in 1936 by the Indian Companies (Amendment) Act, XXII of 1936,
section 86-I was introduced. The marginal note of that section indicated that
it contained provision concerning vacation of office of directors. There was,
however, significant difference between the provisions of that section and the
two sections with which we are now dealing, and that was to be found in
sub-section (2) which reads as follows:
"86-I. (2) Nothing contained in this section shall be
deemed to preclude a company from providing by its articles that the office of
director shall be vacated on grounds additional to those specified in this
section".
Thus, under
an express provision of section 86-I, any company, private or public, was
empowered to provide by its articles additional grounds for vacation of office.
It cannot be denied that there is considerable difference between such a
provision and the provisions to be found in subsection (3) of the two sections
of the Companies Act, 1956, which we are considering, viz., sections 274 and
283.
During the course of arguments I was referred to the
report of the Company Law Committee, 1952 (Bhabha Committee) as also to certain
statements to be found in the Statement of Objects and Reasons and the Notes on
Clauses to Bill No. 46 of 1953. Before setting out the relevant extracts from
the Bhabha Committee Report and from the Notes on Clauses, I may refer to two
Supreme Court decisions which have indicated the principle to be applied and
the course to be adopted when the question of making such reference arises.
During the course of arguments I was referred to
Madanlal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Ltd.,
where the majority judgment refers to certain amendments made in 1960 as a
result of the recommendation of the Committee appointed in that behalf, as also
to the extracts of the report of the Committee. The court was dealing with the
provisions of the very Act which we are dealing with, i.e., the Companies Act,
1956.
In a fairly recent decision of the Supreme Court in
State of Mysore v. R.V. Bidap the Supreme Court seems to have approved of a
passage from Crawjord on Statutory Construction, which is in the following
terms :
"The judicial opinion on this point is certainly
not quite uniform and there are American decisions to the effect that the
general history of a statute and the various steps leading up to an enactment
including amendments or modifications of the original bill and reports of
legislative committees can be looked at for ascertaining the intention of the
legislature where it is in doubt; but they hold definitely that the legislative
history is inadmissible when there is no obscurity in the meaning of the
statute".
Krishna Iyer J., speaking for the court (at page
2558), in the above report proceeds to sound a rule of caution that such
extrinsic material, although admissible, should not be regarded as decisive and
that resort may be had to such sources with great caution and only when
incongruities and ambiguities are to be resolved.
Bearing in mind these words of caution, I think
reference may now be made to the extracts from the Bhabha Committee's Report and
the Notes on Clauses which were brought to my attention during the course of
arguments.
Paragraphs 92, 93 and 94 of the Bhabha Committee's
Report deal with its recommendations vis-a-vis the existing section 86-I of the
Indian Companies Act, 1913, and in paragraph 93 is to be found the view of the
said Committee which is to the effect that the enabling provision of
sub-section (2) should be restricted to
private companies excluding those which are subsidiaries of public companies.
We are not really concerned with the basis for the recommendations which is
also to be found explained in paragraph 93.
We now turn
to Bill No. 46 of 1953. The Statement of Objects and Reasons of that Bill
indicate that the Bill was largely based on the recommendations of the Company
Law Committee, modified in a few respects. Clause 252 of the said Bill provided
for disqualification of directors, the provision being analogous with the
present section 273 ; and clause 261 of the Bill contained the provision
concerning vacation of office by directors, the said clause being comparable to
the present section 283. Sub-clause (4) of section 252 had provisions identical
with sub-section (3) of the present section 274, and sub-clause (3) of clause
261 had provisions identical with sub-section (3) of section 283.
The Notes on
Clauses on clauses 252 and 261 may now be set out:
"252.
This lays down initial disqualifications corresponding to the disqualifications
which, under section 86-I of the existing Act, entail the vacation of office by
a director. Sub-clause (2) takes power to remove any disqualification arising
from conviction or from failure to pay calls. Sub-clause (4) corresponds to
section 86-I(2) of the existing Act. It is considered necessary to confine the
power of a company to add to the disqualifications imposed by the Bill to
private companies which are not subsidiaries of public companies.
261. This is
based on section 86-I of the existing Act. See paragraphs 92 and 93 of the
Company Law Committee's Report and the summary at page 265. Power has been
given to the company to remove the director by an ordinary resolution as in
section 184(1) of the English Act. Sub-clause (2) is a consequential provision,
which seems to be clearly necessary. Sub-clause (3) corresponds to sub-section
(2) of the existing section 86-I but confines the operation of the sub-section
to private companies which are not subsidiaries of public companies. Compare
clause 252(4) ante."
It may be mentioned, as this
aspect was emphasised during arguments by learned counsel for the defendants,
that in its report the Bhabha Committee had not considered grounds of
disqualification as distinguished from grounds of vacation of office by a
director ; and the recommendation to be found in paragraph 93 of the said
report was restricted to additional grounds of vacation, and its opinion was
that the public companies and private companies which are subsidiaries of
public companies ought not to be allowed to have articles of association
containing additional grounds of vacation of office by directors.
As stated earlier, the three questions posed for the
consideration of the court fall into two parts ; the first dealing with
the interpretation and construction of section 274 primarily, and the second
with the interpretation and construction of section 169. As the latter point
is, in my opinion, one which is fairly easy to answer and does not admit of
detailed arguments, I propose to deal with the provisions of that section first
and express my views on questions (b) and (c) of the special case, which are
based on the provisions of section 169. After this is done, I propose to revert
to the somewhat difficult question of construction of section 274.
Under the Indian Companies Act, 1913, the
provisions as regards calling of extraordinary general meetings on requisition
were to be found contained in section 78 of the said Act. Under those
provisions the directors of a company which has a share capital were enjoined
on the requisition of the holders of not less than one-tenth of the issued
share capital of the company, upon which all calls had been paid, to call an
extraordinary general meeting of the company. The scheme was substantially
similar to the scheme of section 169 of the Companies Act, 1956. Sub-section
(2) of section 78 provided for the contents of the requisition and the mode of
its deposit ; and sub-sections (3) to (5) provided for calling of a meeting by
the requisitionists on failure by the directors to cause a meeting to be called
for after deposit of a requisition. In sub-section (3) of section 78, however,
the words used were "date of the requisition being so deposited".
Under section 169(6) of the Companies Act, 1956, one finds a change in the
terminology, the provision being that the requisitionists may themselves call a
meeting (subject to other provisions, with which we are not concerned) if the
board does not call a meeting "within twenty-one days from the date of
deposit of a valid requisition" (underlining
supplied). Now, it was urged by learned counsel for the plaintiffs that the
additional word "valid" indicated clearly that the requisition which
was made must be valid and lawful; in other words, that a requisition which was
for consideration of something which would be illegal or invalid could not per
se be considered to be a valid requisition, and if such requisition was
deposited with the directors of a company the directors were not required to
call a general meeting although the numerical requirement provided for in the
earlier part of the said section was satisfied. Now, it may be pointed out that
whereas under section 78 of the Indian Companies Act, 1913, the power to call
an extraordinary general meeting was restricted to companies having a share
capital, under section 169 of the Companies Act, 1956, such power can be
exercised by the members of the company having a share capital as also by
members of a company not having a share capital, and the requirements in the
latter case are to be found in clause (b) of sub-section (4). Other
requirements of a proper requisition have also been spelt out in greater detail
in section 169 ; and, in my opinion, it would be proper to understand the word
"valid" used in sub-section (6) of section 169 as having reference to
the provisions of the earlier five sub-sections of that section rather than
indicating compliance with any other requirements or provisions of the
Companies Act. In other words, to put it shortly, all that is required to be
seen before the provisions of sub-section (6) of section 169 become applicable
would be to consider whether the requisition deposited was in accordance with
the provisions of section 169 as to its contents, the number of signatories and
similar matters, and it would not be open to the board of directors of a
company to refuse to act on a requisition on the ground that, although such
requisition was in accordance with the requirements of section 169, it was
otherwise invalid. This conclusion receives support when one peruses subsection
(5) of section 169, where also the use of the word "valid" is
perceived. The learned counsel for the plaintiffs emphasised the mischief that
in his opinion would be caused by an otherwise invalid requisition being made
which would put the company to considerable financial loss for what he called
would be an exercise in futility. On the other hand, the question to be
considered would be whether the board of directors of a company can be allowed
to ignore a requisition which complies with all the requirements laid down in
section 169 of the Companies Act, 1956, on the ground that the object of the
requisition was illegal or otherwise invalid and, therefore, the requisition
was not a valid requisition which ground may ultimately be found to be
unsustainable. In my view, the word or the adjective "valid" in
section 169 has no reference to the object of the requisition but rather to the
requirements in that section itself. If these requirements indicated in the
earlier part of the section are satisfied, then the requisition deposited with
the company must be regarded as a valid requisition on which the directors of a
company must act. If the directors fail to act within the period specified by
sub-section (6), then, in my opinion, the requisitionists would be entitled to
proceed under the later provisions of that sub-section and the other
sub-sections of section 169.
Before I proceed to express my view on sub-section
(3) of section 274, as ultimately the conclusion on question (a) must turn on
the correct interpretation of that sub-section, I may proceed to dispose of one
argument based on the provisions of section 9 of the Companies Act, 1956, to
which I have already referred whilst indicating briefly the rival contentions.
Section 9 of the Companies Act, 1956, reads as under :
"9. 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".
It has been urged on behalf of the defendants in the
statement of case and it was also urged in the course of arguments that section
9 would render articles or resolution invalid only if there was conflict with
an express provision under the Companies Act, 1956, and unless there was such
express provision no question of repugnancy could arise. In other words, it was
submitted that the terminology employed in section 9 was such as to exclude any
provision in the articles being rendered invalid by what was not expressly
provided in the Companies Act or in any of its provisions, but which had to be
read in the same provision by necessary implication. In my opinion, this
submission is not one which can be accepted. It is impossible to read the
expression "provisions of this Act" in section 9 as indicative merely
of the express provisions and exclude the meanings which have to be read in the
provisions of the Act by the rule of necessary implication. In my view, any
meaning which has to be read in any section of the Act by the rule or principle
of necessary implication is as much a provision of the Act as something
expressly provided. In this view of the matter any provision contained in the
memorandum, articles, agreement or resolution of a company which is repugnant
to any provision of the Act, whether such provision be expressly found in any
section or is to be read in the said section by necessary implication, would be
clearly void.
I may also dispose of, since it is not a matter
capable of any great elaboration, the argument that what was intended by the
requisitionists was not addition of a ground of disqualification at all, but
what was expressed in the argument as non-qualification. The learned counsel
for the defendants urged that the several grounds of disqualification to be
found in sub-section (1) of section 274 had an aspect of unfitness, defect or
blemish connected therewith and what was sought to be done by the proposed
amendment of article 74 of the articles of association of the Cricket Club had
no such incidence inasmuch as it was sought to be specifically provided that
the person concerned may seek re-election after the expiry of a period of three
years from the date of the six-year period as mentioned in the article (after
amendment). In connection with this branch of the argument I was referred to
the meanings given to the word "disqualification" and
"disqualified" in dictionaries such as Murray's and Random House
Dictionaries, as also to some judgments which were under the Representation of
the People Act, 1951. In my opinion, it is not possible to accept this
submission made by learned counsel for the defendants. Having considered the
various meanings in the dictionaries which were cited and which meanings are
unnecessary to set out in this judgment, the word "disqualified" used
in sub-section (3) of section 274 must be understood in its plain natural
meaning, which in the context would be "not qualified" and not in the
limited sense in which the learned counsel for the defendants has wished me to
understand it, viz., as restricted to some incapacity as a result of defect,
unfitness or blemish. A person may be unfit for a particular office not only by
reason of any defect or blemish but also because he is not qualified for that
office, and in that sense any requirement which non-qualifies a person, although
for a limited period of three years only, must be regarded as a
disqualification within the meaning of that expression. And a ground of
disqualification would be a ground to disqualify the person within the meaning
of sub-section (3) of section 274.
The question which remains for consideration and to
which an answer must now be given is whether there is prohibition on public
companies and private companies which are subsidiaries of public companies
against their adopting an article containing additional grounds of
disqualification other than those found in sub-section (1) of section 274.
It is clear that the provisions to be found in
sub-section (3) of section 274 are not couched in a happy or direct language. There
would not have been any occasion to resort to the doctrine of necessary
implication if sub-section (3) of section 274 had been framed as containing an
express prohibition to operate directly against the companies which were sought
to be prohibited from having additional grounds rather than in the form of an
enabling provision, which, surely, is not an example of good legislative
draftsmanship. Merely by way of interest I had been referred by learned counsel
to observations of this court in D.B. Godbole v. Kunwar Rajnath (?) where Chagla C.J. had occasion to refer to
certain other provisions of the Companies Act, 1956, which were similarly
couched in unhappy and imprecise language. It is with this handicap that I must
now proceed to give some meaning, if at all a meaning can be given, to the
provisions of sub-section (3) of section 274. Here, it may be stated that it is
not necessary for the court to give some meaning to a legislative provision
although it would be normal to presume that the legislature did intend to
provide for something when it enacted the sub-section. It can be that there was
some intention of the legislature, but that intention has not been given effect
to by reason of the unhappy or defective terminology employed in the
legislative provision. It is the terminology which has to be construed and
given effect to and not the intention of the legislature which, one may assume,
is indicated in the Notes on Clauses. It may be mentioned here that it was
submitted—and there is some force in the argument—that the Notes on Clauses
need not necessarily indicate the intention of the legislature but merely
explain what these draftsmen of the legislative provision had in mind.
As stated earlier, the question, very shortly put but
which may require elaborate consideration, is whether the apparently enabling
provision in sub-section (3) of section 274 in favour of private companies is
required to be construed as a prohibition on public companies and private
companies which are subsidiaries of public companies by the rule or principle
of necessary implication.
It has been urged on behalf of the plaintiffs that
the provisions of subsection (3) of section 274, although expressed in
affirmative language, must be construed as having a negative implication. In
this connection I was referred to the observations to be found in Crates on
Statute Law, 7th edition, at pages 264 to 266. The entire passage from Craies
may be usefully set out:
"(v)
Inferences from affirmative language.—Statutory enactments, although
expressed in affirmative language, are sometimes treated as having a negative
implied, and that their provisions, 'though', as Lord O'Hagan said in R. v. All
Saints, Wigan (Churchwardens) .
'affirmative in words, are not necessarily so, if they are absolute, explicit
and peremptory'. In Viner's Abr. Tit. Negative, A. PI. 2, the following rule is
laid down:
Every statute limiting anything to be in one form,
although it bespoke in the affirmative, yet includes in itself a negative; and
in Bacon's Abr. Tit. Statute G., the rule given is that 'if an affirmative statute
which is introductive of a new law direct a thing to be done in a certain way,
that thing shall not, even if there be no negative words, be done in any other
way'."
This rule is borne out by the
following cases :
"In Stradling v. Morgan ,
the question was whether an action founded upon a statute could be commenced
elsewhere than before the justices of Glamorgan, at their sessions, for by the
laws in Wales Act, 1542, it was enacted that 'all actions founded upon any
statute shall be sued by original writ, to be obtained and sealed with the said
original seal returnable before the justices at their sessions, within the
limits of their authorities, in manner and form before declared'. It was
contended that these words had a negative meaning, that is to say, that the
statute appoints the place, order and form of such suits, and that the
plaintiff cannot sue in any other place or form, and, therefore, that this action,
founded upon a statute, which is appointed to be returned before the justices
of Glamorgan, at their sessions, cannot be sued or returned, elsewhere or
before any other justices. And so it was decided by the court, and a verdict
which had been found for the plaintiff was set aside. In Amy Towsend's case ,
the question was whether the Statute of Uses, ss. 1, 2, which was expressed
affirmatively, contained an implied negative. By this statute it was enacted
that persons entitled to a use of lands should have the same estate, both
according to quantity and quality, in the lands as they had in the use. It was
argued that these words contained in themselves a negative, i.e., that the
cestui que use had an estate in no other quantity or quality than they had in
the use, and the reason given was that there is a diversity between a statute
which makes an ordinance by affirmative words touching a thing which was before
at the common law, and a statute which makes an ordinance by affirmative words
touching a thing which was not before at the common law, and that where, as
here, a statute appoints the manner of a thing which was not before at the
common law, then, although it be expressed in the affirmative, it implies a
negative. This argument the court adopted, and decided that the enactment must
be strictly adhered to. In Trott v. Hughes,
Lord Cranworth held that where rules, framed by virtue of a statute for the
regulation of benefit building societies, provided that any dispute which might
arise between the society and any of its members should be referred to and
decided by the directors of the society, the provision was equivalent to
enacting that no such dispute was to be made the subject of litigation in a
court of law, and consequently he dismissed a suit which arose out of such a
dispute. (This view was adopted in Municipal Permanent Investment Building
Society v. Kent ).
In Ex. p. Stephens ,
the question was whether a mere word or distinctive combination of letters was
a trade mark within the meaning of the Trade Marks Registration Act, 1875. By
section 10 of that Act it was enacted that a trade mark might consist of (among
other things) 'any special and distinctive word or words or combination of
figures or letters used as a trade mark before the passing of this Act'. It was
thus held that a word which had not been used as a trade mark before the
passing of the Act could not be used as a trade mark after the passing of the
Act. 'Otherwise' said Jessel M.R., 'it would be contravening the well-known
rule, that when there is a special affirmative power given which would not be
required because there is a general power, it is always read to import the
negative, and that nothing else can be done. Therefore, the power to use as a
trade mark a word used before the passing of the Act clearly negatives the
conclusion that a distinctive word can be so used if the word was not so used
before the passing of the Act'."
I was also referred in this connection to Stroud's
Judicial Dictionary (4th edition), at page 1739, where the expression
"necessary implication" and "necessary intendment" are
dealt with. I was also referred to several authorities cited in Stroud's
Judicial Dictionary for a clearer exposition of these two expressions. It is
obvious that the expression "necessary" means something stronger than
"possible" and the implication must be one which is so strong and
irresistible that the alternative is not one that would appeal to a rational
mind.
In Cork
County Council and Richard Burke v. Commissioners of Public Works in Eyre, The
Minister for Finance and the Attorney-General ,
there are observations as to the phrase "necessary
implication" which may be quoted :
"But what is 'necessary implication' in the
construction of a statute ? I may cite the words of Lord Eldon in Wilkinson v.
Adam,
where, after stating that in construing a will, a particular intention must
appear by necessary implication upon the will itself, he continues : 'With
regard to that expression "necessary implication", I will repeat what
I have before stated from a Note of Lord Hardwick's judgment in Coriton v.
Hellier, that in construing a will, conjecture must not be taken for
implication, but necessary implication means not natural necessity, but so
strong a probability of intention, that an intention contrary to that which is
imputed to the testator cannot be supposed'".
In William
Hill and W.C. Simmons v. Alice Sarah Crook and Earnest William Crook,
the same passage from Wilkinson v. Adam
is set out with approval, and although the passage deals with the construction
of a will the sentiments expressed are, in my opinion, equally apposite in the
construction of a statute. The material passage (which has already been quoted
as part of a passage from an Irish case—supra) reads :
"In construing a will, conjecture must not be
taken for implication, but necessary implication means, not natural necessity,
but so strong a probability of intention that an intention contrary to that
which is imputed to the testator cannot be supposed".
As stated earlier, in my opinion, the passage would
be quite appropriate and applicable to the facts in our case, if for the word
"testator" the word "legislature" was substituted in the
same.
On the other hand, on behalf of the defendants, it
was urged that the principle or rule of interpretation by necessary implication
ought not to be lightly applied in the instant case, and the following
principles of inter-pretation were
submitted for the consideration of the court. These principles may be briefly
referred to :
(1) There is a presumption against the
alteration of well-settled law by implication and such a change should be
either by explicit or express words or only if such inference of alteration is
irresistible.
(2) If the matter is evenly balanced or
fairly arguable on either side, then that interpretation should be preferred
which would involve the least alteration of the existing law.
(3) If one of the two possible
constructions would lead to startling or bizzare results, or to any absurd or
harsh consequences, then that construction is one which ought not to be
preferred and is one which ought to be avoided.
(4) The intention of the legislature is
primarily to be gathered from the actual words used and not from any words not
to be found in the statute, but which are required to be added to make the
statute clear and to bring out the policy intention.
A number of
authorities were cited at the Bar in connection with these propositions. These
will be referred to, if necessary, when these submissions are discussed in
somewhat greater detail as I propose to do. The first two propositions
submitted by learned counsel for the defendants were obviously based on the
position of the previously existing law, viz., the Indian Companies Act, 1913,
as this was the law in existence prior to the Companies Act, 1956. As seen
earlier, under section 86-I, additional grounds (of vacation of office by
directors) could be adopted by all companies, and it was submitted that if that
was the state of the existing law, a change in that law ought not to be lightly
inferred unless the words of the statute were clear. In Murugiah v. Jainuddin
the Privy Council has spoken approvingly of a passage in Maxwell's Interpretation
of Statutes (10th edition), at page 81, entitled "presumption against
implicit alteration of law". The said passage in the Privy Council's
judgment reads as follows:
"'One of
these presumptions is that the legislature does not intend to make any substantial
alteration in the law beyond what it explicitly declares, either in express
terms or by clear implication, or, in other words, beyond the immediate scope
and object of the statute. In all general matters outside those limits the law
remains undisturbed. It is in the last degree improbable that the legislature
would overthrow fundamental principles, infringe rights, or depart from the
general system of law, without expressing its intention with irresistible
clearness.'
Their
Lordships agree that the law is correctly stated in the passage cited".
Similarly, in National Assistance Board v. Wilkinson
it was stated :
"............but it may be presumed that the
legislature does not intend to make a substantial alteration in the law beyond
what it expressly declares".
Similar are the observations to be found in George
Wimpey & Co. Ltd. v. British Overseas Airways Corporation.
It was observed in that case by Lord Reid :
"This is, therefore, an example of the not
uncommon situation where language not calculated to deal with an unforeseen
case must nevertheless be so interpreted as to apply to it. In such cases, it
is, I think, right to hold that, if the arguments are fairly evenly balanced,
that interpretation should be chosen
which involves the least alteration of the existing law." (Underlining
supplied).
It may be mentioned at this juncture that the Privy
Council authority and Wilkinson's case and the passage from Maxwell have been
referred to with approval by our Supreme Court in M.K. Ranganathan v.
Government of Madras .
Similar sentiments are to be found expressed in
Halsbury's Laws of England (third edition), volume 36, para. 625. According to
Halsbury:
"Statutes which limit or extend common law
rights must be expressed in clear unambiguous language ; but, if the language
is clear, there is no reason why such statutes should be construed differently
from other statutes. Except in so far as they are clearly and unambiguously
intended to do so, statutes should not be construed so as to make any
alteration in the common law or to change any established principle of law, or
to alter completely the character of the principal law contained in statutes
which they merely amend".
There is a similar passage in Craies on Statute Law
(7th edition) to be found on pages 112 and 121; it is, however, not necessary
to set it out.
In connection with these principles of interpretation
certain further submissions were made. It was urged that the enabling provision
in subsection (3) must not be regarded as barring by implication the companies
other than the companies mentioned in the enabling provision. I was referred to
the enabling provision contained in section 86-I(2) of the Indian Companies
Act, 1913, and it was argued that such a provision was enacted for abundant
caution and not because without it the companies would have been precluded from
having an additional ground of vacation of office of directors by adopting
suitable articles. In the same vein, it was urged, the enabling provision to be
found in sub-section (3) has to be similarly construed, and there is no warrant
for reading any prohibition or bar in the said enabling provision.
In connection with the Report of the Company Law
Committee (the Bhabha Committee) it was obvious that the said report only dealt
with the grounds of vacation of office, and the said Committee had not applied
its mind to grounds of disqualification or the desirability or otherwise of
adding to such grounds. Bearing this in mind, it was submitted that the
interpretation of, or the inference sought to be drawn from, sub-section (3) of
section 274 ought not to be governed by the principle of mischief sought to be
avoided by the legislature. In connection with the Notes on Clauses to be found
in the Bill presented to Parliament and which Notes have been referred to
earlier, it was submitted that such notes may, at the highest, represent the
intention of the draftsmen of the legislative measure and such intention must
not be assumed to be the intention of the legislature.
I was, therefore, taken through the various articles
of the Cricket Club and arguments were based on these articles, in particular
on articles 24(c) and 84(a). It was submitted that if it was held that
additional grounds of disqualification could not be adopted by a club such as
the Cricket Club, peculiar if not bizzare results would follow. In this
connection I need not refer to the several articles to which reference was made
at the Bar, save to state that the arguments proceeded both on consideration of
sub-section (3) of section 274 and of section 283. It was contended that if
these two sub-sections were construed to restrict the right of public
companies, including clubs such as the Cricket Club, some of the provisions
contained in these articles may be hit and this would lead to unfortunate
results. The submission was that unless the language of the sub-sections was
clear and the inference is irresistible, that inference which was sought to be
given to these sub-sections by the plaintiffs ought not to be given, as in the
case of the Cricket Club and similar institutions unfortunate results might
occur and some of the articles of such clubs and similar institutions which may
be desirable and even absolutely necessary might be rendered invalid. In
connection with this argument various illustrations were given of different
types of bodies which may require some qualifications—special
qualifications—for the members of their executive committees. According to the
submission, if these qualifications are regarded as disqualifications, then,
since such qualifications were absolutely necessary, in the view of the learned
counsel for the defendants the two sub-sections ought not to be interpreted in
a manner which would render such provisions or such rules imposing such
qualifications as invalid in law. Apart from the specific articles of the
Cricket Club which may require reconsideration, I found some of the instances
given to be far-fetched, and the contingency submitted for the court's consideration
by learned counsel for the defendants did not appeal to me as a reasonable and
probable contingency which ought to affect the interpretation of the statutory
provisions with which we are concerned.
Similarly, arguments were based on the principle to
be found enunciated in sections 29, 31 and 36 of the Companies Act, which
statutory provisions would seem to indicate the rights of the members of a
company to adopt such articles as they wish to adopt, subject to the general
principle that the articles or changes in the existing articles should be made
bona fide. It was submitted—and there is considerable force in the
submission—that such power of the members ought not to be restricted or deemed
restricted unless such curtailment or restriction was provided for in express
language or such language from which only one irresistible inference could be
drawn. In other words, the argument was that by reason of the various points
which had been made, the attempt of the legislature to prevent the mischief, even
assuming there was such an attempt and that the mischief was one which was
sought to be prevented, had clearly misfired and it should be so held by the
court. Great stress was laid by learned counsel in this connection on the
terminology employed in sub-section (3) of sections 274 and 283. In the first
place, it was submitted that if the legislature had sought to restrict the
rights of the members to have additional grounds of disqualifications and
vacation of office, the proper way to provide for the same would have been by
addition of the words "and only if" in sub-section (1) and it was
pointed out that similar words are to be found in several other provisions of
the Companies Act, 1956 ; reference may be made only to sections 2(3), 2(4) and
6. Alternatively, it was submitted that if sub-section (3) was intended to
prevent additional grounds from being adopted by a public company, the language
of the sub-section ought to have clearly indicated that only the companies
mentioned in sub-section (3) were entitled to have the articles adding to the
grounds set out in sub-section (1). It is true that the two sections—and I
think the provisions of section 274 cannot be read in isolation from the
provisions to be found in section 283—are not artistically or even properly
drafted. There is much to be said in the submission made as to the language of
these sections by learned counsel for the defendants. I was not much impressed
by the argument at the Bar in connection with harsh or bizzare consequences.
But, on the other hand, arguments which were advanced based on the language of
the two sub-sections as also on the principles of interpretation to which
reference has been made earlier (particularly based on the principles dealing
with the change in the existing law which need not be lightly inferred) were
quite reasonable and fairly appealing.
As stated earlier, in my opinion, the provisions
contained in section 274 would be required to be considered in juxtaposition
with the provisions to be found in section 283, and we have already seen how
the phraseology employed in the two sub-sections with which we are concerned
(both being sub-section (3) to the two sections) is identical.
In this connection reference will now be required to
be made to a judgment of this court on which great reliance was placed by
learned counsel for the plaintiffs. That was not a final judgment but an order
at an interlocutory stage. It did not deal with the provisions of section 274
but proceeded upon a construction of section 283 of the Companies Act, 1956.
But nevertheless, in my opinion, it would have a great bearing on the matter
canvassed before me. Reference may immediately be made to this judgment.
The said judgment was given by Vimadalal J. on 10th
October, 1968, in his order made on the plaintiffs' Notice of Motion dated 30th
August, 1968, in Suit No. 552 of 1968
(Atul Drug House Ltd. v. K.M. Chandaria). The Notice of Motion taken out
by the plaintiffs in that suit (hereinafter referred to as "Atul Drug
House") was for an injunction restraining the 1st defendant, one
Chandaria, from acting as a director and/or managing director of the 1st
plaintiff-company, viz., Atul Drug House, and it was, inter alia, contended in
the motion that the 1st defendant had vacated his office as a director by
virtue of the provisions of article 163 of the articles of the said company. In
the order the said article has been fully set out, but we are only concerned
with the proviso, which is in the following words:
"Provided, however, that such Director shall vacate
office if and when the East African Match Company Ltd., and/or its nominees,
Messrs. Bhagwanji & Co., and/or Messrs. Premchand Brothers Ltd., cease to
hold less than two-thirds of the equity share capital in the company. Shri
Maganlal P. Chandaria referred to in article 142 shall be deemed to be the
first director appointed by the East African Match Company Ltd., in pursuance
hereof".
The plaintiffs' case was that the 2nd defendant,
i.e., the East African Match Company Ltd., had ceased to hold 66-2/3 per cent,
of the issued share capital of Atul Drug House which had resulted in
Chandaria's vacation of office as a director. It was argued before the learned
judge that the provisions of article 163 relating to the vacation of office of
director nominated on behalf of the 2nd defendant was contrary to the
provisions contained in section 283 of the Companies Act, 1956, and the said
article was, therefore, void by reason of section 9(b) of the said Act. As the
said judgment and order clearly indicate, learned counsel on both sides argued
this point in great detail, and after considering the arguments the learned judge expressed his view in
rather emphatic terms that the provisions of section 283(3) by clear
implication that a company other than a private company could not by its
articles provide for any other cases for determination of the office of a
director prior to its normal tenure in any case not provided for in section
283(1). In this connection the relevant passage from the order may be fully set
out:
"The
tenure of office of a director is determined in accordance with the provisions
of section 255(1) of the Companies Act or by the articles of the company
concerned. Section 255(2) provides only for the mode of appointment of
directors whose tenure does not fall within section 255(1) of the Companies Act
but is fixed by the articles of the company. It does not itself have anything
to do with the tenure of office of a director as such, as Mr. Thakkar has
sought to contend. Section 283(1) of the Companies Act lays down that the
office of a director 'shall become vacant' in certain contingencies listed
therein, and sub-section (3) of that section enacts that a private company
(which is not a subsidiary of a public company) could, however, by its articles
provide that the office of director shall be vacated on any grounds in addition
to those specified in sub-section (1). There can, in my opinion, be no doubt
that section 283 deals with the vacating of the office of a director before the
normal term of tenure of his appointment has expired, or in other words, that
it provides for the earlier determination of his tenure on the happening of the
events specified therein. It is the contention of Mr. Amin for the defendants
that it is not open to a public company like the 1st plaintiff-company to
provide, as it has sought to do by article 163 of its articles, for the earlier
determination of the office of a director in any case which does not fall
within section 283(1) of the Companies Act, and that it is only a private
company which is not a subsidiary of a public company that can by its articles
make any such provision by virtue of the express provision contained in
subsection (3) of section 283. In answer to that contention of Mr. Amin, it was
sought to be contended by Mr. Thakkar on behalf of the plaintiffs that section
283 is not exhaustive of all cases in which a director's office stands vacated
before its normal tenure, and that it was open to a company to provide by its
articles for other cases of the earlier determination of that office, and he
sought to refer to some of the other sections of the Act in support of that
argument. That argument of Mr. Thakkar is, in my opinion, clearly unsustainable
and Mr. Thakkar cannot be said to have even a prima facie case in regard to the
same in view of the provisions of section 283(3) which leave no room for doubt
and enact by clear implication that a company other than a private company
cannot by its articles provide for any other cases for the determination of the
office of a director prior to its normal tenure, in any case not provided for
in section 283(1). A reference to section 86-I of the old Companies Act
of 1913 lends emphatic support to this view in so far as the provisions
contained in subsection (2) of the said section 86. I -permitted all companies,
whether public or private, to provide by their articles for the earlier
determination of the office of a director in cases other than those provided
for in subsection (1) of the said section. It may be mentioned that in the
present Act there is a deliberate departure from the provisions of sub-section
(2) of the old section 86-I, in so far as under sub-section (3) of section 283
it is permissible to private companies only to contain any provision in their
articles for the earlier determination of the office of director in cases other
than those provided for in sub-section (1) of section 283. Mr. Thakkar's
argument that section 283(1) is not exhaustive must, therefore, be rejected.
The reference to the other sections of the Act cannot help Mr. Thakkar for the
simple reason that even if there are other provisions in the Act itself which
deal with the vacating of the office of director in certain contingencies, that
cannot possibly lead to the conclusion that such a provision can be made in the
articles of association notwithstanding the provisions of section 283 of the
Companies Act, particularly in view of sub-section (3) thereof. In view of the
provisions of section 9(b) of that Act, any provision in the articles of a company
shall be void to the extent to which it is repugnant to any of the provisions
of the Companies Act.
"There can, therefore, be no doubt that if
article 163 does provide for determination of the office of director of the 1st
plaintiff-company earlier than his normal tenure, it would be void.....".
We are not really concerned with the remaining
observations in the order, though it is material to point out that the learned
judge in the said order made it quite clear that his views as to the
construction of article 163 were prima facie views, whereas no such reservation
was made in so far as his views on section 283(3) were concerned. I am making
this observation in view of the submission made by the learned counsel for the
defendants as to the weight to be given to the observations of Vimadalal J. to
be found in the relevant passage in the said order, which passage has been
fully set out by me.
The learned counsel for the defendants submitted that
these were the views at the Notice of Motion stage and that the views or
observations made at such interlocutory stage ought not to be given that
binding effect as the views expressed in a final judgment. Now, even in an
interlocutory proceeding, the court may be called upon or required, for the
purposes of passing an appropriate interlocutory order, to construe a statutory
provision or to apply the same to a given set of facts. At that stage the
observations made would, in my opinion, normally be regarded as observations
made on a proper and adequate consideration of the question, unless the court
were to qualify the observations by saying that the court has had not the
benefit of a full argument or that the views expressed were only prima facie
views subject to reconsideration at a subsequent stage which is sometimes done
by using the phrase "as at present advised". Now, in the order the
learned judge has indicated quite clearly and categorically that his views as
to construction of article 163 were prima facie views and, therefore, the
observations of Vimadalal J. as to the construction of that article would have
only limited persuasive authority. The same would not be true about the views
expressed by the learned judge as to the implication of sub-section (3) of
section 283 of the Companies Act with which section he was concerned in the
said judgment. It has been indicated that the views expressed have been arrived
at after full arguments, and having had the benefit of such full arguments, the
opinion of the court is found expressed in rather emphatic terms, the court
holding that the argument of Mr. Thakkar that it was open to a public company
to provide by its articles for other cases of the earlier determination of the
office of director was "clearly unsustainable". In my opinion, it
would not be permissible nor proper to tone down the effect of these
observations on the somewhat specious plea that the observations were made
during the course of a judgment on a Notice of Motion and not in the course of
a judgment after the final determination of a suit. Bearing in mind the tenor
of these observations and the emphatic language in which these observations are
couched, these observations must be given the same weight as observations made
in the course of a final judgment.
It is certainly true that these observations have
been made with reference to sub-section (3) of section 283 and not with
reference to subsection (3) of section 274. As far as section 283 is concerned,
it has been submitted that the legislature had intended to curb a mischief
which was brought to its attention by the Bhabha Committee and that in view of
that circumstance it would be, perhaps, appropriate to give to sub-section (3)
of that section the necessary implication which Vimadalal J. had chosen to
give. On the other hand, it was emphasised that there was no previous
legislation dealing with the disqualifications of directors as such, nor was
there any recommendation in that behalf by the Bhabha Committee, so that it
would not be possible to say that sub-section (3) of section 274 was enacted to
prevent the type of mischief which might be presumed to be in the contemplation
of the legislature when it enacted sub-section (3) of section 283. In other
words, I was asked, if I regarded the observations of Vimadalal J. as having
substantial persuasive authority to restrict them to sub-section (3) of section
283 and not to follow them in a case where the construction of sub-section (3)
of section 274 was concerned. This approach was sought to be supported on the
basis of the reasoning which had been earlier referred to and set out, part of
which, as I have already expressed, cannot be considered to be devoid of
substance, although there is some part which has not appealed to me. The
difficulty in adopting this approach arises from the fact that the operative
wordings of the two subsections are identical. As indicated earlier, in my
opinion, it would be appropriate to consider these two sub-sections in
juxtaposition and not in isolation from one another. If that is done, it would
not be proper nor appropriate to give to sub-section (3) of section 283 the
construction given to it by Vimadalal J. and to deny to sub-section (3) of
section 274 the same construction. This line of interpretation to read in
sub-section (3) of section 283 the prohibition of public companies by necessary
implication and to deny that prohibition to sub-section (3) of section 274 on
the ground of the reasoning suggested by learned counsel for the defendants
would, in my opinion, be a totally impermissible course. It is possible to
argue—and argue quite attractively and persuasively—that the language of
subsection (3) of section 274, which is also the language of sub-section (3) of
section 283, would not warrant or justify the reading of the prohibition by the
process of necessary implication. This would amount to rejecting the line of
reasoning which appealed to Vimadalal J. and differing from him. The
distinction which has been suggested which can be made by me does not appeal to
me, nor am I prepared, although the arguments advanced have to be described as
persuasive and not unattractive, to persuade myself to the extent of differing
from the observations of Vimadalal J. In this view of the matter, I think I
must hold that sub-section (3) of section 274 by necessary implication
prohibits public companies and private companies which are subsidiaries of
public companies from adopting by their articles additional grounds of
disqualification, i.e., grounds other than those specified by sub-section (1)
of that section.
In this view of the matter, the questions are
answered as follows :
Question (a):
In my opinion, the amendment of article 74 proposed
by the resolution contained in the requisition would be invalid as being
repugnant to section 274 of the Companies Act, 1956. No other provision of the
said Act has been brought to my attention which would render such resolution
invalid.
Questions (b)
& (c):
Inasmuch as it has been conceded that the requisition
satisfied the procedural and numerical' requirements postulated by section 169
of the Companies Act, 1956, the requisition must be considered to be a valid
requisition within the meaning of sub-section (6) of section 169. Accordingly,
the executive committee of the Cricket Club would appear to be bound and liable
to call the meeting as provided by the said section. I do not wish to express
any opinion as to the course to be adopted by the requisitionists or by the
chairman of such meeting at the meeting. This course would depend upon the
answer to question (a) which I have indicated earlier.
Mr. Chinai applies for costs.
It is agreed that the defendants' costs, quantified
at Rs. 3,000, will be paid by the 1st plaintiff-club. Order accordingly.
[1987] 62 COMP. CAS. 301
(AP)
HIGH COURT OF ANDHRA PRADESH
v.
M. JAGANNATHA RAO, J.
APRIL 9, 1985
V.T.M. Prasad
for the Petitioner.
M.
Ramachandra Reddy for Respondent.
M. Jagannatha Rao, J.—The point of law raised
in this writ petition relates to the jurisdiction of the civil court to
entertain a civil suit involving the question as to the disqualification of the
director of a company, under the Companies Act, 1956, in the context of
sections 2(11), 10, 283, and 299 of the Companies Act (hereinafter called "the
Act") and section 9 of the Code of Civil Procedure.
The petitioner is a company registered under the Act
and the first respondent is the Principal Subordinate Judge, Tirupathi. The
second respondent, Sri N.S. Vasantakumar, who is the plaintiff in the suit was
the managing director of the petitioner-company. The petitioner-company was
initially having its registered office at Secunderabad. A proposal to shift the
registered office of the company from Secunderabad to Tirupathi was accepted by
the board of directors at a meeting dated June 13, 1980. At Tirupathi, the
company was to be located in premises bearing No. 194/C,
The second respondent then filed the present suit
stating that he was present at the meeting which took place on February 13,
1984, and no such resolution disqualifying him was passed. The allegation of
the petitioner that the second respondent had walked out of the meeting when
this item was taken up in the agenda was denied.
The reliefs claimed in the suit are for a declaration
that the plaintiff, second respondent, is and continues to be the managing
director of the first defendant (petitioner-company) and for a further
declaration that any board meeting held by the petitioner subsequent to
February 13, 1984, is null and void and also for a further declaration that any
change effected on the board of the petitioner subsequent to February 13, 1984,
is illegal and for a permanent injunction restraining the defendants therein
from interfering with the office of the second respondent-plaintiff as managing
director in the day-to-day affairs of the petitioner-company. In the lengthy
plaint, the second respondent has denied the passing of this resolution on
February 13, 1984, and has also set out various facts, which, according to him,
show that the other directors of the company including the chairman, 'formed
into one group to oust the second respondent from the board of directors and
that they had thus infringed the rights of the minority arbitrarily and with
mala fide intentions. It is also alleged in the plaint that the second
respondent was excluded by all the other directors who joined into a kind of an
illegal arrangement to siphon off the funds of the company with a view to
damage the interests of the shareholders. There were also certain interlocutory
orders passed in the suit.
It was at that stage that the present writ petition
was filed subsequently on April 30, 1984. By an order dated May 2, 1984, passed
by this court, the proceedings in the suit were stayed.
The main contention of Sri V.T.M. Prasad, learned
counsel for the petitioner, is that the disqualification specified in sections
283(1)(i) and 299 of the Act relates to certain rights unknown to the common
law and that these rights as well as the remedies in that regard are those
specially created by the Companies Act and the second respondent should have
approached the company court (the High Court) and not the civil court for
adjudication of disputes relating to his disqualification.
Sri M. Ramachandra Reddy, learned counsel for the
second respondent, has contested the above propositions.
The only question that arises for consideration is :
Whether the civil court has jurisdiction to decide the
question relating to the alleged disqualification of the second respondent
under section 283(1)(i) read with section 299 of the Companies Act in the
context of section 211 and section 10 of that Act, and section 9, Civil
Procedure Code.
Before going into the main question, it is necessary
to refer to the relevant statutory provisions. It is provided in section
283(1)(i) and section 299 that a director has to disclose his interest—in a
contract to be entered into by the company—at the first meeting, or otherwise
he becomes disqualified. Section 10 of the Act deals with the jurisdiction of
the courts. Sub-clauses (1) and (2) of section 10 of the Act read as follows :
"10 (1). The court having jurisdiction under this Act shall be—
(a) The High
Court having jurisdiction in relation to the place at which the registered
office of the company concerned is situate, except to the extent to which
jurisdiction has been conferred on any District Court or District Courts
subordinate to that High Court in pursuance of subsection (2); and
(b) Where
jurisdiction has been so conferred, the District Court in regard to matters
falling within the scope of the jurisdiction conferred, in respect of companies
having their registered offices in the district.
(2) The
Central Government may, by notification in the Official Gazette and subject to
such restrictions, limitations and conditions as it thinks fit, empower any
District Court to exercise all or any of the jurisdiction conferred by this Act
upon the court, not being the jurisdiction conferred—
(a) in respect of companies generally, by sections 237, 391, 394, 395 and 397 to 407, both inclusive;
(b) in respect of companies with a paid-up share capital of not less than one lakh of rupees, by Part VII (sections 425 to 560) and the other provisions of this Act relating to the winding up of companies".
It is also necessary to refer to the definition of
the words "the court" used in the above section.
Section 2(11) of the Act reads as follows :
"2(11). 'the court' means,—
(a) with respect to any matter relating to a company (other than any offence against this Act), the court having jurisdiction under this Act with respect to that matter relating to that company, as provided in section 10;
(b) with respect to any offence against this Act, the Court of a Magistrate of the First Class or, as the case may be, a Presidency Magistrate having jurisdiction to try such offence".
The above provisions in section 2(11) and section 10
fall for consideration on the question of jurisdiction.
It will be noted that there is no express provision
ousting the jurisdiction of the civil court in any particular respect. All that
section 10 does is to state that "the court" having jurisdiction
under the Act shall be the High Court in whose jurisdiction the registered
office of the company is situate, except to the extent to which the
jurisdiction has been conferred on any District Court under sub-section (2) by
a notification issued by the Central Government. The Central Government can
empower a District Court to exercise all or any jurisdiction conferred by this
Act "upon the court", except the jurisdiction conferred by sections
237, 391, 394, 395 and 397 to 407 (both inclusive) and not being the
jurisdiction conferred in respect of companies with paid-up share capital of
not less than Rs. 1 lakh by Part VII and the provisions of the Act relating to
winding up of companies.
It may be seen that there are various provisions in
the Act which refer to "the court", such as sections 107, 155,
163(6), 237, 391, 394, 395 and 397 to 407, 425, etc. The Central Government is
empowered, however, to confer jurisdiction on the District Court powers only in
respect of some of these sections but not all.
In my view, section 10 of the Act only proceeds to
enumerate or specify "the court having jurisdiction under this Act",
wherever such jurisdiction is conferred on "the court" by the other
provisions of the Act. Powers are conferred by the Act not only on courts but
also on other authorities like the Central Government, the Company Law Board
and the Registrar; and where a power is vested in a court, that court has to be
specified. Beyond so specifying the court competent to deal with a matter
arising under the Act, section 10 does not purport to invest the company court
with jurisdiction over every matter arising under the Act. It may be that, in
view of the elaborate provisions contained in the 1956 Act in regard to the
management and the conduct of a company's affairs including important internal
matters of administration, the court's interference by civil court has become
more limited, but the power has not at all been taken away. Every suit for
redress of individual wrongs cannot be considered as merely concerned with
matters of internal management. (M.P. Menon J. in R. Prakasam v. Sree Narayana
Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker)).
In Foss v. Harbottle [1843] 2 Hare 461, the minority
shareholders alleged that the company had a claim in damages against some of
the directors by reason of the fraudulent acts of those directors, but at the
general meeting, the majority resolved that no action should be taken against
them. Two of the minority shareholders took legal proceedings against the
directors and others to compel them to make good the losses to the company. The
court dismissed the action on the ground that, as the acts of the directors
were capable of confirmation by the majority of members, the court should not
interfere. It was thus left to the majority to decide what was for the benefit
of the company. This rule has been applied in several cases later, vide
MacDougallv. Gardiner [1875] 1 Ch 13.
The procedural character of the rule in Foss v.
Harbottle [1843] 2 Hare 461, was explained by Jenkins L.J. in Edwards v.
Halliwell [1950] 2 All ER 1064, 1066 (CA).
Palmer in his Company Law, 21st edition (1968),
points out that in English company law, while the substantive aspects of the
rule of the majority are not neglected, the emphasis is on the procedural
character of that rule. The reasoning on which the rule is founded is that in
these cases, it is for the company to complain, by suing the alleged wrongdoer.
The company is thus the proper plaintiff and the company is ruled by the
majority.
However, the following exceptions to the rule in Foss
v. Harbottle [1843] 2 Hare 461, are admitted as pointed out by Jenkins L.J. in
Edwards v. Halliwell [1950] 2 All ER 1064 (CA), namely, the majority cannot
confirm—
(1) an act which is ultra vires the company or illegal;
(2) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company; or
(3) a resolution which requires a qualified majority but has been passed by a simple majority.
In other words, the rule in Foss v. Harbottle [1843]
2 Hare 461 does not apply to such acts as referred to above inasmuch as the
majority cannot sanction those acts. A resolution which is ultra vires or
illegal or is a fraud on the minority or is not bona fide or for the benefit of
the company as a whole or is intended to discriminate between the majority
shareholders and the minority shareholders, is illegal and can be questioned by
a separate action in the civil court. The reason for this is that if the
minority were denied that right, their grievance could never reach the court
because the wrongdoers themselves being in control, do not allow the company to
sue. In some cases, it has been held that further exceptions to the rule in
Foss v. Harbottle [1843] 2 Hare 461, are permissible in cases in which
"justice requires that the courts should intervene" to assist an
otherwise minority shareholder. In Heyting v. Dupont [1964] 1 WLR 843 (CA),
Harman L. J. said (at page 854):
"...there are cases which suggest that the rule (in Foss v.
Harbottle [1843] 2 Hare 461) is not a rigid one and that exception will be made
where the justice of the case demands it".
The above rule in Foss v. Harbottle [1843] 2 Hare
461, has come up for consideration in several High Courts in our country.
K.K. Mathew J. (as he then was) was dealing in Joseph
v. Jos [1964] 34 Comp Cas 931 (Ker), with a suit for a declaration that the
proceedings of the meeting regarding the election of certain directors was null
and void and for a permanent injunction restraining defendants Nos. 3 to 5 therein
from functioning as directors and for directing the defendant-company to hold a
meeting for re-electing three directors. After referring to the rule in Foss v.
Harbottle [1843] 2 Hare 461, and the exceptions thereto, the learned judge made
a distinction between "individual membership right" and the
"corporate membership right" of a shareholder. It was held that the
rule against interference by court with the internal management of companies,
was not applicable to cases of infringement of the individual membership right.
The learned judge quoted from Palmer's Company Law, 20th edition, page 492 :
"By contract with the company (and the other members; c.f.s. 20) the
shareholder undertakes with respect to some—and, in fact, most rights which his
membership carries, to accept as binding upon him, the decision of the majority
of shareholders, if arrived at in accordance with the law and the articles;
these membership rights are known as corporate membership rights. Other rights
of the shareholder, according to his contract with the company, cannot be taken
away from him unless he consents; if such right is in question, a single
shareholder can, on principle, defy a majority consisting of all the other
shareholders. Rights of this type are known as individual membership
rights". (emphasis supplied)
Mathew J. then concluded (at page 935) :
"...the wrong done to the plaintiff is not a wrong which the majority
can ratify as it would be against the provisions of the articles of
association, and it is settled by authorities that a shareholder can insist on
the strict observance of the legal rules, statutory provisions and provisions
in the memorandum and articles which cannot be waived by a bare majority of
shareholders".
And, the plnintiff's right to move the civil court
was upheld.
Bearing these general principles in mind, I shall now
refer to certain rulings of the Madras and other High Courts wherein the
infringement to an individual right of the shareholder was upheld. In T.A.K.
Mohideen Pichai Taraganar v. Tinnevelly
Mills Co. Ltd., AIR 1928 Mad 571, a suit for declaration that the
plaintiffs were the validly elected "policy-holders directors" of the
company and that the defendant company had no power to nominate such directors
and for a permanent injunction restraining the defendants from excluding the
plaintiffs or in any way restraining or interfering with the plaintiffs' acting
or attending as directors was held maintainable. Pydah Venkatachalapathi v.
Guntur Cotton, Jute and Paper Mills Co. Ltd., AIR 1929 Mad 353, related to a
suit for a declaration that the defendant ceased to hold office from March 31,
1928, and for a permanent injunction restraining them from interfering with the
management of the company and for accounts and damages; M.K. Srinivasan v.
Watrap S. Subrahmanya Ayyar [1932] 2 Comp Cas 147; AIR 1932 Mad 100, was a suit
for a declaration that the appointments of certain directors should be declared
illegal and for a direction to order a poll for electing five shareholders as
directors in the vacancies; N.V.R. Nagappa Chettiar v. Madras Race Club [1949]
19 Comp Cas 175; AIR 1951 Mad 831, was a suit for a declaration that the
meeting of the general body held on November 7, 1947, was invalid and that the
managing committee comprising of certain defendants purported to have been
elected at the said meeting was not entitled to assume office and for
consequential injunction; M.R.S. Rathnavelusami Chettiar v. M.R.S. Manickavelu
Chettiar [1951] 21 Comp Cas 93; AIR 1951 Mad 542, was a suit for a declaration
that the removal from office of the managing director was void; Bank of
Hindustan Ltd. v. Kowtha Suryanarayana Rao, AIR 1957 Mad 702; [1958] 28 Comp
Cas 71, was a suit for a declaration that the plaintiffs were entitled to have
their names cancelled, struck out and omitted in the bank register of
shareholders and to have the second defendant or his nominees or transferors
entered in their place and that the plaintiffs had ceased to own or hold 1,668
shares; and all those suits were held maintainable. In Sree Krishna Jute Mills
Ltd. v. Mothey Krishna Rao [1947] 17 Comp Cas 63 (Mad); AIR 1947 Mad 322, an
application was filed in the High Court for a direction to the secretary and
treasurer of the firm to hand over the records, account books, pass books,
keys, etc., to the applicant. The objection of the respondents that the
petitioners should have filed a suit and not a company petition was upheld.
In the Kerala High Court in Star Tile Works v. N.
Govindan, AIR 1959 Ker 254, the Chief Justice and Justice Vaidialingam held
that a suit for a declaration that the entire proceedings of a meeting were
void and illegal and that the audit report, balance-sheet and election of
certain directors was illegal and for permanent injunction was maintainable. I
have already referred to Joseph v. Jos [1964] 34 Comp Cas 931 (Ker). R.
Prakasam v. Sree Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker),
was a case of a suit for a declaration that the annual general meeting was not
duly and validly convened, that the election of the president, vice-president,
directors, etc., made at a meeting was invalid and for a permanent injunction;
Marikar (Motors) v. M.I. Ravi Kumar [1982] 52 Comp Cas 362 (Ker), was a suit
for a declaration that the co-option of certain defendants as directors was
illegal and for removing some of them from the board of directors as being
unfit for holding office by reason of mismanagement, oppression and fraud and
for appointment of an administrator; these suits were held maintainable.
In our High
Court in Bhagawandas Garg v. Canara Bank Ltd. [1978] 1 An WR 504; [1981]
51 Comp Cas 38 (AP), Chennakesav Reddi J. (as he then was) held that a suit for
recovery of money against the Canara Bank in respect of the deposit amount
payable by the plaintiff in respect of twelve shares was maintainable,
observing (at page 46 of 51 Comp Cas):
"Section 10 of the Companies Act also confers exclusive jurisdiction
on the High Court only in respect of matters covered by sections 237, 391, 394,
395 and 367 to 497 (both inclusive) and in respect of matters covered by Part
VII of the Companies Act with a paid-up capital of one lakh of rupees and over
and in respect of other provisions relating to winding up of companies. Except
in respect of these matters, the ordinary jurisdiction of the civil courts to
decide the rights of parties is not excluded".
The Punjab High Court in Muni Lal Peshawaria v.
Balwant Rai Kumar [1964] 34 Comp Cas 717; AIR 1965 Punj 24, held that a suit
for the taking of accounts and for distribution of surplus assets in the course
of the winding up of the company was maintainable. In Panipat Woollen and General Mills Co. Ltd. v. R.L. Kaushik [1969]
39 Comp Cas 249 (P & H), the suit was for a declaration that the
plaintiff was a director and that one of the directors was not properly elected
and that the exclusion of the plaintiff was invalid and was held maintainable.
In Gokul Chit Funds and Trades P. Ltd.
v. K. Thoundasseri Kochu Ouseph Vareed [1977] 47 Comp Cas 264 (Ker), an
application filed on the company side of the High Court that an election held
on September 8, 1975, was illegal and contrary to the provisions of the Act was
held not maintainable and the party was directed to file a civil suit.
Following the aforesaid rulings with which I
respectfully agree, I hold that the present case deals with an individual right
of the second respondent and that the suit filed by him is maintainable.
But it is urged by Sri V.T.M. Prasad, learned counsel
for the petitioner, that the rights of the second respondent are creatures of
the company law and hence the remedy under that law alone has to be followed.
For the above proposition, he places reliance on the decision of the Calcutta
High Court in Hirendra Bhadra v. Titwin Ergied [1975-76] 80 CWN 242, where the
decision of the Supreme Court in Premier Automobiles Ltd. v, Kamlekar Shaniaram Wadke [1975] 48 FJR 252; AIR 1765 SC
2238, arising under the Industrial Disputes Act, 1947, was referred to. He
referred to the well-known case of Wolverhampton New Waterworks Co. v.
Hawkesford [1859] 6 CB (NS) 336, where the three classes of actions were
analysed by Willes J. and then to the third class mentioned therein (at page
260 of 48 FJR):
"There are three classes of cases in which a liability may be
established by statute. There is that class where there is a liability existing
at common law, and which is only re-enacted by the statute with a special form
of remedy; there, unless the statute contains words necessarily excluding the
common law remedy, the plaintiff has his election of proceeding either under
the statute or at common law. Then there is a second class, which consists of
those cases in which a statute has created a liability, but has given no
special remedy for it; there the party may adopt an action of debt, or other
remedy at common law to enforce it. The third class is where the statute
creates a liability not existing at common law, and gives also a particular
remedy for enforcing it........with respect to that class it has always been
held that the party must adopt the form of remedy given by the statute".
The question, therefore, is whether the rights and
obligations in question in this case owe their very creation to the Companies
Act, or whether they are traceable to a basic contract which is statutorily
regulated. What is the historical background of the company statutes ?
In the eighteenth and the beginning of the nineteenth
centuries, the association, namely, the unincorporated company, became
increasingly popular. As the Industrial Revolution advanced, men of business
began again to recognise the advantages derived from co-operation in commercial
enterprise, namely, the advantage of raising funds for the purposes of large
undertakings by means of contributions from a number of small capitalists ready
and willing to co-operate, and that of minimising the risk by spreading the
liability. The difficulty was how to secure these advantages. A charter or
private Act of Parliament was often too costly or impracticable. Businessmen
had to devise for themselves a new form of partnership which would possess the
advantages as nearly as might be of a chartered corporation, and in particular
would have shares of a fixed amount freely transferable by the holders. The
outcome of these commercial needs was the unincorporated company, the lineal
ancestor of the ordinary company under the Companies Acts. The deed of
settlement by which such an unincorporated company was formed was made between
the various shareholders and a trustee or trustees with whom the shareholders
covenanted to observe the provisions of the deed. The deed commonly declared
that the several persons for the time being holding shares in the capital of
the company should constitute and be a company with a specified name, and with
a specified capital, and subject to specified regulations (set out in the deed)
until dissolved in a specified manner. The deed usually also made the shares
transferable. To secure the continuity of the concern, notwithstanding the
death or bankruptcy of members, the management of the enterprise was
transferred to a select body of directors, often known as the committee of
directors, to the exclusion of the members generally, and the property of the
company was vested in all or some directors as trustees. (Palmer's Company Law,
21st edition, page 6).
The learned author then proceeds to give the history of
the legislation in England and the passing of the Chartered Companies Act,
1837, the Joint Stock Companies Act, 1844, the Limited Liability Act, 1855, the
Joint Stock Companies Act, 1856, the Companies Act, 1862, the Companies
(Consolidation) Act, 1908, the Companies Act of 1929 and then the Companies
Act, 1948. (See also the history traced in Marikar (Motors) v. M.I. Ravikumar
[1982] 52 Comp Cas 362 (Ker).
I may point out that as a result of reforms in recent
times, the English Company Law (subsequently re-enacted as the Companies Act,
1967, 1976, 1980, 1981) and the European Companies Act, 1972, came to be
enacted. The series of Acts only show that the law of contract which was the
basis of the "deed of settlement company" was regulated by a statute
at various stages. It is, therefore, clear that the position in law is that the
rights and liabilities between the contracting parties and governed by the
articles of association are regulated by the various statutes relating to
company law, and these laws have not created any special rights and remedies.
This was also recognised by the Madras High Court in the following case.
A Division Bench of the Madras High Court, consisting
of Srinivasa Ayyangar J. and Anantha Krishna Iyer J., in T.A.K. Mohideen Pichai
Taraganar v. Tinnevelly Mills Co. Ltd., AIR 1928 Mad 571, to which I have
already referred, also pointed out the "regulatory" nature of the Act
vis-a-vis the common law and held that the general right of suit cannot be
considered to have been taken away merely because of some
"regulatory" provisions. A civil suit was held maintainable.
I, therefore, hold that the general law of contracts
is the basis of the rights of parties and that the Companies Act, 1956, merely
regulates these rights and does not create any new rights or remedies. Unless,
as stated in Wolverhamptons's case [1859] 6 CB (NS) 336, there is an exclusion
of the jurisdiction of the civil court, by words express or implied, the suit
is maintainable, and no such exclusion has been held existing by the courts in
respect of individual rights.
It is then urged by learned counsel for the
petitioner that the disqualification of a "managing" director covered
by sections 283(1)(i) and 299 are creatures of the Companies Act. I am unable
to agree. The position of a "managing director" is nothing but a
special position of a director of the company with powers delegated to him from
the other directors. It is clear from Palmer's Company Law above referred to
and also at page 531, where the learned author says :
"The maxim 'delegatus non potest delegare' applies to directors, so
that, prima facie, they cannot delegate their powers; but this rule may be
altered by giving the directors express or implied authority to delegate".
Such special provision is usually made in the
articles of association.
In that view of the matter, it cannot be contended
that the office of a "managing director" is something created by the
statute.
It is next contended by Sri V.T.M. Prasad that the
"disqualification" created under section 283(1)(i) and section 2 (11)
of the Companies Act is a disqualification created by a statute. I am unable to
agree. The obligation of a director to disclose his interest in a contract
entered into or to be entered into is an obligation similar to that of a
trustee. We have already seen that the directors are in the position of
trustees according to common law and they have a fiduciary relation towards the
shareholders. It is well known that the trustees will become disqualified if
they have any interest adverse to that of the beneficiaries and that they have
to account for any secret profit made by them. This is clear from Lewin on
Trusts, XVIth edition, at page 193 :
"The principle that a trustee must not benefit from his trust
applies to agents, solicitors who are also mortgagees, guardians who are
trustees to the extent of the property coming to their hands, directors of a
company, a secretary of a company, promoters of a company, etc."..
In my view, the provisions of sections 283(1)(i) and
299 are mainly a re-enactment of the obligations of a trustee arising out of
the common law I am, therefore, unable to agree with the contention of the
petitioner that the alleged disqualification in question cannot be the
subject-matter of a civil suit.
I, therefore, dissent from Hirendra Bhadra v. Titwin Engineering Co. [1975-76] 80 CWN 242, of the Calcutta High Court. I also dissent from the view taken by the Allahabad High Court in Patna Devi v. Harihar Prasad [1978] Tax LR 2292, to the effect that a suit for a declaration that the defendants are not directors of the company and for restraining the defendants in financial matters is not maintainable. In that case, the differing views expressed in Nava Samaj Ltd. v. Civil Judge, Rajnandgaon, AIR 1966 MP 286, were referred to.
For the aforesaid reasons, I hold that the suit filed
by the second respondent is maintainable.
It is argued for the second respondent, relying upon
Costa Rica Railway Co. Ltd. v. Forwood [1901] 1 Ch 746, that the knowledge of
the other directors with regard to information which the second respondent
shall, according to the petitioner, have intimated to the other directors, was
sufficient to take the second respondent out of the disqualification , if any,
imposed by sections 283(1)(i) and 299. The above English ruling has been
referred to in Pydah Venkatachalapathi v. Guntur Cotton, Jute and Paper Mills
Co. Ltd., AIR 1929 Mad 353.
But, in my opinion, that is a matter which arises on
the merits of the suit and I cannot go into that question.
For the reasons given above, I hold that the civil
suit is maintainable. The writ petition is accordingly dismissed but in the
circumstances without costs. The interim stay granted earlier is vacated.