[1988] 64 COMP. CAS. 19 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Paragaon Utility Financiers P.
Ltd.
MAY 15, 1986
Arun Jain for the
Petitioners.
N.K. Sodhi, H.S. Bajwa,
N.C. Sahni and Rajiv Narain Raina for the Respondents.
Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the
Companies Act, 1956.
Briefly, the facts are that
the respondent is a private limited company having authorised capital of Rs.
10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up
capital is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in
arrears amount to Rs. 59,000. It was incorporated on August 21, 1961, under the
provisions of the Companies Act (hereinafter referred to as "the
Act"). The petitioners hold 150 shares as detailed below:
|
Col. Kuldip Singh, petitioner |
No. 1 |
20 |
|
Hardev Singh Minhas," |
No. 2 |
30 |
|
Maj. K. Gurdev Singh," |
No. 3 |
20 |
|
Smt. Nasib Kaur," |
No. 4 |
20 |
|
Iqbaljit Singh," |
No. 5 |
20 |
|
Smt. Kirpal Kaur," |
No. 6 |
20 |
|
Smt. Chanan Kaur," |
No. 7 |
20 |
It is alleged that the affairs of the company are
being conducted prejudicially to public interest and in a manner oppressive to
the petitioners, who are in minority, as detailed below:
(i) The company had been allotted 490 equity shares of
Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as
"PISCO"). The paid-up amount in respect of the above shares was Rs.
3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife,
Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife (124
shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran
Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares).
These were transferred in a clandestine manner and without having been offered
to any other shareholder including the petitioners, for a consideration of Rs.
3.90 lakhs in a meeting of the board of directors of the company held on
December 30, 1978. No money in cash was paid by the purchasers to the company
as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited
with the company was adjusted towards the purchase price and the balance amount
of Rs. 1,90,000 was given by the company as loan to the purchasers with
interest at the rate of 15 per cent, per annum. The meeting in which the shares
were transferred was illegal and void for want of quorum. Some other
irregularities were also committed by the board of directors in calling and
holding the meeting. Thus, the transfer of shares is not binding on the
company.
(ii) Shri Ramesh Inder Singh was the managing director of the
company in the year 1976 and he had been operating the bank account of the
company maintained in the Central Bank of India, Civil Lines, Jalandhar City,
without any authority. He issued cheques in fictitious names with the result that
amounts to the tune of lakhs of rupees were misappropriated.
(iii) Mohinder Singh had been appointed as
manager-cum-cashier of the company during the regime of Pavittar Singh, father
of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh.
As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by
him in the year 1976. The board of directors decided to take action against
him. The matter was taken in various meetings of the board of directors but no
action was taken against him. Thus, the interest of the shareholders was not
protected by the management.
(iv) The minutes book of the company relating to the meetings
of the board of directors and shareholders was not kept properly from November,
1978, to September, 1979. Some of the proceedings have not been signed by the
chairman. There are various violations of the provisions of section 193 of the
Act. Therefore, the business transacted in the meetings during that period is
illegal and void ab initio.
(v) The company had been advancing loans to some persons
without any documents. It is alleged that it advanced loan without interest and
without getting executed any document to PISCO. An amount of Rs. 14,309.57
stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder
Singh as on December 31, 1978, but no action has been taken to recover the
amounts from them.
The aforesaid allegations,
it is pleaded, go to prove the mismanagement on the part of the management
which is prejudicial to public interest and oppressive to the minority members
of the compauy. Thus, the circumstances are such in which it would be just and
equitable that the company can be ordered to be wound up. Consequently, it is
prayed that action be taken under the aforesaid section. The respondents in the
petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar
Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder
Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No.
2, late Pavittar Singh, was ordered to be deleted.
The petition has been
contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two
written statements have been filed, one on behalf of respondent No. 1 and the
other on behalf of the latter respondents. Respondent No. 1 alleged that the
affairs of the company were meticulously looked after during the period when
Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application
for rectification of the register of shareholders of PISCO under section 155.
The application was decided against him but an appeal is pending in this court
against that order.
In the written statement on
behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the
allegations in the petition do not make out a case of oppression and
mismanagement of the affairs of the company and its winding up on just and
equitable grounds. The petition is mala fide and had been filed at the behest
of Col. P. S. Dhillon who had been the managing director till April 20, 1982,
when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of
Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in
the petition, it is stated, related to the transfer of 490 shares held by the
company in PISCO. The matter had been decided in company petition filed by Col.
P. S. Dhillon which had since been dismissed. It is further pleaded that
rectification of the transfer of shares cannot be the subject-matter of a
petition under sections 397 and 398. The allotment cannot also be declared
invalid in the absence of PISCO. The other allegations in the petition have
been controverted by the said respondents.
On the pleadings of the
parties, the following issues were framed:
1. Whether the petition is maintainable in view of the preliminary
objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and
paragraph No. 6 of the written statement of respondent No. 1? [Opp].
2. Whether the affairs of the company are being conducted in a manner
prejudicial to the interest of the company and public? [Opp].
3. Whether the acts of
the majority are oppressive to the interest of the minority? [Opp].
A. Relief.
Issue No. 1: The first
preliminary objection raised by Mr. Sodhi is that the petitioners have no right
to maintain the present petition as they did not own 10 per cent, shareholding
on the date of filing the petition. On the other hand, Mr. Jain, counsel for
the petitioners, has argued that the petitioners had 150 shares out of 1,000
shares on the date of filing the petition as given in the petition. Thus, they
had the right to file the petition.
I have duly considered the
arguments of learned counsel and find force in the contention of Mr. Jain. The
petitioners, as given in the list of members, exhibit P-88, filed with the
Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June
30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the
time of filing the petition, the petitioners were shareholders of the company.
From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that
the petitioners had more than 10 per cent, shareholding in the company.
At this, Mr. Sodhi sought
to urge that the position reflected in exhibit P-88 relates to the month of
June, 1982, whereas the petition was filed in October, 1982. He argues that it
was incumbent on the petitioners to show the total number of shareholding held
by them on the date of filing the petition which they failed to do. He made reference
to Rajahmundry
Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of
the board of directors dated October 29,1978, wherein 20 shares held by
Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh
and Amarjit Singh Bajwa, son of Rattan Singh.
I do not find any substance
in this submission of learned counsel as well. The petitioners have shown that
according to the latest list of members filed with the Registrar of Companies,
they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement
that all the petitioners were shareholders of the company on the date of filing
the petition. The proceedings of the board of directors dated October 29, 1978,
however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner.
It cannot be ruled out that 20 shares might have been again transferred in the
name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of
shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not
been transferred to her subsequently, the remaining petitioners still had more
than 10% shareholding on the date of petition and thus they were entitled to
file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case.
[1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant
after obtaining the consent of more than one-tenth in number of the members
presented the petition under section 153C of the Indian Companies Act, 1913
(section 397 of the Companies Act, 1956). Subsequent to the presentation of the
petition, some of the members withdrew their consent. It was held that
subsequent withdrawal of the consent could not affect the right of the
petitioner to proceed with the petition or the jurisdiction of the court to
dispose of it on merits. In my view, the observations in the above case are of
no assistance to Mr. Sodhi. Consequently, I overrule this preliminary
objection.
The second objection of Mr.
Sodhi is that the allegations made in the petition should be such that a prima
facie case for winding up of the company has been made out under section
433(f), but from the allegations in the petition, no such case stands
established. In support of his contention, he places reliance on Shanti Prasad
Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth
Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas
P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976
SC 565.
There is no dispute about
the proposition that an action under section 397 can be taken only if a prima
facie case for winding up has been made out on the allegations in the petition.
In the above observations, I find support from Rajahmundry Electric Supply
Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows
(at page 95):
".before taking action
under section 153C, the court must be satisfied that circumstances exist on
which an order for winding up could be made under section 162".
Sections 153C and 162 of
the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956
Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 (SC). It was further observed therein that the conduct of the majority
shareholders must be burdensome, harsh and wrongful and mere lack of confidence
between the majority shareholders and the minority shareholders would not be
enough unless the lack of confidence springs from oppression by the majority in
the management of the company's affairs and such oppression must involve at
least an element of lack of probity or fair dealing to a member in the matter
of his proprietary rights as a shareholder.
It is now to be determined
whether the allegations in the petition make out a prima facie case for the
winding up of the company under section 433(f). The section says that a company
may be wound up by the court if it is of opinion that it is just and equitable
to do so. The question arises what the words "just and equitable"
mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that
the principle of "just and equitable" baffles a precise definition.
It must rest with the judicial discretion of the court depending upon the facts
and circumstances of each case. These are necessarily equitable considerations
and may, in a given case, be superimposed on law. Whether it would be so done
in a particular case cannot be put in the strait-jacket of an inflexible
formula. Clause (f) is not to be read as being ejusdem generis with the
preceding five clauses. Whether the five earlier clauses prescribe definite
conditions to be fulfilled for the one or the other to be attracted in a given
case, the just and equitable clause leaves the entire matter to the wide and wise
judicial discretion of the court. The only limitations are the force and
content of the words "just and equitable" themselves. In view of
sections 397, 398 and 443(2), relief under section 433(f) based on the just and
equitable clause is in the nature of a last resort, when other remedies are not
efficacious enough to protect the general interest of the company. There must
be materials to show when the just and equitable clause is invoked that it is
just and equitable not only to the persons applying for winding up but also to
the company and to all its shareholders. It is further observed that the court
will have to keep in mind the position of the company as a whole and the
interest of the shareholders and to see that they do not suffer in a fight for power
that may ensue between the two groups. Similar observations were made in Seth
Mohan Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in
making an order for winding up on the ground that it is just and equitable that
a company should be wound up, the court shall consider the interest of the
shareholders as well as of the creditors. It is not necessary to dilate further
on this matter. It is sufficient to observe that if the allegations in the
petition are taken to be established, the petitioners are entitled to obtain an
order of winding up under section 433(f).
The third preliminary
objection of Mr. Sodhi is that the oppression should continue up to the date of
the petition. He contends that the petition in this case does not show that the
oppression is continuous and, therefore, it is liable to be dismissed. To
fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35
Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and
Jute Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand,
Mr. Jain has argued that if the effect of a single act is continuously
oppressive, the court is entitled to pass an order under sections 397 and 398.
He refers to In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal).
I have duly considered the
argument. The matter does not require any elaborate discussion as it has been
settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas 351
that in order to file an application under section 397, if must be shown that
the conduct of the majority shareholders was oppressive to the minority members
and this requires that events have to be considered not in isolation but as
part of a consecutive story. There must be continuous acts on the part of the
majority shareholders, continuing up to the date of the petition, showing that
the affairs of the company were being conducted in a manner oppressive to some
part of the members. Same view was expressed by P. N. Bhagwati, J. as he then
was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777 (Guj). It was observed
therein that sections 397 and 398 postulate that there must be at the date of
the application a continuing course of conduct of the affairs of the company
which is oppressive to any shareholder or shareholders or prejudicial to the
interests of the company. I am in respectful agreement with the above
observations. It is true that in Sindhri Iron Foundry's case [1964] 34 Comp Cas
510, it was held by a learned single judge of the Calcutta High Court that if
the court is satisfied that a single wrongful act is such that its effect will
be a continuous course of oppression and there is no prospect of remedying the
situation by the voluntary act of the party responsible for the wrongful act,
the court is entitled to interfere by an appropriate order under section 397 of
the Act. However, the above observations are not in consonance with those of
the Supreme Court in Shanti Prasad Jain's [1965] 35 Comp Cas 351. Consequently,
it is not possible for me to rely upon the view expressed by the Calcutta High
Court.
It is clear from the facts
that the petitioners have alleged oppression relating to the year 1978-79.
Thereafter, Col. P. S. Dhillon was appointed as the managing director who
remained as such for many years, but during that period, the petitioners
remained quiet and took no action. Thus, it cannot be said that there are
continuous acts of the majority shareholders which have been oppressive to the
petitioners. Consequently, the petition is liable to be dismissed on this short
ground.
Issues Nos. 2 and
3.—Though, in view of the above finding, it is not necessary to deal with the
arguments of Mr. Jain on these issues, in order to avoid the possibility of
remand in appeal, I consider it proper to deal with them.
In the first instance,
counsel for the petitioners has challenged the resolutions passed in the
meetings of the company held on November 30, 1978, December 30, 1978, January
15, 1979, and February 28, 1970. It was highlighted by him that several
directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt.
Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder
Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt.
Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder
Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri
Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh.
Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh
Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother
of Smt. Nasib Kaur. He submits that the matter is to be examined in this
background. He has challenged the legality of the resolution dated November 30,
1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in
which the resolution was passed was incomplete; secondly, no notice of the
meeting was given to the directors and, thirdly, that, in fact, no meeting was
held on that date.
The first question that
arises for determination is as to whether the quorum for the meeting in which
resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that
there were 32 directors of the company on November 30, 1978, and, therefore,
the quorum for the meeting was 11. However, only 8 directors were present. Out
of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on
September 27, 1977, and January 30, 1978, respectively, as they failed to
attend three consecutive meetings and thus they would be deemed to be not
present in the meeting. In this way, only six directors would be deemed to be
present.
On the other hand, Mr.
Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej
Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib
Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh
and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of
directors on that date was 24. The number for determining the quorum will be
deemed to be 24 and not 32. Therefore, the quorum would have been complete if
eight directors were present. He further contends that Shri Pavittar Singh had been
re-elected as director on June 30, 1978, and, therefore, he did not suffer from
any disability on November 30, 1978.
I have duly considered the
arguments of learned counsel. It has been admitted by Mr. Jain that out of the
32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh,
Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar
Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh
had ceased to be directors prior to November 30, 1978. Subsection (2) of
section 287 provides that the quorum for a meeting of the board of directors of
the company shall be one-third of its total strength or two directors,
whichever is higher. In clause (a) of sub-section (2) of section 287, the total
strength of the board of directors of a company has been denned as the total
strength of the board of directors as determined in pursuance of the Act, after
deducting there from the number of directors, if any, whose places may be
vacant at the time. It is thus evident that for constituting quorum, l/3rd of
the total number of directors who do not suffer from any disability are to be
taken into consideration. The effective number of directors who admittedly
ceased to be so is 8. Thus, the number of effective directors was 24 and out of
them 8 directors could constitute the quorum. The directors present in the
meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt.
Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar
Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt.
Inderjit Kaur and Shri Ravinder Singh ceased to be directors. There is a
dispute as to whether Shri Pavittar Singh was re-elected as a director or not.
Even if it may be assumed that Shri Pavittar Singh had been re-elected as
director, the quorum was incomplete as only six directors were present.
The second question to be
determined is whether notice of the meeting was given to the directors and if
not with what effect. Mr. Jain has argued that the copy of the despatch
register of the company from October 16, 1978, to February 19, 1979, exhibit
P-74, does not show that any notice was issued for the said meeting. On the
other hand, Mr. Sodhi, has argued that the only requirement under section 286
is that the notice of the meeting should be in writing. It does not prescribe
the manner in which it is to be served on the directors. The notice under
article 82 of the articles of association can be served personally. He submits
that notices were not sent by post but through a messenger.
It is not disputed by Mr.
Sodhi that the notices were not entered in the despatch register. There is no
reliable evidence on record to prove that notices were sent through messenger
and, therefore, it cannot be held that notices were given to the directors. It
is essential that the notices of the meetings have to be sent to all the
directors, otherwise, the resolutions passed in such meetings are invalid. In
this view, I am fortified by the observations of the Supreme Court in
Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC
2389, wherein it was observed that notice to all the directors of a meeting of
the board of directors is essential for the validity of any resolution passed at
the meeting and where no notice was even given to one of the directors, the
resolution passed at the meeting of the board of directors is invalid.
Consequently, I am of the opinion that the resolution dated November 30, 1978,
is invalid on this ground.
The third question to be
determined is whether the meeting was held on November 30, 1978, or the minutes
were recorded without holding the meeting. Mr. Jain has argued that no meeting
was held but the minutes were recorded subsequently by the eight directors in
collusion with each other. In support of his contention, he brought to my
notice the fact that the signatures of the chairman at the end of the minutes
bear the date November 30, 1979, instead of November 30, 1978. The arguments
have been considered by me but I do not agree with them. The proceedings book
is page-marked and consists of several resolutions even after this resolution.
This resolution cannot be said to have been incorporated therein subsequently
merely because under the resolution, Shri Pavittar Singh purported to have
signed on November 30, 1979. The year and the date might have been mentioned
through an oversight.
Now, I advert to the
resolution, exhibit P-2, passed in the meeting held on December 30, 1978. Mr. Jain
has challenged the said resolution on four grounds, out of which three grounds
are the same on which resolution, exhibit P-1, was challenged. The fourth
ground is that 5 transferees of the shares of PISCO, namely, Smt. Nasib Kaur,
Shri Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri
Swaran Singh, took part in the meeting without disclosing their interest in the
proposed transaction and, therefore, they ceassed to be directors on that date.
The first question to be seen is whether the quorum for the meeting was
complete or not. This meeting was attended by the following ten directors:
|
1. |
Smt. Nasib Kaur. |
|
2. |
Smt. Mohinder Kaur, |
|
3. |
Smt. Rajinder Singh Johal, |
|
4. |
Smt. Gurbax Kaur, |
|
5. |
Shri Pavittar Singh, |
|
6. |
Shri Ravinder Singh, |
|
7. |
Shri Swaran Singh, |
|
8. |
Smt. Inderjit Kaur, |
|
9. |
Shri Rameshinder Singh, and |
|
10. |
Shri Amar Singh. |
The resolution was passed
for transferring 490 shares of PISCO held by the company in favour of the following
persons for full consideration:
|
|
Shares |
|
1. Shri
Pavittar Singh and his wife, Smt. Nasib Kaur |
122 |
|
2. Shri
Ravinder Singh and his wife, Smt. Santosh |
124 |
|
3. Shri
Rameshinder Singh |
122 |
|
4. Shri
Swaran Singh |
122 |
|
|
490 |
N.B. Out of 6
transferees, all except Smt. Santosh were directors of the company.
Mr. Jain has contended that
out of the ten directors present in the meeting, five directors were transferees.
Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder Singh had also
ceased to be directors. Smt. Inderjit Kaur had further ceased to be a director.
If the presence of the five transferee-directors and that of Smt. Inderjit Kaur
is not taken into consideration, then the quorum is incomplete. On the other
hand, Mr. Sodhi has argued that Shri Pavittar Singh, after he had ceased to be
a director, was re-elected on June 30, 1978. However, he admits that Smt.
Inderjit Kaur ceased to be a director. He further submits that the transferees
did not cease to be directors at the time of passing the resolution and at the
most they ceased to be so after the resolution had been passed.
First, it is to be seen
whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as
argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the
shareholders dated June 30, 1978, from which it is clear that he was re-elected
as director on June 30, 1978. Thereafter, it is not shown that he ceased to be
so. Consequently, I am of the opinon that he was a director on December 30,
1978.
It is next to be seen
whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri
Ravinder,Singh and Shri Rameshinder Singh had ceased to be directors on that
date because they took part in the meeting at the time of passing the
resolution, exhibit P-2. Relevant parts of sections 283(1)(i) and 299 read as
follows:
"Section 283. Vacation
of office by directors.—(1) The office of a director shall become vacant if—.
(i) he acts in
contravention of section 299.
Section 299. Disclosure of interests by
director.—(1) Every director of a company who is in any way, whether directly
or indirectly, concerned or interested in a contract or arrangement, or
proposed contract or arrangement, entered into or to be entered into, by or on
behalf of the company, shall disclose the nature of his concern or interest at
a meeting of the board of directors.".
From a reading of section 283,
it is clear that the office of the director becomes vacant when a director acts
in contravention of section 299. It is enjoined by section 299 that a director,
who is interested in a contract entered into by or on behalf of the company,
should disclose the nature of his interest at a meeting of the board of
directors. If he fails to do so, he ceases to be a director. In view of the
aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran
Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of
the company.
Now, the question arises,
whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1)
of section 300 provides that no director of a company shall, as a director,
take any part in the discussion or vote on any contract by or on behalf of the
company, if he is in any way, whether directly or indirectly interested in the
contract, nor shall his presence count for the purpose of forming a quorum at
the time of any such discussion or vote; and if he does vote, his vote shall be
void. Sub-section (2)(a), which is in the nature of a proviso to sub-section
(1), says that sub-section (1) shall not apply to a private company which is
neither a subsidiary nor a holding company of a public company. A reading of
the above provisions makes it clear that sub-section (1) applies to a public
limited company and not to a private company which is not a subsidiary or a
holding company of a public company. Therefore, it is in the case of a public
company and a private company which is a subsidiary or a holding company of a
public company, that if a director takes part in the proceedings of the board
of directors and votes regarding any contract in which he is interested, his
presence for the purposes of forming a quorum shall not be counted and his vote
shall be void. However, it will not be so if the company is a private company.
In the present case, the company is a private company. Therefore, the presence
of the aforesaid five directors for the purposes of quorum and their vote for
the purpose of passing the resolution cannot be excluded. They shall, however,
cease to be directors after the passing of the said resolution. Consequently,
the resolution, exhibit P-2, cannot be held to be invalid on this ground. However,
it may be reiterated that the shares were transferred in the names of some of
the directors. Thus, the action of the directors in passing the resolution
amounts to oppression of the minority shareholders in spite of the fact that it
is not an invalid resolution. In the above observation, I find support from
Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it was held that
a resolution may be passed by the directors which is perfectly legal in the
sense that it did not contravene any provision of law, and yet it may be
oppressive to the minority shareholders or prejudicial to the interest of the
company. Such a resolution can certainly be struck down by the court under
section 397 or 398.
Now, it is to be seen
whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt.
Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978,
and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on
June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter
she ceased to be so. Consequently, she was a director on the date of the
meeting. Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be
directors. If the presence of two directors, namely, Ravinder Singh and Smt.
Inderjit Kaur, is not taken into consideration, eight directors were still
present in the meeting. The total number of directors, as already mentioned,
was 24. Thus, the quorum was complete.
Mr. Jain next submits that
no notice of the meeting was sent to the directors and, consequently, the
meeting was illegal. There is force in this submission. The copies of the
despatch register from October 16, 1978, to February 19, 1979, exhibit P-74,
show that no notice was sent regarding the meeting. A similar argument was
raised earlier and was dealt with while determining the validity of the
resolution dated November 30, 1978. For similar reasons, the resolution dated
December 30, 1978, is also invalid.
Mr. Jain has then argued
that in the resolution dated November 30, 1978, it was decided that the shares
be offered to the existing shareholders. Shri R. S. Johal was authorised to do
so. However, he did not offer the shares to the other shareholders and,
therefore, the transfer of shares to Pavittar Singh, etc., amounts to oppression
on the minority shareholders.
I find substance in this
submission. Before deciding to whom the shares should be sold, it was the duty
of Shri Johal to make an offer of sale to all the shareholders. Those should
have been transferred to one who made the highest offer. However, it was not
done. It is true that Shri Johal says that he told orally all the shareholders
in this regard. This part of the statement, however, cannot be accepted.
Consequently, transfer of the shares to the transferees without offering the
shares to the other shareholders in terms of the resolution dated November 30,
1978, exhibit P-1, is oppressive to the other shareholders.
Mr. Jain has further argued
that the consideration for the 490 shares purchased by Shri Pavittar Singh,
etc., was not paid in cash by them. The purchase price of the shares was Rs.
4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them
towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them
from the company for interest at the rate of 15% per annum and that amount has
not been repaid till today.
I have duly considered the
argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some
amount was shown payable to the transferees in the account books of the
company. In case that amount was got adjusted by them towards the payment of
consideration of the shares, no fault can be found therein. However, the act of
advancing a loan by the company to the transferee-directors at the juncture
when the company was not in sound financial condition was an oppressive act on
the minority shareholders. It is also relevant to point out that they have not
repaid the amount of loan or interest thereon up-to-date.
The third resolution of the
company, which has been challenged by the petitioners, is dated January 15,
1979, exhibit P-17. By this resolution, the minutes of the meeting dated
December 30, 1978, were confirmed and the loans given to the directors for
purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that
there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri
Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took
part in the meeting dated December 30, 1978, without disclosing their interest
in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and
Shri Avtar Singh admittedly ceased to be directors. The total number of
directors present was eleven and in case the aforementioned seven directors are
excluded, the number of directors present remained four. The quorum of the
meeting should have been eight and thus the resolution is invalid. I agree with
the submission of learned counsel. It is not necessary to dilate (further) on
the paint as the matter has already been discussed above.
Mr. Jain has further
challenged the validity of the resolution on the ground that the notices of the
meeting were not despatched to the directors. He, in support of his contention,
referred to the despatch register, exhibit P-74. I agree with this submission
as well. The matter has already been discussed above. For similar reasons, this
resolution is also invalid.
Mr. Jain has next
challenged on similar grounds the resolution passed in the meeting held on
February 28, 1979, exhibit P-18, by which the sale of 490 shares in favour of
Shri Pavittar Singh, etc., was approved. The first thing to be seen is as to
whether the quorum of the meeting was complete. Eleven directors were present
in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder
Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As
already held, they ceased to be directors on December 30, 1978. Out of the
remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt.
Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six
directors are to be excluded for the purposes of quorum. Consequently, five
directors would be deemed to be present in the meeting. The quorum for the
meeting was eight. I am, therefore, of the opinion that the resolution dated
February 28, 1979, is also invalid.
The second question is
whether the resolution is invalid as the notices of the meeting were not sent
to all the directors. In the despatch register, exhibit P-74, admittedly, the
despatch of the notices of the meeting to the directors is entered. Therefore,
I am of the view that this formality had been fulfilled by the company and the
resolution cannot be held to be invalid on this ground.
Mr. Jain has further argued
that the resolution was invalid as Shri R. S. Johal and ten other directors
protested against the resolution and walked out of the meeting. He made
reference to the letter dated February 28, 1969, exhibit P-76. There is force
in this submission also. It is stated in the letter, exhibit P-76, that in the
meeting of the board of directors held on February 28, 1979, the directors who
signed the letter did not agree to the proposal for transfer of the 490 shares
held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh, Ravinder
Singh and Swaran Singh and voted against the resolution. The resolution,
therefore, stood defeated. The directors who signed the letter walked out of
the meeting in protest against the overbearing, arbitrary, unconstitutional and
illegal action, arrogant attitude and threatening behaviour of the directors
interested in the transferees. The latter prevailed upon the managing director
and, therefore, he refused to record their disapproval and vote of dissent. It
was requested by them that the minutes be not recorded, contrary to the will
and verdict of the majority of the directors. The letter is signed by 11
directors and addressed to the managing director. From the above letter, it is
evident that eleven other directors were present in the meeting but neither
their presence nor their vote of dissent against the resolution was recorded.
Shri R. S. Johal appeared in the witness-box as P.W.-4 and affirmed the stand
taken in the letter, exhibit P-76. He stated that in the meeting held on
February 28, 1979, there was a dispute regarding the sale of shares in favour
of Rameshinder Singh and his partymen and that some of the directors, namely,
Shri N. S. Domeli, Shri Puran Chand, Smt. Beant Kaur, Shri Didar Singh, Smt.
Ravinder Kaur, Smt. Rattan Kaur, Shri Puran Singh, Shri Hardev Singh, Smt.
Nasib Kaur and Mrs. Vaneet, walked out of the meeting. There is no mention
about the dispute in the minutes. Shri Domeli also admits his signature on the
letter. I am, therefore, of the opinion that the resolution dated February 28,
1979, exhibit P-18, is invalid.
The petitioners have also
challenged the resolutions passed in the annual general meeting held on June
30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and
loss account for the year ending December 31, 1978, were passed. It is
contended by Mr. Jain that 21 days' clear notice for holding the meeting was
required to be iven to the shareholders under section 171, but that was not
done. The notices were despatched on June 13, 1979, and thus 21 days' clear
notice was not given to them. He also contends that the copies of the
balance-sheet should have been sent with the notices but the same were not
sent.
Mr. Sodhi has not disputed
that the notices given to the shareholders were of less than 21 days. Section
171 reads as follows:
"171. Length of notice
for calling meeting.—(1) A general meeting of a company may be called by giving
not less than twenty-one days' notice in writing.
(2)A general meeting may be
called after giving shorter notice than that specified in sub-section (1), if
consent is accorded thereto—
(i) in the case of an annual general meeting, by all the members
entitled to vote thereat; and
(ii) in the case of any other meeting, by members of the company (a)
holding, if the company has a share capital, not less than 95 per cent, of such
part of the paid-up share capital of the company as gives a right to vote at
the meeting, or (b) having, if the company has no share capital, not less than
95 per cent, of the total voting power exercisable at that meeting:
Provided that where any
members of a company are entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall
be taken into account for the purposes of this sub-section in respect of the
former resolution or resolutions and not in respect of the latter".
A reading of the section
shows that 21 days' notice is necessary for convening the annual general
meeting. However, a shorter notice for such a meeting can be given, if all the
members who are entitled to vote in the meeting accord their consent for doing
so. Previously, fourteen days' notice was provided but later the period of
notice was extended to 21 days on the report of the Company Law Committee. The
reasons for extension of period have been given in the report, the relevant
portion of which reads as follows:
"We further recommend
that twenty-one day's notice should be given of all resolutions to be passed at
a general meeting—ordinary or special. The extension of the period of notice
from fourteen to twenty-one days is necessary to enable shareholders to combine
and canvass for proxies if they so desire. The present period of fourteen days
is too short for all the processes that are involved before the shareholders
canvass their opinion in favour of or against a particular resolution proposed
to be considered at any meeting of the company".
After taking into
consideration the provisions of the section and the reasons for incorporating
the same, I am of the view that the period of notice cannot be curtailed except
on the ground mentioned in the section itself. The provisions of the section
are mandatory and if they are not complied with, the resolutions passed in such
a meeting cannot be held to be valid. The members in this case admittedly did
not agree for curtailing the period of notice. Therefore, the resolutions
passed in the meeting dated June 30, 1979, are invalid.
The petitioners have
further challenged the validity of the resolution of the board of directors
dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and
loss account for the year ending December 31, 1978. Mr. Jain submits that the
quorum in the meeting was not complete and, therefore, the resolution was
invalid. I do not find any substance in the argument. In the meeting, eight
directors were present. As already mentioned, there were only twenty-four
directors of the company. Consequently, eight directors constituted the quorum.
I am, therefore, of the view that the resolution cannot be said to be invalid.
The next contention of Mr.
Jain is that the shares which were transferred to Shri Pavittar Singh, etc.,
had more value than that for which they were sold. In support of his contention,
he places reliance on the balance-sheet ending December 31, 1976, exhibit R.
2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and the
balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find substance
in this submission. The shares were not quoted on the stock exchange. No
reliable data has been provided by the petitioners showing that the value of
the shares was more. In the first two balance-sheets, the company is shown to
have suffered losses to the tune of several lakhs of rupees. In the
balance-sheet ending December 31, 1978, some profit is shown to have been
earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs
odd. The aforesaid figure shows that PISCO was not faring well.
The respondents produced
Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the
shareholders during the aforesaid period. The face value of each share was Rs.
1,000. He further deposed that, according to the assets of the company, the
value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs.
625 in the year 1978.
After taking into
consideration the circumstances, it cannot be accepted that the value of the
shares was more than Rs. 1,000 per share when they were transferred to the respondents.
Mr. Jain then contends that
the accounts of the company were not even operated by duly authorised persons.
To fortify his argument, he made reference to the copy of the resolution of the board of
directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India
and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of
directors.
I
have duly considered the matter. In the copy of the resolution, exhibit P-3, it
is stated that Shri Pavittar Singh, managing director, would remain out of
station for two months with effect from April 10, 1976. The accounts of the
company with the Central Bank of India, Civil Lines, Jullundur, and Indian
Overseas Bank, Jullundur, would be jointly operated by Shri Naranjan Singh Domeli,
chairman of the company, and Shri Rameshinder Singh, director of the company in
place of Shri Pavittar Singh, managing director. It was further stated that in
future any two of the three persons, namely, Shri Naranjan Singh Domeli, Shri
Pavittar Singh and Shri Rameshinder Singh, would jointly operate the accounts.
It has been certified to be a true copy by Shri Mohinder Singh as the managing
director. The original resolution purports to bear the signatures of Shri Bir
Singh Johal, chairman. However, Mohinder Singh was not the managing director of
the company nor was Bir Singh Johal its chairman. The resolution does not find
a place in the original minutes book of the board of directors. Some
resolutions dated April 11, 1976, are entered in the minutes book (copy exhibit
P. 3-A). These resolutions are different from the resolution, exhibit P-3. Mr.
Sodhi has not been able to show any other resolution in the minutes book, copy
of which is exhibit P-3. In the circumstances, it is evident that the affairs
of the company were mismanaged by the respondents.
Mr.
Jain has further argued that Shri Rameshinder Singh operated the accounts on
the basis of that resolution and advanced loans to the persons in the names of
some fictitious persons and thus misappropriated the amounts. He submits that
the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there
was no such person. On the other hand, Mr. Sodhi has placed reliance on the
statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew
Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also
referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a
payee's account cheque and the payment of the cheque was made to the Punjab and
Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it
cannot be held that Jagtar Singh was a fictitious person.
The
next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a
manager by the respondent had embezzled a huge amount of the company but no
effective step was taken to recover the amount from him. In order to prove the
aforesaid facts, Mr. Jain placed reliance on
the resolutions of the board of directors, exhibit P-87, dated December 30,
1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977,
exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit
P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the
resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due
on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda.
However, Shri Mohinder Singh reconstructed the record and showed an amount of
Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was given
to the company. It is further stated that Shri Mohinder Singh had introduced
false credits in the account books in favour of Sarabha Land and Motor Finance
(P.) Ltd. in connivance with Shri Raghbir Singh of the said company. These
entries were got fictitiously made by him. In the resolution, exhibit P-67, it
was said that certain irregularities were committed by Shri Mohinder Singh and,
therefore, his services had been terminated. It was resolved that a
sub-committee consisting of the chairman and the managing director be appointed
to go into the accounts and submit a report for taking appropriate action
against him.
In the resolutions,
exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the
report of the sub-committee had not been received. In exhibit P-71, it was said
that Mohinder Singh had not rendered accounts and had handed over the cash.
Consequently, it was decided to approach him for that purpose. In the
resolution, exhibit P-72, dated December 13, 1977, the matter again came up
before the board of directors and it was resolved that action against Shri
Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that
taking of appropriate action against Shri Mohinder Singh was being deferred
without any reason even though it stood established that he had misappropriated
the funds of the company. It is true that Shri Naranjan Singh Domeli made a
statement that a FIR was lodged against Shri Mohinder Singh but the particulars
of the FIR have not been brought on the record. It has not been shown that any
further action was taken by the directors to recover the amount. It appears
that the FIR was lodged to complete the formalities and the directors were not
serious in taking any action against him. Thus, the allegation of the
petitioners that the company was mismanaged stands established.
Mr. Jain has also argued
that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri
Paramjit Singh. Even no document was got executed from them in token of having
received the amounts. The act amounts to mismanagement. I find substance in
this submission. The argument regarding the payment of loans to the aforesaid
persons and PISCO stands established from the copies of the ledger of the
respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several
amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is
shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various
amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an
amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30,
1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri
Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on January
1, 1977. No amount of interest was debited to their account. No document was
got executed from the said debtors. The aforesaid amounts have not been repaid
by the said persons. Col. K. S. Dhillon, petitioner, deposed that Shri Pavittar
Singh was the managing director of PISCO and Shri Swaran Singh, Shri Ravindar
Singh, Shri Rameshin-der Singh and Amar Singh were its directors. It appears
that the amounts were advanced to PISCO without interest because the said
directors wanted to help their concern. After taking into consideration all the
circumstances, I am of the view that the affairs of the company were conducted
by the respondents in a manner oppressive to the petitioners.
Before parting with the
judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the
resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the
directors, they could not be challenged in view of section 290 of the Act. In
support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills
P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).
I do not agree with the
argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner,
five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits
P-l, P-17 and P-18 have been declared invalid on the ground that the quorum at
the meetings was incomplete and no proper notice of the meeting was given to
the directors, exhibit P-2 on the ground that no proper notice was given to the
directors and exhibit R. 2/6 on the ground that no notice of requisite period
was given. Exhibit P-18 was declared invalid also on the ground that the
resolution was opposed by the majority of the directors and, therefore, it
could not be deemed to have been passed. Section 290 of the Companies Act
provides that the acts done by a person as a director shall be valid
notwithstanding that it may afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. It is evident from
the language of the section that it gives protection to the acts of the
directors if their appointments were invalid on account of any defect or
disqualification or the same had come to an end. It does not give protection to
their acts which are otherwise illegal. Thus, the resolutions passed in a
meeting which had not been properly convened are not valid resolutions.
Consequently the resolutions, exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot
be held valid under the said section.
It is true that the
resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground
that the quorum for the meeting was incomplete as some of the directors present
there ceased to be so. But, in the facts and circumstances of this case, the
section does not give protection to the resolutions passed in such meetings.
The reason is that the resolutions in the present case have not been passed
bona fide by the directors, as out of the six beneficiaries, five were
directors of the company and the sixth was the wife of one of them. The sole
object of the directors in passing the resolution was to promote their
self-interest. Moreover, the benefit of the said section can normally be taken
by a third person and not by the directors or their close relations. It is
further noteworthy that some of the resolutions were oppressive to the minority
shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it
was observed by me that even if a director ceased to be so in view of section
283, the resolution of the board of directors could not be held illegal in view
of section 290 which provided that the acts done by a person would be valid
notwithstanding that it might afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. The facts of that
case were that a boiler was sold by the company after a decision had been taken
in a meeting of the board of directors. The purchaser had no concern with the
company. He took a plea that he was a bona fide purchaser for valuable
consideration. The case is clearly distinguishable and, therefore, the
observations therein are of no help in deciding the petition.
Consequently, in view of
the finding that there were no continuous acts of the majority shareholders
which had been oppressive to the petitioners, I dismiss the petition. However,
the parties are left to bear their own costs.
[1981] 51 COMP. CAS. 743 (SC)
SUPREME COURT OF
Needle Industries (
v.
Needle Industries Newey (
Y.V. CHANDRACHUD, C.J.
P.N. BHAGWATI AND E.S. VENKATARAMIAH, JJ.
Civil Appeal Nos. 2139, 2483 &
2484 of 1978.
MAY 7, 1981
F.S. Nariman, A.K. Sen,
Dalip Singh, K.J. John, Ravinder Narain, O.C. Mathur, T.A. Devagnanam, Dr. Y.S.
Chitale, A.G. Menzes, S.N. Kackar, R. Narain, for the Appellants.
H.M. Seervai, Anil B.
Divan, A.R. Wadia, S.N. Talwar, I.N. Shroff, H.S. Parihar and D.N. Gupta for
the Respondents.
Chandrachud, C.J.—These three appeals by special leave arise out of a
judgment of a Division Bench of the High Court of Madras dated October 6, 1978,
allowing an appeal against the judgment of a learned single judge, dated May
17, 1978, in Company Petition No. 39 of 1977. The main contending parties in
these appeals are: (i) the Needle Industries (India) Ltd., and (ii) the Needle
Industries Newey (Indian Holdings) Ltd. These two companies have often been
referred to in the proceedings as the Indian company and the English company,
respectively, but it would be convenient for us to refer to the former as
"NIIL" and to the latter as "the Holding Company". The
Holding Company has been referred to in a part of the proceedings as
"NINIH".
In Civil Appeal No. 2139 of
1978, which was argued as the main appeal, NIIL is appellant No. 1, while, one
T.A. Devagnanam is appellant No. 2. The latter figures very prominently in
these proceedings and is indeed one of the moving spirits of this acrimonious
litigation. He was appointed as a director of NIIL in 1956, and as its managing
director in 1961. He is referred to in the correspondence as "TAD" or
"Theo", but we prefer to call him "Devagnanam". The Holding
Company is respondent No. 1 to the main appeal, the other respondents being
some of the directors and shareholders of NIIL. Civil Appeal No.2483 of 1978 is
filed by some of the shareholders of NIIL while Civil Appeal No. 2484 of 1978
is filed by some of its directors and officers. The Holding Company is the
contesting respondent to these two appeals. We will deal with the main appeal
and our judgment therein will dispose of all the three appeals.
The NIIL was incorporated
as a private company under the Indian Companies Act, 1913, on July 20, 1949,
with its registered office at Madras. Its factory is situated at Ketty,
Nilgiris. At the time of its incorporation, NIIL was a wholly owned subsidiary
of Needle Industries (India) Ltd., Studley, England (hereinafter called
"NI-Studley"). The authorised capital of NIIL was Rs. 50,00,000
divided into 50,000 equity shares of Rs. 100 each. Its issued and paid up
capital prior to 1961 was Rs. 6,75,600 divided into 6,756 equity shares of Rs.
100 each. The issued and paid up capital was increased to Rs. 11, 09,000 in
1961. In that year, NI-Studley entered into an agreement with Newey Bros. Ltd.,
Birmingham, England (hereinafter called "NEWEY"), under which NEWEY
agreed to participate in the equity capital of NIIL to the extent of Rs. 4,33,400
consisting of 4,334 equity shares of Rs. 100 each. Thus, in 1961, the position
of the shareholding in NIIL was that Nl-Studley held approximately 60.86% of
the issued capital and NEWEY held the balance of 39.14%. In 1963, NIIL
increased its share capital by issuing 2,450 additional shares to NI-Studley,
as a result of which the latter became the holder of about 68% shares in NIIL,
the rest of the 32% belonging to NEWEY. Later in the same year, NI-Studley and
NEWEY combined to form the Holding Company, of which the full official name, as
stated earlier, is the Needle Industries-Newey (India) Holding Ltd. The Holding
Company was incorporated in the United Kingdom under the English Companies Act,
1948, with its registsred office at Birmingham, England. The entire share
capital of NIIL, held by NI-Studley and NEWEY, was transferred to the Holding
Company in which NI-Studley and NEWEY became equal sharers. As a result of this
arrangement, the Holding Company came to acquire 99.95% of the issued and paid
up capital of NIIL. The balance of 0.05%, which consisted of 6 shares being the
original nominal shares, was held by Devagnanam.
The NIIL, it shall have
been noticed, was incorporated about two years after India attained
independence. As a result of an undertaking given by it to the Govt. of India
at the time of its incorporation, and pursuant to the subsequent directives
given by the said Government, for achieving Indianisation of the share capital
of foreign companies, three issues of shares were made by NIIL in the years
1968, 1969 and 1971, all at par. There was also an issue of bonus shares in
1971. As a result of these issues, about 40% of the share capital of NIIL came
to be held by the Indian employees of the company and their relatives while the
balance of about 60% remained in the hands of the Holding Company. In terms of
the number of shares, by 1971-72, the Holding Company owned 18,990 shares and
the Indian shareholders owned 13,010 shares. Out of the latter block of shares,
Devagnanam and his relatives held 9,140 shares while the remaining 3,870 shares were held
by other employees and their relatives, amongst whom were N. Manoharan and his
group who held 900 shares and D.P. Kingsley and his group who held 530 shares.
The total share capital of NIIL thus came to consist of 32,000 equity shares of
Rs. 100 each.
In
or about 1972, a company called Coats Paton Ltd., Glasgow, U.K. (hereinafter
called "Coats") became an almost 100% owner of NI-Studley. The
position at the beginning of the year 1973 thus was that 60% (to be exact
59.3%) of the share capital of NIIL came to be owned half and half by Coats and
NEWEY, the remaining 40% being in the hands of the Indian group. The bulk of
this 40% block of shares was held by Devagnanam's group, which came to about
28.5% of the total number of shares.
Though
NIIL was at one time wholly owned by NI-Studley and later, by NI-Studley and
NEWEY, the affairs of NIIL were managed ever since 1956 by an entirely Indian
management, with Devagnanam as its chief executive and managing director with
effect from the year 1961. The Holding Company which was formed in 1963, had
only one representative on the board of directors of NIIL. He was N. T.
Sanders. He resided in England and hardly ever attended the board meetings. The
Holding Company reposed great confidence in the Indian management which was
under the direction and control of Devagnanam.
But
the acquisition of NI-Studley by Coats in 1972 and their consequent entry in
NIIL created in its wake a sense of uneasy quiet between Coats on one hand,
which came to own half of the 60% share capital held by the Holding Company,
that is to say, 30% of the total share capital of NIIL, and the Devagnanam
group on the other hand, which owned 28.5% of that share capital. By the mere
size of their almost equal holding in NIIL, Coats and Devagnanam developed
competing interests in the affairs of NIIL. Coats were in the same line of
business as NIIL, namely, manufacture and sale of needles for various uses,
fish-hooks, etc., and they had established trading centres far and wide, all
over the world. It is plain business, involving no moral turpitude as far as
business ethics go, that Coats could not have welcomed competition from NIIL
with their world interests. Devagnanam was a man of considerable ability and foresight
and in NIIL he saw an opportunity of controlling and dominating an industrial
enterprise of enormous potential in a rapidly growing market. The turnover of
NIIL had increased from Rs. 2.80 lakhs in 1953 to Rs. 149.93 lakhs in 1972 and
the profits ran as high as 19.4% of the turnover. Implicit confidence in the
Indian management which was the order of the day almost till 1974 gradually
gave way to an atmosphere of suspicion and distrust between Coats and
Devagnanam. NEWEY apparently kept away from the differences which were
gradually mounting up between the two, but,
evidently, they nursed a preference for Devagnanam. Coats are a giant
multi-national organization. NEWEY, comparatively, are small fish, though they
too had their own independent business interests to protect and foster.
NEWEY owned a nourishing
business in Malaysia, Hong Kong, Taiwan, Japan and Australia and from 1972
onwards they drew Devagnanam increasingly into the orbit of their Far Eastern
interests. In July, 1972, he was offered the office of managing director of a
group of four companies in Hong Kong and Taiwan on a five year contract, with
an annual salary of six thousand pounds. He had already been appointed to the
board of the NEWEY joint venture company in Osaka, Japan, and acted as the
liaison director for that company. He had also been asked to co-ordinate sales
with NEWEY Brothers, Australia. Willing to accept these manifold
responsibilities, Devagnanam became strenuously involved therein. He and his
wife began to reside in Hong Kong and he cogitated over resigning from his
position in NIIL. Coats, on their part, were clear that Devagnanam should
relinquish his responsibilities in NIIL, in view of the time his role in
NEWEY's Far Eastern interests was consuming. The question of appointing his
successor as managing director in NIIL then began to be discussed, the Holding
Company wanting to have Manoharan as a substitute. Devagnanam carried the
feeling that he was already persona non grata with Coats, because of certain
incidents which had taken place some years ago.
The Foreign Exchange
Regulation Act ("FERA"), 46 of 1973, which came into force on January
1, 1974, provided to Coats and Devagnanam a legal matrix for fighting out their
differences. The provisions of the FERA, which was passed, inter alia, for the
conservation of foreign exchange resources of the country and the proper
utilisation thereof in the interests of the economic development of the
country, are stringent beyond words. Putting it broadly and briefly, s. 29(1)
of the FERA prohibits non-residents, non-citizens and non-banking companies not
incorporated under any Indian law or in which the non-resident interest is more
than 40%, from carrying on any activity in India of a trading, commercial or
industrial nature except with the general or special permission of the Reserve
Bank of India. By s. 29(2)(a), if such a person or company is engaged in any
such activity at the commencement of the Act, he or it has to apply to the
Reserve Bank of India, for permission to carry on that activity, within six
months of the commencement of the Act or such further period as the Reserve
Bank may allow. Since the Holding Company is a non-resident and its interest in
NIIL exceeded 40%, NIIL had to apply for the permission of the Reserve Bank for
continuing to carry on its business. Section 29(4)(a) imposes a similar
restriction on such person or company from holding shares in India of any
company referred to in cl. (b) of s. 29(1), without the permission of the Reserve Bank. Therefore, the Holding Company also had
to apply for the permission of the Reserve Bank for continuing to hold its
shares in NIIL. The time for making an application for the requisite permission
under s. 29 was extended by the Reserve Bank by two months generally, that is
to say, until August 31, 1974. The need to comply with the provisions of s. 29
of the FERA is the pivot round which the whole case revolves.
NIIL applied to the Reserve
Bank for the necessary permission through its director and secretary, D. P. Kingsley,
on September 3, 1974. By its letter dated May 11, 1976, the Reserve Bank
allowed that application on certain conditions. NIIL's application was late by
three days but the delay was evidently ignored or condoned. One of the
conditions imposed by the Reserve Bank on NIIL was that it must bring down the
non-resident interest from 60% to 40% within one year of the receipt of its
letter. That letter having been received by NIIL on May 17, 1976, the dead-line
for reducing the non-resident interest to 40% was May 17, 1977.
The Holding Company applied
to the Reserve Bank for a "holding licence" under s. 29(4)(a) of the
FERA, on September 18, 1974. That application which was late by 18 days is, we
are informed, still pending with the Reserve Bank. Perhaps, it will be disposed
of after the non-resident interest in NIIL is reduced to 40% in terms of s.
29(1) of the FERA.
Devagnanam was residing in
Hong Kong to fulfil his commitment to NEWEY's Far Eastern business interests.
The FERA had its implications for him too, especially since he could be
regarded as a non-resident and did consider himself as such. He obtained a
holding licence dated March 4, 1975, from the Reserve Bank in respect of his
shares in NIIL. But, his interest in the affairs of NIIL began to flag for one
reason or another and he started looking out for a purchaser who would buy his
shares on convenient and attractive terms. In a note dated April 29, 1975,
which he prepared on "further Indianisation—Needle Industries (India)
Ltd"., he pointed out that Indianisation should be considered on the
footing that the non-resident interest should be reduced to 40% and that, as
between the two feasible methods of Indianisation, namely, (1) going to public,
and (2) placement of shares, the latter was preferable. He said:
"There can be no
question of my becoming in any way involved with Ketty and its future as I am
committed to NEWEY. There appears to be no possibility of returning to India in
what is left of my working life. I, therefore, have little choice but to sell
my shares".
("Ketty" in
Nilgiris, is the place where NIIL's factory is situated and is treated as
synonymous with NIIL). Devagnanam referred in his note to an inquiry from Mr. Khaitan,
the head of a powerful group with diverse interests and investment in industry,
who was already involved in the manufacture of products allied to NIIL's. Coats
were alarmed that Devagnanam was negotiating
the sale of his shares "to a Marwari, one Khaitan of Shalimar, a sewing
needle competitor to Ketty". In a letter dated August 6, 1975, addressed
to Doraiswamy, a partner in a Madras firm of solicitors called "King and
Partridge" who was a director of NIIL, Sanders, a director of the Holding
Company on NIIL's board, expressed his grave concern at the proposed deal thus:
"No doubt Mr. Khaitan
would pay the earth to acquire NIIL and judging by what Theo (Devagnanam) had
said about him in the past, he may be prepared to arrange or facilitate payment
abroad, a most attractive possibility from Theo's point of view, since he has
said clearly that he intends leaving India for good, finally settling in
Australia".
Sanders added that the deal
was so dangerous from the point of view of NIIL that the Holding Company
"would feel obliged to prevent it by whatever means were open" to it.
By his reply dated August 12, 1975, Doraiswamy said that the news of the
proposed sale came as no surprise to him and that he had heard that Silverston,
a former solicitor-partner of his, was acting as a "go-between" in
Devagnanam's deal with Khaitan.
On September 16, 1975,
Devagnanam wrote to M.M.C. Newey of NEWEY, Birmingham, pointing out the
advantages that would accrue by the sale of the shares to Khaitan. Devagnanam
reiterated his total identification with NEWEY's Far Eastern interests and
expressed his anxiety to free himself from all commitments to or involvement
with NIIL, as early as possible.
On October 22, 1975, an
important meeting was held in which Alan Mackrael, a director of the Holding
Company, made it clear on behalf of Coats that neither Khaitan nor any other
single purchaser would be acceptable to the Holding Company if that meant the
acquisition of a 30% share holding. The notes of the meeting record that
Devagnanam had confirmed that the offer which he had received from Khaitan was
at Rs. 360 per share, out of which a substantial proportion (perhaps 50%) would
be payable outside India. Mackrael stated at the meeting that the price in
rupees could be matched but not the method of payment which was illegal and
reiterated that the Holding Company would prevent any attempt by Devagnanam to
sell his holding to Khaitan. The notes of the meeting were signed by Mackrael
on October 30, 1975. On the date, Sanders wrote a letter to Manoharan stating
that the Holding Company was not prepared for that 30% of the share capital
should get into the hands of any one person, bearing in mind the problems that
had arisen in allowing Devagnanam to acquire a holding of nearly that proportion.
On November 7, 1975, M.M.C. Newey wrote to Devagnanam making it clear beyond
the manner of any doubt that Coats will not accept Khaitan and that, accord-ing
to Bannatyne of Coats, they were put to considerable trouble in finding Indian
residents who would match Khaitan's offer of 3.6 times par. Newey made it clear
that in any event, the sale price would have to be paid in India and that they
would not be a party to any illicit currency deal. Finding that Coats were
determined not to allow him to sell his shares to Khaitan, Devagnanam changed
his mind and decided against disposing of his holding in NIIL. On November 13,
1975, he wrote to Newey saying:
"I do not think any of
us want to see Coats dominate Ketty. Hence there can be no question of selling
any part of my shares to their nominee. As they in turn will not approve of
anyone we choose, there is no way of solving the problem...The best thing to
do, therefore, is for me to revert to the original basis and they should have
no cause to complain. This will of course include effectively managing the
Indian company. Let me however assure you that it will not be at the expense of
Newey".
And so did Devagnanam
remain in NIIL, with the stage set for a battle between him and Coats for the
acquisition of control over the affairs of NIIL.
Yet another statutory
provision which has an important bearing on the issues arising in these appeals
is the one contained in s. 43A of the Companies Act, 1956, which was introduced
in 1961 by Act 65 of 1960. NIIL was incorporated as a private company in 1949
under the Indian Companies Act, 1913. It was a private company as defined in s.
3(1)(iii) of that Act, since by its articles of association it restricted the
right to transfer its shares, limited the number of its members to fifty and
prohibited any invitation to the public to subscribe to any of its shares or
debentures. By s. 43A, it became a public company, since not less than
twenty-five per cent. of its paid-up share capital was held by a body
corporate, namely, the Holding Company. But, under the first proviso to s.
43A(1), it had the option to retain its articles relating to matters specified
in s. 3(1)(iii) of the Companies Act. NIIL did not alter the relevant
provisions of its articles after it became a public company within the meaning
of s. 43A. One of the points in controversy between the parties is whether, in
the absence of any positive step taken by NIIL for exercising the option to
retain its articles relating to matters specified in s. 3(1)(iii) of the Companies
Act, it can be held that NIIL had in fact exercised the option, which was
available to it under the first proviso to s. 43A, to include provisions
relating to those matters in its articles.
To resume the thread of
events, on receipt of the letter of the Reserve Bank dated May 11, 1976,
Kingsley, as NIIL's secretary, sent a reply on May 18, 1976, to the bank
confirming the acceptance of the various conditions under which permission was
granted to NIIL to continue its business. On
August 11, 1976, the term of Devagnanam's appointment as the managing director
of NIIL came to an end but in the meeting dated October 1, 1976, of NILL's
board of directors, that appointment was renewed for a further period of five
years. On being informed of the renewal of Devagnanam's appointment, NEWEY's
Chairman, C. Raeburn, who used to attend to the affairs of the Holding Company,
did not object as such to the board's decision ("It may well be that the
reappointment in itself is right"), but he demurred to the modality by
which the decision was taken since, according to him, questions relating to
appointments to senior positions in the company ought to be decided in
consultation with the U. K. shareholders so that they could have an opportunity
to express their views. Sanders, it may be mentioned, had received the notice
of the meeting duly. On October 20 and 21, 1976, a meeting took place at Ketty
between the U. K. shareholders and the Indian shareholders of NIIL. The former
were represented by Alan Mackrael, the managing director of the Holding
Company, and C. Raeburn, the Chairman of NEWEY, the latter by Devagnanam and
Kingsley. One Martin Henry, the managing director of "Madura Coats",
an Indian company in which the Holding Company had substantial interest, also attended
that meeting and took part in its deliberations. Silverston, an Englishman who
was practising in India as a solicitor, attended the meeting as an adviser to
the Indian shareholders. C. Raeburn chaired the meeting. Para. 2 of the note
prepared by him of the discussions held at the meeting says that it was agreed
that Indianisation should be brought about by May, 1977, as requested by the
Government, so as to achieve a 40% U.K. and 60% Indian shareholding. But the
meeting virtually ended in a stalemate because, whereas the Holding Company
wanted a substantial part of the share capital held by it in excess of 40% to
be transferred to Madura Coats as an Indian shareholder, Devagnanam insisted
that the existing Indian shareholders of NIIL alone had the right, under its
articles of association, to take up the shares Which the Holding Company was no
longer in a position to hold because, of the directives issued by the Reserve
Bank pursuant to the FERA. Thus, the difference between the two groups, who
were fast falling out, was not, as it could not be, whether the Holding Company
had to reduce its share holding NIIL from 60% to 40%, but as regards the mode
by which that reduction was to be brought about. The bone of contention was as
to which Indian party should take up the excess of 20%—the existing Indian
shareholders of NIIL or an outside Indian company, the Madura Coats. Raeburn
played the role of a mediator but did not succeed. On the conclusion of the
Ketty meeting, Silverston wrote a letter to Kingsley conveying his appreciation
of the efforts made by Raeburn to bring the parties together and his distress
at the attitude of Coats which, according to Silverston, showed that they were
trying to circumvent the provisions of the FERA. Raeburn too wrote a letter on
October 23, 1976 to Devagnanam saying that Coats were not really interested in
any independent Indians taking their excess shareholding. On December 11, 1976,
Devagnanam wrote to Raeburn expressing the resentment of himself and his group
at the attempts made by Coats to maintain their control over NIIL by indirect
means. On December 14, Devagnanam offered a package deal under which the
existing Indian shareholders would augment their holding to 60%. Mackrael and
Raeburn would be on the board of directors but not Martin Henry, and even B.T.
Lee, a senior executive of NI-Studley, could be appointed as a wholetime
director of NIIL to be in charge of its export programme. On January 20, 1977,
the Reserve Bank sent a reminder to NIIL asking it to submit at an early date
the progress report regarding the dilution of the nonresident interest. By its
reply dated February 21, 1977, NIIL confirmed its commitment to achieve the
desired Indianisation by the stipulated date, viz., May 17, 1977. On March 9,
1977, Raeburn wrote to Devagnanam, saying that after a discussion with Mackrael
and three other high-ranking persons of Coats, it was clear that Coats were not
agreeable to allowing the present Indian shareholders to acquire 60% of the
equity capital of NIIL, since such a course carried in the long run too great a
risk to their world trade. Raeburn made certain fresh proposals by his letter
in the hope that they would be acceptable to Coats and invited Devagnanam to
come to Birmingham for negotiations.
On March 18, 1977, a notice
was issued by NIIL's secretary, D. P. Kingsley, intimating that a meeting of
the board of directors will be held on April 6, 1977. One of the items on the
agenda of the meeting was shown as "policy—Indianisation". Sanders
received the notice of the meeting duly but did not attend the meeting.
Devagnanam went to
Birmingham in the last week of March 1977. Between 29th and 31st March, he held
discussions with four out of the six directors of the Holding Company, namely
Newey, Jackson, Whitehouse and Kaeburn. The other two directors, Mackrael and
Sanders, did not take any part in those discussions. During his visit to
Birmingham, Devagnanam expended considerable time in discussing various matters
with NEWEY, pertaining to their Far Eastern business.
On April 4, 1977, NIIL
received a reminder letter dated March 30, 1977, from the Reserve Bank which
pointed out that the company had not yet submitted any concrete proposal for
the reduction of the non-resident interest and asked it to submit its proposal
in that behalf without any further delay. The letter warned the company that if
it failed to comply with the directive regarding the dilution of the foreign
equity within the stipulated period, the Bank
would be constrained to view the mattter seriously.
Raeburn had written a
letter to Devagnanam on 4th April on the question of the compromise formula and
Devagnanam too had written a letter to Raeburn on the 5th, saying that he would
place the formula before his colleagues. These letters evidently crossed each
other. The 6th April was then just at hand.
The meeting of NIIL's board
of directors was held on April 6, 1977, as scheduled. Seven directors were
present at the meeting, with Devagnanam in the chair at the commencement of the
proceedings. C. Doraiswamy, solicitor-partner of "King and
Partridge", was one of the directors present at the meeting. He had no
interest in the proposal of "Indianisation" which the meeting was to
discuss and was, therefore, considered to be an independent director. In order
to complete the quorum of two independent directors, the other directors apart
from C. Doraiswamy being interested in the business of the meeting, Silverston,
an ex-partner of C. Doraiswamy's firm of solicitors, was appointed to the board
as an additional director under art. 97 of the articles of association.
Silverston chaired the meeting after his appointment as an additional director.
The meeting resolved that the issued capital of NIIL be increased to Rs.
48.00,000 by a new issue of 16,000 equity shares of Rs. 100 each, to be offered
as rights shares to the existing shareholders in proportion to the shares held
by them. The offer was to be made by a notice specifying the number of shares
which each shareholder was entitled to, and in case the offer was not accepted
within 16 days from the date on which it was made, it was to be deemed to have
been declined by the concerned shareholder. The minutes of the meeting recorded
that as a matter of abundant caution, the directors who were holding shares in
NIIL did not take part either in the discussions which took place in the
meeting or in the voting on the resolution.
After the aforesaid meeting
of the board dated April 6, 1977, Devagnanam wrote a letter bearing the date
April 12, to Raeburn, explaining that every alternative proposal was discussed
in the meeting and setting out the compelling circumstances arising out of the
requirements of the FERA which led to the passing of the particular resolution.
It was stated in the letter that a copy of the Reserve Bank's letter of March
30, 1977, to NIIL was enclosed therewith, but in fact it was not so enclosed.
The letter of offer dated April 14, 1977, was prepared pursuant to the
resolution passed in the meeting of 6th April. The envelope containing Devagnanam's
letter dated April 12 (without the copy of the letter of the Reserve Bank dated
March 30, 1977), and the letter of offer dated April 14 were received by
Raeburn on May 2, 1977, in an envelope bearing the Indian postal mark of April 27, 1977. The letter of
offer which was sent to one of the Indian shareholders, Manoharan, was posted
in an envelope which also bore the postal mark of 27th April. The next meeting
of the board was due to be held on May 2, 1977, and it is on that date that
Reaburn received the letter of offer dated April 14, which, evidently, was
posted at Madras on April 27, 1977. The Holding Company was thereby denied an
opportunity to exercise its option whether or not to accept the offer of rights
shares, assuming that any such option was open to it. Whether such an option
was open to it and whether, if it could not or did not want to take the rights
shares, it could transfer its rights, under NIIL's letter offering the rights
shares, to a person of its choice depends upon the provisions of the FERA, the
necessity to comply with the directives of the Reserve Bank, the terms of
NIIL's articles of association and the provisions of the Indian Companies Act.
On
April 19, 1977, a notice was issued by NIIL's secretary intimating that a
meeting of the board of directors will be held on May 2, 1977. One of the items
of agenda mentioned in the notice was "policy—(a) Indianisation, (b)
Allotment of shares". The notice of the meeting was sent to the Holding
Company in an envelope which also bore the Indian postal mark of April 27,
1977. The notice was received by Sanders in England on May 2, 1977, i.e., on
the date when the meeting was due to be held in India. Even the fastest and the
most modern means of transport could not have enabled Sanders to attend the
meeting.
In
between, on April 26, 1977, Raeburn had written a letter to Devagnanam at
Malacca, following a telex message which said:
"HAD HELPFUL DISCUSSIONS COATS YESTERDAY PLEASE
MAKE NO DECISIONS RE INDIANISATION PENDING LETTER".
By
his letter of 26th April, which is said to have been received by Devagnanam on
May 4, 1977, Raeburn stated that Coats were still unwilling to grant majority
shareholding control to the existing Indian shareholders, but that they were
equally not keen to do anything which would be regarded as circumventing the
proposal for Indianisation or the law bearing on the subject, since that would
undermine the position of the Indian shareholders.
A
meeting of the board of directors was held on May 2, 1977, as scheduled. The minutes
of that meeting show that Kingsley, the secretary of NHL, pointed out in the
meeting that applications for allotment of the rights shares offered as also
the amounts payable along with the acceptance of the offer had been received
from all the shareholders except the U.K. shareholders and the Manoharan group.
The offer to Manoharan was sent at Virudhunagar but Silverston pointed out to
the meeting that Manoharan was working in Jaipur and that, therefore, he should
be given further time to participate in the
rights issue. The Manoharan group was accordingly allowed twenty days' time
from the date of the allotment letter for payment of the allotment amount. In
the meeting of 2nd May the whole of the new issue consisting of 16,000 rights
shares was allotted to the Indian shareholders, including members of the
Manoharan group. Out of these, the Devagnanam group was allotted 11,734 shares.
A dividend of 30%, subject to tax, amounting to Rs. 9,60,000 was recommended by
the board, and it was resolved that the annual general meeting of the company
be held on 4th June, 1977. Silverston was appointed as an additional director
of the company and his election as such at the annual general meeting was
recommended by the board. Further, it was resolved that deposits be invited
from the public. On the same day, i.e., 2nd May, Devagnanam wrote a letter to
Raeburn intimating to him that in a meeting held that morning the formalities
relating to allotment of shares were completed, bringing the company under the
control of the Indian shareholders. Devagnanam reiterated by his, letter the
hope of a closer association with the NEWEY group.
Raeburn reacted sharply to
Devagnanam's letter of April 12, and to the letter of offer dated April 14. As
stated earlier, he had received both of these on May 2, in an envelope which
bears the postal mark of Madras dated April 27. Raeburn sent a telex message to
Devagnanam on 2nd May, and another to Kingsley on 3rd May. By the first telex,
he complained about the inadequacy of the notice of the meeting and by the
second, he conveyed that there was considerable doubt on the question whether
the necessary disinterested quorum was available at the meeting of the
directors held on April 6. On receipt of the telex message, Devagnanam wrote a
letter to Raeburn on May 4, explaining the pressure of circumstances which
compelled the board to take the decision which it did in the meeting of May 2,
1977. Raeburn followed up his telex messages by a letter to Devagnanam on May
3. While expressing his distress and displeasure at the manner in which the
decision regarding the issue of rights shares was taken and the allotment of
the shares was made, Raeburn stated in his letter that the rights issue at par,
which was considerably less than the fair value of the shares, was most unfair
to the shareholders who could not take up the rights issue.
After making the allotment
of shares in the meeting of May 2, NIIL sent a letter to the Reserve Bank
reporting compliance with the requirements of the FERA by the issue of 16,000
rights shares and the allotment thereof to the Indian shareholders which
resulted in the reduction of the foreign holding to approximately 40% and
increased that of the Indian shareholders to almost 60%. Reference was made in
the letter to the fact that the allotment money of Rs. 1,10,700 had yet to be received,
which was obviously in reference to the amount due on the 1,107 rights shares
which were allotted to the Manoharan group in the meeting of 2nd May. The
Manoharan group did not evince any interest even later in taking up those
shares. Manoharan. it may be stated, who was a director and general manager of
NHL, had resigned his post in April, 1976, after serving the company for nearly
17 years.
Between
the 2nd and 9th May, there was an exchange of cables between Mackrael and
Doraiswamy which led to the latter writing a letter on the 9th to the former.
Doraiswamy stated in that letter that he had thoroughly investigated the
position by perusing all available records placed before him by Devagnanam and
Kingsley and that he was of the opinion that, in the meeting of the 6th April,
there was the required quorum of two disinterested directors consisting of
Silverston and himself and, therefore, there could be no doubt whatsoever about
the legality of the resolution passed in that meeting. He admitted that
although the time-limit fixed by the Reserve Bank had expired on 17th May,
1977, "it may have been possible for the company to get further time from
the Reserve Bank of India". As regards the decision to issue the
additional shares at par, he explained that if the issue had been made at a
premium, it would have necessitated an approach to the Controller of Capital
Issues, a process which was time-consuming and complicated. He pointed out that
the authorities would not have allowed the company to issue the rights shares
at a premium and that even if they were to allow such a course, the premium
permissible would have been only nominal. He asserted that the delay caused in
the offer of new shares being received by the U. K. shareholders was of little
consequence because they would not have been able to take up the shares in any
event. He expressed the hope that Mackrael would agree that the decision
regarding the issue of rights shares taken at the board meeting on April 6,
1977, was bona fide and in the best interests of the company. He concluded his
letter by an assurance that as regards the late despatch of the notice of the
board meeting of 2nd May, further enquiries were being made.
On
May 11, Devagnanam wrote to Raeburn apologising for the manner in which the
foreign shareholding had been reduced and, for good measure, he projected the
various advantages which the NEWEY group would enjoy under the new Indian
management and control of NIIL. As if to illustrate that it was better late
than never, he enclosed with his letter a copy of the Reserve Bank's letter
dated 30th March, 1977, which was to have been sent along with the letter dated
April 12 but was in fact not so sent.
On May 17, 1977 Mackrael,
acting on behalf of the Holding Company, filed a company petition in the Madras
High Court under ss. 397 and 398 of the Companies Act, 1956, out of which the
present appeals arise.
It is alleged in the petition
that the Indian directors abused their fiduciary position in the company by
deciding in the meeting of April 6, to issue the rights shares at par and by
allotting them exclusively to the Indian shareholders in the meeting of 2nd
May, 1977. In so doing, they acted mala fide and in order to gain an illegal
advantage for themselves. The Indian directors, according to the company
petition, either knew or ought to have known that the fair value of the shares
of the company was about Rs. 204 per share. By deciding.to issue the rights
shares at par, they conferred a tremendous and illegitimate advantage on the
Indian shareholders. Devagnanam delayed deliberately the intimation of the
proceedings of the 6th April to the Holding Company. By that means and by the
late giving of the notice of the meeting of the 2nd May, the Devagnanam group
presented a fait accompli to the Holding Company in order to prevent it from
exercising its lawful rights. Thus, according to the petition, the conduct of
the Indian directors lacked in probity and fair dealing which the Holding
Company was entitled to expect. By the petition, the Holding Company asked for
the following reliefs:—
(a) That the board of directors of the company be superseded
and one or more administrators be appointed to administer the affairs of the
company or, in the alternative, the board of directors be reconstit-uted so as
to ensure that the Holding Company had adequate representation on it.
(b) That the proceedings of the meeting of the board of
directors held on April 6 and May 2, 1977, be declared illegal, void and
inoperative.
(c) That Silverston's appointment as an additional director
of the company be declared as void and inoperative and he be restrained from
functioning as a director of the company.
(d) That the purported allotment of 16,000 shares pursuant to
the impugned resolution of the board of May 2, 1977 be declared void.
(e) That the Indian group of shareholders to whom the rights
shares were allotted be restrained from exercising any voting rights in regard
to any part of those shares.
(f) That the company be restrained from giving effect to the allotment of the 16,000 rights shares and from making any payment of dividend on those shares.
(g) That the articles of association of the company be amended
so as to permit the transfer of the shares to persons other than the existing
members of the company in order to enable the Holding Company to comply with
the requirement of disinvestment without prejudice to its interest as a
shareholder. And
(h) That a special majority for decisions of the board be
prescribed in regard to all important matters and provision be made for the
appointment of directors by proportional representation.
The learned Acting Chief
Justice who tried the company petition, found several defects and infirmities
in the board's meeting dated May 2, 1977, and concluded that appropriate relief
should be granted to the Holding Company under s. 398 of the Companies Act. The
learned judge was of the view that the average market value of the rights
shares was about Rs. 190 per share on the crucial date and that, since the
rights share were issued at par, the Holding Company was deprived unjustly of a
sum of Rs. 8,54,550 at the rate of Rs. 90 per share on the 9,495 rights shares
to which it was entitled. Exercising the power under s. 398(2) of the Companies
Act, the learned judge directed NII to make good that loss which, according to
him, could have been avoided by it "by adopting a fairer process of
communication" with the Holding Company and "a consequential
dialogue" with them, in the matter of the issue of rights shares at a
premium. The learned judge directed NIIL to pay to the Holding Company the
aforesaid sum of Rs. 8,54,550 as a "solatium" in order to meet the ends
of justice.
Being aggrieved by the
aforesaid judgment, the Holding Company filed O.S. Appeal No. 64 of 1978 while
NIIL filed cross-objections to the decree. The appeal and cross-objections were
argued before the Division Bench of the High Court on the basis of affidavits,
the correspondence that had passed between the parties and certain additional
documents which were filed before the appellate court by the consent of
parties. Though the company petition was filed under s. 397 as also under s.
398 of the Companies Act and though the trial court had granted partial relief
to the Holding Company under s. 398, it was stated in the appellate court on
its behalf that its entire case was based on s. 397 and that it did not want to
invoke the provisions of s. 398. A similar statement was made before us also.
On a consideration of the
matters and material before it, the Division Bench formulated its view in the
form of 18 conclusions on various aspects of the case. They may be summed up
thus:
(a) As soon as Devagnanam became involved in the Far Eastern
ventures of NEWEY, he decided to sell his shareholding in NIIL to an Indian
concern or party from which he expected to receive at least a part of the con
sideration in a foreign country.
(b) Seeing that Coats were opposed to his receiving any part
of the consideration for the sale of his shares in a foreign country,
Devagnanam decided
not to part with his shares but to obtain the control of the company.
(c) The directives of the Reserve Bank
of India on the question of Indianisation were exploited by Devagnanam for
compelling the Holding Company to part with its shares in favour of the Indian
shareholders.
(d) Coats were willing to carry out the
directives of the Reserve Bank but they did not want to transfer their shares
to the existing Indian share-holders because thereby, the latter would have
acquired a controlling interest in NIIL which Coats wanted to prevent. Coats
were willing to part with their excess shares in favour of other Indian
residents.
(e) Though Coats originally contemplated
the transfer of 15% of their excess 20% shares to Madura Coats, or the
incorporation of a company to take over their excess 20% shares, they were
ultimately agreeable that the existing Indian shareholders should get 9% out of
that 20% so as to have a 49% holding in the share capital of NIIL and that 11%
should go to new, independent, Indian institutional shareholders. The object of
Coats was that any one group of shareholders should not have a dominating
position in the affairs of NIIL.
(f) At the Ketty meeting held on
October 20 and 21, 1976, the issue of rights shares was considered as an
alternative to disinvestment, but that was subject to two conditions: one, that
it should be shown that there was a viable development plan which required
additional funds which the existing cash flow of NIIL could not meet, and two,
that the value of the U.K. equity interest required to be transferred would be
no less favourable than what would be achieved by a direct sale of that
interest.
(g) Though by his letters of December 11
and 14, 1976, Devagnanam had informed Raeburn of the decision of the Indian
shareholders to acquire 60% shares for themselves, he did not ever say one word
about the issue of rights shares in any of the numerous communications which he
sent to Raeburn. No reference was made to the issue of rights shares even in
the memorandum of discussions which took place during the visit of Devagnanam
to U.K. from March 29-31, 1977. Thus, the issue of rights shares was sprung as
a surprise on the U.K. shareholders.
(h) The notice dated March 18, 1977, for
the meeting of the board of directors held on April 6, 1977, referred to the
main item on the agenda in ambiguous terms as: "policy
Indianisation". In the context of the discussions which had taken place until
then between the parties, N.T. Sanders who represented the Holding Company on
the board had no means or opportunity of knowing that the particular item on
the agenda involved the question of the issue of rights shares.
(i) Since every major decision was taken by the board of
directors in consultation with the Holding Company and since there was no
agenda for the appointment of an additional director under art. 97 of the
articles of association of NIIL, the decision taken by the board in its meeting
of April 6 on the issue of rights shares and the appointment of Silverston as
an additional director constituted a departure from established practice and
showed want of good faith and lack of fair play on the part of the board of
directors of NIIL.
(j) The letter dated April 12, the letter of offer dated
April 14 and the notice for the meeting of the board of directors to be held on
May 2, were all got posted by Devagnanam as late as on April 27, 1977, at
Madras, so as to ensure that these important documents should not reach the
Holding Company in time to enable it to participate in the all important
meeting of the 2nd. Devagnanam wanted to present a fait accompli to the Holding
Company so as to prevent it from taking any pre-emptive action.
(k) Whenever NIIL wrote to the Reserve Bank alleging that the
Holding Company was not willing to carry out the directives of the Bank or to
comply with the provisions of the FERA, its object was to prejudice the bank
against the Holding Company by drawing a red-herring across the track.
(1) The directives of the Reserve Bank of India and the
provisions of the FERA were not concerned with who should be the Indian
shareholders of NIIL. All that they were concerned with was that 60% of the
shareholding must be with the Indian residents. For the purpose of achieving
that result, three courses were available to NIIL: (1) Disinvestment by foreign
shareholders in favour of Indian shareholders. (2) Issue of rights shares
pursuant to s. 81 of the Companies Act. and (3) Action under s. 81(1A) of the
Companies Act for issuing additional shares to Indian residents other than the
existing Indian shareholders by passing an appropriate special resolution, or
if no special resolution was passed, then, by a majority of the shareholders
approving such a course with the consent of the Central Govt. The first course
was ruled out since Coats had taken a definite stand that they will not allow
the existing Indian shareholders to obtain the excess shares. As far as the
second, alternative was concerned, the Holding Company had the right to
renounce shares offered to it in favour of any other person under s. 81(1)(c)
of the Companies Act, which right was denied to it because, the letter of offer
dated April 14 did not contain a statement regarding renunciation of the right
to take shares and also because the letter was not posted in time. As regards
the third course, if the Holding Company were given adequate notice of the proposal to issue rights shares, it might
have taken appropriate action under s. 81(1A) of the Companies Act.
(m) The object of the directors of NIIL in deciding upon the
issue of rights shares, and that too in the manner in which they did so, was
clearly to obtain control of the company and to eschew and eliminate any
controling power which the Holding Company had over NIIL. The conversion of the
existing minority of the Indian shareholders into a majority, far from being a
matter of statutory compulsion, was an act of self-aggrandisement on the part
of the existing Indian shareholders.
(n) The action taken by the Indian shareholders was against
the interest of the Company itself because the rights shares were issued at par
which was far below their market price.
(o) The true motivation of the various steps taken by the Devagnanam—NEWEY
Combination was the furtherence of the interest of NEWEY's Far Eastern
enterprises, coupled with the personal interest of Devagnanam himself.
Devagnanam was receiving Rs. 96,000 per annum in addition to substantial fringe
benefits as the managing director of NIIL. He was also getting a large salary
from NEWEY which was Ł10,000 in 1975, Ł11,000 in 1976 and Ł12,000 for the year
ending July 31, 1977.
(p) The fact that NIIL informed the Holding Company on May
21, 1977, which was after the company petition was filed, that the Holding
Company could not exercise and will not be allowed to exercise any rights in
respect of the whole of Rs. 18,990 shares held by it since its application
under s. 29(4) of the FERA was not granted by the Reserve Bank, shows that the
object of the board of directors in taking the impugned decision was to exclude
the Holding Company from all control over NIIL. That is why NIIL advised the
Reserve Bank of India by its letter dated May 24, 1977, that no application for
holding any shares by a non-resident should be allowed by the bank without the
knowledge and consent of NIIL. That also is the reason why NIIL conveyed to the
Reserve Bank by its letter of September 20, 1977, that until such time as the
company petition was finally disposed of, no licence should be issued to the
non-resident shareholders and no remittance of dividend out of India should be
permitted without the non-resident shareholders reducing their holding in NIIL
to less than 40%.
The two other conclusions are
comprehended within the 16 set out above.
On the basis of the
aforesaid formulations, the Division Bench concluded that the affairs of NIIL
were being conducted in a manner oppressive, that is to say, burdensome, harsh
and wrongful to the Holding Company. After referring to certain passages from
Palmer's Company Law and Gore-Browne on Companies, and the decisions of the
House of Lords, the Privy Council, and our own courts including the Supreme
Court, the Division Bench held that since the action of the board of directors
of NIIL was not in the interest of the company but was taken merely for the
purpose of welding the company into NEWEY's Far Eastern complex, it was just
and equitable to wind up the company.
NIIL had filed
cross-objections in the High Court appeal contending that, in any event, the
learned Acting Chief Justice was in error in directing it to pay the sum of Rs.
8,54,550 to the Holding Company. While dealing with the cross-objections, the
Division Bench held that the injury suffered by the Holding Company on account
of the oppression practised by the board of directors of NIIL could not be
remedied by the award of compensation and, therefore, the action of the board
of directors in issuing the rights shares had to be quashed. Having found that
the Holding Company was entitled to relief under s. 397 of the Companies Act
and the award of solatium made by the trial court was not the appropriate
relief to grant, the Division Bench allowed the appeal filed by the Holding
Company, dismissed the cross-objections in substance and adjourned the appeal
for a fortnight for hearing further arguments on the nature of the relief to be
granted in the case.
Eventually, by its order
dated October 26, 1978, the Division Bench granted the following reliefs:
(a) Devagnanam was removed forthwith both as the managing
director and director of NIIL and was asked to vacate the bungalow occupied by
him, by November 1, 1978. He was paid one year's remuneration as compensation
for the termination of his appointment as the managing director.
(b) The board of directors was superseded and an interim
board con-sisting of nine directors proposed by the Holding Company was
constituted with Shri M. M. Sabharwal as an independent chairman.
(c) Harry Bridges, an executive of Coats, was appointed as
the managing director for a period of four months.
(d) The rights issue made on 6th April, 1977, and the
allotment of shares made on 2nd May, 1977, at the board meetings were set aside
and the interim board was directed to make a fresh issue of shares at a
pre-mium to the existing shareholders, including the Holding Company which was
to have a right of renunciation. The new board was directed to apply to the
Controller of Capital Issues for determining the amount of premium.
(e) The articles of association were to be altered by
appropriate additions and deletions in order to provide for the election of
directors by proportional representation, and
(f) Devagnanam was asked to pay to the Holding company, the
costs of the appeal and cross-objections quantified at Rs. 25,000. He was also
asked personally to reimburse the expenses incurred by NIIL in the appeal and
cross-objections.
These appeals were heard in
the first instance by Justice Untwalia and Justice Pathak. In view of the importance
of the questions arising therein, on some of which our learned brothers, it
seems, were unable to agree, they devised that the appeals be heard by a larger
Bench. That is how the appeals are now before us.
The petition of the Holding
Company, out of which these appeals arise, sought relief under ss. 397 and 398
of the Companies Act, 1956. The case under s. 398 not having been pressed
except before the learned trial judge, we are only concerned with the question
whether the Holding Company is entitled to relief under s. 397 which reads
thus:
"397. (1) any members of a company who complain that
the affairs of the company are being conducted in a manner prejudicial to
public interest or in a manner oppressive to any member or members (including
any one or more of themselves) may apply to the court for an order under this
section, provided such members have a right so to apply in virtue of section
399.
(2) If, on any application under sub-section
(1), the court is of the opinion—
(a) that the company's affairs are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any member or
members; and
(b) that to wind up the company would unfairly prejudice such member
or members, but that otherwise the facts would justify the making of a
winding-up order on the ground that it was just and equitable that the company
should be wound up;
the court may, with a view-
to bringing to an end the matters complained of, make such order as it thinks
fit".
Section 398 provides for relief
in cases of mismanagement. Section 399(1) restricts the right to apply under
ss. 397 and 398 to persons mentioned in cls. (a) and (b) of sub-s. (1).
It is necessary to refer
briefly to the relevant part of the pleadings before examining the charge of
oppression made by the Holding Company against a group of the minority
shareholders of NIIL. After tracing the history of formation and composition of
NIIL, the company petition states that the management of NIIL was in the hands
of the board of directors in which the Indian group had a large majority. The
Holding Company had implicit trust in them and was content to leave the
management in their hands. After referring to the impact of s. 43A of the
Companies Act, 1956, the company petition says
that in the wake of the FERA, discussions and negotiations were held between
the representatives of the Holding Company and the management of NIIL, amongst
themselves, as well as with the Reserve Bank of India, in order to enable NIIL
to obtain the requisite permission for carrying on its business. Paragraph 13
of the company petition states that the Reserve Bank of India by its letter
dated May 11, 1976, granted to NIIL the necessary permission subject to the
condition, inter alia, that it reduce its non-resident shareholding to 40 per
cent. on or before May 17, 1977. The case of the Holding Company in regard to
its own attitude is stated succinctly in para. 14 of the company petition which
may with advantage be reproduced:
"Discussions were
thereafter held on a number of occasions between the petitioner and the
management of the company to effectuate the aforesaid condition imposed by the
Reserve Bank of India which the petitioner was at all times ready and willing
to comply with. The petitioner did not, however, desire to dilute its holding
of shares in the company by a further issue of capital and preferred to
effectuate the said intention by disinvesting or selling 20% of its holding in
the company. The Reserve Bank of India was agreeable to such dilution taking place
by the petitioner selling a part of its holding to an Indian resident or Indian
residents. The Reserve Bank had indicated that they would be willing for such
dilution taking place by a further issue of shares provided that additional
capital was required for purposes of expansion. The petitioner was not willing
to sell a part of its holding to the Indian group as such a sale would result
in the Indian group acquiring an absolute majority interest. Further more under
the articles of association of the company the consent of the existing
shareholders would be required (apart from the approval of the Reserve Bank)
before the petitioner sold any of its shares to an Indian party, other than to
a member".
According to the Holding
Company, the various steps which culminated in the allotment of rights shares
to the existing Indian shareholders were vitiated by mala fides, their dominant
object being to convert an existing minority into a majority. The decision
taken in the meeting of the board on April 6, 1077, was taken deliberately in
haste and hurry in order to pre-empt any action by the Holding Company to
restrain the board from taking the desired decision. The Reserve Bank,
according to the company petition, would not have been so unreasonable as not
to extend the time for complying with its directive, especially since the
Holding Company had agreed in principle to dilute its holding and the only
difference between the parties was as regards the method by which such dilution
was to be effected. In para. 27 of the company petition it is stated that the
Devagnanam group decided to issue the rights shares with a view to securing an illegal and
unjust advantage for itself, for improving its own position in the company and
in order to deprive the Holding Company of its lawful rights as majority
shareholders. In this behalf, reliance is placed on the following facts and
circumstances, inter alia:
(a) The Holding Company was never informed
of any specific proposal to make the rights issue.
(b) The notice of the board meeting of April
6, 1977, did not refer to the said proposal.
(c) The notice offering rights shares to the
Holding Company was not prepared till April 14, 1977, and was not posted till
April 27, 1977. By the time the notice was received by the Holding Company, the
board of NIIL had met to allot the rights: shares.
(d) The
time given in the notice was much less than was customary.
(e) The notice did not contain a statement
relating to the right of the shareholders to renounce the rights shares.
(f) The notice of the board meeting of May
2, 1977, although dated 19th April, 1977, was posted to Sanders on 27-4-1977,
thereby ensuring that it would reach him only after the date of the meeting.
(g) By issuing shares at par, though their
value was much higher than Rs. 100 per share, the existing Indian shareholders
were enabled to acquire the shares at a gross undervalue and the company was
put to a heavy loss.
(h) The Reserve Bank of India had indicated
that dilution of the foreign holding by a rights issue could be considered if
the company required further capital for expansion. At the discussions and
negotiations held between the Holding Company and the Indian group it was,
inter alia, agreed that the rights issue would be made only if there was a
viable development plan requiring further funds. The rights issue was made even
though no such need for expansion or development existed or was referred to.
(i) Though the Reserve Bank had, inter
alia, stipulated that the said dilution should be effectuated on or before 17th
May, 1977, the time schedule is never strictly insisted upon. There have been
numerous instances when the Reserve Bank has granted reasonable extension of
time to comply with such conditions. The board of NIIL never requested the
Reserve Bank to grant further time. C. Doraiswamy, the 8th respondent, stated
in his letter dated 9-5-1977 to Mackrael, a director of the Holding Company,
that it would have been possible for the company to get further time from the
Reserve Bank of India.
The
Holding Company contends further that M. J. Silverston was not a disinterested
person, that his vote on the resolution for the issue of rights shares had, therefore, to be ignored, in which case there
was no quorum of two disinterested directors and that his appointment as an
additional director was not valid since the notice for the meeting of the board
of directors to be held on 6-4-1977 did not contain in the agenda any subject
regarding appointment of an additional director under art. 97 of the company's
articles of association.
In answer to these
contentions, Devagnanam filed an elaborate counter-affidavit on his behalf as
well as on behalf of NIIL. In that counter-affidavit, every one of the material
contentions put forward by the Holding Company has been denied or disputed.
Devagnanam contends that it was the Holding Company which wanted to retain its
control over NIIL contrary to the directive of the Reserve Bank of India, the
national policy of the Central Govt. and the provisions of the FERA. According
to Devagnanam, every action taken in the board meetings of April 6, 1977, and
May 2, 1977, was in accordance with law, that Sanders never used to attend the
meetings of the board, being a non-resident he was not entitled to have notice
of the board meetings, that there was no violation of s. 81 of the Companies
Act at all, that s. 81(c) of the Companies Act did not apply to the present
case and that, in view of the attitude adopted by Coats, NIIL, in order to
comply with the restrictions imposed by the Reserve Bank and to carry out its
directive, had no option but to decide upon the issue of rights shares to bring
about the reduction in the non-resident shareholding. Devagnanam repudiates
emphatically the charge of mala fides or of conduct in breach of the fiduciary
duty of NIIL's board of directors.
Having regard to these
pleadings, the main question for consideration is whether the decisions taken
in the meetings of the board of directors of NIIL on April 6, and May 2, 1977,
constitute acts of oppression within the meaning of s. 397 of the Companies
Act, 1956. The High Court has answered this question in the affirmative and has
issued consequential directions in regard to the management of NIIL's affairs.
The findings recorded by the High Court in appeal have been challenged before
us with vehemence and ability in an equal measure, matched equally in both
respects on either side. Learned counsel who led the arguments on the rival
sides, Shri F.S. Nariman for the appellants and Shri H. M. Seervai for the
respondents have drawn our attention in copious details to the correspondence
that transpired between the parties, the correspondence with the Reserve Bank
of India, the discussions at Ketty and Birmingham which preceded the impugned
decisions, the conduct of Devagnanam as a man and a managing director, the
attitude of Coats stated to arise out of their world-wide business interests
and the predicament of NEWEY which was willing to strike but was afraid to
wound its partner Coats. We have also been taken through several decisions and
texts bearing particularly on:
(a) The meaning of "oppression" of the members of a
company within the terms of s. 397 and the circumstances in which a company can
be wound up under the just and equitable clause under s. 433(f) of the
Companies Act, 1956.
(b) The approach which the court should adopt in cases
wherein mala fides and abuse of power on the part of directors are alleged but
no oral evidence is led.
(c) The
fiduciary powers of directors in issuing shares.
(d) The impact of the provisions of the Foreign Exchange
Regulation Act, 1973, with particular reference to s. 2(p), (q) and (u) and s.
29.
(e) The question as to whether it is necessary to issue a
prospectus under s. 81(1)(c) of the Companies Act.
(f) The constraints on public and private companies under
the Companies Act, and their duties and obligations, with particular reference
to ss. 2(35), 2(37), 3(1)(iii) and (iv) and ss. 43A and 81 of the Companies
Act.
(g) The relationship of partnership between the Indian
shareholders, Coats and Newey who owned respectively 40%, 30% and 30% of the
shareholding in NIIL.
(h) The question whether Silverston was an
"interested" director within the meaning of s. 300 of the Companies
Act, and
(i) Whether Silverston's appointment as an additional
director in the meeting of the board held on April 6, 1977, was, in the
circumstances, valid.
Coming to the law as to the
concept of "oppression", s. 397 of our Companies Act follows closely
the language of s. 210 of the English Companies Act of 1948. Since the
decisions on s. 210 have been followed by our court, the English decisions may
be considered first. The leading case on "oppression" under s. 210 is
the decision of the House of Lords in Scottish Co-operative Wholesale Society Ltd. v. Meyer
[1959] AC 324; 29 Comp Cas 1 (HL). Taking the
dictionary meaning of the word "oppression", Viscount Simonds said at
page 342 that the appellant-society could justly be described as having behaved
towards the minority shareholders in an "oppressive" manner, that is
to say, in a manner "burdensome, harsh and wrongful". The learned law
Lord adopted, as difficult of being bettered, the words of Lord President
Cooper at the first hearing of the case to the effect that s. 210 "warrants
the court in looking at the business realities of the situation and does not
confine them to a narrow legalistic view". Dealing with the true character
of the company, Lord Keith said at page 361 that the company was in substance,
though not in law, a partnership consisting of the society, Dr. Meyer and Mr.
Lucas and whatever may be the other different legal consequences following on
one or other of these forms of combination, one result followed from the method
adopted, "which is common to partnership, that there should be the utmost
good faith between the constituent members". Finally, it was held that the
court ought not to allow technical pleas to defeat the beneficent provisions of
s. 210 (p. 344 per Lord Keith; pp. 368-369 per Lord Denning).
In Meyer [1959] AC 324; 29
Comp Cas 1(HL) above referred to, the House of Lords was dealing with a case in
which the appellant-company was accused of having committed acts of oppression
against its subsidiary. In that context, it was held that the parent company
must, if it is engaged in the same class of business, accept, as a result of
having formed such a subsidiary, an obligation so to conduct, what are in a
sense its own affairs, as to deal fairly with its subsidiary. In Re Associated
Tool Industries Ltd. [1964] Argus L R 73, of which judgment a photographic copy
was supplied to us, Joske J. held that the rule in Meyer [1959] 29 Comp Cas 1
(HL) involved the consequence that the subsidiary companies must also exercise
good faith to the holding company and not merely that the latter should so act
to the former.
In an application under s.
210 of the English Companies Act, as under s. 397 of our Companies Act, before
granting relief the court has to satisfy itself that to wind up the company
will unfairly prejudice the members complaining of oppression, but that
otherwise the facts will justify the making of a winding-up order on the ground
that it is just and equitable that the company should be wound up. The rule as
regards the duty of utmost good faith, on which stress was laid by Lord Keith
in Meyer [1959] 29 Comp Cas 1, received further and closer consideration in
Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 (HL), wherein Lord
Wilberforce considered the scope, nature and extent of the "just and
equitable" principle as a ground for winding up a company. The business of
the respondent-company was a very profitable one and profits used to be
distributed among the directors in the shape of fees, no dividends being
declared. On being removed as a director by the votes of two other directors,
the appellant petitioned for an order under s. 210. Allowing an appeal from the
judgment of the Court of Appeal, it was held by the House of Lords that the
words "just and equitable" which occur in s. 222(f) of the English
Act, corresponding to our s. 433(f), were not to be construed ejusdem generis
with cls. (a) to (e) of s. 222 corresponding to our cls. (a) to (e) of s. 433.
Lord Wilberforce observed that the words "just and equitable" are a
recognition of the fact that a limited company is more than a mere legal
entity, with a personality in law of its own; and that there is room in company
law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and
obligations inter se which are not necessarily submerged in the company
structure (p. 379 of [1973] AC 360):
"The 'just and
equitable' provision does not, as the respondents suggest, entitle one party to
disregard the obligation he assumes by entering a company, nor the court to
dispense him from it. It does, as equity always does, enable the court to
subject the exercise of legal rights to equitable considerations, that is, of a
personal character arising between one individual and another, which may make
it unjust, or inequitable, to insist on legal rights, or to exercise them in a
particular way".
Observing that the
description of companies as "quasi-partnerships" or "in
substance partnerships" is confusing, though convenient, Lord Wilberforce
said (Ibid p. 380):
"A company, however
small, however domestic, is a company not a partnership or even a
quasi-partnership and it is through the just and equitable clause that
obligations, common to partnership relations, may come in".
Finally, it was held that
it was wrong to confine the application of the just and equitable clause to
proved cases of mala fides, because to do so would be to negative the
generality of the words. As observed by the learned law lord in the same
judgment, though in another context (Ibid p. 374):
"Illustrations may be
used, but general words should remain general and not be reduced to the sum of
particular instances".
In his judgment in
Westbourne Galleries, In re [1973] AC 360 (HL), Lord Wilberforce has referred
at two places to the decision in Blisset v. Daniel [1853] 68 ER 1022; [1853] 10
Hare 493, which is recognised as the leading authority in the Law of
Partnership on the duty of utmost good faith which partners owe to one another.
Lindley on Partnership (14th Edn., pp. 194-95) cites Blisset v. Daniel as an
authority for the proposition that:
"The utmost good faith
is due from every member of a partnership towards every other member; and if
any dispute arise between partners touching any transaction by which one seeks
to benefit himself at the expense of the firm, he will be required to show, not
only that he has the law on his side, but that his conduct will bear to be
tried by the highest standard of honour".
The fact that the company
is prosperous and makes substantial profits is no obstacle to its being wound
up if it is just and equitable to do so. This position was accepted in the
decision of the Court of Appeal in Yenidje Tobacco Co., In re [1916] 2 Ch 426
and of the Privy Council in Loch v. John Blackwood Ltd. [1924] AC 783.
The question sometimes
arises as to whether an action in contravention of law is per se oppressive. It
is said, as was done by one of us, Bhagwati J., in a decision of the Gujarat
High Court in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute
Mills Co. [1964] 34 Comp Cas 777, 830-31, that "a resolution passed by the
directors may be perfectly legal and yet oppressive, and conversely a
resolution which is in contravention of the law may be in the interests of the
shareholders and the company. On this question, Lord President Cooper observed
in Elder v. Elder & Watson [1952] SC 49, 55:
"The decisions
indicate that conduct which is technically legal and correct may nevertheless
be such as to justify the application of the 'just and equitable' jurisdiction,
and, conversely, that conduct involving illegality and contravention of the Act
may not suffice to warrant the remedy of winding-up, especially where
alternative remedies are available. Where the 'just and equitable' jurisdiction
has been applied in cases of this type, the circumstances have always, I think,
been such as to warrant the inference that there has been, at least, an unfair
abuse of powers and an impairment of confidence in the probity with which the
company's affairs are being conducted, as distinguished from mere resentment on
the part of a minority at being outvoted on some issue of domestic
policy".
Neither the judgment of
Bhagwati J. nor the observations in Elder [1952] SC 49, are capable of the
construction that every illegality is per se oppressive or that the illegality
of an action does not bear upon its oppressiveness. In Elder a complaint was
made that Elder had not received the notice of the board meeting. It was held
that since it was not shown that any prejudice was occasioned thereby or that
Elder could have bought the shares had he been present, no complaint of
oppression could be entertained merely on the ground that the failure to give
notice of the board meeting was an act of illegality. The true position is that
an isolated act, which is contrary to law, may not necessarily and by itself
support the inference that the law was violated with a mala fide intention or
that such violation was burdensome, harsh and wrongful. But a series of illegal
acts following upon one another can, in the context, lead justifiably to the
conclusion that they are a part of the same transaction, of which the object is
to cause or commit the oppression of persons against whom those acts are
directed. This may usefully be illustrated by reference to a familiar
jurisdiction in which a litigant asks for the transfer of his case from one
judge to another. An isolated order passed by a judge which is contrary to law
will not normally support the inference that he is biassed; but a series of
wrong or illegal orders to the prejudice of a party are generally accepted as
supporting the inference of a reasonable apprehension that the judge is biassed and that the party complaining of the orders will
not get justice at his hands.
In England, after the
decision of the House of Lords in Meyer [1959] 29 Comp Cas 1 (HL) a restricted
interpretation has been given to s. 210 by the Court of Appeal in Jermyn Street
Turkish Baths Ltd., In re [1971] 3 All ER 184; 41 Comp Cas 999 which has been
adversely criticised by writers on company law (see Palmer's Company Law, 22nd
Edn., p. 613, paras. 57-06, 57-07. Gore-Browne on Companies, 43rd Edn., para.
28-12). In India, this restrictive development has no place, for, in Shanti
Prasad Jain v. Kalinga Tubes Ltd. [1965] 2 SCR 720, 737; AIR 1965 SC 1535; 35 Comp Cas 351,
366, 367. Wanchoo J. accepted the broad and
liberal interpretation given to the court's powers in Meyer.
In Kalinga Tubes, Wanchoo
J. referred to certain decisions under s. 210 of the English Companies Act
including Meyer and observed (p. 366):
"These observations
from the four cases referred to above apply to section 397 also which is almost
in the same words as section 210 of the English Act, and the question in each
case is whether the conduct of the affairs of a company by the majority shareholders
was oppressive to the minority shareholders and that depends upon the facts
proved in a particular case. As has already been indicated, it is not enough to
show that there is just and equitable cause for winding up the company, though
that must be shown as preliminary to the application of section 397. It must
further be shown that the conduct of the majority shareholders was oppressive
to the minority as members and this requires that events have to be considered
not in isolation but as a part of a consecutive story. There must be continuous
acts on the part of the majority shareholders, continuing up to the date of
petition, showing that the affairs of the company were being conducted in a
manner oppressive to some part of the members. The conduct must be burdensome,
harsh and wrongful and mere lack of confidence between the majority
shareholders and the minority shareholders would not be enough unless the lack
of confidence springs from oppression of a minority by a majority in the
management of the company's affairs, and such oppression must involve at least
an element of lack of probity or fair dealing to a member in (the matter of his
proprietary rights as a shareholder. It is in the light of these principles
that we have to consider the facts......with reference to section 397".
At pages 734-735 of the
judgment in Kalinga Tubes [1965] 2 SCR 720; 35 Comp Cas 351, 365, Wanchoo J.
has reproduced from the judgment in Meyer [1959] 29 Comp Cas 1 (HL), the five
points which were stressed in Elder [1952] SC 49. The fifth point reads thus:
"The power conferred
on the court to grant a remedy in an appropriate case appears to envisage a
reasonably wide discretion vested in the court in relation to the order sought
by a complainer as the appropriate equitable alternative to a winding-up
order".
It is clear from these
various decisions that on a true construction of s. 397, an unwise, inefficient
or careless conduct of a director in the performance of his duties cannot give rise
to a claim for relief under that section. The person complaining of oppression
must show that he has been constrained to submit to a conduct which lacks in
probity, conduct which is unfair to him and which causes prejudice to him in
the exercise of his legal and proprietary rights as a shareholder. It may be
mentioned that the Jenkins Committee on Company Law Reform had suggested the
substitution of the word "oppression" in s. 210 of the English Act by
the words "unfairly prejudicial" in order to make it clear that it is
not necessary to show that the act complained of is illegal or that it
constitutes an invasion of legal rights (see Gower's Company Law, 4th Edn., p.
668). But that recommendation was not accepted and the English law remains the
same as in Meyer [1959] 29 Comp Cas 1 (HL) and in H. R. Harmer Ltd., In re
[1959] 1 WLR 62; 29 Comp Cas 305 (CA) as modified in Re Jermyn St. Turkish
Baths [1971] 3 All ER 184; 41 Comp Cas 999. We have not adopted that
modification in India.
Having seen the legal
position which obtains in cases where a member or members of a company complain
under s. 397 of the Companies Act that the affairs of the company are being
conducted in a manner oppressive to him or them, we can proceed to consider the
catena of facts and circumstances on which reliance is placed by the Holding
Company in support of its case that the conduct of the board of directors of
NIIL constitutes an act of oppression against it. There is, however, one matter
which has to be dealt with before adverting to facts, namely, the provisions of
the FERA, their impact on the working of NIIL and on the right of the Holding
Company to continue to hold its shares in NIIL. This we consider necessary to
discuss before an appraisal of the factual situation, since without a proper
understanding of the working of the FERA, it would be impossible to appreciate
the turn of intertwined events. It is in the setting of the FERA that the
significance of the various happenings can properly be seen.
The Foreign Exchange Regulation
Act, 46 of 1973, is "An Act to consolidate and amend the law regulating
certain payments, dealings in foreign exchange and securities, transactions
indirectly affecting foreign exchange and the import and export of currency and
bullion, for the conservation of the foreign exchange resources of the country
and the proper utilisation thereof in the interests of the economic development
of the
country". It repealed the earlier Act, namely, the Foreign Exchange
Regulation Act, 1947, and came into force on January 1, 1974.
"Person
resident in India" is defined in cl. (p) of s. 2 to mean:
"(i) A citizen of India, who has, at any time
after the 25th day of March, 1947, been staying in India, but does not include
a citizen of India who has gone out of, or stays outside, India, in either
case—
(a) for
or on taking up employment outside India, or
(b) for
carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances
as would indicate his intention to stay outside India for an uncertain period;
(ii) a citizen of India, who having ceased by
virtue of paragraph (a) or paragraph (b) or paragraph (c) of sub-clause (i) to
be resident in India, returns to or stays in India, in either case—
(a) for
or on taking up employment in India, or
(b) for
carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances
as would indicate his intention to stay in India for an uncertain period".
"Person
resident outside India" according to cl. (q) means "a person who is
not resident in India". Under cl. (u) "security" means
"shares, stocks, bonds", etc.
Section
19(1) provides:
"Notwithstanding
anything contained in section 81 of the Companies Act, 1956, no person shall,
except with the general or special permission of the Reserve Bank,—
(a) take
or send any security to any place outside India;
(b) transfer any security, or create or transfer
any interest in a security, to or in favour of a person resident outside
India;......
(d) issue, whether in India or elsewhere, any
security which is registered or to be registered in India, to a person resident
outside India;."..
Section 29, which is
directly relevant for our purpose, reads thus:
"29.
(1) Without prejudice to the
provisions of section 28 and section 47 and notwithstanding anything contained
in any other provision of this Act or the provisions of the Companies Act,
1956, a person resident outside India (whether a citizen of India or not) or a
person who is not a citizen of India but is resident in India, or a company
(other than a banking company) which is not incorporated under any law in force
in India or in which the non-resident interest is more than forty per cent. or
any branch of such company, shall not, except with the general or special
permission of the Reserve Bank,—
(a) carry on in India, or establish in India
a branch, office or other place of business for carrying on any activity of a
trading, commercial or industrial nature,
other than an activity for the carrying on of which permission of the Reserve
Bank has been obtained under section 28, or......
(2) (a) Where
any person or company (including its branch) referred to in sub-section (1)
carries on any activity referred to in clause (a) of that sub-section at the
commencement of this Act or has established a branch, office or other place of
business for the carrying on of such activity at such commencement, then, such
person or company (including its branch) may make an application to the Reserve
Bank within a period of six months from such commencement or such further
period as the Reserve Bank may allow in this behalf for permission to continue
to carry on such activity or to continue the establishment of the branch,
office or other place of business for the carrying on of such activity, as the
case may be.
(b) Every application made under clause (a) shall be in such form
and contain such particulars as may be specified by the Reserve Bank.
(c) Where any application has been made under clause (a), the
Reserve Bank may, after making such inquiry as it may deem fit, either allow
the application subject to such conditions, if any, as the Reserve Bank may
think fit to impose or reject the application......
(4) (a) Where
at the commencement of this Act any person or company (including its branch)
referred to in sub-section (1) holds any shares in India of any company
referred to in clause (b) of that subsection, then, such person or company
(including its branch) shall not be entitled to continue to hold such shares unless
before the expiry of a period of six months from such commencement or such
further period as the Reserve Bank may allow in this behalf such person or
company (including its branch) has made an application to the Reserve Bank in
such form and containing such particulars as may be specified by the Reserve
Bank for permission to continue to hold such shares.
(b) where an application has been made under clause (a), the
Reserve Bank may, after making such inquiry as it may deem fit, either allow
the application subject to such conditions, if any, as the Reserve Bank may
think fit to impose or reject the application...."..
It is clear from these
provisions that NIIL, being a company in which the non-resident interest of the
Holding Company was more than 40%, could not carry on its business in India
except with the permission of the Reserve Bank of India. An application for
permission to continue to carry on such business had to be filed within a
period of six months from the commencement of the Act or such further period as
the Reserve Bank may allow. The time for filing the application was extended in
all cases by two months and, therefore, it could be filed by August 31, 1974.
NIIL filed its application three days late on September 3, 1974, and the application
was granted by the Reserve Bank on certain conditions, by its letter dated May
10, 1976. Under the terms and conditions imposed by the Reserve Bank, the
non-resident interest of the Holding Company, which came to about 60%, had to
be brought down to 40% within one year of the receipt of the letter dated May
10, 1976, that is to say, before May 17, 1977.
By reason of s. 29(4) of
the FERA, the Holding Company too had to apply for permission to hold its
shares in NIIL. It applied to the Reserve Bank for a holding licence on
September 18, 1974. The application which was filed late by 18 days is still
pending with the Reserve Bank and is likely to be disposed of after the
non-resident interest of the Holding Company in NIIL is reduced to 40%.
There is a sharp
controversy between the parties on the question as to whether May 17, 1977, was
a rigid deadline by which the reduction of the non-resident interest had to be
achieved or whether NIIL could have applied to the Reserve Bank before that
date for extension of time to comply with the bank's directive, in which case,
it is urged, no penal consequences would have flowed. We will deal later with
this aspect of the matter, including the question of business prudence involved
in applying to the Reserve Bank for such an extension of time.
Shri Nariman raised at the
outset an objection to a finding of mala fides or abuse of the fiduciary
position of directors being recorded on the basis merely of affidavits and the
correspondence, against the NIIL's board of directors or against Devagnanam and
his group. He contends: Under the company court rules framed by this court,
petitions, including petitions under s. 397, are to be heard in the open court
(rr. 11(12) and 12(1)), and the practice and procedure of the court and of the
Civil Procedure Code are applicable to such petitions (r. 6). Under O. XIX, r.
2 of the Code, it is open to a party to request the court that the deponent of
an affidavit should be asked to submit to cross-examination. No such request
was made in the trial court for the cross-examination of Devagnanam who,
amongst all those who filed their affidavits, was the only person having
personal knowledge of everything that happened at every stage. Why he did or
did not do certain things and what was his attitute of mind on crucial issues
ought to have been elicited in cross-examination. It is not permissible to rely
argumentatively on inferences said to arise from statements made in the
correspondence, unless such inferences arise irresistibly from admitted or virtually
admitted facts. The verification clause of Mackrael's affidavit shows that he
had no personal knowledge on most of the material points. Raeburn. who,
according to Mackrael, was the chief negotiator on behalf of the Holding
Company in the Birmingham meeting did not file any
affidavit at all. Whitehouse, the secretary of the Holding Company, and N.T.
Sanders, who was the sole representative of the Holding Company on NIIL's board
of directors, did file affidavits but they are restricted to the question of
the late receipt of the letter of offer of shares and the notice for the board
meeting of May 2, 1977. Their affidavits being studiously silent on all other
important points and the affidavit filed on behalf of the Holding Company being
utterly inadequate to support the charge of mala fides or abuse of the
directors' fiduciary powers, it was absolutely essential for the Holding
Company to adduce oral evidence in support of its case or at least to ask that
Devagnanam should submit himself for cross-examination. This, according to Shri
Nariman, is a fundamental infirmity from which the case of the Holding Company
suffers and, therefore, this court ought not to record a finding of mala fides
or of abuse of powers, especially when such findings are likely to involve
grave consequences, moral and material, to Devagnanam and jeopardise the very
functioning of NIIL itself.
In support of his
submission, Shri Nariman has relied upon many a case to show that issues of
mala fides and abuse of fiduciary powers are almost always decided not on the
basis of affidavits but on oral evidence. Some of the cases relied upon in this
connection are: In re Smith S Fawcett Ltd. [1942] 1 All ER 542, 545 (CA),
Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] SCR 391, 394; 20 Comp
Cas 179, Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch 77 (Ch D), Hogg v.
Cramhorn Ltd. [1967] 1 Ch 254, 260; 37 Comp Cas 157 (Ch D), Mills v. Mills
[1938] 60 CLR 150, 160, Harlowe's Nominees [1968] 121 CLR 483, 485 and Howard
Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821, 831 (PC).
We appreciate that it is
generally unsatisfactory to record a finding involving grave consequences to a
person on the basis of affidavits and documents without asking that person to
submit to cross-examination. It is true that men may lie but documents will not
and often, documents speak louder than words. But a total reliance on the
written word, when probity and fairness of conduct are in issue, involves the
risk that the person accused of wrongful conduct is denied an opportunity to
controvert the inferences said to arise from the documents. But then, Shri
Nariman's objection seems to us a belated attempt to avoid an inquiry into the
conduct and motives of Devagnanam. The company petition was argued both in the
trial court and in the appellate court on the basis of affidavits filed by the
parties, the correspondence and the documents. The learned appellate judges of
the High Court have observed in their judgment that it was admitted that before
the learned trial judge both sides had agreed to proceed with the matter on the
basis of affidavits and correspondence only and neither party asked for a trial
in the sense of examination of witnesses.
In these circumstances, the
High Court was right in holding that, having taken up the particular attitude,
it was not open to Devagnanam and his group to contend that the allegation of
mala fides could not be examined on the basis of affidavits and the
correspondence only. There is ample material on the record of this case in the
form of affidavits, correspondence and other documents, on the basis of which
proper and necessary inferences can safely and legitimately be drawn.
Besides, the cases on which
counsel relies do not all support his submission that from mere affidavits or
correspondence, mala fides or breach of fiduciary power ought not to be
inferred. In In re Smith & Fawcett Ltd. [1942] 1 All ER 542 (CA), Lord
Greene, after stating that he strongly disliked being asked on affidavit
evidence alone to draw up inferences as to the bona fides or mala fides of the
actors, added that this did not mean that it is illegitimate in a proper case
to draw inferences as to bona fides or mala fides in cases where there is on
the face of the affidavits sufficient justification for doing so. In Nanalal
Zaver [1950] SCR 391 at page 394; 20 Comp Cas 179, the judgment of Kania C.J.
contains a statement that "considerable evidence was led in the trial
court on the question of bona fides" but it is not clear what kind of
evidence was so led and, besides, the fact that oral evidence was led in some
cases does not mean that it must be led in all cases or that without it, the
matters in issue cannot be found upon. We may mention that in Punt v. Symons
& Co. [1903] 2 Ch 506 (Ch D), Fraser v. Whalley [1864] 71 ER 361 and Hogg
v. Cramphorn Ltd. [1967] 1 Ch 254; 37 Comp Cas 157 (Ch D), the breach of
fiduciary duty was inferred from affidavit evidence.
We have, therefore, no
hesitation in rejecting the submission that we ought not to record a finding of
mala fides or abuse of fiduciary power on the basis of the affidavits,
correspondence and the other documents which are on the record of the case. May
it be said that these are on the record by consent of parties. Not merely that,
but more and mare documents were placed on the record, mostly by consent of
parties, as the case progressed from stage to stage. A very important document,
namely, Devag-nanam's telex to Raeburn dated May 25, 1977, was put on the
record for the first time before us since Shri Nariman himself desired it to be
produced, waiving the protection of the caveat "without prejudice".
That shows that the parties adopted willingly a mode of trial which they found
to be most convenient and satisfactory.
That takes us to the
question as to whether, on the basis of the material which is on the record of
the case, it can be said that the decision taken by NIIL's board of directors
in their meetings of April 6, and May 2, 1977, constitute acts of oppression as
against the Holding Company. The case of the Holding Company as put forward by
Shri Seervai is like this:
(i) Devagnanam kept Raeburn and Coats under the impression
that negotiations were still going on and were not to be treated as concluded
while, in reality, he had made up his mind to treat the matter as at an end.
(ii) He kept the Holding Company in total ignorance of the
steps which he was taking on behalf of the issuance and allotment of the rights
shares. The copy of the letter of the Reserve Bank dated March 30, 1977, which
is said to have spurred the decision taken in the meetings of April 6, was not
sent to the Holding Company though Devagnanam had stated in his letter dated
April 12 to Raeburn that the said copy was being enclosed along with that
letter. Deliberately and designedly, the letter of offer dated April 14, 1977,
meant for the Holding Company in England was not posted until April 27.
Similarly, the notice calling a meeting of the board on May 2 was not posted
till April 27. The notice to Manoharan too was posted as late as on April 27,
since he was believed to be siding with Coats. The letter of offer and the
notice of meeting of May 2, which were posted at Madras on April 27, were
received by the Holding Company on May 2, after the board's meeting for the
allotment of rights shares was held.
(iii) The Reserve Bank of India was not
informed of the proposal to issue rights shares to the existing shareholders
although it was the most obvious thing to do, in response to its letter dated
March 30, 1977, calling upon NIIL to submit its proposal for reducing its
non-resident interest without delay.
(iv) No application was made to the Controller of Capital
Issues for fixing the premium on rights shares, notwithstanding that the
Reserve Bank had informed NIIL that, if necessary, an application to that
effect may be made to the Controller of Capital Issues.
(v) The whole idea was to cut off all sources of information
from Raeburn and Coats and to confront them with the fait accompli of the
allotment of rights shares to the Indian shareholders, including the shares
formally offered to the Holding Company which were not allotted to it on the
ground of its non-compliance with the letter of offer.
(vi) The agenda of the meetings of April 6 and May 2, 1977, was
purposely expressed in vague terms: "Policy—Indianisation", in order
that the Holding Company should not know that the reduction of the nonresident
interest was proposed to be effected by the issue of rights shares. By
suppressing from the knowledge of the Holding Company what was its right to know,
and what was the duty of the board's secretary to convey to it, Devagnanam
succeeded in achieving his purpose on the sly and preempted any action by the
Holding Company to restrain the holding of the meeting, the issue of rights
shares and the allotment thereof exclusively to the existing shareholders
(barring Manoharan).
(vii) Silverston was appointed as an
additional director in the meeting of April 6, to make up the quorum of two
"disinterested" directors even though he was in the true sense not a disinterested
person in the decision taken in that meeting. The appointment of additional
directors was not even an item on the agenda of the meeting.
(viii) Devagnanam was emboldened to take this
course because he believed that no matter how wrongful his conduct, he could
count upon the support of NEWEY to see that he was not brought to book in a
court of justice for his wrongful conduct. He even attempted to thwart the
company petition and render it infructuous by persuading NEWEY to withdraw the
power-of-attorney executed by them, authorizing the filing of the petition.
(ix) In these machinations, Devagnanam was actuated by the sole
desire to acquire the control of NIIL for his personal benefit, by ousting the
Holding Company from its control over the affairs of NIIL.
(x) In fact, the rights shares were issued at par, though
their market value was far greater, as a measure of personal aggrandisement in
the supposition and forethought that such shares will inevitably go to
Devagnanam and his group. This was blantantly in breach of the fiduciary
obligation of the directors.
(xi) By these means and methods, which totally lacked in
probity, Devagnanam succeeded in converting the existing majority into a
minority and the minority into a majority, a conduct which is burdensome, harsh
and unlawful, qua the existing majority.
According to Shri Seervai,
the question before the court is not whether the issue of rights shares to the
existing Indian shareholders only amounted to oppression but whether, the offer
of rights shares to all existing shareholders of NIIL but the issue of rights
shares to existing Indian shareholders only constituted oppression of the
Holding Company on the facts and circumstances disclosed in the case. This
argument raises questions regarding the interpretation of ss. 43A and 81 of the
Companies Act, 1956.
These contentions of the
Holding Company have been controverted by Shri Nariman, according to whom, the
appellate court has taken a one-sided view of the matter which is against the
weight of evidence on the record. Counsel contends that Devagnanam had done all
that lay in his power to persuade the Holding Company to disinvest so as to
reduce its holding in NIIL to 40%, that the directors of NIIL were left with no
option save to decide upon the issue of rights shares, since disinvestment was
a matter of the Holding Company's volition, that the wording of the agenda of
the meetings of April 6 and May 2 conveyed all that there was to say on the
subject since, in the background of the negotiations which had taken place
between the parties, it was clear that what was meant by
"policy—Indianization" and "allotment of shares" was the
allotment of rights shares in order to effectuate the policy of the Reserve
Bank that the Indianization of the company should be achieved by the reduction
of the non-resident holding to 40%, that Coats refused persistently, both
actively and passively, either to disinvest or to consider the only other
alternative of the issue of rights shares, and that the impugned decisions were
taken by the board of directors objectively in the larger interests of the
company. According to Shri Nariman, Coats left no doubt by their attitude that
their real interest lay in their worldwide business and that they wanted to
bring the working of NIIL to a grinding halt with a view to eliminating an
established competitor from their business. It is denied by counsel that
important facts or circumstances were deliberately suppressed from the Holding
Company or that the letter of offer and the notice of the board's meeting of
May 2 were deliberately posted late on April 27. It is contended that neither
by the issue of rights shares nor by the failure to give the right of
renunciation to the Holding Company was any injury caused to its proprietary rights
as a shareholder in NIIL. As a result of the operation of the FERA, the
directives issued by the Reserve Bank thereunder and because of the fact that
NIIL had retained its old articles after becoming a public company under s. 43A
of the Companies Act, the Holding Company could neither have participated in
the issue of rights shares nor could it have renounced the rights shares
offered to it in favour of an outsider, not even in favour of a resident Indian
company like Madura Coats. It is denied that Silverston was not a disinterested
director or that his appointment as an additional director was otherwise
invalid. Counsel sums up his argument by saying that the board of directors of
NIIL had in no manner abused its fiduciary position and that far from their
conduct being burdensome, harsh and wrongful, it was the attitude of Coats
which was unfair, unjust and obstructive. Coats having come into an equitable
jurisdiction with unclean hands, contends Shri Nariman, no relief should be
granted to them assuming for the sake of argument that Devagnanam is guilty of
any lapse. The reliefs awarded by the appeal court, particularly the removal of
Devagnanam from the position of managing director, are characterised by counsel
as wholly uncalled for, transcending the exigencies of the situation.
It seems to us
unquestionable that Devagnanam played a key role in the negotiations with the
Holding Company and ultimately masterminded the issue of rights shares. He
occupied a pivotal position in NIIL, having been its director for over twenty
years and a managing director for over fifteen years, in which capacity he held
an undisputed sway over the affairs of NIIL. The Holding Company had nominated
only one director on the board of NIIL,
namely, N. T. Sanders, who resided in England and hardly ever attended the
board's meetings. Devagnanam was thus a little monarch of all that he surveyed
in Ketty. He had a large personal stake in NIIL's future since he and his group
held nearly 30% shares in it, the other Indian shareholders owning a mere 10%.
In the 60% share capital owned by the Holding Company, Coats and NEWEY were
equal sharers with the result that Coats, NEWEY and Devagnanam each held an
approximately 30% share capital in NIIL. This equal holding created tensions
and rivalries between Coats and Devagnanam, NEWEY preferring to side with the
latter in a silent, unspoken banner. Eventually, after the filing of the
company petition, Coats bought over NEWEY's interest in NIIL sometime in July,
1977.
The picture which Devagnanam
has drawn of himself as a person deeply committed to Ketty, and as having built
up the business with scrupulous regard to the observance of foreign exchange
regulations and Indian laws in contradistinction to Coats who, he alleged,
wanted to contravene the foreign exchange regulations of our country is not
borne out by the correspondence. In fact, the letter which he wrote to Shread
of Newey-Goodman Ltd. on August 11, 1973, (which was filed by consent in the
appeal court) shows that he wanted to dispose of his shares at a large premium
by officially receiving the par value in rupees in India and obtaining the
balance in foreign currency outside India. Nevertheless, he stated on oath in
para. 13 of his rejoinder affidavit that "it is not true that in selling
my shares, I wanted a part of the consideration in foreign exchange". The
said letter discloses that over and above proposing to make a large profit in
contravention of the foreign exchange regulations and the tax laws of India by
receiving money outside India, Devagnanam proposed to take away from Ketty its
"select key personnel and technicians" to Malacca and to manufacture
competitively, products which were then manufactured by Needle Industries, U.
K. The footnote to the letter to Shread asked him to keep these matters secret
from Coats till the shares had been sold, and till the deed had been done.
There is another aspect of
Devagnanam's conduct to which reference must be made. The statement made by him
in para. 15 of his reply affidavit, denying that he was a non-resident, is not
entirely true because at least between August 26, 1974, and June 9, 1976, he
was a non-resident within the meaning of s. 2 (p)(i)(a) of the FERA. By his
letter dated August 26, 1974, to the Reserve Bank, he asked, though out of
abundant caution, for permission under s. 29(4) of the FERA to hold his shares
in NIIL. He referred in that letter to his contract with Newey and Taylor under
which he was to be a full-time managing director of that company for five years
from August 1, 1974, to July 31, 1979, and asked the Reserve Bank to determine his status. On September 3, 1975, he wrote to the
Reserve Bank contending that he was a "resident", referring this,
time not to his contract with Newey-Taylor but to the agreement between NIIL
and Newey Goodman Ltd., a company about to be formed, under which he was to be
on deputation with it as an employee of NIIL.
Devagnanam's letter dated
August 11, 1973, to Shread of Newey-Goodman, the gloss which he put on his
status as a resident in his letters to the Reserve Bank dated August 26, 1974,
and September 3, 1975, and the clever manner in which he had his status
determined as a resident, cast a cloud on his conduct and credibility. And
though, as contended by Shri Seervai, we do not propose to apply to
Devagnanam's affidavit-evidence the rule of "corroboration in material
particulars", which is generally applied in criminal law to accomplice
evidence, we shall have to submit Devagnanam's conduct to the closest scrutiny
and statements made by him, from time to time, to the most careful examination.
We shall have to look to something beyond his own assertion in order to accept
his claim or contention.
Shri Nariman attacked the
conduct of Coats almost as plausibly as Shri Seervai attacked that of
Devagnanam, though in terms of a saying in a local language we may say that
"a brick is softer than a stone", Coats being the brick. Coats, as
will presently appear, are not to be outdone by Devagnanam in the matter of
lack of business ethics. But that is no wonder, because when the dominant
motivation is to acquire control of a company, the sparring groups of
shareholders try to grab the maximum benefit for themselves. If one decides to
stay on in a company, one must capture its control. If one decides to quit, one
must obtain the best price for one's holding, under and over the table, partly
in rupees and partly in foreign exchange. Then, the tax laws and the foreign
exchange regulations look on helplessly, because law cannot operate in a vacuum
and it is notorious that in such cases evidence is not easy to obtain.
Alan Mackrael says in para.
20 of his reply affidavit in the company petition that it was made clear to
Devagnanam that neither Coats nor the Needle Industries (U. K.) would ever be a
party to any transaction which was illegal under the Indian law. In a letter
dated May 24, 1976, to Devagnanam, A. D. Jackson of NEWEY has this to say:
"In broad terms the
proposition is that Alan Mackrael, Martin Henry and myself should meet with you
in Malacca during September to discuss arrangements whereby an Indian gentleman
known to Coats would purchase both your shares and our own share of the NINH
holding in the manner which I outlined to you on the telephone. In order to
provide a base for the calculations, Kingsley is to be asked to obtain
the government approved price but, of course, the
basis of our discussions has been that the actual payment will be higher than
this".
In the same letter,
Jackson, after warning that Coats/Needle Industries (U. K.) are "certainly
not going to relinquish control of Ketty without a major struggle",
proceeds to describe the helpless condition of NEWEY by saying that in the
financial position in which they found themselves, they were "in no state to
do battle with this particular giant". Leaving aside the determination of
Coats to engage in a major struggle with NIIL's board of directors, Jackson's
letter leaves no doubt that Coats were willing to be a party to the arrangement
whereby the shares of Devagnanam and NEWEY would be sold to an "Indian
gentleman", under which the actual payment would be higher than the
Government approved price ascertained by Kingsley, the secretary of NIIL. This
is doubtful ethics which justifies Shri Nariman's argument that he who comes
into equity must come with clean hands; if he does not, he cannot ask for
relief on the ground that the other man's hands are unclean. The "Notes on
further Indianization" made by Devagnanam on April 29, 1975, at a time
when the relations between the parties were not under a strain, show that N. T.
Sanders who was nominated by the Holding Company as a director of NIIL was
"aware of an inquiry from a Mr. Khaitan". This shows that Devagnanam
was not trying to dispose of his shares secretly to Khaitan and Coats were
aware of that move.
In para. 20 of his reply
affidavit, Alan Mackrael says that none of the proposals put forward by the
Holding Company for achieving Indianization to comply with the requirements of
the FERA would have given the control of NIIL to the Holding Company. This is
falsified by Raeburn's letter dated October 25, 1976, to Devagnanam, in which
he says that the idea of an outside independent party holding 15% of the share
capital of NIIL was raised, but this did not appear to be acceptable to Coats
since "they want to achieve not only that the present Indian shareholders
hold a minority but that they (Coats) hold and influence a substantial block,
thereby hoping to influence NEWEY, to their views". Thus, there is a wide
difference between what Coats practised earlier and pleaded later. Towards the
end of para. 21, Mackrael asserts that the shareholders of the Holding Company,
namely, Coats and NEWEY, were unanimous in the filing of the company petition
and the prosecution of the proceedings following upon it, which is said to be
clear from the fact that two powers of attorney were attested by the directors
of the Holding Company, both of whom were directors of NEWEY also. The fact
that Coats and NEWEY were not of one mind is writ large on the face of these
proceedings and, in fact, the charge against
NEWEY is that because of their Far-Eastern interests in which Devagnanam was a
great asset to them, they were supporting Devagnanam. We may in this connection
draw attention to a letter dated June 8, 1977, by Raeburn to Mackrael, saying
that the insistence of Coats ("Glasgow") to hold on to the 60%
shareholding in NIIL or at least to ensure that 60% did not get into the hands
of the Indian shareholders will involve a long and costly legal battle. Raeburn
proceeds to say:
"We, as Neweys, have
neither the will nor the means to participate in that battle, nor do we think
it right to do so bearing in mind the legal position regarding Indianisation,
the provision in the articles and the fact that substantially the modern
business of N.I.I.L. has been built up by the efforts of the present Indian
shareholders".
In para. 5 of the
aforesaid; letter, Raeburn clarifies the attitude of NEWEY by saying that if
Coats were unable to agree to the arrangement suggested by NEWEY, then, NEWEY
will be compelled to notify to those concerned in India that they can no longer
be parties to the power-of-attorney granted by the Holding Company to Mackrael
or to any other proceedings in the Indian courts. In spite of this letter of
Raeburn (dated June 8, 1977), Mackrael had the temerity in his reply affidavit
dated July 8, 1977, to say that Coats and NEWEY were unanimous in the
prosecution of the proceedings consequent upon the filing of the company
petition. There was no agreement between Coats and NEWEY either in regard to
Indianisation of NIIL or in regard to the legal proceedings instituted to
challenge the issue of rights shares.
There are many other
contradictions on material points between the actual state of affairs and what
Coats represented them to be, but we consider it unnecessary to cover the whole
of that field. We will refer to one of these only, in order to show how
difficult it is to choose between Coats and Devagnanam. In para. 19 of the
company petition, which is sworn to by Mackrael, it is stated that Devagnanam
was in U.K. some time towards the end of March, 1977, and that he held several
discussions with the representatives of the Holding Company. In para 40 of his
reply affidavit, Mackrael says that as to the contents of para. 19 of the
company petition, he himself was not present at such meeting, since it was a
meeting between Devagnanam and the officials of NEWEY for the purpose of
discussing matters concerning NEWEY's Far-Eastern interests. The verification
clause of Mackrael's affidavit in support of the company petition shows that
the contents of para. 19 are based on information which he believed to be true.
A clearer contradiction between the parent petition and the reply affidavit is
difficult to imagine. It would appear that it was not until quite late that
Coats realised that they had to plead all ignorance of the discussions which
were held in U.K. towards the end of March, 1977,
between Devagnanam and the representatives of the Holding Company.
We will now shift our
attention to another scene in order to show how unethical the Coats are. Coats'
subsidiary called the Central Agency Ltd., who were sole selling agents of
NIIL's products in various markets in the world, ceased to be so after NIIL put
an end to the agreement with them. The Central Agency never applied during the
time that they were sole selling agents of NIIL's products, for the
registration of the Indian company's trade-marks as a protective measure. The
learned trial judge, Ratnaprasada Rao, Acting C.J., delivered the judgment in
the company's petition on May 17, 1978. Immediately, thereafter, Application
No. 34991 of 1978 was filed by the Japanese trade-marks agents of Needle
Industries, U.K., for registration of the trade-marks "Pony" and
"Rathna", which were the registered Indian trade-marks of NIIL. That
application was made under the authority of a power-of-attorney signed by Alan
Mackrael. In June, 1978, Application No. 102987 was filed in Thailand on behalf
of the Needle Industries, U.K. as owners of the trade-mark "Pony"
which is clear from the trade-mark attorney's letter dated January 22, 1979. In
October, 1978, Coats Patons, Hong Kong, got the Indian company's trademark
"Pony" registered. In November, 1978, the trade-mark agents and
solicitors of NIIL in Hong Kong had to give a notice to Coats Patons, Hong
Kong, that the latter had registered the "Pony" trade-mark in Hong
Kong with the full knowledge that NIIL was the legal owner of that trademark
and threatening legal action. As a result of that notice, the Indian company's
trade-mark "Pony" which was registered by Coats Patons in Hong Kong
as their own trade-mark, was assigned to the Indian company on December 21,
1978, for a nominal sum of 10 dollars. Items 7 and 8 of the minutes dated March
28, 1979, of the meeting of the interim board of directors of NIIL refer to the
registration in Hong Kong by Coats Patons of the Indian trade-mark of NIIL and
the subsequent assignment thereof to NIIL when legal action was threatened.
Harry Bridges, who was appointed as a temporary managing director by the High
Court, has stated in his counter-affidavit dated March 27, 1980, that the
application for registration of the "Pony" trade-mark was made in
Hong Kong and other places in order to protect that trade-mark from its
improper use by other traders. This is a lame explanation of an act of near
piracy. Were this explanation true, the application for registration of the
trade-mark would have mentioned that it was being filed on behalf of NIIL, and
that "Pony" was in fact the trade-mark of NIIL. It is quite amazing
that anyone should claim that the registration of the trade-mark was being
sought as a protective measure when a battle royal was raging between the
Holding Company and NIIL and after the trial court had delivered its judgment. We may mention that by a letter dated June 15,
1977, Mackrael had informed Devagnanam that he was removed from the board of
directors of the Holding Company and M.D.P. Whiteford was appointed in the
vacancy. The fact that Needle Industries, U.K., had surreptitiously made an
application for the registration of NIIL's trade-mark "Pony" came to
light fortuitously in January, 1979, when NIIL applied for the registration of
the "Pony" trade-mark in Thailand and Japan. NIIL's trade-mark agents
there found, on inspection of the registers, that certain applications made by
Needle Industries, U.K., claiming the same mark as their own, were pending
consideration.
The decision, in appeal, of
the High Court appointing Harry Bridges as a managing director for 4 months was
pronounced on October 26, 1978. As a managing director appointed by the court,
Bridges called a board meeting of the other members of the board appointed by
the appellate court, for November 2, 1978. Bridges took away many files,
documents and statements from the NIIL's factory at Ketty on October 28, 1978,
his explanation being that he wanted to carry these documents to Madras where
the board meeting was to be held. A little before Bridges left Ketty for
Madras, he was informed that this court had passed an interim order on November
1, 1978. Consequently, the meeting of the 2nd November did not take place.
Bridges says that when it became clear that he was no longer required to act as
a managing director of NIIL, he took the earliest opportunity of returning the
documents which he had taken from the office of the factory at Ketty.
It is understandable that
Bridges wanted to take with him certain documents to help him perform his
functions as a managing director in the meeting of November 2, 1978. But it is
surprising that, in addition to the documents which Bridges returned on
November 8, he had taken with him several other documents which he returned
when pressed to do so. He took away with him, (1) design drawing, (2)
statistical returns, (3) the master budget summary, 1978, (4) cash forecast for
1978-79, (5) detailed project report with cash flow forecast, (6) details of
project investment, and (7) note on activity up to October, 1978, and one or
two other documents. These were eventually returned by the Holding Company's
advocate, Shri Raghavan. When NIIL wrote on November 21, 1978, to Shri Raghavan
asking him to call upon Bridges to confirm that he had not retained copies of
any of the documents which he had removed from Ketty, Bridges replied by his
letter dated November 29, 1978, that he had taken copies of such documents
which he considered relevant and that he proposed to retain such copies since
"as director of the company, I am entitled to peruse and take copies of
whatever records I choose". This is a wee bit high and mighty. The design
drawing is not the drawing of a bungalow (with
a swimming pool) which was being built for Devagnanam but it is a "ring
spring fastener tool design". The other documents which Bridges had taken
away and of which he got copies made in assertion of his directorial right,
contain important matters like details of production, sales and exports of
NIIL's products, orders outstanding and sales, the proposed additional turnover
and the working capital requirements, etc. The fact of Harry Bridge's taking
away these documents and making copies thereof for his own use leaves not the
slightest doubt that the motivation of Coats at all times was to advance their
own world interests at the expense of NIIL. In the background of such conduct,
it becomes difficult to appreciate the Holding Company's contention, so
strongly pressed upon us, that Coats, NEWEY and Devagnanam being in the
position of partners, the greatest good faith and probity were expected to be
displayed by them. The contention, as a bald proposition of law, is sound. The
snag is: who should harp upon it? Not Devagnanam, we agree. But, not Coats
either, we think.
We have said, while
discussing the conduct of Devagnanam, that it would be difficult to accept his
word unless there is support forthcoming to it from other circumstances on the
record. We feel the same about Coats. It would be equally unsafe to accept
their word unless it finds support from the other facts and circumstances on
the record of the case. It is true that in saying this, we have partly taken
into account facts which came into existence after the company petition was
filed. But those facts do not reflect a new trend or a new thinking on the part
of Coats, generated by success in the litigation. Finding that they had
succeeded in the High Court, Coats took courage to pursue relentlessly their
old attitude with the added vigour which success brings.
On the question of
oppression, there is a large mass of correspondence and other documentary
evidence on the record before us. We shall have to concentrate on the
essentials by separating the chaff from the grain. In the earlier part of this
judgment we have already referred to the course of events generally, which culminated
in the meetings of NIIL's board of directors, held on April 6, and May 2, 1977.
We propose now to refer to these events selectively.
The FERA having come into
force on January 1, 1974, D. P. Kingsley, the secretary-director of NIIL,
applied on September 3, 1974, to the Reserve Bank for the necessary permission
under s. 29(2) of that Act. The Reserve Bank intimated to NIIL by its letter
dated November 5, 1975, that permission would be accorded to NIIL under s.
29(2)(a) read with s. 29(2)(c) of the FERA to carry on its activities in India
subject to the conditions enumerated in para. 2 of the letter. One of the
conditions mentioned in the aforesaid paragraph was that the non-resident
interest in the equity capital must be reduced to a level not exceeding 40%,
within a period of one year from the date of receipt of the letter. The Reserve
Bank asked NIIL to submit a scheme within a period of three months, showing how
it proposed to achieve the required reduction in the non-resident interest;
"(a) whether by disinvestment by non-resident shareholders, or (b) whether
by issue of additional equity capital to Indian residents to the extent
necessary to finance any scheme of expansion/diversification, or (c) by
both". Kingsley wrote a letter to Mackrael on November 19, 1975, enclosing
therewith a copy of the letter of the Reserve Bank dated November 5. On
February 4, 1976, Kingsley wrote to the Reserve Bank that NIIL was prepared to
agree to reduce the non-resident interest in the equity capital to a level not
exceeding 40% and that the company was proposing to bring this about by
disinvestment though, depending upon future developments, the company reserved
its right to reduce the nonresident interest by issue of additional equity
capital to Indian shareholders. Kingsley requested the bank to extend the
stipulated time of one year in case NIIL was not able to comply with the bank's
directive by reason of circumstances beyond its control. A copy of this letter
dated February 4, 1976, was sent by Kingsley to Whitehouse, the secretary of
the Holding Company. It is significant that there was no response as such to
this communication, from the Holding Company. On May 11, 1976, the Reserve Bank
of India sent a letter to NIIL granting permission to it under the FERA to carry
on its business on certainconditions, one of them being that the non-resident
interest in the equity capital had to be reduced to a level not exceeding 40%
within a period of one year from the date of receipt of the letter. The Reserve
Bank stated in the aforesaid letter that until such time as the non-resident
interest was not reduced to 40%, the manufacturing activity of the company
shall not exceed such capacity as was validly approved or recognised by the
appropriate authority on December 31, 1973, and that the company shall not
expand its manufacturing activities beyond the level so approved or recognised.
It is clear from this letter that all developmental activities of NIIL stood
frozen as of the date December 31, 1973, until the non-resident interest was
reduced to 40%. The Reserve Bank stated further in the letter that NIIL should
submit quarterly reports to it indicating the progress made in implementing the
reduction of the non-resident interest and that the transfer of shares from
non-residents to Indian residents would be required to be confirmed by the
Reserve Bank under s. 19(5) of the FERA. The letter of the Reserve Bank was
received by NIIL on May 17, 1976, which meant that the reduction of the
non-resident interest had to be achieved by May 17, 1977.
It shall have been seen
that by the time the permission was granted by the Reserve Bank to NIIL in May
1976, the FERA had been in force for a period
of about 2˝ years. A period of one year and eight months had gone by since the
filing by NIIL of the application for dilution of the non-resident interest.
Over and above that, the Reserve Bank had granted a long period of one year for
bringing about the dilution of the non-resident interest. It is true that
public authorities are hot generally averse, in the proper exercise of their
discretion, to extending the time limit fixed by them, as and when necessary.
But an elementary sense of business prudence would dictate that the time
schedule fixed by the Reserve Bank had to be complied with. The firm tone of
the Reserve Bank's letter conveyed that it would not be easy to obtain an
extension of time for complying with its directive, while the stringent
conditions imposed by it, particularly in regard to future developmental
activities, dictated an early compliance with the directive.
Kingsley sent a letter to
the Reserve Bank on May 18, 1976, confirming the acceptance of the various
conditions under which permission was granted to NIIL to carry on its business.
Kingsley pointed out a difficulty in implementing one of the conditions
regarding the sale of petroleum products, but the Reserve Bank by its letter
dated May 29, 1976, informed him that after a careful consideration of the
request, the bank regretted its inability to enhance the ceiling on the turnover
from the company's trading activity, as stipulated in the letter dated May 11,
1976.
In the meeting of the board
held on October 1, 1976, Devagnanam's appointment as managing director was
renewed for a further period of five years. Raeburn, Chairman of NEWEY, who was
looking after the affairs of the Holding Company, wrote to Devagnanam on
October 4, 1976, complaining that it was necessary that the Holding Company
should be kept informed in ample time of the board's meetings on important
organisational matters.
Raeburn and Mackrael came
to India to discuss the question of dilution of the non-resident holding in
NIIL. A meeting was held at Ketty on October 20 and 21, 1976, in which the U.K.
shareholders were represented by Mackrael and Raeburn and the Indian
shareholders by Devagnanam and Kingsley. Silverston took part in the meeting as
an adviser to the Indian shareholders. Martin Henry, the managing director of
Madura Coats which is an Indian company in which the Needle Industries (U.K.)
and Coats have substantial interest, attended the meeting and took part in the
discussions. A note of the discussions which took place at Ketty on October 20
and 21 was prepared by Raeburn and forwarded along with a letter dated November
10, 1976, to Devagnanam, with copies to Mackrael, Newey, Jackson and
Whitehouse. Paragraph 2 of this note, which is important, says:
"It was agreed that
Indianization should be brought about by May, 1977, as requested by Government,
so as to achieve a 40% U.K. and 60% Indian shareholding".
The main features of the
discussions which took place in the Ketty meeting are these:
(1) Mackrael and Martin Henry suggested acceptability of
Madura Coats as holding part of the 60% of the equity to be held by Indian
share-holders. The latter "saw no reason to give up the right which the
Indianization legislation, combined with the company's articles, conferred upon
them and, therefore, they insisted on taking up the whole of their entitlement
to 60% of the equity". Silverston, who. was an Englishman by nationality
and a solicitor by profession in India and was acting as an adviser to the
Indian shareholders in the Ketty meeting, plainly and rightly pointed out that
the Government's approval of a holding by Madura Coats of 15% of NIIL shares
would be unlikely, because by that method Coats would, indirectly and
effectively with NEWEY, hold over 40%, approximately 46%, share in NIIL. It is
apparent that this would have been a clear violation of the FERA.
(2) To allay the concern of U.K. shareholders when they
became in minority, by the Indian shareholders coming to hold 60%, some safe
guards were suggested which, amongst others, were: (i) the articles of the
company could be altered only by a special resolution which requires a 75%
majority of the members voting in person or by proxy. Thus, either group of the
shareholders could prevent the sale of shares to any one not approved; (ii) the
board could be reconstructed as mentioned in para. 4.3 of the note to give the
U.K. shareholders sufficient safeguards and hand in the management of the
Indian company.
(3) The preferred method of transferring 20% of the equity to
Indian shareholders was thought to be by sale by U.K. members of the
appropriate number of shares at the price to be determined by the Government and
the advice to be taken from Price Waterhouse in this regard. As an alternative
it was suggested that a rights issue, with the Indian share holders taking up
the U.K. members' rights would also be considered, provided it was demonstrated
by Ketty that there was a viable development plan requiring funds that the
expected NIIL cash flow could not meet. The value of the U.K. equity interest
thus transferred was not to be less favourable than by a direct sale of shares.
(4) Approval was given in principle to the renewal of the
contract of Devagnanam as managing director of NIIL. Devagnanam agreed to
devote adequate time to the affairs of Ketty and was authorised to continue to
supervise the NEWEY affairs in Hong Kong and Malacca.
At the resumed discussion
on October 21, 1976, both sides stuck to their stand. Devagnanam was insistent
that he will "not accept on behalf of the Indian shareholders anything
less than the full entitlement of 60% of the shares", while Mackrael,
equally insistent, "could not accept on behalf of NI/Coats that the full
60% be held by the present Indian shareholders, even with the safeguards and
assurances discussed previously".
The Ketty meeting thus
ended in stalemate, both sides insisting on what they considered to be their
right and entitlement. Raeburn attempted to play the role of a mediator but
failed. In this situation, the parties decided to give further consideration to
the matter and to adhere to the following time-table:
"Mid-December
TAD (Devagnanam) to submit
to the U.K. shareholders the decision reached by the Indian shareholders both
as regards the 60% and the case, if any, for a rights issue.
Mid-January
U.K. shareholders to decide
on their reaction to the Indian shareholders' decision".
Silverston conveyed to
Kingsley his regret that the Ketty meeting could produce no outcome because of
the attitude of Coats who wanted to put pressure on the directors of NIIL by
giving 15% of the shareholding to Madura Coats and thereby avoiding the provisions
of the FERA. This reaction of Silverston finds support in the reaction of
Raeburn himself, which he described in his letter dated October 23, 1976, to
Devagnanam. Raeburn says in that letter that he had learnt from Martin Henry
that Coats were keen to introduce Prym technology in India in their Madura
Coats factory. It may be mentioned that the Prym technology when introduced in
Madura Coats would have created a direct competition between it and NIIL. It
would also appear from Devagnanam's letter of October 21, 1976, to Jackson that
Coats were intending to start an Engineering Division at Bangalore for the
manufacture of Dynecast and Prym products with an investment to the tune of Rs.
3,00,00,000 (rupees three crores). Compared with that, the interest of Coats in
NIIL was just about Rs. 10 lakhs even if the shares of NIIL were to be valued
at Rs. 190 per share.
Devagnanam wrote a letter
dated December 11, 1976, to Raeburn, informing him that they had just closed
the board's meeting in which the principal subject of discussion was
"Indianization". Devagnanam expressed resentment of himself and his
colleagues that after they had faithfully served the Holding Company for almost
the whole of their working lives, the Holding Company should be unwilling to
accept them as partners, especially when they
were legally entitled to be so considered. Devag-nanam made it clear in this
letter that any attempt by Coats to retain an indirect control in the
management of NIIL will not be acceptable to the Indian shareholders.
Then comes the important
letter of December 14, 1976, which was written by Devagnanam to Raeburn.
Devagnanam informed Raeburn by that letter that he had further discussions with
his colleagues and was able to persuade them to agree to a kind of package deal.
The terms of the deal so suggested were: "(1) Indianization should take
place with the existing Indian shareholders acquiring 60% of the stock; (2)
Mackrael and Raeburn should be taken on NIIL's board as directors, but in no
event Martin Henry who was connected with Madura Coats which had a powerful
plan of development of Prym technology; (3) the Indian shareholders were
prepared to take B. T. Lee, a senior executive of Needle' Industries/ Coats,
Studley, as a permanent wholetime director of NIIL to be put specifically in
charge of exports". Some other suggestions were made by Devagnanam to show
the bona fides of the Indian shareholders and to alleviate the apprehensions in
the minds of the U.K. shareholders. Devagnanam asked Raeburn to convey his
reactions in the matter. This letter has been gravely commented upon by the
Holding Company on the ground that it did not comtemplate the issue of rights
shares. We are unable to see the validity of this criticism. There is not the
slightest doubt that the Indian shareholders were insisting all along that they
should become the owners of 60% of the equity capital of NIIL. A simple method
of bringing this about was thetransfer by the Holding Company of 20% of its
shareholding to the existing Indian shareholders. It was only when this plain
method of bringing about a reduction in the equity holding failed and the
deadline fixed by the Reserve Bank was drawing nearer, that the Board of NIIL
decided upon the issue of rights shares, which was the only other alternative
that could be conceived of for reducing the non-resident interest. The issuance
of rights shares, after all, was not like a bolt from the blue. In any event,
it was mentioned in the Ketty meeting.
On December 20, 1976,
Silverston wrote a letter to Raeburn saying that he would be proceeding to the
U.K. early in January in connection with his personal matters and that he would
then visit Raeburn also. Silverston stated candidly in the letter that the
situation which was developing between the U.K. and the Indian shareholders, if
allowed to continue, could do much damage to the British interest and "as
one who is still concerned with the interests of British industry, I feel I
cannot sit by and allow matters to deteriorate to their detriment, without making
some attempt towards bringing the issues between the parties to a fair
conclusion". Raeburn wrote to Kingsley on January 14, 1977, stating that
he had a discussion with Silverston a couple
of days back, during which Silverston had stated clearly the legal position and
given his advice upon it. In the last para, of this letter, Raeburn said:
"We have now put our
views quite clearly to Mr. Mackrael and we are awaiting the reaction of Needle
Industries and Coats. Therefore, I am hoping, but I cannot be sure of this, to
be able to let you know fairly soon what the formal decision of the U.K.
shareholders is".
It needs to be emphasised,
especially since its importance was not fully appreciated by the appellate
bench of the High Court, that the Indian point of view was communicated with
the greatest clarity to Raeburn in Devagnanam's letter dated December 14, 1976,
which was within the time schedule which was agreed to be adhered to in the
Ketty meeting. The views of the U.K. shareholders were most certainly not communicated
to the Indian shareholders by the middle of January, 1977, as was clearly
agreed upon in the Ketty meeting. In fact, they were never communicated.
On January 20, 1977, the
Reserve Bank sent a reminder to NIIL. After referring to the letter of May 11,
1976, the Reserve Bank asked NIIL to submit at an early date the progress
report regarding dilution of the non-resident interest. In reply, a letter
dated February 21, 1977, was sent by NIIL to the bank, stating:
"We confirm that we
are following up the matter regarding dilution of non-resident interest and we
confirm our commitment to achieve the desired Indianisation by the stipulated
date, i. e., 17th May, 1977".
It is very important to
note that a copy of this letter was forwarded both to Whitehouse and Sanders.
They must at least be assumed to know that not only was Indianisation to be
achieved by May 17, 1977, but that NIIL had committed itself to do so by that
date.
It is contended by Shri
Seervai that the negotiations with Coats had in fact not come to an end and
that Coats were never told that the compromise talks will be regarded as having
failed. It is urged that Coats were all along labouring under the impression,
and rightly, that the compromise proposals which were discussed with Raeburn in
the meeting of March 29-31, 1977 in U.K., would be placed by Devagnanam before
the Indian shareholders, and the U.K. shareholders apprised whether or not the
proposals were acceptable.
Shri Seervai relies
strongly on a letter dated March 9, 1977, written by Raeburn to Devagnanam.
After saying that on the Friday preceding the 9th March, he had discussions
with Mackrael and three high-ranking personnel of Coats, Raeburn says in that
letter that Coats had refused to agree that the Indian shareholders should acquire
a 60% shareholding in NIIL, that this had created a new situation and that he
was appending to the letter an outline of what
he believed, but could not be sure, would be agreeable to Coats/Needle
Industries. Raeburn stated further in that letter:
"I know that all this
will be difficult for you and your fellow Indian shareholders, but I urge you
to support this view and get their acceptance, and to come here to be able to
negotiate. If these or similar principles can be agreed during your visit, I have
no doubt that the detailed method can be quickly arranged".
Raeburn stated that the
proposal annexed to the letter had not been agreed with Coats but he, on his
own part, believed that Coats could be persuaded to agree to it. Stated
briefly, the proposal annexed by Raeburn to his letter aforesaid involved: (i)
the existing Indian shareholders holding 49% of the shares, (ii) new Indian
independent institutional shareholders holding 11% of the shares, and (iii) the
existing U.K. shareholders either directly or indirectly, holding 40% of the
shares. The proposed board of directors was to consist of representatives of
the shareholders appointed by them thus:
"Existing Indian
shareholders 3, New independent Indian shareholders 1, existing U.K.
shareholders 2, and an independent Indian Chairman acceptable to all
parties".
It is contended by Shri
Seervai that these proposals are crucial for more than one reason, since, in
the first place the proposal to increase the holding of the existing Indian
shareholders to 49% and the offer of 11% to new Indian independent
institutional shareholders was inconsistent with the charge that Coats wanted
to retain control over NIIL, directly or indirectly. The second reason, why it
is said that the proposal is crucial is that Raeburn's letter of March 9, must
have been received by Devagnanam before March 14 since it was replied to on the
14th. Therefore, contends Shri Seervai, the negotiations between the parties
were still not at an end. Counsel says that it was open to Devagnanam to refuse
to negotiate on the terms suggested and insist that the Indian shareholders
must have 60% of the shares. Instead of conveying his reactions to the proposal
Devagnanam, it is contended, went to the United Kingdom to discuss the
question. The minutes of the discussions which took place in U.K., Mackrael and
Sanders not taking any part therein, show that NEWEY continued to plead that
the Indian shareholders and Coats should consider the compromise formula and
that Devagnanam undertook to put to the Indian shareholders further proposals
for compromise and to consider what other proposals or safeguards they might
suggest. Reliance is also placed by counsel on a letter which Devagnanam wrote
to Raeburn on April 5, in support of the submission that the negotiations were
still not at an end. The last but one para of that letter reads thus:
"As undertaken, I
shall place the compromise formula, very kindly suggested by you, before my
colleagues later today. We shall discuss it fully at the board meeting tomorrow
and I shall communicate the outcome to you shortly thereafter".
We are unable to agree that
the proposal annexed to Raeburn's letter of March 9, 1977, was either a
proposal by or on behalf of Coats or one made with their knowledge and approval.
Were it so, it is difficult to understand how Raeburn could write to Mackrael
on June 8, 1977, that Coats were still insistent on the entire 20% of the
excess equity holding not going to the existing Indian shareholders. There is
also no explanation as to why, if the proposal annexed to Raeburn's letter of
March 9, was a proposal by or on behalf of Coats, Raeburn said at the U.K.
meeting of March 29-31, 1977, that it was better to "let Coats declare
their hand". It is indeed impossible to understand why Coats, on their own
part, did not at any time communicate any compromise proposal of theirs to the
Indian shareholders directly. They now seem to take shelter behind the proposal
made by Raeburn in his letter of March 9, adopting it as their own. Even in the
letter which Crawford Bayley & Co., wrote on June 21, 1977, on behalf of
Sanders to the Reserve Bank of India, no reference was at all made to any
proposal by or on behalf of Coats to the Indian shareholders. The vague
statement made in that letter is that "certain proposals" were being
considered and would be submitted "shortly" before the authorities.
No such proposals were ever made by the solicitors or their client to anyone.
These letters and events
leave no doubt in our mind that the negotiations between the parties were at an
end and that there were no concrete proposals by or on behalf of Coats which
remained outstanding, to be discussed by the Indian shareholders. To repeat,
Devagnanam declared his hand in his letter of December 14, 1976, by reiterating
beyond any manner of doubt, that nothing less than 60% share in the equity
capital of NIIL would be acceptable to the Indian shareholders. Coats never
replied to that letter nor indeed did they convey their reaction to it in any
other form or manner at any time. In fact, it would be more true to say that
Coats themselves treated the matter as at an end, since, they were wholly
opposed to the stand of the Indian shareholders that they (the Indian share
holders) must have 60% share in equity capital of NIIL. What happened in the
meeting of April 6, 1977, has to be approached in the light of the finding that
the negotiations between the parties had fallen through, that Coats had refused
to declare their hand and that all that could be inferred from their attitude
with a fair amount of certainty was that they were unwilling to disinvest.
On March 18, 1977, NIIL's
secretary gave a notice of the board meeting for April 6, 1977. The notice was
admittedly received by Sanders in U.K., well in time but he did not attend the
meeting. The explanation for his failure to attend the meeting is said to be
that the item on the agenda of the meeting, "policy—Indianisation"
was vague and did not convey that any matter of importance was going to be discussed
in the meeting, like for example, the issue of rights shares. We find it quite
difficult to accept this explanation. Just as a notice to quit in
landlord-tenant matters cannot be allowed to be split on a straw, notices of
board meetings of companies have to be construed reasonably, by considering
what they mean to those to whom they are given. To a stranger,
"policy—Indianisation" may not convey much but to Sanders and the
U.K. shareholders it would speak volumes. By the time that Sanders received the
notice, the warrings camps were clearly drawn on the two sides of the
battle-line, the Indian group insisting that they will have nothing less than a
60% share in the equity capital of NIIL and the U.K. shareholders insisting
with equal determination that they will not allow the existing Indian
shareholders to have anything more than 49%. In pursuance of a resolution
passed by the board, a letter had already been written to the Reserve Bank
confirming the commitment of NIIL to achieve the required Indianisation by May
17, 1977. A copy of NIIL's letter to the Reserve Bank was sent to Sanders and
Whitehouse. In view of the fact that to the common knowledge of the two sides
there were only two methods by which the desired Indianisation could be
achieved, namely, either disinvestment by the Holding Company in favour of the
existing Indian shareholders or a rights issue, the particular item on the
agenda should have left no doubt in the mind of the U.K. shareholders as to
what the board was likely to discuss and decide in the meeting of the 6th.
Disinvestment stood ruled out of consideration, a fact which was within the
special knowledge of the Holding Company, since whether to disinvest or not was
a matter of their volition.
After the despatch of the
notice dated March 18, 1977, two important events happened. Firstly, Devagnanam
went to Birmingham, where discussions were held from March 29-31, 1977, in
which Indianisation of NIIL was discussed, as shown by the minutes of that
discussion. NEWEY were willing to accept Indianisation, by the existing Indian
shareholders acquiring a 60% interest in the share capital of NIIL while
"COATS were adamantly opposed" to that view. It is surprising that
during the time that Devagnanam was in Birmingham, Sanders did not meet him to
seek an explanation of what the particular item on the agenda of the meeting of
April 6 meant. Sanders had received the notice of March 18, before the
Birmingham discussions took place, and significantly, he has made no affi-davit
at all on the question as to why he did not meet Devagnanam in Birmingham, or
why he did not attend the meeting of April 6, or what the particular item on
the agenda meant to him.
The second important event
which happened after the notice of March 18, was issued was that on April 4,
1977, NIIL received a letter dated March 30, 1977, from the Reserve Bank. The
letter which was in the nature of a stern reminder left no option to NIIL's
board except to honour the commitment which it had made to the Reserve Bank. By
the letter the Reserve Bank warned NIIL: "Please note that if you fail to
comply with our directive regarding dilution of foreign equity within the
stipulated period, we shall be constrained to view the matter seriously".
We do not see any substance
in the contention of the Holding Company that despite the commitment which NIIL
had made to the Reserve Bank, the long time which had elapsed in the meanwhile
and the virtual freezing of its developmental activities as of December 31,
1973, NIIL should have asked for an extention of time from the Reserve Bank. In
the first place, it could not be assumed or predicated that the bank would
grant extension; and, secondly, it was not in the interest of NIIL to ask for
such an extension.
The board meeting was held
as scheduled on April 6, 1977. The minutes of the meeting show that two
directors, Sanders and M. S. P. Rajes, asked for leave of absence which was
granted to them. Sanders, as representing the U.K. shareholders on NIIL's
board, did not make a request for the adjournment of the meeting on the ground
that negotiations for a compromise had not yet come to an end or that the
Indian shareholders had not yet conveyed their response to the "Coats'
compromise formula". Nor did he communicate to the Board his views on
"policy— Indianisation", whatever it may have meant to him. Seven
directors were present in the meeting, with Devagnanam in the chair at the
commencement of the meeting. C. Doraiswamy, a solicitor by profession and,
admittedly, an independent director, was amongst the seven. In order to
complete the quorum of two "independent" directors, other directors
being interested in the issue of the rights shares, Silverston was appointed to
the board as an additional director under art. 97 of NIIL's articles of
association. Silverston then chaired the meeting, which resolved that the
issued capital of the company be increased to Rs. 48,00,000 by the issue of
16,000 equity shares of Rs. 100 each to be offered as rights shares to the
existing shareholders in proportion to the shares held by them. The offer was
decided to be made by a notice specifying the number of shares which each
shareholder was entitled to, and in case, the offer was not accepted within 16
days from the date of the offer, it was to be deemed to have been declined by
the shareholder concerned.
The aforesaid resolution of
the board raises three important questions, inter alia, which have been pressed
upon us by Shri Seervai on behalf of the Holding Company: (1) Whether the
directors of NIIL, in issuing the rights shares, abused the fiduciary power
which they possessed as directors to issue shares; (2) Whether Silverston was a
"disinterested director"; and (3) Whether Silverston's appointment
was otherwise invalid, since there was no item on the agenda of the meeting for
the appointment of an additional director. If Silverston's appointment as an
additional director is bad, either because he was not a distinterested director
or because there was no item on the agenda under which his appointment could be
made, the resolution for the issue of rights shares which was passed in the
board's, meeting of April 6 must fall because then, the necessary quorum of two
disinterested directors would be lacking.
On the first of these three
questions, it is contended by Shri Seervai that notwithstanding that the issue
of shares is intra vires the directors, the directors' power is a fiduciary
power, and although an exercise of such power may be formally valid, it may be
attacked on the ground that it was not exercised for the purpose for which it was
granted. It is urged that the issue of shares by the directors which is
directed to affect the right of the majority of the shareholders or to defeat
that majority and convert it into a minority is unconstitutional, void and in
breach of the fiduciary duty of directors, though in certain situations it may
be ratified by the company in the general meeting. Any reference by the company
to a general meeting in the present case, it is said, would have been futile
since, without the impugned issue of rights shares, the majority was against
the issue. It was finally argued that good faith and honest belief that in fact
the course proposed by the directors was for the benefit of the shareholders or
was bona fide believed to be for their benefit is irrelevant because, it is for
the majority of the shareholders to decide as to what is for their benefit, so
long as the majority does not act oppressively or illegally. Counsel relies in
support of these and allied contentions on the decision of the Privy Council in
Howard Smith Ltd. [1974] AC 821 (PC) and of the English courts in Fraser [1864]
71 ER 361, Punt [1903] 2 Ch 506 (Ch D), Piercy [1920] 1 Ch 77 (Ch D) and Hogg
[l967] 1 Ch 254; 37 Comp Cas 157 (Ch D).
In Punt v. Symons [1903] 2
Ch 506 (Ch D), which applied the principle of Fraser v. Whalley, it was held
that:
"Where shares had been
issued by the directors, not for the general benefit of the company, but for
the purpose of controlling the holders of the greater number of shares by
obtaining a majority of voting power they ought to be restrained from holding
the meeting at which the votes of the new shareholders were to have been
used".
But Byrne J. stated:
"There may be
occasions when directors may fairly and properly issue shares in the case of a
company constituted like the present for other reasons. For instance it would
not be at all an unreasonable thing to create a sufficient number of
shareholders to enable statutory powers to be exercised".
In the instant case, the
issue of rights shares was made by the directors for the purpose of complying
with the requirements of the FERA and the directives issued by the Reserve Bank
under that Act. The Reserve Bank had fixed a deadline and NIIL had committed
itself to complying with the bank's directive before that deadline.
Peterson J. applied the
principle enunciated in Fraser [1864] 71 ER 361 and in Punt [1903] 2 Ch 506 (Ch
D) in the case of Piercy v. S. Mills & Company Ltd. [1920] 1 Ch 77 (Ch D).
The learned judge observed at page 84:
"The basis of both
cases is, as I understand, that directors are not entitled to use their powers
of issuing shares merely for the purpose of maintaining their control or the
control of themselves and their friends over the affairs 6f the company, or
merely for the purpose of defeating the wishes of the existing majority of
shareholders".
The fact that by the issue
of shares the directors succeed, also or incidentally, in maintaining their
control over the company or in newly acquiring it, does not amount to an abuse
of their fiduciary power. What is considered objectionable is the use of such
powers merely for an extraneous purpose like maintenance or acquisition of
control over the affairs of the company.
In Hogg v. Cramphorn Ltd.
[1967] 37 Comp Cas 157 (Ch D), it was held that if the power to issue shares
was exercised from an improper motive, the issue was liable to be set aside and
it was immaterial that the issue was made in a bona fide belief that it was in
the interest of the company. Buckley J. reiterated the principle in Punt [1903]
2 Ch 506 (Ch D) and in Piercy [1920] 1 Ch 77 (Ch D) and observed (p. 167 of 37
Comp Cas):
"Unless a majority in
a company is acting oppressively towards the minority, this court should not
and will not itself interfere with the exercise by the majority of its
constitutional rights or embark upon an inquiry into the respective merits of
the views held or policies favoured by the majority and the minority. Nor will
this court permit directors to exercise powers, which have been delegated to
them by the company in circumstances which put the directors in a fiduciary
position when exercising those powers, in such a way as to interfere with the
exercise by the majority of its constitutional rights; and in a case of this
kind also, in my judgment, the court should
not investigate the rival merits of the views or policies of the parties".
(p. 268)
Applying this principle, it
seems to as difficult to hold that by the issue of rights shares the directors
of NIIL interfered in any manner with the legal rights of the majority. The
majority had to disinvest or else to submit to the issue of rights shares in
order to comply with the statutory requirements of the FERA and the Reserve
Bank's directives. Having chosen not to disinvest, an option which was open to
them, they did not any longer possess the legal right to insist that the
directors shall not issue the rights shares. What the directors did was clearly
in the larger interests of the company and in obedience to their duty to comply
with the law of the land. The fact that while discharging that duty they
incidentally trenched upon the interests of the majority cannot invalidate
their action. The conversion of the existing majority into a minority was a
consequence of what the directors were obliged lawfully to do. Such conversion
was not the motive force of their action.
Before we advert to the
decision of the Privy Council in Howard Smith Ltd. v. Ampol Petroleum Ltd.
[1974] AC 821 (PC), we would like to refer to the decision of the High Court of
Australia in Harlowe's Nominees Pvt. Ltd. v. Woodside (Lakes Entrance) Oil Company No Liability
[1968] 121 CLR 483 and to the Canadian
decision of Berger J. of the Supreme Court of British Columbia, in the case of
Teck Corporation Ltd. v. Millar [1972] 33 DLR (3d) 288, both of which were
considered by Lord Wilber-force in Howard Smith [1974] AC 821 (PC). On a
consideration of the English decisions, including those in Punt [1903] 2 Ch 506
(Ch D) and Piercy [1920] 1 Ch 77 (Ch D), Barwick C. J. said in Harlowe's
Nominees (p. 493 of 121 CLR):
"The principle is that
although primarily the power is given to enable capital to be raised when
required for the purposes of the company, there may be occasions when the
directors may fairly and properly issue shares for other reasons, so rang as
those reasons relate to a purpose of benefiting the company as a whole, as
distinguished from a purpose, for example, of maintaining control of the
company in the hands of the directors themselves or their friends. An inquiry
as to whether additional capital was presently required is often most relevant
to the ultimate question upon which the validity or the invalidity of the issue
depends; but that ultimate question must always be whether in truth the issue
was made honestly in the interests of the company".
We agree with the principle
so stated by the Australian High Court and, in our opinion, it applies with
great force to the situation in the present case. In Teck Corporation [1972] 33
DLR (3d) 288, the court examined several decisions of the English courts and of
other courts, including the one in Hogg. [1967] 37 Comp Cas 157 (Ch D). The headnote of the last report (33 DLR (3d) 288) at page
289 reads thus:
"Where directors of a
company seek, by entering into an agreement to issue new shares, to prevent a
majority shareholder from exercising control of the company, they will not be
held to have failed in their fiduciary duty to the company if they act in good
faith in what they believe, on reasonable grounds, to be the interests of the
company. If the directors' primary purpose is to act in the interests of the
company, they are acting in good faith even though they also benefit as a
result".
In Howard Smith [1974] AC
821 (PC), no new principle was evolved by Lord Wilberforce who, distinguishing
the decisions in Teck Corporation [1972] 33 DLR (3rd) 288 and Harlowe's
Nominees (121 CLR 483) said (p. 837 of [1974] AC):
"By contrast to the
cases of Harlowe and Teck, the present case, on the evidence, does not, on the findings
of the trial judge, involve any consideration of management, within the proper
sphere of the directors. The purpose found by the judge is simply and solely to
dilute the majority voting power held by Ampol and Bulkships so as to enable a
then minority of shareholders to sell their shares more advantageously. So far
as authority goes, an issue of shares purely for the purpose of creating voting
power has repeatedly been condemned".
The dictum of Byrne J. in
Punt [1903] 2 Ch 506 (Ch D) that "there may be reasons other than to raise
capital for which shares may be issued" was approved at p. 836 and it was
observed at p. 837:
"Just as it is
established that directors, within their management powers, may take decisions
against the wishes of the majority of shareholders, and indeed that the
majority of shareholders cannot control them in the exercise of these powers
while they remain in office (Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuningham [1906] 2
Ch 34 (CA)), so it must be unconstitutional
for directors to use their fiduciary powers over the shares in the company
purely for the purpose of destroying an existing majority, or creating a new
majority which did not previously exist. To do so is to interfere with that
element of the company's constitution which is separate from and set against
their powers. If there is added, moreover, to this immediate purpose, an
ulterior purpose to enable an offer for shares to proceed, which the existing
majority was in a position to block, the departure from the legitimate use of
the fiduciary power becomes hot less, but all the greater. The right to dispose
of shares at a given price is essentially an individual right to be exercised
on individual decision and on which a majority, in the absence of oppression or
similar impropriety, is entitled to prevail".
In our judgment, the
decision of the Privy Council in Howard Smith [1974] AC 821 (PC), instead of
helping the Holding Company, goes a long way in favour of the appellants. The
directors in the instant case did not exercise their fiduciary powers over the
shares merely or solely for the purpose of destroying an existing majority or
for creating a new majority which did not previously exist. The expressions
"merely", "purely", "simply" and
"solely" virtually lie strewn all over (p. 837 of the report in
Howard Smith). The directors here exercised their power for the purpose of
preventing the affairs of the company from being brought to a grinding halt, a
consummation devoutly wished for by Coats in the interest of their extensive
world-wide business.
In
Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] SCR 391; 20 Comp Cas 179, Das J., in his separate but concurring
judgment deduced the following principle on the basis of the English decisions
(p. 203 of 20 Comp Cas):
"It is well
established that directors of a company are in a fiduciary position vis-a-vis
the company and must exercise their power for the benefit of the company. If
the power to issue further shares is exercised by the directors not for the
benefit of the company but simply and solely for their personal aggrandisement
and to the detriment of the company, the court will interfere and prevent the
directors from doing so. The very basis of the court's interference in such a
case is the existence of the relationship of a trustee and of cestui que trust
as between the directors and the company". (pp. 419-420 of [1950] SCR)).
It is true that Das J. held
that the Singhanias were complete strangers to the company and, consequently,
the directors owed no duty, much less a fiduciary duty, to them. But we are
unable to agree with the contention that the observations extracted above from
the judgment of Das J. are obiter. The learned judge has set forth the
plaintiffs' contentions under three sub-heads at p. 415 of 1950 SCR. At the
bottom of p. 419, he finished the discussion of the 2nd sub-head and
said:
"This leads me to a
consideration of the third sub-head on the assumption that...the additional
motive was a bad motive".
The question was thus
argued before the court and was squarely dealt with. Before we leave this
topic, we would like to mention that the mere circumstance that the directors
derive benefit as shareholders by reason of the exercise of their fiduciary
power to issue shares, will not vitiate the exercise of that power. As observed
by Gower in Principles of Modern Company Law, 4th Edn., p. 578 :
"As it was happily put
in an Australian case they are 'not required by the law to live in an unreal
region of detached altruism and to act in a vague mood of ideal abstraction
from obvious facts which must be present to
the mind of any honest and intelligent man when he exercises his powers as a
director'".
The Australian case
referred to above by the learned author is Mills v. Mills [1938] 60 CLR 150,
which was specifically approved by Lord Wilber-force in Howard Smith [1974] AC
821 (PC). In Nanalal Zaver [1950] SCR 391 20 Comp Cas 179 too, Das J. stated at
p. 425, that the true principle was laid down by the Judicial Committee of the
Privy Council in Hirsche v. Sims [1894] AC 654, 660-661 thus (p. 207 of 20 Comp
Cas):
" 'If the true effect
of the whole evidence is, that the defendants truly and reasonably believed at
the time that what they did was for the interest of the company, they are not
chargeable with dolus malus or breach of trust merely because in promoting the
interest of the company they were also promoting their own, or because they
afterwards sold shares at prices which gave them large profits' ".
Whether one looks at the matter
from the point of view expressed by this court in Nanalal Zaver [1950] 20 Comp
Cas 179 (SC), or from the point of view expressed by the Privy Council in
Howard Smith [1974] AC 821, the test is the same, namely, whether the issue of
shares is simply or solely for the benefit of the directors. If the shares are
issued in the larger interest of the company, the decision to issue the shares
cannot be struck down on the ground that it has incidentally benefited the
directors in their capacity as shareholders. We must, therefore, reject Shri
Seervai's argument that, in the instant case, the board of directors abused its
fiduciary power in deciding upon the issue of rights shares.
The second of the three
questions arising out of the proceedings of the board's meeting dated April 6,
1977, concerns the validity of the appointment of Silverston as an additional
director. Under s. 287(2) of the Companies Act, 1956, the quorum for the said
meeting of the board of directors was two. There can be no doubt that a quorum
of two directors means a quorum of two directors who are competent to transact
and vote on the business
before the Board. (See Greymouth Point Elizabeth-Railway & Coal Co. Ltd.,
In re [1904] 1 Ch 32 (Ch D) and Palmer's Company Precedents, 17th Edn., p. 579, f.n. 3). The contention of the Holding
Company is that Silverston was a director "directly or indirectly
concerned or interested" in the arrangement or contract arising from the
resolutions to offer and allot rights shares and, consequently, the resolutions
were invalid: firstly, on the ground, that they were passed by a vote of an
interested director without which there would be no quorum and, secondly,
because, Silvers-ton's appointment as an additional director was for the
purpose of enabling the said resolution to be passed for the benefit of the
interested directors. Relying upon a decision of the Bombay High Court in
Firestone Tyre & Rubber
Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp Cas 377, Shri Seervai contends that s. 300 of the Companies Act
embodies the general rule of equity that no person who has to discharge duties
on behalf of a corporate body shall be allowed to enter into engagements in
which he has a personal interest conflicting, or which may possibly conflict,
with the interests of those whom he is bound to protect.
The reason why it is said
that Silverston was interested in or concerned with the allotment of the rights
shares to the existing shareholders is, firstly, because at the Ketty meeting
held in October, 1976, he had acted as an "adviser to the Indian
shareholders", and, secondly, because on October 25, 1976, he had written
a letter to Kingsley purporting to convey his advice to the board of directors.
That letter contains allegations against the directors of Needle Industries,
U.K. and of Coats. In other words, it is contended, Silverston was hostile to
Needle Industries, U.K., and to Coats, and no person in his position could
possibly bring to bear an unbiassed or disinterested judgment on the question
which arose between the Holding Company and the Indian shareholders as regards
the issue of rights shares. It is also said that certain other aspects of
Silverston's conduct, including his attitude in the meeting of the 6th April,
show that he was an interested director.
We are unable to accept the
contention that Silverston is an "interested" director within the
meaning of s. 300 of the Companies Act. In the first place, it is wrong to
attribute any bias to Silverston for having acted as an adviser to the Indian
shareholders in the Ketty meeting. Silverston is by profession a solicitor and
we suppose that legal advisers do not necessarily have a biassed attitude to
questions on which their advice is sought or tendered. The fact that Silverston
was received cordially in U.K. both by Raeburn and Mackrael when he went there
in January, 1977, shows that even after he had acted as an adviser to the
Indian shareholders it was not thought that he was in any sense biassed in
their favour. Silverston's alleged personal hostility to Coats cannot, within
the meaning of s. 300(1) of the Companies Act, make him a person "directly
or indirectly, concerned or interested in the contract or arrangement" in
the discussion of which he had to participate or upon which he had to vote.
Section 300(1) disqualifies a director from taking part in the discussion of or
voting on any contract or arrangement entered into or to be entered into by or
on behalf of the company, if he is in any way concerned or interested in that
contract or arrangement. Under s. 299(1) of the Companies Act:
"Every director of a
company who is in any way, whether directly or indirectly, concerned or
interested in a contract or arrangement, or proposed contract or arrangement,
entered into or to be entered into, by or on behalf of the company, shall
disclose the nature of his concern or interest at a metting of the board of
directors".
The concern or interest of
the director which has to be disclosed at the board meeting must be in relation
to the contract or arrangement entered into or to be entered into by or on
behalf of the company. The interest or concern spoken of by ss. 299(1) and
300(1) cannot be a merely sentimental interest of ideological concern.
Therefore, a relationship of friendliness with the directors who are interested
in the contract or arrangement or even the mere fact of a lawyer-client
relationship with such directors will not disqualify a person from acting as a
director on the ground of his being, under s. 300(1), an "interested"
director. Thus, howsoever, one may stretch the language of s. 300(1) in the
interest of purity of company administration, it is next to impossible to bring
Silverston's appointment within the framework of that provision. In the
Firestone [1971] 41 Comp Cas 377 (Bom), the solicitor-director was held to be
concerned or interested in the agreement for the appointment of Kilachands as
selling agents as he had a substantial shareholding in a private limited
company of Kilachands. Besides, he was also a shareholder-director in various
other concerns of Kilachands.
We must, accordingly,
reject the argument that Silverston was an interested director, that,
therefore, his appointment as an additional director was invalid and that,
consequently, the resolution for the issue of rights shares was passed without
the necessary quorum of two disinterested directors. We have already held that
the resolution was not passed for the benefit of the directors. There is,
therefore, no question of Silverston's appointment having been made for the
purpose of enabling such a resolution to be passed.
The third contention,
arising out of the proceedings of the meeting of 6th April, to the effect that
Silverston's appointment as an additional director was invalid since there was
no item on the agenda of the meeting for the appointment of an additional
director is equally without substance. Section 260 of the Companies Act
preserves the power of the board of directors to appoint additional directors
if such a power is conferred on the board by the articles of association of the
company. We are not concerned with the other conditions laid down in the
section, to which the appointment is subject. It is sufficient to state that
art. 97 of NIIL's articles of association confers the requisite power on the
Board to appoint additional directors.
We do not see how the
appointment of an additional director could have been foreseen before the 6th
April, on which date the meeting of the board was due to be held. The occasion
to appoint Silverston as an additional director arose when the board met on 6th
April, with Devagnanam in the chair. Sanders was absent and no communication
was received from or on behalf of the Holding Company that they had decided
finally not to disinvest. They always had the right to such a locus poenitentiae.
Were they to intimate that they were ready to disinvest, there would have been
no occasion to appoint an additional director. That occasion arose only when
the picture emerged clearly that the board would have to consider the only
other alternative for reduction of the non-resident holding, namely, the issue
of rights shares. It is for this reason that the subject of appointment of an
additional director could not have, in the then state of facts, formed a part
of the agenda. Silverston's appointment is, therefore, not open to challenge on
the ground of want of agenda on that subject.
It is necessary to clear a
misunderstanding in regard to the power of directors to issue shares. It is not
the law that the power to issue shares can be used only if there is need to
raise additional capital. It is true that the power to issue shares is given
primarily to enable capital to be raised when it is required for the purposes
of the company but that power is not conditioned by such need. That power can
be used for other reasons as, for example, to create a sufficient number of
shareholders to enable the company to exercise statutory powers [See Punt v.
Symons & Co. [1903] 2 Ch 506 (Ch.D), or to enable it to comply with legal
requirements as in the instant case. In Hogg v. Cramphorn [1967] 37 Comp Cas
157 (Ch D), Buckley J. (p. 267) agreed with the statement of law by Byrne J. in
Punt. And so did Lord Wilberforce (p. 835) in Howard Smith [1974] AC 821 (PC)
where he said s
"...it is, in their
Lordships' opinion, too narrow an approach to say that the only valid purpose
for which shares may be issued is to raise capital for the company. The
discretion is not in terms limited in this way: the law should not impose such
a limitation on directors' powers. To define in advance exact limits beyond
which directors must not pass is, in their Lordships' view, impossible. This
clearly cannot be done by enumeration, since the variety of situations facing
directors of different types of company in different situations cannot be anticipated".
The Australian decision in
Harlowe Nominees [1968] 121 CLR 483, 493 took the same view of the directors'
power to issue shares. It was said therein:
"The principle is that
although primarily the power is given to enable capital to be raised when required
for the purposes of the company, there may be occasions when the directors may
fairly and properly issue shares for other reasons, so long as those reasons
relate to a purpose of benefiting the company as a whole, as distinguished from
a purpose, for example, of maintaining control of the company in the hands of
the directors themselves or their friends".
We have already expressed
our view that the rights shares were issued in the instant case in order to
comply with the legal requirements, which, apart
from being obligatory as the only viable course open to the directors, was for
the benefit of the company since, otherwise, its developmental activities would
have stood frozen as of December 31, 1973. The shares were not issued as a part
of a take-over war between the rival groups of shareholders.
The decision to issue
rights shares was assailed on the ground also that the company did not, as
required by the, Reserve Bank's letter dated May 11, 1975, submit any scheme
indicating whether the reduction in the non-resident interest was proposed to
be brought about by issue of additional equity capital to Indian residents to
the extent necessary to finance any scheme of expansion or diversification. It
is true that by the aforesaid letter, the Reserve Bank had asked NIIL to report
to it as to how the company proposed to reduce the non-resident interest:
whether by disinvestment by non-resident shareholders, or by issue of
additional equity capital to Indian residents to the extent necessary to
finance any scheme of expansion/diversification, or by both. We are, however,
unable to read the bank's letter as requiring or asking the company not to
issue the additional capital unless it was necessary to do so for financing a
scheme of expansion or diversification. The Reserve Bank could not have
intended to impose any such condition by way of a general direction in the face
of the legal position, which we have set out above, that the power of the
directors to issue shares is not conditioned by the need for additional
capital. We are not suggesting that the Reserve Bank, in the exercise of its
statutory functions, cannot ever impose such conditions as it deems
appropriate, subject to which alone a new issue may be made. But, neither the
wording of the bank's letter nor the true legal position justifies the stand of
the Holding Company. The minutes of the Ketty meeting of October 20-21, 1976,
saying that it was agreed that the rights issue, with the Indian shareholders
taking up the U.K. members' rights, would be considered provided it was
demonstrated by NIIL that "there is a viable development plan requiring
funds that the expected NIIL cash flow cannot meet", cannot also justify
the argument that the power of the company to issue rights shares was, by agreement,
conditioned by the need to raise additional capital for a development plan. In
fact, the occasion for consideration by the Holding Company of NIIL's proposal
to issue rights shares did not arise, since the Holding Company virtually
boycotted the meeting of April 6. Assuming for the sake of argument that there
was any such understanding between the parties, the minutes of the meeting of
April 6 show that the company needed additional capital for its expansion. The
minutes say:
"As per the final
budget for the year 1977, the working capital requirements amounted to nearly
Rs. 100 lakhs and even after tapping the facilities that we will be entitled to
obtain from the banking sector, we will be left with a gap of about Rs. 25
lakhs which can be met by only increasing equity capital and attracting
deposits from public".
There is no reason to
believe that this statement does not accord with the economic realities of the
situation as assessed by the directors of the company.
Finally, it is also not
true to say, as a statement of law, that the directors have no power to issue
shares at par, if their market price is above par. These are primarily matters
of policy for the directors to decide in the exercise of their discretion and
no hard and fast rule can be, laid down to fetter that discretion. As observed
by Lord Davey in Hilder v. Dexter [1902] AC 474, 480 (HL):
"I am not aware of any
law which obliges a company to issue its shares above par because they are
saleable at a premium in the market. It depends on the circumstances of each
case whether it will be prudent or even possible to do so, and it is a question
for the directors to decide".
What is necessary to bear
in mind is that such discretionary powers in company administration are in the
nature of fiduciary powers and must, for that reason, be exercised in good
faith. Mala fides vitiate the exercise of such discretion. We may mention that,
in the past, whenever the need for additional capital was felt, or for other
reasons, NIIL issued shares to its members at par.
We are, therefore, of the
opinion that Devagnanam and his group acted in the best interests of NIIL in
the matter of the issue of rights shares and, indeed, the board of directors
followed in the meeting of the 6th April a course which they had no option but
to adopt and in doing which, they were solely actuated by the consideration as
to what was in the interest of the company. The shareholder-directors who were
interested in the issue of rights shares neither participated in the discussion
of that question nor voted upon it. The two directors who, forming the
requisite quorum, resolved upon the issue of rights shares were Silverston who,
in our opinion, was a disinterested director and Doraiswamy, who unquestionably
was a disinterested director. The latter has been referred to in the company
petition, Mackrael's reply affidavit and in the Holding Company's memorandum of
appeal in the High Court as "uninterested", "disinterested"
and "independent". At a crucial time, when Devagnanam was proposing
to dispose of his shares to Khaitan, Sanders asked for Doraiswamy's advice by
his letter dated August 6, 1975, in which he expressed "complete
confidence" in Doraiswamy in the knowledge that the Holding Company could
count on his guidance. Disinvestment by the Holding
Company, as one of the two courses which could be adopted for reducing the
non-resident interest in NIIL to 40% stood ruled out, on account of the rigid
attitude of Coats who, during the period between the Ketty meeting of October
20-21, 1976, and the Birmingham discussions of March 29-31, 1977, clung to
their self-interest, regardless of the pressure of the FERA, the directive of
the Reserve Bank of India and their transparent impact on the future of NIIL.
Devagnanam and the disinterested directors, having acted out of legal
compulsion precipitated by the obstructive attitude of Coats and their action
being in the larger interest of the company, it is impossible to hold that the
resolution passed in the meeting of April 6 for the issue of rights shares at
par to the existing shareholders of the NIIL constituted an act of oppression
against the Holding Company. That cannot, however, mark the end of the case
because 2nd May has still to come and Shri Seervai's argument is that the true
question before the court is whether the offer of rights shares to all existing
shareholders of NIIL but the issue of rights shares to existing Indian
shareholders only, constitutes oppression of the Holding Company.
That takes us to the
significant, and if we may so call them, sordid happenings between April 6 and
May 2, 1977. Devagnanam wrote a letter to Raeburn on April 12, 1977, stating
that a copy of the Reserve Bank's letter dated March 30, 1977, was enclosed
therewith. It was in fact not enclosed. Pursuant to the decision taken in the
board's meeting of April 6, a letter of offer dated April 14 was prepared by
NIIL. Devagnanam's letter to Raeburn dated April 12, (without a copy of the
Reserve Bank's letter dated March 30) and the letter of offer dated April 14,
were received by Raeburn on May 2, 1977, in an envelope bearing the postal mark
of Madras dated April 27, 1977. The letter of offer which was posted to the
Holding Company also bore the postal mark of Madras dated April 27, 1977, and
that too was received in Birmingham on May 2, 1977. The letter of offer which
was posted to one of the Indian shareholders, Manoharan, who was siding with
Coats, was also posted in an envelope which bore the postal mark of Madras
dated April 27, 1977. On April 19, 1977, a notice of the board's meeting for
May 2, 1977, was prepared. One of the items of the agenda of the meeting was
stated in the notice as "policy—(a) Indianisation, (b) Allotment of
shares". The notice dated April 19, of the board's meeting for May 2, was
posted to Sanders in an envelope which bore the postal mark of Madras dated
April 27, 1977, and was received by him in Birmingham on May 2, 1977, after the
board's meeting fixed for that date had already taken place.
It puts a severe strain on
one's credulity to believe that the letters of offer dated April 14 to the
Holding Company, to Raeburn and to Manoharan were posted on the 14th itself but
that somehow they rotted in the post office
until the 27th, on which date they took off simultaneously for their respective
destinations. The affidavit of Selvaraj, NIIL's senior clerk in the despatch
department, and the relevant entry in the outward register are quite difficult
to accept on this point since they do not accord with the ordinary course of
human affairs. Not only the three letters of offer abovesaid, but even the
notice dated April 19, of the board meeting for May 2, was received by Sanders
at Birmingham in an envelope bearing the Madras postal mark of April 27.
Selvaraj's affidavit, apparently, supported by an entry in the outward
register, that the envelope addressed to Sanders containing the notice of 19th
April was posted on the 22nd is also difficult to accept. It takes all kinds to
make the world and we do not know whether the NIIL's staff was advised
astrologically that 27th April was an auspicious date for posting letters. But
if only they had sought a little legal advice which, at least from Doraiswamy
and Silverston, was readily available to them, they would have seen the folly
of indulging in such behaviour. Add to that the circumstance that
Devagna-n'am's letter to Raeburn dated April 12 was put in the same envelope in
which the letter of offer dated April 14 was enclosed and the envelope
containing these two important documents bore the postal mark of Madras dated
27th April. These coincidences are too tell-tale to admit of any doubt that
someone or the other, not necessarily Devagnanam, unduly solicitous of the
interest of NIIL and of the Indian shareholders manipulated to delay the
posting of the letters of offer and the notice of the board meeting for 2nd
May, until the 27th April. What is naively sought to be explained as a mere
coincidence reminds one of the "Brides in the Bath Tub" case: The
death of the first bride in the bath tub may pass off as an accident and of the
second as suicide but when, in identical circumstances, the third bride dies of
asphyxia in the bath tub, the conclusion becomes compelling, even applying the
rule of circumstantial evidence, that she died a homicidal death.
The purpose behind the
planned delay in posting the letters of offer to Raeburn and to the Holding
Company, and in posting the notice of the board's meeting for May 2 to Sanders,
was palpably to ensure that no legal proceeding was taken to injunct the
holding of the meeting. The object of withholding these important documents,
until it was quite late to act upon them, was to present to the Holding Company
a fait accompli in the shape of the board's decision for the allotment of
rights shares to the existing Indian shareholders.
We are, however, unable to
share the view expressed in the "12th conclusion" in the appellate
judgment of the High Court, that Devagnanam and "his colleagues in the
board of directors" arranged to ensure the late posting of the letters of
offer and the notice of the meeting. We do not
accept Shri Nariman's argument that Devagnanam must be exonerated from all
responsibility in. this behalf because he was away in Malacca from April 13 to
26. In the first place, to be in a place on two dates is not necessarily to be
there all along between those dates and, therefore, we cannot infer that
Devagnanam was in Malacca from 13th to 26th, since he was there on the 13th and
the 26th. Besides, it was easy for a man of Devagnanam's importance and ability
to pull the strings from a distance and his physical presence was not necessary
to achieve the desired result. That is how puppets are moved. But there is no
evidence, at least not enough, to justify the categorical finding recorded by
the appellate Bench of the High Court. The fact that Devagnanam stood to gain
by the machination is a relevant factor to be taken into account but even that
is not the whole truth: NIIL, not Devagnanam was the real beneficiary, a thesis
which we have expounded over the last many pages. And the involvement of the
other directors by calling them Devagnanam's colleagues is less than just to
them. There is not a shred of evidence to justify the grave charge that they
were willing tools in Devagnanam's hands and lent their help to concoct evidence.
We clear their conduct, expressly and categorically.
In so far as Devagnanam
himself is concerned, there is room enough to suspect that he was the
part-author of the late postings of important documents, especially since he
was the prime actor in the play of NIIL's Indianisation. But even in regard to
him, it is difficult to carry the case beyond the realm of suspicion and
"room enough" is not the same thing as "reason enough".
Section 15 of the Evidence Act which carries the famous illustration of a
person obtaining insurance money on his houses which caught fire successively,
the question being whether the fire was accidental or intentional or whether
the act was done with a particular knowledge or intention, will not help to
fasten the blame on Devagnanam because it is not shown that he was instrumental
or concerned in any of the late postings complained of. Were his complicity
shown in any of these, it would have been easy to implicate him in all of them.
On the contrary, there is
an admitted act, described as a lapse, on Devagnanam's part which shows that he
failed to do what was to his advantage to do. It may be recalled that in his
letter dated April 12 to Raeburn, Devagnanam had stated that he was enclosing
therewith a copy of the Reserve Bank's letter dated March 30, 1977, but that
copy was not enclosed. Nothing was to be gained by suppressing the Reserve
Bank's letter from Raeburn who was always sympathetic to the Indian
shareholders. If anything, there was something to gain by apprising Raeburn of
the urgency of the matter in view of the Reserve Bank's letter. The strongest
point in favour of the Indian shareholders was the last para. of the Reserve Bank's letter which they would
have liked the U.K. shareholders to know. Raeburn's response of 2nd May to
Devagnanam's letter of 12th April and the letter of offer was without the
knowledge of the Reserve Bank's letter of March 30. When the bank's letter was
sent to Raeburn along with Devagnanam's letter of May 11, Raeburn categorically
supported the stand of the Indian shareholders, as is clear from para. 4 of the
letter dated June 8, 1977, by Raeburn to Mackrael, a copy of which was sent by
Raeburn to Devagnanam along with his letter dated June 17, 1977.
The inferences arising from
the late posting of the letter of offer to the Holding Company as also of the
notice of meeting for May 2 to Sanders and the impact of those inferences on
the conduct and intentions of Devagnanam are one thing; we have already dealt
with that aspect of the matter. Their impact on the legality of the offer and
the validity of the meeting of May 2, is quite another matter, which we propose
now to examine. In doing this, we will keep out of consideration all questions
relating to the personal involvement of Devagnanam and his group in the delay
caused in sending the letters of offer and the notice of meeting for May 2.
First, as to the letter of
offer: The letter of offer dated April 14, 1977, sent to the Holding Company at
Birmingham, like all other letters of offer, mentions, inter alia, that it was
resolved in the meeting of April 6, to increase the issued capital of the
company from 32,000 shares of Rs. 100 each to 48,000 shares of Rs. 100 each by
issuing rights shares to the existing shareholders on the five conditions mentioned
in the letter. The second condition reads thus: "If the offer is not
accepted within 16 days from the date of offer, it shall be deemed to have been
declined by the shareholder". The Holding Company was informed by the last
para. of the letter of offer that in respect of its holding of 18,990 shares,
it was entitled to 9,495 rights shares and that its acceptance of the offer
together with the application money (at Rs. 50 per share) should be forwarded
so as to reach the registered office of NIIL on or before April 30, 1977. A
postal communication by air between the U.K. and Madras, which is the normal
mode of communication, generally takes five days to reach its destination. If
the letter of offer were to be posted on the 14th itself in Madras, it would
have reached the Holding Company in Birmingham, say, on the 19th. Even assuming
that the 16 days' period allowed for communicating the acceptance of offer is
to be counted from the 14th and not from the 19th, it would expire on 30th
April. To that has to be added the period of five days which the Holding
Company's letter would take to reach Madras. That means that the Holding
Company would be within its rights if its acceptance reached NIIL on or before
May 5, 1977. The board of directors had,
however, met in Madras three days before that and had allotted the entire issue
of the rights shares to the Indian shareholders, on the ground that the Holding
Company had not applied for the allotment of the shares due to it. In these
circumstances, it is quite clear that the rights shares offerred to the Holding
company could not have been allotted to any one in the meeting of May 2, for
the supposed failure of the Holding Company to communicate its acceptance
before April 30. The meeting of May 2, of which the main purpose was to
consider "allotment" of the rights shares must, therefore, be held to
be abortive which could produce no tangible result. The matter would be worse
if April 27 and much worse if May 2 were to be taken as the starting point for
counting the period of 16 days. Except for circumstances hereinafter appearing,
the allotment to Indian shareholders of the rights shares which were offered to
the Holding Company would have been difficult to accept and act upon.
The objection arising out
of the late posting of the notice dated April 19 for the meeting of 2nd May
goes to the very root of the matter. That notice is alleged to have been posted
to N. T. Sanders, Studley, Warwickshire, U.K., on April 22. But we have already
held that in view of the fact that the envelope in which the notice was sent
bears the postal mark of Madras dated April 27, 1977, this latter date must be
taken to be the date on which the notice was posted. The notice was received by
Sanders on May 2, on which date the Board's meeting for the allotment of rights
shares was due to be held and was, in fact, held. The utter inadequacy of the
notice to Sanders in terms of time stares in the face and needs no further
argument to justify the finding that the holding of the meeting was illegal, at
least in so far as the Holding Company is concerned. It is self-evident that
Sanders could not possibly have attended the meeting. There is, therefore, no
alternative save to hold that the decision taken in the meeting of May 2
cannot, in the normal circumstances, affect the legal rights of the Holding
Company or create any legal obligations against it.
The next question, and a
very important one at that, on which there is a sharp controversy between the
parties, is as to what is the consequence of the finding, which we have
recorded, that the objection arising out of the late posting of the notice of
the meeting for 2nd May goes to the root of the matter. The answer to this
question depends upon whether the Holding Company could have accepted the offer
of rights shares and if, either for reasons of volition or of legal compulsion,
it could not have accepted the offer, whether it could have at least renounced
its right under the offer to a resident Indian, other than the existing Indian
shareholders. The decision of this question depends upon the true construction
of the provisions of the FERA and of ss. 43A and 81 of the Companies Act, 1956.
We have already reproduced
the relevant provisions of the FERA, namely, s. 2(p). (q) and (u); s. 19(1)(a),
(b) and (d); s. 29(1)(a);s. 29(2)(a), (b) and (c); and s. 29(4)(a) and (b).
Section 29(1) provides thus:
"...notwithstanding
anything contained the provisions of the Companies Act, 1956 .a company which
is not incorporated under any law in force in India or in which the
non-resident interest is more than forty per cent shall not, except with the
general or special permission of the Reserve Bank carry on in India any
trading, commercial or industrial...other than an activity for the carrying on
of which permission of the Reserve Bank has been obtained under section
28;."..
The other provisions are of
an ancillary and consequential nature, following upon the main provision
summarised above.
NIIL had applied for the
necessary permission, since the non-resident interest therein was more than
40%, the Holding Company owning nearly 60% of its share capital. That
permission was accorded by the Reserve Bank on certain conditions which, inter
alia, stipulated that the reduction in the non-resident holding must be brought
down to 40% within one year of the receipt of its letter, that is, before May
17, 1977, and that until then, the manufacturing and business activities of the
company shall not be extended beyond the approved level as of December 31,
1973.
It is contended by Shri
Seervai that non-compliance with the condition regarding the dilution of
non-resident interest within the stipulated period could not have resulted in
the RBI directing NIIL to close down its business or not to carry on its
business. It is also argued that non-compliance with the conditions imposed for
permission to carry on its business would not have exposed the Indian directors
to any penalties or liabilities and that, in the absence of a power to revoke
the permission already granted (as in other sections like ss. 6 and 32), the
RBI had no power to revoke the permission granted to NIIL even if the
conditions subject to which the permission was granted were breached. According
to the counsel, closing down a business which the RBI had allowed to be continued
by granting permission would have such grave consequences—public and
private—that the power to direct the business to be discontinued was advisably
not conferred, even if the conditions are breached. Section 29(4)(c), it is
urged, which enables the RBI to direct non-residents to sell their shares or
cause them to be sold where an application under s. 29(4)(a), for permission to
continue to hold shares, was rejected, is the only power given to the Reserve
Bank where a condition imposed under s. 29(2) is breached.
We are unable to accept
these contentions. The Reserve Bank granted permission to NIIL to carry on its
business, "subject to the conditions" mentioned in the letter of May
11, 1976. It may be that each of those conditions
is not of the same rigour or importance as, e. g., the condition regarding the
submission of quarterly reports indicating the progress made in implementing
the other conditions, which could reasonably be relaxed by condonation of the
late filing of any particular quarterly report. But the dilution of the
non-resident interest in the equity capital of the company to a level not
exceeding 40% "within a period of 1 (one) year from the date of the
receipt of" the letter was of the very essence of the matter. A permission
granted subject to the condition that such dilution shall be effected would
cease automatically on the non-compliance with the condition at the end of the
stipulated period or the extended period, as the case may be. The argument of
the Holding Company would make the granting of a conditional permission an
empty ritual since, whether or not the company performs the conditions, it
would be free to carry on its business, the only sanction available to the bank
being, as argued, that it can compel or cause the sale of the excess
non-resident interest in the equity holding of the company, under s. 29(4)(c)
of the FERA. This particular provision, in our opinion, is not a sanction for
the enforcement of conditions imposed on a company under cl. (c) of s. 29(2).
Section 29(4)(c) provides for a situation in which an application for holding
shares in a company is not made or is rejected. The sanction for the
enforcement of a conditional permission to carry on business, where the
conditions are breached, is the cessation, ipso facto, of the permission itself
on the non-performance of the conditions at the time appointed or agreed. This
involves no element of surprise or of unjustness because permission is granted,
as was done here, only after the applicant agrees to perform the conditions
within the stipulated period. When NIIL wrote to the bank on February 4, 1976,
binding itself to the performance of certain conditions, it could not be heard
to say that the permission will remain in force despite its non-performance of
the conditions. Having regard to the provisions of s. 29 read with ss. 49,
56(1) and (3) and s. 68 of the FERA, the continuance of business after May 17,
1977, by NIIL would have been illegal, unless the condition of dilution of
nonresident equity was duly complied with. It is needless, once again, to dwell
upon the impracticability of NIIL applying for extension of the period of one
year allowed to it by the bank. Coats could be optimistic about such an
extension being granted especially since thereby they could postpone the evil
day. For NIIL, the wise thing to do, and the only course open to it, was to
comply with the obligation imposed upon it by law, without delay or demur.
It seems to us quite clear
that by reason of the provisions of s. 29(1) and (2) of the FERA and the
conditional permission granted by the RBI by its letter dated May 11, 1976, the
offer of rights shares made by NIIL to the
Holding Company could not possibly have been accepted by it. The object of s. 29,
inter alia, is to ensure that a company (other than a banking company) in which
the non-resident interest is more than 40% must reduce it to a level not
exceeding 40%. The RBI allowed NIIL to carry on its business subject to the
express condition that it shall reduce its nonresident holding to a level not
exceeding 40%. The offer of rights shares was made to the existing
shareholders, including the Holding Company, in proportion to the shares held
by them. Since the issued capital of the company which consisted of 32,000
shares was increased by the issue of 16,000 rights shares, the Holding Company
which held 18,990 shares, was offered 9,495 shares. The acceptance of the offer
of rights shares by the Holding Company would have resulted in a violation of the
provisions of the FERA and the directive of the Reserve Bank. Were the Holding
Company to accept the offer of rights shares, it would have continued to hold
60% share capital in NIIL and the Indian shareholders would have continued to
hold their 40% share capital in the company. It would indeed be ironical that
the measure which was taken by NIIL's board of directors for the purpose of
reducing the non-resident holding to a level not exceeding 40%, should itself
become an instrument of perpetuating the ownership by the Holding Company of
60% of the equity capital pf NIIL. We are not suggesting that the offer of
rights shares need not have been made to the Holding Company at all. But the
question is, whether the offer, when made, could have been accepted by it.
Since the answer to this question has to be in the negative, no grievance can
be made by the Holding Company that, since it did not receive the offer in
time, it was deprived of an opportunity to accept it.
We see no substance in Shri
Nariman's contention that the letter of offer could not have been sent to the
Holding Company without first obtaining the RBI's approval under s. 19 of the
FERA. Counsel contends that under s. 19(1)(b), notwithstanding anything
contained in s. 81 of the Companies Act, no person can, except with the general
or special permission of the Reserve Bank, create "any interest in a
security" in favour of a person resident outside India. The word
"security" is defined by s. 2(u) to mean shares, stocks, bonds, etc.
We are unable to appreciate how an offer of shares by itself creates any
interest in the shares in favour of the person to whom the offer is made. An
offer of shares undoubtedly creates "fresh rights" as said by this
court in Mathalone v. Bombay Life Assurance Co. Ltd. [1954] SCR 117; 24 Comp
Cas 1, but the right which it creates is either to accept the offer or to
renounce it; it does not create any interest in the shares in respect of which
the offer is made.
But though it could not
have been possible for the Holding Company to accept the offer of rights shares
made to it, the question still remains whether
it had the right to renounce the offer in favour of any resident Indian person
or company of its choice, be it an existing shareholder like Manoharan or an
outsider like Madura Coats. The answer to this question depends on the effect
of ss. 43A and 81 of the Companies Act, 1956.
We will first notice the
relevant parts of ss. 3, 43A and 81 of the Companies Act. Section 3(1)(iii)
defines a "private company" thus:
" 'Private company '
means a company which, by its articles,—
(a) restricts
the right to transfer its shares, if any;
(b) limits
the number of its members to fifty...and
(c) prohibits any invitation to the public to
subscribe for any shares in, or debentures of, the company".
Clause (iv) of s. 3(1)
defines a "public company" to mean a company which is not a private
company.
Section 43A of the
Companies Act, which was inserted by Act 65 of 1960, reads thus:
"43A.
(1) Save as otherwise provided in this
section, where not less than twenty-five per cent. of the paid-up share capital
of a private company having a share capital, is held by one or more bodies
corporate the private company shall......become by virtue of this section a
public company:
Provided that even after
the private company has so become a public company, its articles of association
may include provisions relating to the matters specified in clause (iii) of
sub-section (1) of section 3 and the number of its members may be, or may at any
time be reduced, below seven:...
(2) Within three months from the date on which a
private company becomes a public company by virtue of this section, the company
shall inform the Registrar that it has become a public company as aforesaid,
and thereupon the Registrar shall delete the word 'private' before the word
'Limited' in the name of the company upon the register and shall also make the
necessary alterations in the certificate of incorporation issued to the company
and in its memorandum of association......
(4) A private company which has become a public
company by virtue of this section shall continue to be a public company until
it has, with the approval of the Central Government and in accordance with the
provisions of this Act, again become a private company.
Section 81 of the Companies
Act reads thus:
"81.
(1) Where......it is proposed to
increase the subscribed capital of the company by allotment of further shares,
then,—
(a) such further shares, shall be offered to the
persons who, at the date of the offer, are holders of the equity shares of the
company, in proportion, as nearly as
circumstances admit, to the capital paid up on those shares at that date;
(b) the offer aforesaid shall be made by notice
specifying the number of shares offered and limiting a time not being less than
fifteen days from the date of the offer within which the offer, if not
accepted, will be deemed to have been declined;
(c) unless the articles of the company otherwise
provide, the offer aforesaid shall be deemed to include a right exercisable by
the person concerned to renounce the shares offered to him or any of them in
favour of any other person; and the notice referred to in clause (b) shall
contain a statement of this right;
(d) after the expiry of the time specified in
the notice aforesaid or on receipt of earlier intimation from the person to
whom such notice is given that he declines to accept the shares offered, the
board of directors may dispose of them in such manner as they think most beneficial
to the company.......
(1A) Notwithstanding
anything contained in sub-section (1), the further shares aforesaid may be
offered to any persons (whether or not those persons include the persons
referred to in clause (a) of sub-section (1)) in any manner whatsoever—
(a) if
a special resolution to that effect is passed by the company in general
meeting, or
(b) where no such special resolution is passed
if the votes cast..... in favour of the proposal.........exceed the votes, if
any, cast against the proposal.........and the Central Government is satisfied
on an application made by the board of directors in this behalf, that the
proposal is most beneficial to the company. ......
(3) Nothing in this section
shall apply—
(a) to
a private company....."..
While interpreting these
and allied provisions of the Companies Act, it would be necessary to have
regard to the relevant articles of association of NIIL, especially since s.
81(1)(c) of that Act, which is extracted above, is subject to the qualification:
"Unless the articles of the company otherwise provide". The relevant
articles are arts. 11, 32, 38 and 50 and they read thus:
Article
11
"In order that the
company may be a private company within the meaning of the Indian Companies
Act, 1913, the following provisions shall have effect, namely:—
(i) No invitation shall be issued to the public
to subscribe for any shares, debentures, or debenture stock of the company.
(ii) The number of the members of the company (exclusive
of persons in the employment of the company) shall be limited to fifty,
provided that for the purposes of this article where two or more persons hold
one or more shares in the company jointly, they shall be treated as a single
member.
(iii) The right to transfer shares of the company
is restricted in the manner hereinafter provided.
(iv) If there shall be any inconsistency between
the provisions of this article and the provisions of any other article the
provisions of this article shall prevail".
Article
32
"A share may, subject
to article 38, be transferred by a member or other person entitled to transfer
to any member selected by the transferor; but, save as aforesaid, no share
shall be transferred to a person who is not a member so long as any member is
willing to purchase the same at the fair value. Such value to be ascertained in
manner hereinafter mentioned".
Article
38
"The directors may
refuse to register any transfer of a share, (a) where the company has a lien on
the share, or (b) in case of shares not fully paid-up, where it is not proved
to their satisfaction that the proposed transferee is a responsible person, or
(c) where the directors are of opinion that the proposed transferee (not being
already a member) is not a desirable person to admit to membership, or (d)
where the result of such registration would be to make the number of members
exceed the above-mentioned limit. But clauses (b) and (c) of this article shall
not apply where the proposed transferee is already a member".
Article
50
"When the directors
decide to increase the capital of the company by the issue of new shares such
shares shall be offered to the shareholders in proportion to the existing
shares to which they are entitled. The offer shall be made by notice specifying
the number of shares offered and limiting a time within which the offer, if not
accepted, will be deemed to be declined and after the expiration of such time,
or on the receipt of an intimation from the person to whom the offer is made
that he declines to accept the shares offered, the directors may dispose of the
same in such manner as they think most beneficial to the company. The directors
may likewise so dispose of any new shares which (by reason of the ratio which
the new shares bear to the shares held by persons entitled to an offer of new
shares) cannot, in the opinion of the directors, be conveniently offered under
this article".
It is contended by Shri
Nariman that by reason of the articles of the company and on a true
interpretation of s. 81, the right of renunciation of the shares offered by
NIIL was not available to the Holding Company since NIIL was not a full-fledged
public company in the sense of being incorporated as a public company but had
become a public company under s. 43A(1) and had, under the first proviso to
that section, retained its articles relating to matters specified in s.
3(1)(iii). According to Shri Nariman, s. 81(1A) can have no application to a
"section 43A(1) proviso company" (for short, the "proviso
company") because, it contemplates issue of shares to the public and to
persons other than members of the company, which cannot be done in the case of
a company which falls under the proviso to s. 43A(1). Section 81(1A), it is
urged, is complementary to s. 81 and since the latter cannot apply to the
"proviso company", the former too cannot apply to it. In any event,
according to counsel, s. 81(1)(c) cannot apply in the instant case, since the
articles of NIIL provide by necessary implication at any rate, that the members
of the company shall have no right to renounce the shares in favour of
"any" other person, because such a right would include the right to
renounce in favour of persons who are not members of the company, and NIIL had
retained its articles under which shares could not be transferred or renounced
in favour of outsiders.
Shri Seervai has refuted
these contentions, his main argument being that the definitions of "public
company" and "private company" are mutually exclusive and,
between them, are exhaustive of all categories of companies. There is,
according to the learned counsel, no third category of companies recognised by
the Companies Act, like the "proviso company". Shri Seervai further
contends:
(a) The right of renunciation is not a
"transfer" and, therefore, the directors' power to refuse to register
the shares under the articles does not extend to a renunciation.
(b) Before considering s. 43A, which was
inserted for the first time in the Act of 1956 by the Amending Act of 1960, it
should be noted that s. 81 as enacted in the Act of 1956 contained three
sub-ss. (1), (2) and (3), and sub-s. (3) provided that "nothing in this
section shall apply to a private company". The opening words of s. 81, as
they now stand, were substituted by the Amending Act of 1960, and sub-s. (1A)
was inserted by the said Amendment Act, and sub-s. (3) was substituted by the
Amendment Act of 1963. But sub-s. 3(a) reproduced sub-s. (3) of the Act of
1956, namely, "nothing in this section shall apply to a private
company". It is clear, therefore, that the rights conferred by s. 81(1)
and (2) do not apply to a private company, and this provision in the Act of
1956 was not connected with the insertion of s. 43A for the first time in 1960.
(c) The provisos to s. 43A(1), (1A) and (1B) are very important
in connection with s. 81 of the Act 1 of 1956. Just as the crucial words in s.
27(3) are "shall contain", the crucial words in the provisos are
"may include" (or may retain). The words "shall contain"
are mandatory and go to the constitution of a private company. The words
"may include" are permissive and they do not go to the constitution
of a company which has become a public company by virtue of s. 43A because
whether the articles include (or retain) those requirements, or do not include
those requirements the constitution of the company as a public company remains
unaffected.
(d) No statutory consequence follows, as
to the company being a public company, on the retention of the three
requirements or one or more of them, or in not complying with those
requirements. But in the case of a private company which does not comply with
the requirements of s. 3(1)(iii) serious consequences follow under s. 43, and
in the case of a private company altering its articles so as not to include all
the matters referred to in s. 3(1)(iii) serious consequences follow under s.
44. In short, the inclusion, or retention, of all the matters referred to in s.
3(1)(iii) has a radically different part or function in a private company which
becomes a public company by virtue of s. 43A from that which it has in a
private company. More particularly the non-compliance with the three
requirements of s. 3(1)(iii) included, or retained, in the articles of a
private company which has become a public company by virtue of s. 43A, involves
no statutory consequences or disabilities, since such a company is a public
company and s. 43 is not attracted.
(e) It is wrong to contend that the
whole of s. 81(1) does not apply to a "proviso company" because it is
a private company entitled to the pro-tection of sub-s. 3(a). Section 81(3)(a)
applies to a private company; a "proviso company" is one which has
become, and continues to remain a public company.
(f) Section 81(1)(c) applies to all
companies other than private com-panies. The articles of a public company may
include all of the matters referred to in s. 3(1)(iii), or may include one or
two of the matters referred to therein without ceasing to be a public company.
A public company which has become such by virtue of section 43A can delete all
the matters referred to in s. 3(1)(iii) or may delete one or two of them or may
include (or retain) all the three matters referred to in s. 3(1)(iii). The
retention of the three matters mentioned in s. 3(1)(iii) does not in any way
affect the constitution of the company because it has become and continues to
be a public company.
(g) Section 81 when enacted in 1956
consisted of 3 sub-sections. The need to exempt private companies arose from s.
81(1)(c), for the right to renounce in favour of any person might (not must),
conflict with the limitation on the number of members to 50 and since that was
one of the matters which went to the constitution of a company as a private
company, private companies were expressly exempted. No such exemption was
necessary in the case of a "proviso company" which retains in its
articles all the three matters referred to in s. 3(1)(iii), because an increase
in the number of its members above 50 will not affect the constitution of the company
which remains that of a public company.
(h) Section 81, as enacted in 1956, did
not contain sub-s. (1A) which was inserted for the first time by the Amending
Act of 1960, which Amending Act also inserted s. 43A. After the insertion of sub-s.
(1A) the effect of the exemption of private companies from the operation of s.
81 became even more necessary, for, the provisions of sub-s. (1A)(a) and (b)
override the whole of s. 81(1) and shares need not be offered to existing
shareholders. Section 81(1A) also overrides art. 50 of NIIL.
(i) The articles of NIIL provide for the
transfer of shares, and art. 38 sets out the circumstances under which the
directors may refuse to transfer the shares. However, since a renunciation of
shares is not a transfer, the restriction in art. 11(iii) is not violated by an
existing member of NIIL renouncing his share in favour of any other person.
(j) The opening words of s. 81(1)(c) are
"unless the articles of the company otherwise provide". Section
81(1)(c) contains no reference to "expressly provide" or
"expressly or by necessary implication provide". According to the
plain meaning of the words "otherwise provide", there must be a
provision in the articles which says that an offer of shares to the existing
members does not entitle them to renounce the shares in favour of any person.
Article 11 of NIIL merely states the matters necessary to constitute a company,
a private company. Such companies are exempt from s. 81 and so, the question of
"otherwise providing" does not arise. Article 50 refers to the rights
shares but it makes no other provision with regard to the right of renunciation
than is made in s. 81(1)(c). Unless such other provision is made, the opening
words of s. 81(1)(c) are not attracted. Secondly, s. 81(1)(c) provides that
unless the articles otherwise provide "the offer aforesaid shall be deemed
to include a right exercisable by the person concerned to renounce the shares
offered to him or any of them in favour of any person". The right conferred
by the deeming clause can be taken away only by making a provision in the
articles to prevent the deeming provision from taking effect. The deeming
provision cannot be avoided by implication; and
(k) The Holding Company could have
renounced the rights shares offered to it at least in favour of the Manoharan
group and the fact that after the shares were allotted, the Manoharan group
stated that they were not interested in subscribing to the shares offered does
not affect the question of the legal right.
Besides, it was one thing to refuse to subscribe to the shares offered; it was
another thing to accept the renunciation of merely 6,190 shares which would
have given the Manoharans a substantial stake in the affairs of the company.
Shri Seervai relies upon
many a text and authority in support of the proposition that the classification
of companies into private and public is mutually exclusive and collectively
exhaustive. He relies upon a decision in Park v. Royalty Syndicates Ltd. [1912]
1 KB 330 (KB) in which Hamilton J. (Later Lord Sumner) observed that a public
company is simply one which is not a private company and that there is no
"intermediate state or tertium quid". In support of the proposition
that the right to renunciation of shares is not a transfer, counsel relies upon
a decision in Pool Shipping Co. Ltd., In re [1920] 1 Ch 251 (Ch D). Reliance is
also placed in this behalf on the statement of law in Halsbury (Vol. 7, 4th
Edn., p. 218), Palmer's
Company Law (Vol. 1, 22nd Edn., p. 393), Palmer's Company Precedents (Part 1, 17th Edn., p. 688), Gore-Brown on
Companies (43rd Edn., para. 16.3) and Buckley on Compnies Act (13th Edn,, p.
815). While indicating his own reasons as to why the Legislature enacted
identical provisos to sub-ss. (1), (1A) and (1B) of s. 43A, counsel mentioned
that no light is thrown for enacting these provisos, either by the Shastri
Committee Report which led to the Companies (Amendment) Act, 1960 or by the
Notes on Clauses, or by the Report of the Joint Select Committee. In regard to
the opening words of s. 81(1)(c): "unless the articles of the company
otherwise provide", counsel cited the Collins English Dictionary, the
Random House Dictionary and the Oxford English Dictionary. An interesting
instance of the use of the word "provide" is to be found in the
Random House Dictionary, 1967, p. 1157, to this effect: "The Mayor's wife
of the city provided in her will that she would be buried without any pomp or
noise'".
It shall have been noticed
that the entire superstructure of Shri Seer-vai's argument rests on the
foundation that the definitions of "public company" and "private
company" are mutually exclusive and collectively exhaustive of all
categories of companies, that is to say, that there is no third kind of company
recognised by the Companies Act, 1956. The argument merits close examination
since it finds support, to an appreciable extent, from the very text of the
Companies Act. The definition of "private company" and the manner in
which a "public company" is defined ("public company means a
company which is not a private company") bear out the argument that these
two categories of companies are mutually exclusive. If it is this, it cannot be
that and if it is that it cannot be this. But, it is not true to say that
between them, they exhaust the universe of companies. A private company which
has become a public company by reason of s. 43A may include, that is to say,
may continue to retain in its articles,
matters which are specified in s. 3(1)(ii), and the number of its members may
be or may at any time be reduced below 7. This provision itself highlights the
basic distinction between, on one hand, a company which is incorporated as a
public company or a private company which is converted into a public company
under s. 44, and on the other hand, a private company which has become a public
company by reason of the operation of s. 43A.
In the first place, a s.
43A-company may include in its articles, as part of its structure, provisions
relating to restrictions on transfer of shares, limiting the number of its
members to 50, and prohibiting an invitation to the public to subscribe for
shares, which are the typical characteristics of a private company. A public
company cannot possibly do so because, by the very definition, it is that which
is not a private company, that is to say, which is not a company which by its
articles contains the restrictions mentioned in s. 3(1)(iii). Therefore, the
expression "public company" in s. 3(1)(iv) cannot be equated with a
"private company which has become a public company by virtue of section
43A".
Secondly, the number of
members of a public company cannot fall below 7 without attracting the serious
consequences provided for by s. 45 (personal liability of members for the
company's debts) an s. 433(d) (winding up in case the number of its members
falls below 7). A s. 43A-company can still maintain its separate corporate
identity qua debts even if the number of its members is reduced below seven and
is not liable to be wound up for that reason.
Thirdly, a s. 43A-company
can never be incorporated and registered as such under the Companies Act. It is
registered as a private company and becomes, by operation of law, a public
company.
Fourthly, the three
contingencies in which a private company becomes a public company by virtue of
s. 43A (mentioned in sub-ss. (1), (1A) and (1B) read with the provisions of
sub-s. (4) of that section) show that it becomes and continues to be a public
company so long as the conditions in sub-ss. (1), (1A) or (1B) are applicable.
The provisos to each of these sub-sections clarify the legislative intent that
such companies may retain their registered corporate shell of a private company
but will be subjected to the discipline of public companies. When the necessary
conditions do not obtain, the legislative device in s. 43A is to permit them to
go back into their corporate shell and function once again as private
companies, with all the privileges and exemptions applicable to private
companies. The proviso to each of the sub-sections of s. 43A clearly indicates
that although the private company has become a public company by virtue of that
section, it is permitted to retain the structural characteristics of its
origin, its birth marks, so to say. Any provision of the Companies Act which would
endanger the corporate shell of a "proviso company" cannot be applied to it because, that would constitute an
infraction of one or more of the characteristics of the "proviso
company" which are statutorily allowed to be preserved and retained under
each of the three provisos to the three sub-sections of s. 43A A right of
renunciation in favour of any other person, as a statutory term of an offer of
rights shares, would be repugnant to the integrity of the company and the
continued retention by it of the basic characteristics under s. 3(1)(iii).
Fifthly, s. 43A, when
introduced by Act 65 of 1960, did not adopt the language either of s. 43 or of
s. 44. Under s. 43 where default is made in complying with the provisions of s.
(3)(1)(iii), a private company "shall cease to be entitled to the
privileges and exemptions conferred on private companies by or under this Act,
and this Act shall apply to the company as if it were not a private
company". Under s. 44 of the Act, where a private company alters its
articles in such a manner that they no longer include the provisions, which
under s. 3(1)(iii), are required to be included in the articles in order to
constitute it a private company, the company "shall as on the date of the
alteration cease to be a private company". Neither of the expressions,
namely. "This Act shall apply to the company as if it were not a private
company" (s. 43) or that the company "shall......cease to be a
private company" (s. 44) is used in section 43A. If a s. 43A-company were
to be equated in all respects with a public company, that is a company which
does not have the characteristics of a private company, Parliament would have
used language similar to the one in s. 43 or s. 44, between which two sections,
s. 43A was inserted. If the intention was that the rest of the Act was to apply
to a s.43A-company "as if it were not a private company", nothing
would have been easier than to adopt that language in s. 43A, and if the
intention was that a s.43A-company would for all purposes "cease to be a
private company", nothing would have been easier than to adopt that
language in s. 43A.
Sixthly, the fact that a
private company which becomes a public company by virtue of s. 43A does not
cease to be for all purposes a "private company" becomes clear when
one compares and contrasts the provisions of s. 43A with s. 44: when the
articles of a private company no longer include matters under s. 3(1)(iii),
such a company shall on the date of the alteration cease to be a private
company (s. 44(1)(a)). It has then to file with the Registrar a prospectus or a
statement in lieu of the prospectus under s. 44(2). A private company which
becomes 1 public company by virtue of s. 43A is not required to file a
prospectus or a statement in lieu of a prospectus.
These considerations show
that, after the Amending Act 65 of 1960, three distinct types of companies
occupy a distinct place in the scheme of our Companies Act: (1) private
companies, (2) public companies, and (3) private companies which have become
public companies by virtue of s. 43A, but
which continue to include or retain the three characteristics of a private
company. Sections 174 and 252 of the Companies Act which deal respectively with
quorum for meetings and minimum number of directors, recognise expressly, by
their paranthetical clauses, the separate existence of public companies which
have become such by virtue of s. 43A. We may also mention that while making an
amendment in sub-cl. (ix) of r. 2 of the Companies (Acceptance of Deposits)
Rules, 1975, the Amendment Rules, 1978, added the expression:
"Any amount received
by a private company which has become a public company under section 43A of the
Act and continues to include in its articles of association provisions relating
to the matters specified in clause (iii) of sub-section (1) of section 3 of the
Act", in order to bring deposits received by such companies within the
Rules.
The various points
discussed above will facilitate a clearer perception of the position that under
the Companies Act, there are three kinds of companies whose rights and
obligations fall for consideration, namely, private companies, public companies
and private companies which have become public companies under s. 43A(1) but
which retain, under the first proviso to that section, the three
characteristics of private companies mentioned in s. 3(1)(iii) of the Act.
Private companies enjoy certain exemptions and privileges which are peculiar to
their constitution and nature. Public companies are subjected severely to the
discipline of the Act. Companies of the third kind like NIIL, which become
public companies but which continue to include in their articles the three
matters mentioned in clauses (a) to (c) of s. 3(1)(iii) are also, broadly and
generally, subjected to the rigorous discipline of the Act. They cannot claim
the privileges and exemptions to which private companies which are outside s.
43A are entitled. And yet, there are certain provisions of the Act which would
apply to public companies but not to s. 43A-companies. Is s. 81 of the
Companies Act one such provision? and if so, does the whole of it not apply to
a s. 43A company or only to some particular part of it? These are the questions
which we have now to consider.
On these two questions,
both the learned counsel have taken up extreme positions which, if accepted,
may create confusion and avoidable inconvenience in the administration of s.
43A-companies like NIIL. Shri Nariman contends that a s. 43A-company becomes a
public company qua the outside world, as, e.g., in matters of remuneration of
directors, disclosure, commencement of business, information to be supplied but
it remains a private company qua its own shareholders. Therefore, says counsel,
no provision of the Companies Act can apply to such companies, which is inconsistent
with or destructive of the retention of the three essential features of private
companies as mentioned in s. 3(1)(iii). Section 81, it is said, is one such
provision and in so far as private companies go,
it can apply only to, (a) such companies which become public companies under s.
43A but which do not retain the three essential features, and to (b) private
companies which are duly converted into public companies. It is urged that even
assuming that the expression "private company" occurring in the
various provisions of the Companies Act (including s. 81(3)(a)) does not
include a s. 43A-proviso-company, that does not mean that s. 81 would be
applicable to a s. 43A-proviso-company, because: (a) The proviso to s. 43A(1)
and s. 81 are both substantive provisions and neither is subordinate to the
other; in fact s. 43 A was introduced later in 1960. and (b) An offer of rights
shares to a member in a s. 43A-proviso-company cannot include a right to
renounce the shares in favour of any other person, because such a right would
be inconsistent with the article of the company limiting the number of its
members to 50 and with the article prohibiting invitation to the public to
subscribe for shares in the company. The fact that the statute overrides the
articles is not a sufficient ground for rendering the provisions of s. 81
applicable to a s.43A(1) proviso company since the right to continue to include
provisions in its articles specified in s. 3(1)(iii) is itself a statutory
right. Counsel says that in these circumstances—and this is without taking the
assistance of the words "unless the articles of the company otherwise
provide" in s. 81(1)(c)—the provision regarding the right of renunciation
cannot apply to a s. 43A-proviso-company.
The answer of Shri Seervai
to this contention flows from what truly is the sheet anchor of his argument,
namely, that the definitions of "public company" and "private
company" are mutually exclusive and between them, they are exhaustive of
all categories of companies. Counsel contends that s. 81(1A) overrides s.
81(1); that by reason of sub-s. (3) of s. 81, s. 81 is not applicable to a
"private company" but NIIL is not a "private company" since
it became a public company by virtue of s. 43A; and that, therefore, the offer
of rights shares made by NIIL can be renounced by the offerees in favour of any
other person.
Neither of the two extreme
positions for which the counsel contend commends itself to us. The acceptance
of Shri Nariman's argument involves tinkering with cl. (a) of s. 81(3), which
shall have to be read as saying that "Nothing in section 81 shall apply to
a 'private company' and to a company which becomes a public company by virtue
of s. 43A and whose articles of association include provisions relating to the
matters specified in cl. (iii) of sub-s. (1) of s. 3". Section 81(1) does
not contain a non obstante clause. But, if Shri Nariman is right, there would
be no alternative save to exclude the applicability of all of its provisions to
a company like NIIL, by reading into it an overriding provision which alone can
achieve such a result. On the other hand, to accept wholesale the argument of
Shri Seervai would render the first proviso to s. 43A(1) nugatory. The right to
retain in the articles the provision regarding the restriction on the right to
transfer shares, the limitation on the number of members to fifty and the
prohibition of any invitation to the public to subscribe for the shares or
debentures of the company will then be washed off. The truth seems to us to lie
in between the extreme stands of the learned counsel for the two sides.
There is no difficulty in
giving full effect to cls. (a) and (b) of s. 81(1) in the case of a company
like NIIL, even after it becomes a public company under s. 43A. Clause (a)
requires that further shares must be offered to the holders of equity shares of
the company in proportion, as nearly as circumstances admit, to the capital
paid up on those shares, while cl. (b) requires that the offer of further
shares must be made by a notice specifying the number of shares offered and
limiting the time, not being less than fifteen days from the date of the offer,
within which the offer, if not accepted, will be deemed to have been declined.
The real difficulty arises when one reaches cl. (c) according to which, the
offer shall be deemed to include the right of renunciation of shares or any of
of them in favour of any other person. We will keep aside for the time being
the opening words of cl. (c): "unless the articles of the company otherwise
provide". Clause (c) further requires that the notice referred to in cl.
(b) must contain a statement as to the right of renunciation provided for by
cl. (c). Having given to the matter our most anxious consideration, we are of
the opinion that cl. (c) of s. 81(1) cannot apply to the erstwhile private
companies which have become public companies under section 43A and which
include, that is to say which retain or continue to include, in their articles
of association the matters specified in s. 3(1)(iii) of the Act, as specified
in the first proviso to s. 43A. If cl. (c) were to apply to the s.
43A-proviso-companies, it would be open to the offerees to renounce the shares
offered to them in favour of any other person or persons. That may result
directly in the infringement of the article relating to the matter specified in
s. 3(1)(iii)(b) because, under cl. (c) of s. 81(1), the offeree is entitled to
split the offer and renounce the shares in favour of as many persons as he
chooses, depending partly on the number of shares offered by the company to
him. The right to renounce the shares in favour of any other person is also
bound to result in the infringement of the article relating to the matter
specified in s. 3(1)(iii)(c), because an offer which gives to the offeree the
right to renounce the shares in favour of a non-member is, in truth and
substance, an invitation to the public to subscribe for the shares in the
company. As stated in Palmer's Company Law (22nd Edn., Vol. I, para. 21-18, p.
182):
"Where the company issues
renounceable letters of allotment the circle of original allottees can easily
be broken by renunciation of those rights and
complete strangers may become the allottees; here the offer will normally be
held to be made to the public".
There is a statement to the
same effect in Gower's Company Law (4th Edn., p. 351):
"It is therefore,
clear that an invitation by or on behalf of a private company to a few of the
promoter's friends and relations will not be deemed to be an offer to the public.
Nor, generally, will an offer which can only be accepted by the shareholders of
a particular company. On the other hand it is equally clear that an offer of
securities in a public company even to a handful of people may be an offer to
the public if it is calculated (which presumably means 'likely' rather than
'intended') to lead to the securities being subscribed (i.e., applied for on
original allotment) or purchased (i.e., bought after original allotment) by
persons other than those receiving the initial offer. In particular, if
securities are to be issued under renounceable allotment letter or letters of
right the invitation to take them up must be deemed to be made to the public,
since these securities are obviously liable to be subscribed or purchased by
others".
The learned author says at
page 430 that in the case of a private placing—an issue by a private
company—allotment letters will probably be dispensed with, "in any case
they cannot be freely renounceable". In footnote (22) the author points out
that the real danger is that if renounceable allotment letters are issued, the
company may be regarded as having made an offer to the public. We cannot
construe the provision contained in cl. (c) in a manner which will lead to the
negation of the option exercised by the company to retain in its articles the
three matters referred to in s. 3(1)(iii). Both these are statutory provisions
and they are contained in the same statute. We must harmonise them, unless the
words of the statute are so plain and unambiguous and the policy of statute so
clear that to harmonise will be doing violence to those words and to that
policy. Words of the statute, we have dealt with. Its policy, if anything,
points in the direction that the integrity and structure of the s. 43A-proviso-com-panies
should, as far as possible, not be broken up.
The exemption in favour of
private companies would appear to have been inserted in s. 81(3)(a) because of
the right of renunciation conferred by s. 81(1)(c). Section 105C of the Indian
Companies Act, 1913, which contained substantially all the provisions that are
to be found in s. 81(1)(a), (b) and (d) applied to all companies. The right of
renunciation in favour of any other person was conferred for the first time by
the Act of 1956. That led to the insertion of the exception in favour of
private companies since, a right of renunciation in favour of other persons is
wholly inconsistent with the structure of a private company, which has to
contain the three characteristics mentioned in s. 3(1)(iii). When s. 43A was
introduced by Act 65 of 1960, the Legislature apparently overlooked the need to exempt companies falling under it, read with its
first proviso, from the operation of cl. (c) of s. 81(1). That the Legislature
has overlooked such a need in regard to other matters, in respect of which
there can be no controversy, is clear from the provisions of ss. 45 and 433(d)
of the Companies Act. Under s. 45, if at any time the number of members of a
company is reduced, in the case of a public company below seven, or in the case
of a private company below two, every member of the company becomes severally
liable, under the stated circumstances, for the payment of the whole debt of
the company and can be severally sued therefor. No exception has yet been
provided for in s. 45 in favour of the s. 43A-proviso-companies, with the
result that a private company having say, three members which becomes a public
company under s. 43A and continues to function with the same number of members,
will attract the rigour of s. 45. Similarly, under s. 433(d), such a company
would automatically incur the liability of being wound up for the same reason.
If and when these provisions fall for consideration, due regard may have to be
given to the principle of harmonious construction, in order to exclude the s.
43A-proviso-companies from the application of those provisions. We hope that
before such an occasion arises, the Legislature will make appropriate
amendments in the relevant provisions of the Companies Act. Such amendments
have been made in s. 174(1), cl. (iii) of the second proviso to sub-s. (1) of
s. 220 and s. 252(1) in order to accord separate treatement to private
companies which become public companies by virtue of s. 43A, as distinguished
from public companies of the general kind.
In coming to the conclusion
that cl. (c) of s. 81(1) cannot apply to s. 41A-proviso-companies, we have not
taken into consideration the impact of the opening words of cl. (c):
"Unless the articles of the company otherwise provide". The effect of
these words is to subordinate the provisions of cl. (c) to the provisions of
the articles of association of the company. In other words, the provision that
the offer of further shares shall be deemed to include the right of
renunciation in favour of any other person will not apply if the articles of
the company "otherwise provide". Similarly, the requirement that the
notice of offer must contain a statement of the right of renunciation will not
apply if the articles of the company otherwise provide. The question which we
have to consider under this head is whether the articles of association of NIIL
provide otherwise than what is provided by cl. (c) of s. 81(1). We have already
extracted the relevant articles, namely, arts. 11, 32, 38 and 50. To recapitulate,
art. 11, which has an important bearing on the subject now under discussion,
provides that in order that the company may be a private company, (i) no
invitation shall be issued to the public to subscribe for any shares,
debentures, etc; (ii) the number of members of the company shall be limited to
50; and (iii) the right to transfer shares of the company will be restricted in
the manner provided in the articles. By art. 32, a share may be transferred,
subject to art. 38, by a member to any member selected by the transferor but no
share shall otherwise be transferred to a person who is not a member so long as
any member is willing to purchase the same at a fair value. Article 38 confers
upon the directors the power to refuse to register the transfer of a share for
four reasons, the last of which is that the transfer will make the number of
members exceed the limit of 50. Article 50, which also is important, provides
that the offer of new shares shall be made by a notice specifying the number of
shares offered and limiting the time within which the offer, if not accepted,
will be deemed to have been declined. If the offer is declined or is not
accepted before the expiration of the time fixed for its acceptance, the
directors have the power to dispose of the shares in such manner as they think
most beneficial to the company.
It is urged by Shri Seervai
that none of the articles of the company provides otherwise than what is
provided in cl. (c) of s. 81(1) and, therefore, cl. (c) must have its full play
in the case of NIIL. On the other hand, it is contended by Shri Nariman that
the opening words of cl. (c) do not require or postulate that the articles of
the company must contain an "express" provision, contrary to what is
contained in cl. (c). The contention, in other words, is that if the articles
of a company contain a provision which, by necessary implication, is otherwise
than what is provided in cl. (c), that clause can have no application. In view
of our finding that keeping aside the opening words of cl. (c), the provisions
of that clause cannot apply to s. 43A-proviso-companies, it is academic to
consider whether the word "provide" in the opening part of cl. (c)
postulates an express provision on the subject of renunciation or whether it is
sufficient compliance with the opening words, if the articles contain by
necessary implication a provision which is otherwise than what is provided in
cl. (c). We would, however, like to express our considered conclusion on this
point since the point has been argued fully by both the counsel and needs to be
examined, as it is likely to arise in other cases.
In the first place, while
construing the opening words of s. 81(1)(c), it has to be remembered that s.
43A-companies are entitled under the proviso to that section to include
provisions in their articles relating to matters specified in s. 3(1)(iii). The
right of renunciation in favour of any other person is wholly inconsistent with
the articles of a private company. If a private company becomes a public company
by virtue of s. 43A and retains or continues to include in its articles matters
referred to in s. 3(1)(iii), it is difficult to say that the articles do not
provide something which is otherwise than what is provided in cl. (c). The
right of renunciation in favour of any other person is of the essence of cl.
(c). On the other hand, the absence of that right is of the essence of the
structure of a private company. It must follow, that in all cases in which
erstwhile private companies become public
companies by virtue of s. 43A and retain their old articles, there would of
necessity be a provision in their articles which is otherwise than what is
contained in cl. (c). Considered from this point of view, the argument as to
whether the word "provide" in the opening words of cl. (c) means
"provide expressly" loses its significance.
On the question whether the
word "provide" means "provide expressly", we are unable to
accept Shri Seervai's submission that the articles must contain a provision
which is expressly otherwise than what is provided in cl. (c). In the context,
in which a private company becomes a public company under s. 43A and by reason
of the option available to it under the proviso, the word "provide"
must be understood to mean "provide expressly or by necessary
implication". The necessary implication of a provision has the same effect
and relevance in law as an express provision has, unless the relevance of what
is necessarily implied is excluded by the use of clear words. Considering the
matter from all reasonable points of view, particularly the genesis of s.
43A-proviso-companies, we are of the opinion that in order to attract the
opening words of cl. (c) of s. 81(1), it is not necessary that the articles of
the company must contain an express provision otherwise than what is contained
in cl. (c).
We do not think it
necessary to consider the decision of the Privy Council in Shanmugham v. Commissioner
for Registration [1962] AC 515 (PC), cited by
Shri Nariman, which says that to be an "express provision" with
regard to something it is not necessary that the thing should be specially
mentioned; it is sufficient that it is directly covered by the language,
however broad the language may be which covers it, so long as the applicability
arises directly from the language used and not by inference therefrom. We may
only mention that though the articles of NIIL do not contain an express
provision that there shall be no right of renunciation, that right is wholly
inconsistent with the articles. We have already stated above that the right of
renunciation is tantamount to an invitation to the public to subscribe for the
shares in the company and can violate the provision in regard to the limitation
on the number of members. Article 11, by reason of its cl. (iv), prevails over
the provisions of all other articles if there is inconsistency between it and
any other article.
For these reasons, we are
of the opinion that cl. (c) of s. 81(1) of the Companies Act, apart from the
consideration arising out of the opening words of that clause, can have no
application to private companies which have become public companies by virtue
of s. 43A and which retain in their articles the three matters referred to in
s. 3(1)(iii) of the Act. In so far as the opening words of cl. (c) are concerned,
we are of the opinion that they do not require an express provision in the
articles of the company which is otherwise than what is provided for in cl.
(c). It is enough, in order to comply with the opening words of cl. (c), that
the articles of the company contain by
necessary implication a provision which is otherwise than what is provided in
cl. (c). Articles 11 and 50 of NIIL's articles of association negate the right
of renunciation.
The question immediately
arises, which is of great practical importance in this case, as to whether the
members of a s. 43A-proviso-company have a limited right of renunciation, under
which they can renounce the shares offered to them in favour of any other
member or members of the company. Consistently with the view which we have
taken of cl. (c) of s. 81(1), our answer to this question has to be in the
negative. The right to renounce shares in favour of any other person, which is
conferred by cl. (c) has no application to a company like NIIL and, therefore,
its members cannot claim the right to renounce shares offered to them in favour
of any other member or members. The articles of a company may well provide for
a right of transfer of shares by one member to another, but that right is very
much different from the right of renunciation, properly so called. In fact,
learned counsel for the Holding Company has cited the decision in Re Pool
Skipping Co. Ltd. [1920] 1 Ch 251 (Ch D), in which it was held that the right
of renunciation is not the same as the right of transfer of shares.
Coming to sub-s. (1A) of s.
81, it provides, stated briefly, that notwithstanding anything contained in
sub-s. (1), the further shares may be offered to any persons in any manner
whatsoever, whether or not those persons include a person referred to in cl.
(a) of sub-s. (1). That can be done under cl. (a) of sub-s. (1A) by passing a
special resolution in the general meeting of the company or under cl. (b),
where no such special resolution is passed, if the votes cast in favour of the
proposal exceed the votes cast against it and the Central Govt. is satisfied
that the proposal is most beneficial to the company. For reasons similar to
those for which we have come to the conclusion that cl. (c) of s. 81 cannot
apply to a s. 43A-proviso-company, we must hold that sub-s. (1A) can also have
no application to such companies. To permit the further shares to be offered to
the persons who are not members of the company will be clearly contrary to the
articles of association of a s. 43A-proviso-company, in regard to the three
matters which bear on the structure of such companies. At the highest, the
method provided for in cls. (a) and (b) of sub-s. (1A) may be resorted to by a
s. 43A-proviso-com-pany for the limited purpose of offering the new shares to its
members otherwise than in proportion to the capital paid up on the equity
shares of the company. That course may be open for the reason that sub-s. (1A)
permits the further shares to be offered "in any manner whatsoever".
A change in the pro rata method of offer of new shares is not necessarily
violative of the basic characteristics of a private company which becomes a
public company by virtue of s. 43A. To this limited extent only, but not beyond
it, the provisions of sub-s. (1A) of s. 81 can apply to such companies.
The
following propositions emerge out of the discussion of the provisions of the
FERA, ss. 43A and 81 of the Companies Act and of the articles of association of
NIIL:
(1) The Holding
Company had to part with 20% out of the 60% equity capital held by it in NIIL.
(2) The
offer of rights shares made to the Holding Company as a result of the decision
taken by the board of directors in their meeting of April 6, 1977, could not
have been accepted by the Holding Company.
(3) The
Holding Company had no right to renounce the rights shares ffered to it in
favour of any other person, member or non-member, and
(4) Since
the offer of rights shares could not have been either accepted or renounced by
the Holding Company, the former for one reason and the latter for another, the
shares offered to it could, under art. 50 of the articles of association, be
disposed of by the directors, consistently with the articles of NIIL,
particularly art. 11, in such manner as they thought most beneficial to the
company.
These
propositions afford a complete answer to Shri Seervai's contention that what
truly constitutes oppression of the Holding Company is not the issue of rights
shares to the existing Indian shareholders only but the offer of rights shares
to all the existing shareholders and the issue thereof to the existing Indian
shareholders only.
The
meeting of 2nd May, 1977, was unquestionably illegal for reasons already
stated. It must follow that the decision taken by the board of directors in
that meeting could not, in the normal circumstances, create mutual rights and
obligations between the parties. But we will not treat that decision as non est
because a point of preponderating importance is that the issue of rights shares
to existing Indian shareholders only and the non-allotment thereof to the
Holding Company did not cause any injury to the proprietary rights of the
Holding Company as shareholders, for the simple reason that they could not have
possibly accepted the offer of rights shares because of the provisions of the
FERA and the conditions imposed by the Reserve Bank in its letter dated May 11,
1976, nor indeed could they have renounced the shares offered to them in favour
of any other person at all because s. 81(1)(c) has no application to companies
like NIIL which were once private companies but which become public companies
by virtue of s. 43A and retain in their articles the three matters referred to
in s. 3(1)(iii) of the Act.
It
was neither fair nor proper on the part of the NIIL's officers not to ensure
the timely posting of the notice of the meeting for 2nd May so as to enable
Sanders to attend that meeting. But, there the matter rests. Even if Sanders
were to attend the meeting, he could not have asked either that the Holding
Company should be allotted the rights shares or alternatively, that it should
be allowed to "renounce" the shares in favour of any other person, including the Manoharan group. The charge of
oppression arising out of the central accusation of non-allotment of the rights
shares to the Holding Company must, therefore, fail.
We must mention that we
have rejected the charge of oppression after applying to the conduct of
Devagnanam and his group the standard of probity and fairplay which is expected
of partners in a business venture. And this we have done without being
influenced by the consideration pressed upon us by Shri Nariman that Coats and
NEWEY, who were two of the three main partners, were not of one mind and that NEWEY
never complained of oppression. They may or they may not. That is beside the
point. Such technicalities cannot be permitted to defeat the exercise of the
equitable jurisdiction conferred by s. 397 of the Companies Act. Shri Seervai
drew our attention to the decision in Blissett v. Daniel [1853] 68 ER 1022, 10
Hare 493, the facts of which, as they appear at pp. 1036-37, bear, according to
him, great resemblance to the facts before us. The following observations in
that case are of striking relevance (at p. 1040 of 68 ER; 536 of 10 Hare):
"As has been well
observed during the course of the argument, the view taken by this court with
regard to morality of conduct amongst all parties—most especially amongst those
who are bound by the ties of partnership—is one of the highest degree. The
standard by which parties are tried here, either as trustees or as co-partners,
or in various other relations which may be suggested, is a standard, I am
thankful to say so, far higher than the standard of the world; and, tried by
that standard, I hold it to be impossible to sanction the removal of this
gentleman under these circumstances".
Not only is the law on the
side of Devagnanam but his conduct cannot be characterised as lacking in
probity, considering the extremely rigid attitude adopted by Coats. They drove
him into a tight corner from which the only escape was to allow the law to have
its full play.
Even though, the company
petition fails and the appeals succeed on the finding that the Holding Company has
failed to make out a case of oppression, the court is not powerless to do
substantial justice between the parties and place them, as nearly as it may, in
the same position in which they would have been, if the meeting of 2nd May were
held in accordance with law. The notice of the meeting was received by Sanders
in U.K. on the 2nd May, when everything was over, bar the post-meeting
recriminations which eventually led to this expensive litigation. If the notice
of the meeting had reached the Holding Company in time, it is reasonable to
suppose that they would have attended the meeting, since one of the items on
the agenda was "Policy—(a) Indianisation, (b) allotment of shares".
Devagnanam and his group were always ready and willing to buy the excess shares
of the Holding Company at a fair price, as is
clear from the correspondence to which our attention has been drawn. In the
affidavit dated May 25, 1977, Devagnanam stated categorically that the Indian
shareholders were always ready and willing to purchase one-third of the
shareholding of the non-resident shareholders, at a price to be fixed in
accordance with the articles of association by the Reserve Bank of India. On
May 27, he sent a cable, though 'without prejudice', offering to pay premium if
the Holding Company were to adopt disinvestment as a method of dilution of
their interest. In the trial court, counsel for the Indian shareholders to whom
the rights shares were allotted offered to pay premium on the 16,000 rights
shares. The cable and the offer were mentioned before us by Shri Nariman and
were not disputed by Shri Seervai. There is no reason why we should not call
upon the Indian shareholders to do what they were always willing to do, namely,
to pay to the Holding Company a fair premium on the shares which were offered
to it, which it could neither take nor renounce and which were taken up by the
Indian shareholders in the enforced absence of the Holding Company. The
willingness of the Indian shareholders to pay a premium on the excess holding
or the rights shares is a factor which, to some extent, has gone in their
favour on the question of oppression. Having had the benefit of that stance,
they must now make it good. Besides, it is only meet and just that the Indian
shareholders, who took the rights shares at par, when the value of those shares
was much above par, should be asked to pay the difference in order to nullify
their unjust and unjustifiable enrichment at the cost of the Holding Company.
We must make it clear that we are not asking the Indian shareholders to pay the
premium as a price of oppression. We have rejected the plea of oppression and
the course which we are now adopting is intended primarily to set right the
course of justice, in so far as we may.
The question then is as to
what should be taken to be the reasonable value of the shares which were
offered to the Holding Company but taken over by the bulk of the Indian
shareholders. In his letter dated December 17, 1975, to M.M.C. Newey, D. P.
Kingsley, the secretary of NIIL, had assessed the value of NIIL's shares at Rs.
175 per share. That value was arrived at by averaging the break-up value, the
yield value and the average market price in the case of quoted shares. Citing a
paragraph from a book on the Foreign Exchange Regulation Act, Kingsley says in
his letter that the method which was adopted by him for valuing the shares was
also followed by the Controller of Capital Issues. Copies of Kingsley's letter
were sent to Alan Mackrael and Devagnanam. On June 9, 1976, Price Waterhouse, Peat
& Co., Chartered Accountants, Calcutta, wrote a letter to Mackrael in
response to the letter's cable, valuing the shares of NIIL at Rs. 204 per
share. That letter shows that while valuing the shares, they had taken into
account various factors including "the average
of the net asset value and the earnings basis", which, according to them,
are considered as relevant factors by the Controller of Capital Issues while
valuing the shares of companies. The chartered accountants applied "the
CCI formula" and after making necessary adjustments to the fixed assets,
the proposed dividend and the gratuity liabilities for 1975, they valued NIIL's
business, on a net asset basis, at Rs. 50 lakhs. On an earnings basis, the
valuation of the company based on the past three years' net profits,
capitalized at 15%, was Rs. 80 lakhs. That gives an average valuation of Rs. 65
lakhs for the business or Rs. 204 per share. The purported offer to Devagnanam
by Khaitan "a sewing needle competitor to Ketti", at 3.6 times par,
cannot afford any criterion for valuing NIIL's shares. Khaitan, purportedly,
had competitive business interests and was, therefore, prepared to "pay
the earth to acquire NIIL".
According to the learned
trial judge, one thing which appeared to be certain was that the market value
of the shares of NIIL at or about the time when disputes arose between the
parties, and particularly during the period when the controversial meetings of
the board of directors were held, ranged between Rs. 175 and Rs. 204. We agree
with the learned judge and hold that it would be just and reasonable to take
the average market value of the rights shares on the crucial date at Rs. 190
per share. The learned trial judge awarded a sum of Rs. 90 per share on 9,495
shares to the Holding Company by way of "solatium", which, with
respect, is not an accurate description of the award and is likely to confuse
the basis and reasons for directing the payment to be made. Since, the average
market price of NIIL's shares in April-May 1977, can be taken to be Rs. 190 per
share, the Holding Company which was offered 9,495 rights shares, will be
entitled to receive from the Indian shareholders an amount equivalent to that
by which they unjustifiably enriched themselves, namely, Rs. 90 X 9,495 which
comes to Rs. 8,54,550. We direct that Devagnanam, his group and the other
Indian shareholders, who took the rights shares offered to the Holding Company,
shall pay, pro rata, the sum of Rs. 8,54,550 to the Holding Company. The amount
shall be paid by them to the Holding Company from their own funds and not from
the funds or assets of NIIL.
As a further measure of
neutralisation of the benefit which the Indian shareholders received in the
meeting of 2nd May, 1977, we direct that the 16,000 rights shares which were
allotted in that meeting to the Indian shareholders will be treated as not
qualifying for the payment of dividend for a period of one year commencing from
January 1, 1977, the company's year being the calendar year. The interim
dividend or any further dividend received by the Indian shareholders on the
16,000 rights shares for the year ending December 31, 1977, shall be repaid by
them to NIIL, which shall distribute the same
as if the issue and allotment of the rights shares was not made until after
December 31, 1977. This direction will not be deemed to affect or ever to have
affected the exercise of any other rights by the Indian shareholders in respect
of the 16,000 rights shares allotted to them.
We have not considered the
possibility of Manoharans taking up the rights shares offered to them because,
by a letter dated May 11, 1977, to NIIL's secretary, N. Manoharan had declined
the offer on the ground that he was "not in a position to take those
shares".
Finally, in order to ensure
the smooth functioning of NIIL and with a view to ensuring that our directions
are complied with expeditiously, we direct that Shri M. M. Sabharwal, who was
appointed as a director and chairman of the board of directors under the orders
of this court dated November 6,1978, will continue to function as such until
December 31, 1982.
The company will take all
effective steps to obtain the sanction or permission of the Reserve Bank of
India or the Controller of Capital Issues, as the case may be, if it is
necessary to obtain such sanction or permission for giving effect to the
directions given by us in this judgment.
In the result, the appeals
are allowed with the directions above mentioned and the judgments of the
learned single judge and of the Division Bench of the High Court are set aside.
We make no order as to costs since both the sides are, more or less, equally to
blame, one for creating an impasse and the other for its unjust enrichment. All
parties shall bear their own costs throughout.
The interim orders passed
by this court are vacated.
Further directions
The amount of Rs. 8,54,550
which the Indian shareholders have been directed to pay to the Holding Company
shall be paid in two instalments, the first of which shall be paid before
August 31, 1981, and the second before November 30, 1981.
The interim board of
directors shall forthwith hand over charge to the board which was superseded,
but with Shri M. M. Sabharwal as a director and chairman of the board of
directors. After taking charge from the interim board, the board of directors
will take expeditious steps for convening an annual general meeting for the
year 1976-77, and the years thereafter for the purpose of passing the accounts,
declaring dividends, electing all directors and for dealing; with other
necessary or incidental matters.
[1972] 42 COMP. CAS. 197 (BOM)
HIGH COURT OF
v.
British Burma Petroleum Co. Ltd.
NAIN, J.
JUNE 30, 1971
P.M. Mukhi, M.P. Laud, S.J. Sorabjee and V.R. Chatrapati for the Petitioners.
Porus
A. Mehta, M.R. Parpia and R.J. Bhatt for the Respondents.
Nain,
J.—This is a
petition by three of the shareholders of the British Burma Petroleum Co. Ltd.
(hereinafter referred to as “the company”) for winding up the company. There
three shareholders hold between them about 14shares of the company of the fa
value of about Rs. 300. They are however supported by 210 other shareholders
who hold shares of the value of over one lakh of rupees. The petition is
opposed by the company and 1,682 shareholders holding shares of the value of
about 30 lakhs of rupees. The petition has come up before me for admission, but
has been argued in great detail and as if it were fixed for final hearing.
Most
of the facts relevant to this petition are not in controversy and may be
briefly stated. The company was incorporated in
The
main and dominant object for which the company appears to have been started is
set out in clause 3(1) of its memorandum and is prospecting for, refining,
production of and dealing in petroleum and other mineral oils and in particular
to acquire three existing Indian companies carrying on that business in Burma,
viz., Aungaban Oil Co. Ltd., Rangoon Refinery Co. Ltd. and Rangoon Oil Co. Ltd.
There were prior to 8th December, 19, in the memorandum other object clauses
some of which were ancillary to the main object, some were powers to enable the
company to achieve the main object, many were such as would in any case be
implied and some were inflated objects which it has become customary for
draftsmen to insert, which were never needed by the company. Draftsmen resort
to this device to avoid the cumbersome procedure of subsequently amending the
object clauses. I shall consider some of the object clauses a little later.
There was no clause
providing that the various clauses were to be construed as independent main
object clauses or that the construction would not be limited by the name of the
company. I shall for the sake of brevity refer to such clauses as “independent
construction clause”.
The
company carried on the business of prospecting for, refining, producing and
dealing in petroleum and other mineral oils in
The
fourth annual general meeting of the company was held at
By
the end of March, 1966, the company had cash assets of about R. 70 lakhs mostly
invested in fed deposits with Indian companies. After 13 December, 19, Jagdish
J. Kapadia and his associates started acquiring more shares of the company. On
5th April, 1966, the then directors of the company except the said Jagdish
Kapadia resigned and, in their place, B.L. Kapadia, T.L. Shah and M.C. Kapadia
were appointed as directors under article 106 of the articles of association of
the company. On that day, the newly appointed directors did not hold
qualification shares, viz., 2,500 shares each. They did not acquire the
qualification shares within two months from the date of their appointment.
They, however, acquired the qualification shares after the said period of two
months. They however continued to function as directors and appeared to have
got themselves re-elected from time to time not as newly proposed directors
after a proper notice that they would be so proposed, but without any notice as
if they were validly elected directors who had retired and were eligible for
re-election. The appointment of these three
newly elected directors has been challenged by the petitioners in this petition
as well as in Suit No. 862 of 19, which is pending in this court.
The petitioners allege that
after taking control of the company on 5th April, 1966, Jagdish Kapadia, B.L.
Kapadia, T.L. Shah and M.C. Kapadia began to utilise the funds of the company
for granting badli loans to shareholders of various other companies against the
pledge of shares and in purchase of shares of other limited companies. It is
alleged that they made these investments not only with the funds of the company
but also by borrowing about Rs. 10 lakhs. With the funds of the company these
directors have acquired the shares of National Rayon Corporation Ltd. and
Killick Industries Ltd. and have acquired the control of these two companies.
The Killick Industries Ltd., in turn, were the managing agents of about 7 other
companies and had 7 more companies as subsidiaries. The petitioners allege that
Jagdish Kapadia and his group have acquired the control of these companies by
means of ultra vires business carried on by the company. It is alleged that
this has been done for self-aggrandizement and to gain personal advantage for
Jagdish Kapadia and his group. I may perhaps mention that the facts contained
in these allegations are not denied. It is only the contentions based on the
facts, which are in controversy. The petitioners also allege that Jagdish
Kapadia and his group have “bled the company by taking excessive fees,
remuneration and administrative expenses and dissipated its funds”.
On 22nd May, 1970, the
petitioners filed the present petition for winding up mainly on the following
two grounds (a) that the company has ceased to carry on business and (b) that
it is just and equitable that the company should be wound up, as its substratum
is gone and there is no practical possibility of the company carrying on business
under the main or dominant object for which it was formed.
This petition came up for
admisson before my brother, Vimadalal J., on 12th October, 1970,and was heard
on 13th, 14th and 15th October, 1970. The company then applied for adjournment
of the peition for two months on the ground that the shareholders desired to
call an extraordinary general meeting to consider and, if necessary, to amend
the objects clauses. The adjournment was refused. The company appealed against
the said order. The said appeal was allowed by consent. Thereafter, at the
extraordinary general meeting of the company on 8th December, 1970, a special
resolution was passed altering the memorandum of association of the company by
deleting the dominant and main objects clauses and introducing a number of
other objects clauses which would enable the company not only to carry on the
prospecting for, producing, refining and dealing in petroleum but also to carry
on other manufacturing businesses and the business of import and export and dealing
in shares. The company also introduced the usual “independent construction
clause” and provided that the several objects clauses shall be deemed to be
substantive and independent main objects clauses and that their construction
will not be restricted by the name of the company. We shall consider the effect
of these alterations a little later. It must, however, be mentioned that the
company being a British company under section 5 of the English Companies Act,
1948, the resolution of alteration was not required to be confirmed by court
and came into effect without such confirmation. Thereafter, on 30th November,
1970, some of the shareholders of the company other than the petitioners filed
a suit in this court being Suit No. 862 of 1970, inter alia, for declarations:
(a) that the alteration of memorandum of association at the meeting of 8th
December, 1970, was void, and (b) that Jagdish Kapadia, M.C. Kapadia, B.L.
Kapadia and S.N. Kapadia were not validly elected directors. The plaintiffs
also sought the necessary injunctions in the suit. . The said suit is pending.
I shall first deal with a
preliminary objection as to the jurisdiction of this court taken by the
company. The company contends that it is a foreign company registered in the
United Kingdom and has its office in London and, therefore, this court has no
jurisdiction to entertain the petition. Under section 2(7) of the Companies
Act, 1956 (hereinafter referred to as “the Companies Act”), a “body corporate”
or a “corporation” includes a company incorporated outside India. The company
is, therefore, undoubtedly a “body corporate” and a “corporation”. Part X of
the Companies Act pertains to winding-up of unregistered companies. Section 582
of the Companies Act provides that, for the purposes of Part X, the expression
“unregistered company” shall not include a company registered under the
existing or previous Indian law but shall include any other association or
company consisting of more than 7 members at the time when a petition for
winding up is presented. The company not being registered under Indian law and
undoubtedly being an association of persons consisting of more than 7 members
falls within the meaning of “unregistered company” in section 582. Section 583
contains provision for winding up of unregistered companies. Section 584
provides that where a body corporate incorporated outside India which has been
carrying on business in India ceases to carry on business in India, it may be
wound up as an unregistered company under Part X. The company is a body
corporate incorporated outside India. Even prior to 1942 it had a place of
business and its head office in Bombay. It has therefore been carrying on
business in Bombay and has ceased to carry on its business in India. It does
not matter that the oil installations of the company were in Burma, nonetheless
it was carrying on business in India. It is, therefore, liable to be wound up
as an unregistered company under the
provisions of section 583. I find no substance in the contention that this
court has no jurisdiction to wind up the. company. I reject the said
contention.
Now, I come to the
principal contention of the petitioners that the company has ceased to carry on
business and is therefore liable to be wound up under the provisions of section
583(4)(a) of the Companies Act. From its inception in 1910 to 1942 the company
carried on the business of prospecting for, producing, refining and dealing in
petroleum and other mineral oils. In 1942 due to exigencies of war and
destruction of the company’s properties in Burma that business came to an end.
From 1942 to 1965 the company carried on no business. It was engaged in
litigation and other efforts for recovery of compensation for destruction of
its property. This was a necessary and useful activity and would have been a
good ground for not winding up the company during that period. But, in my
opinion, this was not a business falling within the objects clauses of the
company. It can, therefore, be said that from 1942 to 1965 the company did not
carry on any business. After 1965 up to 1967 the company admittedly carried on
badli business of advancing money on security of shares of other companies.
From 1967 to 1970 the company has invested its capital principally in the
shares of National Rayon Corporation Ltd. and Killick Industries Ltd. We have
to consider whether badli business and the business of investing in shares of
other companies was intra vires the company or ultra vires the company If the
said business was intra vires, it cannot be said that the company has ceased to
carry on business. If on the other hand the said business was ultra vires, it
was not business within the meaning of the objects clauses in the memorandum of
the company and it will mean that the company had not carried on business during
that period and perhaps what is worse that it had carried on ultra vires
business. This requires construction of the objects clauses of the company.
As I have stated
hereinabove, the first objects clause of the company as it stood prior to 8th
December, 1970, was to prospect for, refine, produce and deal in petroleum and
other mineral oils and for this it owned the undertakings of three companies in
Burma mentioned in its first objects clause. The name of the company itself
suggests that it was formed for carrying on petroleum business. From 1910 to
1942 the company carried on no other business than that provided for in its
first objects clause. The memorandum of the company did not contain the usual
“independent construction clause” providing that each objects clause was to be
construed as the main or dominant objects clause and was not to be restricted
by the name of the company. For all these reasons I have no hesitation in
coming to the conclusion that the main and dominant object of the company was contained in its first
sub-clause and was that of prospecting for, refining, producing and dealing in
petroleum and other mineral oils. On behalf of the company reliance has been
placed on sub-clauses (3), (5), (6), (12), (14), (19) and (22) of clause 3. Clause
3 permits a variety of businesses including the business of running railways
and other transport, construction business, engineering, foundries, running
hotels, breweries, churches, chapels. This clause would permit the company to
“fly balloons from the earth to the moon” as the cynical English judge remarked
in the Crown Bank case,
referred to later. Clause 5 permits the company to carry on any trade, business
or manufacture. Clause 6 permits the company to manufacture all kinds of
articles, but this is qualified by the provision that the articles must be
required for the purposes of the business of the company which would, in my
opinion, be the business specified in the first sub-clause. Clause 12 gives
power to the company to lend money on shares or otherwise, but this sub-clause
is also qualified by the condition that it must be directly or indirectly for
furtherance of the objects of the company. Clause 14 also permits investments
in shares but is qualified by the condition that it must be for carrying out
the objects of the company. Clause 19 permits investment of moneys of the
company not immediately required for its general purposes. This contemplates
the existence of its principal business and obviously a power for investment of
surplus funds and not an objects clause enabling the company to invest its
entire funds in other companies with a view to control them. Clause 22 is an
ancillary clause providing for doing all things incidental to the objects of
the company.
In
order to avoid the cumbersome procedure for subsequent alteration of the
objects of companies, it has become customary for companies to inflate the
objects clause by adding to their principal objects a large number of objects
many of which would in any case be implied and many of which are never needed
by the company. Added to this catalogue of possible or conceivable objects is
normally a sub-clause which provides that each of the objects specified in the
clause would be regarded as independent objects, and shall not be limited or
restricted either by reference to any other objects clause or the name of the
company. Such an independent clause does not, however, exist in the memorandum
of the company. The practice of inserting inflated objects has been criticised
by the House of Lords in the case of Cotman v. Brougham.
However, as in that case there was an independent construction clause their
Lordships held that effect would have to be given to it and the independent
construction clause excluded the “main objects” rule of construction. The “main
objects” rule of construction is a special rule of construction and is applied
where the objects of a company are expressed in a series of paragraphs and one
paragraph, commonly the first, appears to
embody the main or dominant object of the company. In such a case, all the
other paragraphs are to be treated as merely ancillary to the main object and as
limited and controlled thereby.
The “main objects” rule was
expressed by Lindley L. J. in In re German Date Coffee Company as
follows:
“In
construing........any........memorandum of association in which there are general words, care must be taken to construe
those general words so as not to make them a
trap for unwary people. General words........must be taken in connection with what are shewn by the context
to be the dominant or main objects (of the company). It will not do under
general words to turn a company for manufacturing one thing into a company for
importing something else, however general the words are.”
In the above case the
memorandum of association of the company stated that it was formed for working
a German patent which had been or would be granted for manufacturing coffee
from dates, and also for obtaining other patents for improvements and
extensions of the said inventions or any modifications thereof or incidental thereto,
and to acquire or purchase any other inventions for similar purposes, and to
import and export all descriptions of produce for the purpose of food, and to
acquire or lease buildings either in connection with the abovementioned
purposes or otherwise, for the purposes of the company. The intended German
patent was never granted, but the Company purchased a Swedish patent, and also
established works in Hamburg, where they made and sold coffee made from dates
without a patent. Many of the shareholders withdrew from the company on
ascertaining that the German patent could not be obtained, but the large
majority of those who remained desired to continue the company which was in
solvent circumstances. It was held that the substratum of the company had failed
and it was impossible to carry out the objects for which it was formed and
therefore that it was just and equitable that the company should be wound up
although the petition was presented within a year of its incorporation.
In In re Haven Gold Mining
Company
the company was established for working a gold mine in New Zealand, and it
turned out that the company had no title to the mine and had no prospect of
obtaining possession of it except as to a small portion for a few months. The
court was satisfied that the subject-matter of the business for which the
company was formed had substantially ceased to exist although there were
general words in the memorandum of association enabling the company to purchase
and work other mines in New Zealand and large majority of the shareholders
wished to continue the company. The court made an order of winding-up. In both the cases of German Date Coffee and
Haven Gold Mining, the
court referred to the name of the company for
determining its dominant or main object.
In In re Crown Bank the
company was registered under the name of Mid-Northsamptonshire Bank Ltd. In
addition to wide and general objects, the memorandum of association stated particularly
numerous objects of diverse character in fifteen paragraphs. The first three
paragraphs related to, banking, discounting, and money-lending and borrowing,
respectively others referred to purchasing and developing land, investing and
dealing in shares and securities, and promoting companies. The company
commenced business as a country bank in Northamptonshire, with an office in
London. After a short time its name was changed to the Crown Bank Ltd. It gave
up its country offices, ceased to do banking business, and carried on in
London, in addition to some land speculation, business of investing in shares
and securities. On a petition by a shareholder to wind up the company on the
ground that its main objects had failed, it was held that the name of a company
is important in construing the objects defined in the memorandum of association
and that the company was not carrying on business authorised by the memorandum
of association and it was just and equitable that it should be wound up.
The “main objects” rule of
construction has been followed in India in numerous cases where independent
construction clause has not appeared in the memorandum. In this state of law, I
have no hesitation in holding that the main and dominant object of the company
as ascertained from its name, the first objects clause, the business actually
done by the company from 1910 to 1942 was to prospect for, refine, produce and
deal in petroleum and mineral oils. I am further of the view that badli
business of advancing money on shares carried on by the company from 1965 to
1967 and the business of investing money in shares of National Rayon
Corporation Ltd. and Killick Industries Ltd. was ultra vires the objects of the
company. It was, therefore, no business at all. What the company did was
perhaps worse than ceasing to carry on business.
On behalf of the company,
my attention was invited to the case of In re Kitson and Co. Ltd. In
this case the main and paramount object of the company was to carry on an
engineering business of a general nature. It had disposed of one engineering
business and before and order on winding-up petition could be made, it had
shown the intention of carrying on another engineering business. The court
refused to make a winding-up order. In my opinion, this case has no
application. The company has not shown that it has acquired other oil
installations with which it could continue the business for which the company
was started.
Another
case cited was In re Taldua Rubber Co. Ltd In
that case the court found that the paramount object of the company was to carry
on the business of rubber estates and that it was not limited to the business
of carrying on the particular estate. The memorandum also contained the
independent construction clause. The company had disposed of a particular
estate and showed an intention to carry on business by acquiring another
estate. Although the company had no concrete scheme before the court for
dealing with the proceeds of the sale of the first estate, the court refused to
make a winding-up order. In the case of In re Eastern Telegraph Co. Ltd the
company was formed for acquiring the undertakings of telegraph lines. In 1929
its telegraph lines were acquired by a Government owned corporation. The
company, however, had power to and had thereafter continued to carry on one of
the main forms of the business authorised by its memorandum. Although not
operating a telegraph or cable business itself, it had participated through the
medium of its shareholding, in the proceeds of operation of the business
carried on by another similar company, the court refused to make a winding-up
order. In my opinion, none of the above three cases has any application to the
facts of the present case. The present case is governed by the decisions in In
re German Date Coffee Co., In
re Haven Gold Mining Co and
In re Crown Bank.
Now,
I come to the alteration of the objects clause on 8th December, 1970, during
the pendency of this petition. This enables the company to carry on a variety
of businesses and also introduces the independent construction clause. This
petition was partly argued before the vacation in April last. The arguments
have been continued on the reopening of courts in June. The company has filed
an affidavit stating that during the vacation it has entered into three
transactions for purchases or sales of mineral oils. I am not at all impressed
with the bona fides of the new business and propose to ignore the same for the
purpose of this petition. Apart from the new business purporting to have been
done under the altered clause, the alteration of the object clauses in the memorandum
was itself effected during the pendency of this petition and its validity is
under challenge in a pending suit.
In
England it was held in Stephens v. Mysore Reefs Mining Co. Ltd,
that, notwithstanding an independent construction clause, the first few
sub-clauses in the memorandum would contain the primary business of the company
and the remaining sub-clauses would be ancillary sub-clauses or powers. But in
the case of Cotman v. Brougham the
House of Lords gave
effect to the independent construction clause. The House of Lords did not refer
to the Mysore Reefs’ case but
text books such as Palmer have treated Mysore Reefs’ case as no longer good law. In the case of Anglo
Overseas Agencies Ltd. v. Green
Salmon J. took the view that Mysore Reefs’ case was no longer good law. I must, however, point
out that in Cotman v. Broughamm as
well as in the case before Salmon J. the question was of ultra vires of certain
acts of the company and not the question of substratum. There is considerable
difference in construction when one is considering whether a particular act is
ultra vires the company’and when one is considering whether the substratum of
the company is gone. It may perhaps yet be argued in England either in the
Court of Appeal or before the House of Lords that the Mysore Reefs’ case; is still good law.
In
India in the case of Lawang Tshang v. Goenka Commercial Bank Ltd. G. K.
Mitter J. (later a judge of the Supreme Court of India) took a view quite
contrary to the view of Salmon J. and he held that, notwithstanding the
independent construction clause, the main and paramount object of the company
in that case was still contained in the first few clauses. P.N. Bhagwati J. has
taken a view contrary to the Calcutta view in Mohanlal Dhanjihhai Mehta v.
Chunilal B. Mehta. In
the case of Akola Electric Supply Co. Pvt. Ltd. Naik
J. took a view similar to the one taken by Bhagwati J., but in that case the
observations of the learned judge are obiter dicta and the point did not arise.
It
would, therefore, appear that this rule of construction based on independent
construction clause is not free from doubt. I must also mention that this
alteration is being challenged as invalid in Suit No. 862 of 1970. Such a suit
is maintainable under the very provisions of section 5(9) of the English
Companies Act, 1948. I do not think, therefore, that because of the subsequent
alteration this petition should be summarily dismissed without further inquiry
at the regular hearing.
Now,
I come to the allegation that the directors of the company are not properly
appointed. This contention is the subject-matter of Suit No. 862 of 1970 in
which a declaration to that effect is sought. There being other remedies
available to the petitioners I would not wind up the company on this ground
alone. However, as I have come to the conclusion that the business carried on
by the company between 1965 and 1970 is ultra vires its memorandum, the fact that
such business is carried on by directors improperly appointed becomes relevant
for the purpose of coming to the conclusion
whether it is just and equitable that the company should be wound up apart from
the fact that its substratum is gone. The three directors other than Jagdish
Kapadia were appointed on 5th April, 1966. At the date of appointment they
admittedly did not ‘have qualification shares nor did they acquire such
qualification within two months. In my opinion, their offices fell vacant on
5th June, 1966. Thereafter, these three persons functioned without being
validly appointed director. The qualification of directors is prescribed by
article 88. It is the owning of 2,500 shares of the company. Article 89
provides that the office of a director shall be vacated if a director does not
obtain his qualification within two months after his appointment. It is alleged
by the petitioners that in the register of directors, the directors falsely
showed that they held qualification shares. This allegation is not denied.
Article 105 provides that no person other than a director retiring at the
meeting shall, unless recommended by the directors for election, be eligible
for the office of a director at any general meeting unless not less than seven
nor more than forty-two clear days before the day appointed for the meeting, a
notice in writing is given by a qualified member of his intention to propose
such person. This previous notice does not apply to a retiring director who is
eligible for re-election. It appears that at all subsequent general meetings,
the three directors other than Jagdish Kapadia have been elected without any
notice given under article 105 on the footing that at the date of the general
meeting, they were retiring directors. In view of the fact that I have come to
the conclusion that these persons ceased to be directors on 5th June, 1966, and
were not directors at any subsequent general meeting, they were, in my opinion,
not retiring directors and were not entitled to be elected without a previous
notice in writing prescribed by article 105. Prima facie it appears to me that
directors other than Jagdish Kapadia were invalidly elected from time to time.
The only validly elected director was Jagdish Kapadia and he alone could not
function as the board of directors. It would, therefore, appear that he could
function only under article 111 for the purpose of summoning general meetings
of the company, but not for any other purpose. His acts other than those of
calling general meeting would therefore be invalid. This may affect the
question of the validity of the resolution altering the memorandum on 8th
December, 1970. This will have to be considered at the hearing of the petition.
During the hearing of the
petition, the shareholders supporting the company offered to purchase the
shares of the petitioners either at the rate of Rs. 3 per share or at the rate
of their own purchase or at the rate of break-up value of shares to be fixed by
any chartered accountant appointed by the court. They also offered to purchase
the shares of other dissentient shareholders at the rate of break-up value of
the shares to be fixed by any chartered accountant appointed by the court. The
petitioners and their supporters in turn offered to buy at these prices the
shares of the present directors and the shareholders supporting them. It is
true that the shareholders supporting the petitioners are very few and that the
majority of the shareholders support the company. The offers and counter-offers
were made to show that the other party was not acting bona fide Reference was
made on behalf of the company to the cases of George v. Athimattam Rubber Co. Ltd and
A.P. Pothen v. Hindustan Trading Corporation Ltd. and
it was argued that the petition was mala fide
because if the petitioners were interested in retrieving their money and not
wrecking the company, they could sell their shares at fair rate and get out. I
am, however, not impressed by the fact that the petitioners are minority
shareholders. If the business carried on by the company is ultra vires its
memorandum and the said business is carried on by meddlers who are not validly
elected directors, the petitioners, though in minority, are entitled to say
that they would have the company wound up. In In re Haven Gold Mining Co.’s
case
the winding-up order was made at the instance of the minority shareholders.
During his arguments, Mr.
Parpia, on behalf of the shareholders supporting the company, applied for
adjournment of the petition to enable his clients to put the offer of his
clients to buy up the minority before a general meeting to be convened for the
purpose. I refused this adjournment. The application was made at a late stage.
Besides, after the petition is admitted and advertised, all the shareholders
would be before the court. It will be open to them to consider the offer at the
final hearing.
The petitioners alleged
that the acquisition of shares of National Rayon Corporation Ltd. and/or
Killick Industries Ltd. by Kapadia group is for ulterior purposes. In my
opinion, an act of a company within the scope of powers expressed in its
memorandum is not ultra vires, because its directors had a foreign purpose in
mind when on the company’s behalf they performed the act in question. This has
been held in Charterbridge Corporation v. Lloyds Bank Ltd. In
view of the fact that I have taken the view that the business carried on by the
company from 1965 to 1970 was ultra vires, the question of ulterior purpose in
carrying on such business is also a matter that will have to be inquired into
at the final hearing of the petition.
It appears to me prima
facie that the company has ceased to carry on business, its substratum is gone,
it has carried on ultra vires business and that the said business has been
carried on by meddlers and that it will be just and equitable that the company
should be wound up. These are, however, prima facie views. I do not think that
this is a petition which should be summarily dismissed without further inquiry into the allegations.
It must be admitted. I am prima facie satisfied that the matter is fit to be
inquired into. At the stage of admission normally only contentions of a
preliminary nature ought to be considered. I have, however, heard the matter
for several days and come to the above conclusion.
On
behalf of the company it was contended that the admission and advertisement
will affect the business of the company. Apart from the alleged 3 transactions
in oil entered into by the company a few days back, which do not appear to be
bona fide, the company carries on no business. Its capital is invested in
shares of National Rayon Corporation Ltd. and Killick Industries Ltd. which are
both controlled by the company. There will, therefore, be no adverse effect on
any business of the company.
In
the result, I admit the petition. The company will pay to the petitioners the
costs of the petition up to the stage of admission. Counsel certified. The
petition will be advertised in the Maharashtra Government Gazette, The Times of
India and The Maharashtra Times. The petition will not be advertised for a
period of one week from today. The petition shall be heard on 2nd August, 1971.
[1988] 64 COMP. CAS. 19 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Paragaon Utility Financiers P.
Ltd.
MAY 15, 1986
Arun Jain for the
Petitioners.
N.K. Sodhi, H.S.
Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the
Companies Act, 1956.
Briefly, the facts are that
the respondent is a private limited company having authorised capital of Rs.
10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up capital
is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in arrears
amount to Rs. 59,000. It was incorporated on August 21, 1961, under the
provisions of the Companies Act (hereinafter referred to as "the
Act"). The petitioners hold 150 shares as detailed below:
|
|
No. 1 |
20 |
|
Hardev Singh Minhas," |
No. 2 |
30 |
|
Maj. K. Gurdev Singh," |
No. 3 |
20 |
|
Smt. Nasib Kaur," |
No. 4 |
20 |
|
Iqbaljit Singh," |
No. 5 |
20 |
|
Smt. Kirpal Kaur," |
No. 6 |
20 |
|
Smt. Chanan Kaur," |
No. 7 |
20 |
It is alleged that the affairs of the company
are being conducted prejudicially to public interest and in a manner oppressive
to the petitioners, who are in minority, as detailed below:
(i) The company had been allotted 490 equity shares of
Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as
"PISCO"). The paid-up amount in respect of the above shares was Rs.
3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife,
Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife
(124 shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and
Swaran Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122
shares). These were transferred in a clandestine manner and without having been
offered to any other shareholder including the petitioners, for a consideration
of Rs. 3.90 lakhs in a meeting of the board of directors of the company held on
December 30, 1978. No money in cash was paid by the purchasers to the company
as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited
with the company was adjusted towards the purchase price and the balance amount
of Rs. 1,90,000 was given by the company as loan to the purchasers with
interest at the rate of 15 per cent, per annum. The meeting in which the shares
were transferred was illegal and void for want of quorum. Some other
irregularities were also committed by the board of directors in calling and
holding the meeting. Thus, the transfer of shares is not binding on the
company.
(ii) Shri Ramesh Inder Singh was the managing director of the
company in the year 1976 and he had been operating the bank account of the
company maintained in the Central Bank of
(iii) Mohinder Singh had been appointed as
manager-cum-cashier of the company during the regime of Pavittar Singh, father
of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh.
As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by
him in the year 1976. The board of directors decided to take action against
him. The matter was taken in various meetings of the board of directors but no
action was taken against him. Thus, the interest of the shareholders was not
protected by the management.
(iv) The minutes book of the company relating to the meetings
of the board of directors and shareholders was not kept properly from November,
1978, to September, 1979. Some of the proceedings have not been signed by the
chairman. There are various violations of the provisions of section 193 of the
Act. Therefore, the business transacted in the meetings during that period is
illegal and void ab initio.
(v) The company had been advancing loans to some persons
without any documents. It is alleged that it advanced loan without interest and
without getting executed any document to PISCO. An amount of Rs. 14,309.57
stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder
Singh as on December 31, 1978, but no action has been taken to recover the
amounts from them.
The aforesaid allegations,
it is pleaded, go to prove the mismanagement on the part of the management
which is prejudicial to public interest and oppressive to the minority members
of the compauy. Thus, the circumstances are such in which it would be just and
equitable that the company can be ordered to be wound up. Consequently, it is
prayed that action be taken under the aforesaid section. The respondents in the
petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar
Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder
Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No.
2, late Pavittar Singh, was ordered to be deleted.
The petition has been
contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two
written statements have been filed, one on behalf of respondent No. 1 and the
other on behalf of the latter respondents. Respondent No. 1 alleged that the
affairs of the company were meticulously looked after during the period when
Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application
for rectification of the register of shareholders of PISCO under section 155.
The application was decided against him but an appeal is pending in this court
against that order.
In the written statement on
behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the
allegations in the petition do not make out a case of oppression and
mismanagement of the affairs of the company and its winding up on just and
equitable grounds. The petition is mala fide and had been filed at the behest
of Col. P. S. Dhillon who had been the managing director till April 20, 1982,
when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of
Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in
the petition, it is stated, related to the transfer of 490 shares held by the
company in PISCO. The matter had been decided in company petition filed by Col.
P. S. Dhillon which had since been dismissed. It is further pleaded that
rectification of the transfer of shares cannot be the subject-matter of a
petition under sections 397 and 398. The allotment cannot also be declared
invalid in the absence of PISCO. The other allegations in the petition have
been controverted by the said respondents.
On the pleadings of the
parties, the following issues were framed:
1. Whether the petition is maintainable in view of the preliminary
objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and
paragraph No. 6 of the written statement of respondent No. 1? [Opp].
2. Whether the affairs of the company are being conducted in a manner
prejudicial to the interest of the company and public? [Opp].
3. Whether the acts of
the majority are oppressive to the interest of the minority? [Opp].
A. Relief.
Issue No. 1: The first
preliminary objection raised by Mr. Sodhi is that the petitioners have no right
to maintain the present petition as they did not own 10 per cent, shareholding on
the date of filing the petition. On the other hand, Mr. Jain, counsel for the
petitioners, has argued that the petitioners had 150 shares out of 1,000 shares
on the date of filing the petition as given in the petition. Thus, they had the
right to file the petition.
I have duly considered the
arguments of learned counsel and find force in the contention of Mr. Jain. The
petitioners, as given in the list of members, exhibit P-88, filed with the
Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June
30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the
time of filing the petition, the petitioners were shareholders of the company.
From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that
the petitioners had more than 10 per cent, shareholding in the company.
At this, Mr. Sodhi sought
to urge that the position reflected in exhibit P-88 relates to the month of
June, 1982, whereas the petition was filed in October, 1982. He argues that it
was incumbent on the petitioners to show the total number of shareholding held
by them on the date of filing the petition which they failed to do. He made
reference to Rajahmundry
Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of
the board of directors dated October 29,1978, wherein 20 shares held by
Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh
and Amarjit Singh Bajwa, son of Rattan Singh.
I do not find any substance
in this submission of learned counsel as well. The petitioners have shown that
according to the latest list of members filed with the Registrar of Companies,
they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement
that all the petitioners were shareholders of the company on the date of filing
the petition. The proceedings of the board of directors dated October 29, 1978,
however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner.
It cannot be ruled out that 20 shares might have been again transferred in the
name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of
shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not
been transferred to her subsequently, the remaining petitioners still had more
than 10% shareholding on the date of petition and thus they were entitled to
file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case.
[1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant
after obtaining the consent of more than one-tenth in number of the members
presented the petition under section 153C of the Indian Companies Act, 1913
(section 397 of the Companies Act, 1956). Subsequent to the presentation of the
petition, some of the members withdrew their consent. It was held that
subsequent withdrawal of the consent could not affect the right of the
petitioner to proceed with the petition or the jurisdiction of the court to
dispose of it on merits. In my view, the observations in the above case are of
no assistance to Mr. Sodhi. Consequently, I overrule this preliminary
objection.
The second objection of Mr.
Sodhi is that the allegations made in the petition should be such that a prima
facie case for winding up of the company has been made out under section
433(f), but from the allegations in the petition, no such case stands
established. In support of his contention, he places reliance on Shanti Prasad
Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth
Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas
P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976
SC 565.
There is no dispute about
the proposition that an action under section 397 can be taken only if a prima
facie case for winding up has been made out on the allegations in the petition.
In the above observations, I find support from Rajahmundry Electric Supply
Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows
(at page 95):
".before taking action
under section 153C, the court must be satisfied that circumstances exist on
which an order for winding up could be made under section 162".
Sections 153C and 162 of
the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956
Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 (SC). It was further observed therein that the conduct of the majority
shareholders must be burdensome, harsh and wrongful and mere lack of confidence
between the majority shareholders and the minority shareholders would not be
enough unless the lack of confidence springs from oppression by the majority in
the management of the company's affairs and such oppression must involve at
least an element of lack of probity or fair dealing to a member in the matter
of his proprietary rights as a shareholder.
It is now to be determined
whether the allegations in the petition make out a prima facie case for the
winding up of the company under section 433(f). The section says that a company
may be wound up by the court if it is of opinion that it is just and equitable
to do so. The question arises what the words "just and equitable"
mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that
the principle of "just and equitable" baffles a precise definition.
It must rest with the judicial discretion of the court depending upon the facts
and circumstances of each case. These are necessarily equitable considerations
and may, in a given case, be superimposed on law. Whether it would be so done
in a particular case cannot be put in the strait-jacket of an inflexible
formula. Clause (f) is not to be read as being ejusdem generis with the
preceding five clauses. Whether the five earlier clauses prescribe definite
conditions to be fulfilled for the one or the other to be attracted in a given
case, the just and equitable clause leaves the entire matter to the wide and
wise judicial discretion of the court. The only limitations are the force and
content of the words "just and equitable" themselves. In view of
sections 397, 398 and 443(2), relief under section 433(f) based on the just and
equitable clause is in the nature of a last resort, when other remedies are not
efficacious enough to protect the general interest of the company. There must
be materials to show when the just and equitable clause is invoked that it is
just and equitable not only to the persons applying for winding up but also to
the company and to all its shareholders. It is further observed that the court will
have to keep in mind the position of the company as a whole and the interest of
the shareholders and to see that they do not suffer in a fight for power that
may ensue between the two groups. Similar observations were made in Seth Mohan
Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in making an
order for winding up on the ground that it is just and equitable that a company
should be wound up, the court shall consider the interest of the shareholders
as well as of the creditors. It is not necessary to dilate further on this
matter. It is sufficient to observe that if the allegations in the petition are
taken to be established, the petitioners are entitled to obtain an order of
winding up under section 433(f).
The third preliminary
objection of Mr. Sodhi is that the oppression should continue up to the date of
the petition. He contends that the petition in this case does not show that the
oppression is continuous and, therefore, it is liable to be dismissed. To
fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35
Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and
Jute Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand,
Mr. Jain has argued that if the effect of a single act is continuously
oppressive, the court is entitled to pass an order under sections 397 and 398.
He refers to In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal).
I have duly considered the
argument. The matter does not require any elaborate discussion as it has been
settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 that in order to file an application under section 397, if must be shown
that the conduct of the majority shareholders was oppressive to the minority
members and this requires that events have to be considered not in isolation
but as part of a consecutive story. There must be continuous acts on the part
of the majority shareholders, continuing up to the date of the petition,
showing that the affairs of the company were being conducted in a manner
oppressive to some part of the members. Same view was expressed by P. N.
Bhagwati, J. as he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777
(Guj). It was observed therein that sections 397 and 398 postulate that there
must be at the date of the application a continuing course of conduct of the
affairs of the company which is oppressive to any shareholder or shareholders
or prejudicial to the interests of the company. I am in respectful agreement with
the above observations. It is true that in Sindhri Iron Foundry's case [1964]
34 Comp Cas 510, it was held by a learned single judge of the Calcutta High
Court that if the court is satisfied that a single wrongful act is such that
its effect will be a continuous course of oppression and there is no prospect
of remedying the situation by the voluntary act of the party responsible for
the wrongful act, the court is entitled to interfere by an appropriate order
under section 397 of the Act. However, the above observations are not in
consonance with those of the Supreme Court in Shanti Prasad Jain's [1965] 35
Comp Cas 351. Consequently, it is not possible for me to rely upon the view
expressed by the Calcutta High Court.
It is clear from the facts
that the petitioners have alleged oppression relating to the year 1978-79.
Thereafter, Col. P. S. Dhillon was appointed as the managing director who
remained as such for many years, but during that period, the petitioners
remained quiet and took no action. Thus, it cannot be said that there are
continuous acts of the majority shareholders which have been oppressive to the
petitioners. Consequently, the petition is liable to be dismissed on this short
ground.
Issues Nos. 2 and
3.—Though, in view of the above finding, it is not necessary to deal with the
arguments of Mr. Jain on these issues, in order to avoid the possibility of
remand in appeal, I consider it proper to deal with them.
In the first instance,
counsel for the petitioners has challenged the resolutions passed in the
meetings of the company held on November 30, 1978, December 30, 1978, January
15, 1979, and February 28, 1970. It was highlighted by him that several
directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt.
Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder
Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt.
Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder
Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri
Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh.
Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh
Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother
of Smt. Nasib Kaur. He submits that the matter is to be examined in this
background. He has challenged the legality of the resolution dated November 30,
1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in
which the resolution was passed was incomplete; secondly, no notice of the
meeting was given to the directors and, thirdly, that, in fact, no meeting was
held on that date.
The first question that
arises for determination is as to whether the quorum for the meeting in which
resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that
there were 32 directors of the company on November 30, 1978, and, therefore,
the quorum for the meeting was 11. However, only 8 directors were present. Out
of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on
September 27, 1977, and January 30, 1978, respectively, as they failed to
attend three consecutive meetings and thus they would be deemed to be not
present in the meeting. In this way, only six directors would be deemed to be
present.
On the other hand, Mr.
Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej
Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib
Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh
and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of
directors on that date was 24. The number for determining the quorum will be
deemed to be 24 and not 32. Therefore, the quorum would have been complete if
eight directors were present. He further contends that Shri Pavittar Singh had
been re-elected as director on June 30, 1978, and, therefore, he did not suffer
from any disability on November 30, 1978.
I have duly considered the
arguments of learned counsel. It has been admitted by Mr. Jain that out of the
32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh,
Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar
Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh
had ceased to be directors prior to November 30, 1978. Subsection (2) of
section 287 provides that the quorum for a meeting of the board of directors of
the company shall be one-third of its total strength or two directors,
whichever is higher. In clause (a) of sub-section (2) of section 287, the total
strength of the board of directors of a company has been denned as the total
strength of the board of directors as determined in pursuance of the Act, after
deducting there from the number of directors, if any, whose places may be
vacant at the time. It is thus evident that for constituting quorum, l/3rd of
the total number of directors who do not suffer from any disability are to be
taken into consideration. The effective number of directors who admittedly
ceased to be so is 8. Thus, the number of effective directors was 24 and out of
them 8 directors could constitute the quorum. The directors present in the
meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt.
Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar
Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt.
Inderjit Kaur and Shri Ravinder Singh ceased to be directors. There is a
dispute as to whether Shri Pavittar Singh was re-elected as a director or not.
Even if it may be assumed that Shri Pavittar Singh had been re-elected as
director, the quorum was incomplete as only six directors were present.
The second question to be
determined is whether notice of the meeting was given to the directors and if
not with what effect. Mr. Jain has argued that the copy of the despatch
register of the company from October 16, 1978, to February 19, 1979, exhibit
P-74, does not show that any notice was issued for the said meeting. On the
other hand, Mr. Sodhi, has argued that the only requirement under section 286
is that the notice of the meeting should be in writing. It does not prescribe
the manner in which it is to be served on the directors. The notice under
article 82 of the articles of association can be served personally. He submits
that notices were not sent by post but through a messenger.
It is not disputed by Mr.
Sodhi that the notices were not entered in the despatch register. There is no
reliable evidence on record to prove that notices were sent through messenger
and, therefore, it cannot be held that notices were given to the directors. It
is essential that the notices of the meetings have to be sent to all the
directors, otherwise, the resolutions passed in such meetings are invalid. In
this view, I am fortified by the observations of the Supreme Court in
Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC
2389, wherein it was observed that notice to all the directors of a meeting of
the board of directors is essential for the validity of any resolution passed
at the meeting and where no notice was even given to one of the directors, the
resolution passed at the meeting of the board of directors is invalid. Consequently,
I am of the opinion that the resolution dated November 30, 1978, is invalid on
this ground.
The third question to be
determined is whether the meeting was held on November 30, 1978, or the minutes
were recorded without holding the meeting. Mr. Jain has argued that no meeting
was held but the minutes were recorded subsequently by the eight directors in
collusion with each other. In support of his contention, he brought to my
notice the fact that the signatures of the chairman at the end of the minutes
bear the date November 30, 1979, instead of November 30, 1978. The arguments
have been considered by me but I do not agree with them. The proceedings book
is page-marked and consists of several resolutions even after this resolution.
This resolution cannot be said to have been incorporated therein subsequently
merely because under the resolution, Shri Pavittar Singh purported to have
signed on November 30, 1979. The year and the date might have been mentioned
through an oversight.
Now, I advert to the
resolution, exhibit P-2, passed in the meeting held on December 30, 1978. Mr.
Jain has challenged the said resolution on four grounds, out of which three
grounds are the same on which resolution, exhibit P-1, was challenged. The
fourth ground is that 5 transferees of the shares of PISCO, namely, Smt. Nasib
Kaur, Shri Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri
Swaran Singh, took part in the meeting without disclosing their interest in the
proposed transaction and, therefore, they ceassed to be directors on that date.
The first question to be seen is whether the quorum for the meeting was
complete or not. This meeting was attended by the following ten directors:
|
1. |
Smt. Nasib Kaur. |
|
2. |
Smt. Mohinder Kaur, |
|
3. |
Smt. Rajinder Singh Johal, |
|
4. |
Smt. Gurbax Kaur, |
|
5. |
Shri Pavittar Singh, |
|
6. |
Shri Ravinder Singh, |
|
7. |
Shri Swaran Singh, |
|
8. |
Smt. Inderjit Kaur, |
|
9. |
Shri Rameshinder Singh, and |
|
10. |
Shri Amar Singh. |
The resolution was passed
for transferring 490 shares of PISCO held by the company in favour of the
following persons for full consideration:
|
|
Shares |
|
1. Shri
Pavittar Singh and his wife, Smt. Nasib Kaur |
122 |
|
2. Shri
Ravinder Singh and his wife, Smt. Santosh |
124 |
|
3. Shri
Rameshinder Singh |
122 |
|
4. Shri
Swaran Singh |
122 |
|
|
490 |
N.B. Out of 6
transferees, all except Smt. Santosh were directors of the company.
Mr. Jain has contended that
out of the ten directors present in the meeting, five directors were
transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder
Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to
be a director. If the presence of the five transferee-directors and that of
Smt. Inderjit Kaur is not taken into consideration, then the quorum is
incomplete. On the other hand, Mr. Sodhi has argued that Shri Pavittar Singh,
after he had ceased to be a director, was re-elected on June 30, 1978. However,
he admits that Smt. Inderjit Kaur ceased to be a director. He further submits
that the transferees did not cease to be directors at the time of passing the
resolution and at the most they ceased to be so after the resolution had been
passed.
First, it is to be seen
whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as
argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the
shareholders dated June 30, 1978, from which it is clear that he was re-elected
as director on June 30, 1978. Thereafter, it is not shown that he ceased to be
so. Consequently, I am of the opinon that he was a director on December 30,
1978.
It is next to be seen
whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder,Singh
and Shri Rameshinder Singh had ceased to be directors on that date because they
took part in the meeting at the time of passing the resolution, exhibit P-2.
Relevant parts of sections 283(1)(i) and 299 read as follows:
"Section 283. Vacation
of office by directors.—(1) The office of a director shall become vacant if—.
(i) he acts in
contravention of section 299.
Section 299. Disclosure of interests by
director.—(1) Every director of a company who is in any way, whether directly
or indirectly, concerned or interested in a contract or arrangement, or
proposed contract or arrangement, entered into or to be entered into, by or on
behalf of the company, shall disclose the nature of his concern or interest at
a meeting of the board of directors.".
From a reading of section
283, it is clear that the office of the director becomes vacant when a director
acts in contravention of section 299. It is enjoined by section 299 that a
director, who is interested in a contract entered into by or on behalf of the
company, should disclose the nature of his interest at a meeting of the board
of directors. If he fails to do so, he ceases to be a director. In view of the
aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran
Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of
the company.
Now, the question arises,
whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1)
of section 300 provides that no director of a company shall, as a director,
take any part in the discussion or vote on any contract by or on behalf of the
company, if he is in any way, whether directly or indirectly interested in the
contract, nor shall his presence count for the purpose of forming a quorum at
the time of any such discussion or vote; and if he does vote, his vote shall be
void. Sub-section (2)(a), which is in the nature of a proviso to sub-section
(1), says that sub-section (1) shall not apply to a private company which is
neither a subsidiary nor a holding company of a public company. A reading of
the above provisions makes it clear that sub-section (1) applies to a public
limited company and not to a private company which is not a subsidiary or a
holding company of a public company. Therefore, it is in the case of a public
company and a private company which is a subsidiary or a holding company of a
public company, that if a director takes part in the proceedings of the board
of directors and votes regarding any contract in which he is interested, his
presence for the purposes of forming a quorum shall not be counted and his vote
shall be void. However, it will not be so if the company is a private company.
In the present case, the company is a private company. Therefore, the presence
of the aforesaid five directors for the purposes of quorum and their vote for
the purpose of passing the resolution cannot be excluded. They shall, however,
cease to be directors after the passing of the said resolution. Consequently,
the resolution, exhibit P-2, cannot be held to be invalid on this ground.
However, it may be reiterated that the shares were transferred in the names of
some of the directors. Thus, the action of the directors in passing the
resolution amounts to oppression of the minority shareholders in spite of the
fact that it is not an invalid resolution. In the above observation, I find
support from Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it
was held that a resolution may be passed by the directors which is perfectly
legal in the sense that it did not contravene any provision of law, and yet it
may be oppressive to the minority shareholders or prejudicial to the interest
of the company. Such a resolution can certainly be struck down by the court
under section 397 or 398.
Now, it is to be seen
whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt.
Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978,
and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on
June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter
she ceased to be so. Consequently, she was a director on the date of the
meeting. Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be
directors. If the presence of two directors, namely, Ravinder Singh and Smt.
Inderjit Kaur, is not taken into consideration, eight directors were still
present in the meeting. The total number of directors, as already mentioned,
was 24. Thus, the quorum was complete.
Mr. Jain next submits that no
notice of the meeting was sent to the directors and, consequently, the meeting
was illegal. There is force in this submission. The copies of the despatch
register from October 16, 1978, to February 19, 1979, exhibit P-74, show that
no notice was sent regarding the meeting. A similar argument was raised earlier
and was dealt with while determining the validity of the resolution dated
November 30, 1978. For similar reasons, the resolution dated December 30, 1978,
is also invalid.
Mr. Jain has then argued that
in the resolution dated November 30, 1978, it was decided that the shares be
offered to the existing shareholders. Shri R. S. Johal was authorised to do so.
However, he did not offer the shares to the other shareholders and, therefore,
the transfer of shares to Pavittar Singh, etc., amounts to oppression on the
minority shareholders.
I find substance in this
submission. Before deciding to whom the shares should be sold, it was the duty
of Shri Johal to make an offer of sale to all the shareholders. Those should
have been transferred to one who made the highest offer. However, it was not
done. It is true that Shri Johal says that he told orally all the shareholders
in this regard. This part of the statement, however, cannot be accepted.
Consequently, transfer of the shares to the transferees without offering the
shares to the other shareholders in terms of the resolution dated November 30,
1978, exhibit P-1, is oppressive to the other shareholders.
Mr. Jain has further argued
that the consideration for the 490 shares purchased by Shri Pavittar Singh,
etc., was not paid in cash by them. The purchase price of the shares was Rs.
4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them
towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them
from the company for interest at the rate of 15% per annum and that amount has
not been repaid till today.
I have duly considered the
argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some
amount was shown payable to the transferees in the account books of the
company. In case that amount was got adjusted by them towards the payment of
consideration of the shares, no fault can be found therein. However, the act of
advancing a loan by the company to the transferee-directors at the juncture
when the company was not in sound financial condition was an oppressive act on
the minority shareholders. It is also relevant to point out that they have not
repaid the amount of loan or interest thereon up-to-date.
The third resolution of the
company, which has been challenged by the petitioners, is dated January 15,
1979, exhibit P-17. By this resolution, the minutes of the meeting dated
December 30, 1978, were confirmed and the loans given to the directors for
purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that
there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri
Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took
part in the meeting dated December 30, 1978, without disclosing their interest
in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and
Shri Avtar Singh admittedly ceased to be directors. The total number of
directors present was eleven and in case the aforementioned seven directors are
excluded, the number of directors present remained four. The quorum of the
meeting should have been eight and thus the resolution is invalid. I agree with
the submission of learned counsel. It is not necessary to dilate (further) on
the paint as the matter has already been discussed above.
Mr. Jain has further
challenged the validity of the resolution on the ground that the notices of the
meeting were not despatched to the directors. He, in support of his contention,
referred to the despatch register, exhibit P-74. I agree with this submission
as well. The matter has already been discussed above. For similar reasons, this
resolution is also invalid.
Mr. Jain has next
challenged on similar grounds the resolution passed in the meeting held on February
28, 1979, exhibit P-18, by which the sale of 490 shares in favour of Shri
Pavittar Singh, etc., was approved. The first thing to be seen is as to whether
the quorum of the meeting was complete. Eleven directors were present in the
meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder Singh and
Shri Pavittar Singh, were the transferees of the shares of PISCO. As already
held, they ceased to be directors on December 30, 1978. Out of the remaining
eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt. Inderjit Kaur
admittedly, ceased to be directors. Thus, the names of six directors are to be
excluded for the purposes of quorum. Consequently, five directors would be
deemed to be present in the meeting. The quorum for the meeting was eight. I
am, therefore, of the opinion that the resolution dated February 28, 1979, is
also invalid.
The second question is
whether the resolution is invalid as the notices of the meeting were not sent
to all the directors. In the despatch register, exhibit P-74, admittedly, the
despatch of the notices of the meeting to the directors is entered. Therefore,
I am of the view that this formality had been fulfilled by the company and the
resolution cannot be held to be invalid on this ground.
Mr. Jain has further argued
that the resolution was invalid as Shri R. S. Johal and ten other directors
protested against the resolution and walked out of the meeting. He made
reference to the letter dated February 28, 1969, exhibit P-76. There is force
in this submission also. It is stated in the letter, exhibit P-76, that in the
meeting of the board of directors held on February 28, 1979, the directors who
signed the letter did not agree to the proposal for transfer of the 490 shares
held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh,
Ravinder Singh and Swaran Singh and voted against the resolution. The
resolution, therefore, stood defeated. The directors who signed the letter
walked out of the meeting in protest against the overbearing, arbitrary,
unconstitutional and illegal action, arrogant attitude and threatening
behaviour of the directors interested in the transferees. The latter prevailed
upon the managing director and, therefore, he refused to record their
disapproval and vote of dissent. It was requested by them that the minutes be
not recorded, contrary to the will and verdict of the majority of the
directors. The letter is signed by 11 directors and addressed to the managing
director. From the above letter, it is evident that eleven other directors were
present in the meeting but neither their presence nor their vote of dissent
against the resolution was recorded. Shri R. S. Johal appeared in the
witness-box as P.W.-4 and affirmed the stand taken in the letter, exhibit P-76.
He stated that in the meeting held on February 28, 1979, there was a dispute
regarding the sale of shares in favour of Rameshinder Singh and his partymen
and that some of the directors, namely, Shri N. S. Domeli, Shri Puran Chand,
Smt. Beant Kaur, Shri Didar Singh, Smt. Ravinder Kaur, Smt. Rattan Kaur, Shri
Puran Singh, Shri Hardev Singh, Smt. Nasib Kaur and Mrs. Vaneet, walked out of
the meeting. There is no mention about the dispute in the minutes. Shri Domeli
also admits his signature on the letter. I am, therefore, of the opinion that
the resolution dated February 28, 1979, exhibit P-18, is invalid.
The petitioners have also
challenged the resolutions passed in the annual general meeting held on June
30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and
loss account for the year ending December 31, 1978, were passed. It is
contended by Mr. Jain that 21 days' clear notice for holding the meeting was
required to be iven to the shareholders under section 171, but that was not
done. The notices were despatched on June 13, 1979, and thus 21 days' clear
notice was not given to them. He also contends that the copies of the
balance-sheet should have been sent with the notices but the same were not
sent.
Mr. Sodhi has not disputed
that the notices given to the shareholders were of less than 21 days. Section
171 reads as follows:
"171. Length of notice
for calling meeting.—(1) A general meeting of a company may be called by giving
not less than twenty-one days' notice in writing.
(2) A general meeting may be called after giving
shorter notice than that specified in sub-section (1), if consent is accorded
thereto—
(i) in the case of an annual general meeting, by all the members
entitled to vote thereat; and
(ii) in the case of any other meeting, by members of the company (a)
holding, if the company has a share capital, not less than 95 per cent, of such
part of the paid-up share capital of the company as gives a right to vote at
the meeting, or (b) having, if the company has no share capital, not less than 95
per cent, of the total voting power exercisable at that meeting:
Provided that where any
members of a company are entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall
be taken into account for the purposes of this sub-section in respect of the
former resolution or resolutions and not in respect of the latter".
A reading of the section
shows that 21 days' notice is necessary for convening the annual general
meeting. However, a shorter notice for such a meeting can be given, if all the
members who are entitled to vote in the meeting accord their consent for doing
so. Previously, fourteen days' notice was provided but later the period of
notice was extended to 21 days on the report of the Company Law Committee. The
reasons for extension of period have been given in the report, the relevant
portion of which reads as follows:
"We further recommend
that twenty-one day's notice should be given of all resolutions to be passed at
a general meeting—ordinary or special. The extension of the period of notice
from fourteen to twenty-one days is necessary to enable shareholders to combine
and canvass for proxies if they so desire. The present period of fourteen days
is too short for all the processes that are involved before the shareholders
canvass their opinion in favour of or against a particular resolution proposed
to be considered at any meeting of the company".
After taking into
consideration the provisions of the section and the reasons for incorporating
the same, I am of the view that the period of notice cannot be curtailed except
on the ground mentioned in the section itself. The provisions of the section
are mandatory and if they are not complied with, the resolutions passed in such
a meeting cannot be held to be valid. The members in this case admittedly did
not agree for curtailing the period of notice. Therefore, the resolutions
passed in the meeting dated June 30, 1979, are invalid.
The petitioners have
further challenged the validity of the resolution of the board of directors
dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and
loss account for the year ending December 31, 1978. Mr. Jain submits that the
quorum in the meeting was not complete and, therefore, the resolution was
invalid. I do not find any substance in the argument. In the meeting, eight
directors were present. As already mentioned, there were only twenty-four
directors of the company. Consequently, eight directors constituted the quorum.
I am, therefore, of the view that the resolution cannot be said to be invalid.
The next contention of Mr.
Jain is that the shares which were transferred to Shri Pavittar Singh, etc.,
had more value than that for which they were sold. In support of his
contention, he places reliance on the balance-sheet ending December 31, 1976,
exhibit R. 2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and
the balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find
substance in this submission. The shares were not quoted on the stock exchange.
No reliable data has been provided by the petitioners showing that the value of
the shares was more. In the first two balance-sheets, the company is shown to
have suffered losses to the tune of several lakhs of rupees. In the
balance-sheet ending December 31, 1978, some profit is shown to have been
earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs
odd. The aforesaid figure shows that PISCO was not faring well.
The respondents produced
Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the
shareholders during the aforesaid period. The face value of each share was Rs.
1,000. He further deposed that, according to the assets of the company, the
value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs.
625 in the year 1978.
After taking into
consideration the circumstances, it cannot be accepted that the value of the
shares was more than Rs. 1,000 per share when they were transferred to the
respondents.
Mr. Jain then contends that
the accounts of the company were not even operated by duly authorised persons.
To fortify his argument, he made reference to the copy of the resolution of the board of
directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India
and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of
directors.
I
have duly considered the matter. In the copy of the resolution, exhibit P-3, it
is stated that Shri Pavittar Singh, managing director, would remain out of
station for two months with effect from April 10, 1976. The accounts of the
company with the Central Bank of India, Civil Lines, Jullundur, and Indian
Overseas Bank, Jullundur, would be jointly operated by Shri Naranjan Singh
Domeli, chairman of the company, and Shri Rameshinder Singh, director of the
company in place of Shri Pavittar Singh, managing director. It was further
stated that in future any two of the three persons, namely, Shri Naranjan Singh
Domeli, Shri Pavittar Singh and Shri Rameshinder Singh, would jointly operate
the accounts. It has been certified to be a true copy by Shri Mohinder Singh as
the managing director. The original resolution purports to bear the signatures
of Shri Bir Singh Johal, chairman. However, Mohinder Singh was not the managing
director of the company nor was Bir Singh Johal its chairman. The resolution
does not find a place in the original minutes book of the board of directors.
Some resolutions dated April 11, 1976, are entered in the minutes book (copy
exhibit P. 3-A). These resolutions are different from the resolution, exhibit
P-3. Mr. Sodhi has not been able to show any other resolution in the minutes
book, copy of which is exhibit P-3. In the circumstances, it is evident that
the affairs of the company were mismanaged by the respondents.
Mr.
Jain has further argued that Shri Rameshinder Singh operated the accounts on
the basis of that resolution and advanced loans to the persons in the names of
some fictitious persons and thus misappropriated the amounts. He submits that
the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there
was no such person. On the other hand, Mr. Sodhi has placed reliance on the
statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew
Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also
referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a
payee's account cheque and the payment of the cheque was made to the Punjab and
Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it
cannot be held that Jagtar Singh was a fictitious person.
The
next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a
manager by the respondent had embezzled a huge amount of the company but no
effective step was taken to recover the amount from him. In order to prove the
aforesaid facts, Mr. Jain placed reliance on
the resolutions of the board of directors, exhibit P-87, dated December 30,
1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977,
exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit
P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the
resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due
on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda.
However, Shri Mohinder Singh reconstructed the record and showed an amount of
Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was
given to the company. It is further stated that Shri Mohinder Singh had
introduced false credits in the account books in favour of Sarabha Land and
Motor Finance (P.) Ltd. in connivance with Shri Raghbir Singh of the said
company. These entries were got fictitiously made by him. In the resolution,
exhibit P-67, it was said that certain irregularities were committed by Shri
Mohinder Singh and, therefore, his services had been terminated. It was
resolved that a sub-committee consisting of the chairman and the managing director
be appointed to go into the accounts and submit a report for taking appropriate
action against him.
In the resolutions,
exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the
report of the sub-committee had not been received. In exhibit P-71, it was said
that Mohinder Singh had not rendered accounts and had handed over the cash.
Consequently, it was decided to approach him for that purpose. In the
resolution, exhibit P-72, dated December 13, 1977, the matter again came up
before the board of directors and it was resolved that action against Shri
Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that
taking of appropriate action against Shri Mohinder Singh was being deferred
without any reason even though it stood established that he had misappropriated
the funds of the company. It is true that Shri Naranjan Singh Domeli made a
statement that a FIR was lodged against Shri Mohinder Singh but the particulars
of the FIR have not been brought on the record. It has not been shown that any
further action was taken by the directors to recover the amount. It appears
that the FIR was lodged to complete the formalities and the directors were not
serious in taking any action against him. Thus, the allegation of the
petitioners that the company was mismanaged stands established.
Mr. Jain has also argued
that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri
Paramjit Singh. Even no document was got executed from them in token of having
received the amounts. The act amounts to mismanagement. I find substance in
this submission. The argument regarding the payment of loans to the aforesaid
persons and PISCO stands established from the copies of the ledger of the
respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several
amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is
shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various
amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an
amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30,
1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri
Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on
January 1, 1977. No amount of interest was debited to their account. No
document was got executed from the said debtors. The aforesaid amounts have not
been repaid by the said persons. Col. K. S. Dhillon, petitioner, deposed that
Shri Pavittar Singh was the managing director of PISCO and Shri Swaran Singh,
Shri Ravindar Singh, Shri Rameshin-der Singh and Amar Singh were its directors.
It appears that the amounts were advanced to PISCO without interest because the
said directors wanted to help their concern. After taking into consideration
all the circumstances, I am of the view that the affairs of the company were
conducted by the respondents in a manner oppressive to the petitioners.
Before parting with the
judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the
resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the
directors, they could not be challenged in view of section 290 of the Act. In
support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills
P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).
I do not agree with the
argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner,
five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits
P-l, P-17 and P-18 have been declared invalid on the ground that the quorum at
the meetings was incomplete and no proper notice of the meeting was given to
the directors, exhibit P-2 on the ground that no proper notice was given to the
directors and exhibit R. 2/6 on the ground that no notice of requisite period
was given. Exhibit P-18 was declared invalid also on the ground that the
resolution was opposed by the majority of the directors and, therefore, it
could not be deemed to have been passed. Section 290 of the Companies Act provides
that the acts done by a person as a director shall be valid notwithstanding
that it may afterwards be discovered that his appointment was invalid by reason
of any defect or disqualification or had terminated by virtue of any provision
contained in the Act or in the articles. It is evident from the language of the
section that it gives protection to the acts of the directors if their
appointments were invalid on account of any defect or disqualification or the
same had come to an end. It does not give protection to their acts which are
otherwise illegal. Thus, the resolutions passed in a meeting which had not been
properly convened are not valid resolutions. Consequently the resolutions,
exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot be held valid under the said
section.
It is true that the
resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground
that the quorum for the meeting was incomplete as some of the directors present
there ceased to be so. But, in the facts and circumstances of this case, the
section does not give protection to the resolutions passed in such meetings.
The reason is that the resolutions in the present case have not been passed
bona fide by the directors, as out of the six beneficiaries, five were
directors of the company and the sixth was the wife of one of them. The sole
object of the directors in passing the resolution was to promote their
self-interest. Moreover, the benefit of the said section can normally be taken
by a third person and not by the directors or their close relations. It is
further noteworthy that some of the resolutions were oppressive to the minority
shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it
was observed by me that even if a director ceased to be so in view of section
283, the resolution of the board of directors could not be held illegal in view
of section 290 which provided that the acts done by a person would be valid
notwithstanding that it might afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. The facts of that
case were that a boiler was sold by the company after a decision had been taken
in a meeting of the board of directors. The purchaser had no concern with the
company. He took a plea that he was a bona fide purchaser for valuable
consideration. The case is clearly distinguishable and, therefore, the
observations therein are of no help in deciding the petition.
Consequently, in view of
the finding that there were no continuous acts of the majority shareholders
which had been oppressive to the petitioners, I dismiss the petition. However,
the parties are left to bear their own costs.
[1995] 084 COMP. CAS. 534 (BOM)
HIGH COURT OF
v.
Shanta Genevieve Pommeret Parulekar
MRS. SUJATA MANOHAR AND SHAH, JJ.
APPEAL
NOS. 655 AND 1032 OF 1988 IN
AND
110 OF 1988 IN C.P. NO. 476 OF 1986
APPEAL
NO. 710 OF 1988 IN
APPEAL NOS. 711, 742 AND
1214 OF 1988 IN C. P. NO. 476.OF 1986
APRIL 30 AND MAY 2, 1991
S.D.
Parekh and D. H. Nanavati for the Appellant.
S.J. Shah, Pravin Mehta, A.H. Desai, Arif Bookwala,
J M. Chagla and F. E. Devitre, and B. Panigrahi for the Respondents.
Mrs. Sujata
Manohak, J.—This
group of six appeals is filed against an order and judgment of a learned single
judge dated January 13, 1988,
in Company Petition No. 476 of 1986, as also against an order of the learned
single judge dated March 30, 1988, in two Company Applications Nos. 93 of 1988
and 110 of 1988 in Company Petition No. 476 of 1986.
Company Petition No.
476 of 1986 was filed by Shanta Genevieve Pommeret Parulekar and Claude-Lila
Parulekar (hereinafter called "the original petitioners") against
Sakal Papers Private Limited and various other respondents as set out in that
petition praying for the rectification of the register of members of the first
respondent company in the following manner :
(i) The names of the original
respondents Nos. 5, 6, 8, 11, 12, 13 and 14 (hereinafter referred to as
"the purchasers") be removed from the register of members of the
first respondent company in respect of the 3,417 shares belonging to the estate
of Dr. N.B. Parulekar and 93 shares belonging to the third respondent ;
(ii) the names.of respondents Nos. 11,
12, 13, 15 and 16 be removed from the register of members of the first
respondent company in respect of 17,666 shares and for other ancillary reliefs.
The learned single
judge, who heard the petition by his judgment and order dated January 13, 1988,
has allowed the petition. He has however, directed the second petitioner to
bring into the court a sum of Rs. 80,73,000 within a period of six weeks. He
has clarified that his order shall become operative on this amount being
deposited in the court within the stipulated period. If the amount is not
deposited, the petition is dismissed. On such amount being deposited, he has
directed the first respondent company to comply with the directions under
prayers (a) and (b) and he has directed respondents Nos. 5, 6, 8, 11, 12, 13,
14, 15 and 16 to comply with the orders and directions under prayers (c) and
(d). He has also directed respondent No, 1 company to pay back to respondents
Nos. 11, 12, 13, 15 and 16 a sum of Rs. 17,66,600 in respect of the 17,666
shares returned to the company as per prayer (b) and directed that the 17,666
shares shall remain in the custody of the first respondent company till such
time as the board of directors, as reconstituted after rectification, decides
the price and the parties to whom these shares should be allotted. He has also
given certain other directions. The petitioners did not deposit in the court
the said sum of Rs. 80,73,000 within the stipulated period. They applied for
extension of time by taking out Company Applications Nos. 93 of 1988 and 110 of
1988. These applications have been rejected by the learned single judge by his
judgment and order dated March 30, 1988. The present appeals are filed by
various parties in respect of these two judgments and orders of the learned
single judge.
Appeal No. 742 of
1988 is an appeal filed by the original petitioners against the judgment of the
learned single judge dated January 13, 1988, conditionally allowing the main
Company Petition No. 476 of 1986. Appeal No. 655 of 1988 is filed by the
executors and trustees of the will of Dr. Parulekar against certain findings
given by the learned single judge against them in his judgment and order dated
January 13, 1988. Appeal No. 711 of 1988 is filed by the purchasers of the
3,417 shares sold by the executors and trustees under the will of Dr. Parulekar
as also of 93 personal shares of some of the executors sold by them, against
the findings given by the learned single judge in his judgment and order of
January 13, 1988. Appeal No. 7,10 of 1988 is another appeal filed by these
purchasers against certain findings given by the learned single judge in his
order dated March 30, 1988, dismissing the company applications for extension
of time. Appeal No. 1214 of 1988 is an appeal filed by the first respondent
company against the findings given by the learned single judge against it in
his judgment dated January 13, 1988, while Appeal No. 1032 of 1988 is another
appeal filed by the first respondent company against the findings given by the
learned single judge against the company in his judgment rejecting the
application for extension of time.
Facts :
In order to
appreciate the contentions raised by the parties in these appeals it is
necessary to examine the relevant facts. The first petitioner in Company
Petition No. 476 of 1986 is the widow of Dr. Parulekar who died on or about
January 8, 1973. Dr. Parulekar was the founder of the first respondent company.
The first petitioner is a shareholder and a permanent director of the first
respondent company. The second petitioner is the daughter of Dr. N.B. Parulekar
and the first petitioner. She is also a Shareholder of the first respondent
company. The first respondent company was incorporated in 1948. It carries on
the business of publishing a newspaper called Sakal from Pune, Bombay and Kolhapur.
Dr. (Mrs.) Banoo J. Coyaji, Jasvantlal Matubhai and Arun Jasvantlal are
respondents Nos. 2, 3 and 4. These respondents and the first petitioner are the
executors of the last will and testament of Dr. N.B. Parulekar. The original
fifth respondent is the managing director of the first respondent company. The
other respondents are the current shareholders and/or directors of the first
respondent company. The tenth respondent is the chairman of the first
respondent company.
The authorised share
capital of the first respondent company is Rs. 25 lakhs consisting of 25,000
equity shares of the face value of. Rs. 100 each. The issued share capital of
the first respondent company, however, was only 7,334 shares of the face value
of Rs. 100 each prior to November, 1985. Disputes in Company Petition No. 476
of 1986 relate to the 3,417 shares of the deceased, Dr. Parulekar, which were
held in trust by the executors of the will of Dr. Parulekar at the material
time and the 93 shares then held by original respondents Nos. 3 and 4 jointly
in their own right.
As on September 21,
1985, the shareholding of the first respondent company was as follows :
|
|
Shares |
|
First
petitioner |
560 |
|
Second
petitioner |
1,172 |
|
Second
respondent |
750 |
|
Third
respondent |
93 |
|
Executors
of the will of the deceased |
3,417 |
|
The
trustees of Lila Trust |
1,317 |
|
Image
Advertising and Marketing Pvt. Ltd. |
25 |
making a total of
7,534 shares. The two petitioners had thus 23 per cent. of the shares of the first
respondent company as of this date.
Under article 57A of
the articles, of association of the first respondent company, it is provided as
follows :
"57A. In the
event any member of the company desires to transfer his shares he shall be
bound to offer the same either to Dr. N.B. Parulekar or to Madam Shanta
Parulekar or such other person or persons as Dr. N.B. Parulekar or Madam Shanta
Parulekar may direct or may nominate and in which event the transferee or
transferees shall pay such price as may be certified by the auditors of the
company."
Article 58 further
provides that subject to article 57A no shares shall be transferred so long as
any member or any person selected by the directors as one whom it is desirable,
in the interest of the company, to admit to membership, is willing to purchase
the same at the fair value as mentioned in article 61. Under article 61, in
case any difference arises between the transferor and the purchaser as to the
fair value of a share, the auditors of the company shall certify in writing the
sum which, in their opinion, is the fair value and the same shall be binding on
the transferor and the purchaser.
Under the terms of
the will of Dr. Parulekar, 3,417shares in the first respondent company which
formed a part of Dr. Parulekar's residuary estate, were directed to be held on
trust by the executors/trustees :
"(1) for the spread of education through newspapers, magazines and
periodicals ;
(2) for effecting improvement of the quality and
standard of journalism and training of personnel in journalism ;
(3) for purchase of shares of concerns, firms,
companies or from person or persons interested in or concerned with newspapers,
magazines, periodicals and otherwise in journalism ;
(4) for publication of books and literature for the
masses at low and reasonable prices ; and
(5) for such other objects and acts that may be
necessary to bring about improvement of information amongst the masses
......"
The will directed
that the above trust shall be known as the "Sakal Papers Trust".
The executors of the
will of Dr. Parulekar gave a notice dated November 18, 1984, of a meeting of
the executors to be held on November 27, 1984, for the purpose of passing
resolutions to enable the executors holding 3,417 shares of the first
respondent company to sell these shares at or for the price of Rs. 2,250 per
share (which was the offer then received by the executors) or at such price as
may be realised under article 61 of the articles of association of the company.
The second resolution which was proposed was to the effect that the executors
had given a notice to the first petitioner under article 57A for the sale of
these shares. In the event of the first petitioner (being a party named under
article 57A) exercising her rights under article 57A, the executors do sell the
shares to her at the abovementioned price. The resolution further stated that
if the first petitioner exercised her rights under article 57A, but did not
agree to the aforesaid price, then the sale should take place at a price to be fixed
in accordance with article 61. Lastly, it was proposed that if the first
petitioner did not exercise her rights and did not buy the shares at a price
fixed under article 61, then the executors shall sell the shares to any other
person or persons at or for the price of Rs. 2,250 per share.
A notice of the
meeting containing the above agenda was served on all the executors including
the first petitioner. Thereupon, the second petitioner wrote a letter dated
November 27, 1984, to the third respondent stating that the first petitioner
would not be able to attend the meeting convened on November 27, on account of
her illness. She asked for a postponement of the meeting by two weeks. This
request was considered by the executors who were present at the meeting held on
November 27, 1984. They felt that the meeting need not be postponed because the
resolutions proposed to be moved regarding the sale of 3,417 shares of the
first respondent did not jeopardise the interests of the first petitioner. They
proceeded with the meeting. The proposed resolutions were there after passed at
the meeting.
By notice dated
November 29, 1984, addressed to the first petitioner, the executors of the late
Dr. Parulekar gave notice to the first petitioner under article 57A of the articles
of association. The notice mentioned that the executors desired to transfer the
3,417 shares of the first respondent company at the offered price of Rs. 2,250
or at a fair value that may be determined by the auditors under article 61. The
notice further stated that if the petitioner chose not to exercise her rights
under article 57A or was not willing to pay the fair price as may be fixed by
the auditors, the executors would be free to sell the same to any other person
in accordance with the articles.
The first petitioner,
by her letter dated December 14, 1984, accepted the offer made on behalf of the
executors. She agreed to purchase the 5,417 shares at a price as may be
certified by the company's auditors. She nominated her daughter, the second
petitioner, as a nominee under article 57A for the purchase of these shares.
Similarly, a notice
dated November 10, 1984, was given to the first petitioner as well as the board
of directors of the first respondent company by respondents Nos. 3 and 4 in
respect of the 93 shares held by them in the first respondent company, offering
to sell these shares to the first petitioner.
Thereupon, the first
respondent company gave a notice to all its shareholders to the effect that the
said 3,417 shares as also the 93 shares of respondents Nos. 3 and 4 were
proposed to be sold by these persons. Under article 57A, an offer had been made
to the first petitioner for the purchase of these 3,417 plus 93 shares and the
first petitioner had been given time till December 15, 1984, for indicating her
intention. The notice further stated that the board of directors had resolved
that in the event of the first petitioner not exercising her rights under
article 57A, it had been decided to sell the said shares to the existing
shareholders of the company. In accordance with the articles of association of
the first respondent company, each shareholder was, therefore, asked to send
his or her reply to the company by December 28, 1984, as to whether he/she was
willing to purchase the said shares in to in accordance with the articles of
association.
As the first
petitioner and/or her nominee agreed to purchase the said shares at a price
certified by the auditors of the company, the matter was referred to the
company's auditors, G.M. Oka and Co., for determining the fair value of the
shares.
The auditors, by
their letter dated January 28, 1985, asked the first petitioner whether she
wished to submit any information for the purpose of determining the fair value
of these shares; She was requested to make her written submission within seven
days. At the request of the first petitioner, this time was extended up to
February 20, 1985. On February 20, 1985, however, she wrote to the auditors
saying that the auditor's request to make a written submission was premature.
The auditors should have prepared a draft report of the valuation of these
shares along with the draft certificate and sent it to her for her submissions.
This letter is dated February 20, 1985. It is not clear when this letter was
received by the auditors. In any event, the auditors issued a certificate dated
February 21, 1985, under article 57A of the articles of association certifying
that the price to be paid for the transfer of 93 shares was Rs. 2,10,273 and
for 3,417 shares was Rs. 77,25,857. The price was calculated at the rate of Rs.
2,160 per share. The petitioners protested against this valuation contending,
inter alia, that an adequate opportunity was not given to them for making
submissions and there was denial of natural justice. They also challenged the
fair value as fixed by the auditors.
They filed a suit on
March 2, 1985, in the court of the Civil Judge, Junior Division, Pune, being
Suit No. 624 of 1985 for a permanent injunction restraining the executors, that
is to say, respondents Nos. 2, 3 and 4, from selling the said shares to any one
other than the petitioners. No interim order, however, was granted in this ;
suit. Thereafter, on September 9, 1985, the executors sold and transferred
3,417 shares to respondents Nos. 8, 11, 12, 13 and 14 for the price of Rs.
78,59,100. The price was arrived at on the basis of each share being valued at
Rs. 2,300. The third and the fourth respondents also sold their 93 shares at
the same price to respondents Nos. 5 and 6. Thus, the shares actually fetched a
higher price than that fixed by the auditors. :
On September 20,
1985, the transfer forms in respect of the 3,417 and 93 shares were lodged with
the first respondent company. At the meeting of the board of directors of the
first respondent company held on November 21, 1985, the transfer of these
shares was approved. The board of directors resolved to register these shares
in the names of the transferees. At this meeting, respondent No. 3 ceased to be
the chairman and director of the company and respondent No. 2 was appointed as
chairman of the board in his place. Respondents Nos. 5 and 10 were appointed as
additional directors of the first respondent company. Notice of this board
meeting was sent to the petitioners. The petitioners attended the board
meeting. But they walked out after protesting against the insufficiency of
notice of the board meeting. The item relating to the transfer of these shares
was not shown on the agenda of the board meeting. This business appears to have
been transacted under the heading "any other business".
Prior thereto, at the
annual general meeting of the company held on November 16, 1985, a resolution
was passed to increase the issued share capital of the company from Rs.
7,33,400 to Rs. 25 lakhs. The resolution also authorised the board of directors
to allot and issue 17,160 new shares at par to any person, whether a member of
the company or not. Once again the agenda of the annual general meeting did not
show that any new shares were proposed to be issued or allotted. Hence, at the
annual general meeting it was resolved that in view of the lack of notice for
the resolution, the resolution should be ratified at an extraordinary general
meeting to be convened for this purpose. This has been done. These resolutions
for issuing fresh shares were carried by a majority of votes. 4,260 votes were
cast for the resolutions and 3,104 against the resolutions. At the board
meeting held immediately after this annual general meeting, the board resolved
to issue additional 17,666 shares at par to respondents Nos. 11, 12, 13, 15 and
16.
As a result, the
purchasers and/or allottees who are admittedly controlled by respondent No. 5
have now a substantial holding in the first respondent company. They together
hold 21,926 shares out of 25,000 shares of the first respondent company.
Thereafter, at a
meeting of the board of directors held on February 22, 1986, the fifth
respondent was appointed as the joint managing director of the first respondent
company. At this meeting it was also proposed to appoint the second petitioner
as a joint managing director along with respondent No. 5. The second petitioner
declined to accept the offer. The board, however, decided to keep this offer
for consideration at the next annual general meeting of the company. Although
the petitioner had initially declined to act as joint managing director, she
ultimately accepted the arrangement and she was appointed as joint managing
director. Although she assumed duties as joint managing director, she has not
so far signed the requisite agreement relating to her appointment.
Company Petition No. 476 of 1986 :
The petitioners filed
the present company petition on August 28, 1986, challenging the transfer of
3,417 shares and the issuance of 17,666 new shares. The petition is filed under
section 155 of the Companies Act. Under section 155, "if the name of any
person is, without sufficient cause, entered in the register of members of a
company, or after having been entered in the register is, without sufficient
cause, omitted there from, .... the person aggrieved, or any member of the
company, or the company, may apply to the court for rectification of the
register." Under sub-section (3), on an application under this section,
the court may decide any question relating to the title of any person who is a
party to the application to have his name entered in or omitted from the
register. The court also has the power to generally decide any question which
it is necessary or expedient to decide in connection with the application for
rectification.
Transfer of 3,417
shares :
The first challenge
of the petitioners relates to the transfer forms which have been signed by the
executors in respect of 3,417 shares transferred by them. In the share transfer
form, the four executors, namely, the first petitioner and respondents Nos. 2,
3 and 4 are shown as transferors. The transfer forms, however, are only signed
by three out of four executors, namely, respondents Nos. 2, 3 and 4. The
petitioners contend that as the fourth transferor has not signed the transfer
forms, these transfers are bad in law and ought not to have been registered.
The executors rely upon the fact that under the terms of the will; the
executors have the like powers which are contained in the declaration of trust
dated June 28, 1972, and the deed of settlement dated July 31, 1972. Under
them, the trustees are entitled to act by majority. The petitioners further
submit that the executors of the trust have, at their meeting of November 27,
1984, passed a resolution to the effect that any one of the executors may be
authorised to implement the resolution and also to take steps to execute the
transfer forms and complete the transaction of sale. According to the
executors, therefore, three of the executors can sign the transfer forms for
the purpose of validly transferring the said shares to the transferees.
Now, it is true that
the transfer forms do not have an endorsement to the effect that the three
executors have signed on behalf of all the executors. Nor does the transfer form
state that the form is signed by the three executors pursuant to the authority
given to them under a resolution passed at their meeting held on November 27,
1984. But the fact remains that in view of the terms of the said will, read
with the deeds of trust referred to therein, the trustees, for the purpose of
selling these shares and for conducting any other business, were entitled to
act by a majority. The trustees had, therefore, the power to sell these shares
on the basis of a decision taken by the majority of trustees. The trustees have
also passed a resolution authorising any one of them to execute the transfer
forms for the purpose of implementing their resolution to sell the said shares.
It is,' therefore, not necessary for all the trustees to sign the transfer
forms.
Under section 108 of
the Companies Act, a company shall not register a transfer of shares unless a
proper instrument of transfer duly stamped and executed by or on behalf of the transferor
and by or on behalf of the transferee has been delivered to the company along
with the certificate relating to the shares. In the present case, the transfer
form is signed by three transferors. Under the resolution of the
trustees/executors any one of the executors was entitled to sign the transfer
forms. Hence, the three executors who have signed the transfer forms have done
so as transferors in valid exercise of the power under the said resolution. At
the highest, the only defect is that they have not stated that they have signed
the transfer forms on behalf of all the executors or in exercise of their
authority under the said resolution. This, in our view, is, at the highest,
only an irregularity which can be easily corrected by the transferors. In these
circumstances, it would be futile to invalidate the registration of transfer of
these shares when the transferors can immediately submit fresh transfer forms
signed by them on behalf of all the transferors. As set out in the case of
Killick Nixon Ltd. v. Dhanraj Mills P. Ltd. [1983] 54 Comp Cas 432, 465 (Bom)
(a judgment to which one of us was a party), the court should not accept any
invitation to indulge in a futile exercise under section 155. The provisions of
this section are not meant for correcting procedural errors.
In the case of
Bentley-Stevens v. Jones [1974] 2 All ER 653, there were irregularities in
convening an extraordinary general meeting of the company at which the
plaintiff was removed as a director. The court held that it would not grant an
interlocutory injunction in respect of the irregularities which could be cured
by going through the proper processes. If, for example, the proceedings that
followed the board meeting were invalid because proper notice had not been
given, the invalidity could be cured by the giving of a valid notice. The
Chancery Court cited with approval the pronouncement of Lindley L.J. in Browne
v. La Trinidad [1887] 37 Ch 1, 17 :
"I think it is
most important that the court should hold fast to the rule upon which it has
always acted, not to interfere for the purpose of forcing companies to conduct
their business according to the strictest rules, where the irregularity
complained of can be set right at any moment."
Applying the same principles
here, the irregularity, if any, in signing transfer forms can be easily set
right by the trustees signing the transfer forms under the authority given to
them under the resolution passed at the meeting of executors and trustees
referred to earlier.
Trustees' power to
act by a majority :
It was submitted, on
behalf of the petitioners by Mr. S.J. Shah, that the majority cannot ride
roughshod over a minority. Even when the trustees have the authority to act by
majority, their decision has to be taken only after discussion with the
minority. In support he cited the case of Fahira Krishnaji v. Ganpat Sakharam,
AIR 1954 Nagpur 92. A learned single judge of this court, in that case,
observed that the majority decision, in order to be binding on the entire body
of the trustees, should have been arrived at after due deliberation by all the
trustees. Where it was an act of the majority alone it will not be binding on
the minority. The ratio of this judgment does not apply to the present case.
Because the notice of the meeting of the executors/trustees was sent to the
first petitioner also. The notice clearly set out the purpose for which the
meeting had been called. The first petitioner was, therefore, aware of the
reason for convening the meeting. She had returned to the house from hospital
at the time when the meeting was called. Her stand on the subject under
discussion was also familiar to all the trustees. In fact, even now she has not
challenged the decision taken by the majority of executors at this meeting to
offer the 3,417 shares for sale. Nor has she challenged the consequential
decision taken by the majority to offer the shares to her in view of the
provisions of article 57A of the articles of association of the company. There
is, therefore, no question of the first petitioner contending that the majority
decision of the trustees is not binding on her. In fact, she has acted on the
decision by accepting the shares offered to her at a valuation to be fixed by
the auditors.
Offer to other
shareholders :
It has also been
contended that the offer made to all the other shareholders of the company in
the, event of the petitioners not exercising their right under article 57A, is
defective. This contention also cannot be accepted. The company did inform all
its shareholders that the trustees were proposing to sell the shares in
question and that, in the event of the petitioners not exercising their right
under article 57A, the shares would be available for purchase by the other
shareholders. None of the other shareholders showed any interest in purchasing
these shares. It was submitted before us that the second petitioner, being a
shareholder, could have purchased these shares in her own right even if she had
declined to purchase these shares as a nominee of the first petitioner under
article 57A. There is, however, no material before us which would indicate that
she had, at any time, informed the company that she proposed to exercise her
rights as a shareholder to purchase these shares. Throughout, even in various
litigations which are pending, her claim has been to enforce her rights under
article 57A as a nominee of the first petitioner. There is, therefore, no basis
for the submission that the second petitioner had exercised her rights as an
ordinary shareholder to purchase these shares.
Valuation by the
auditors :
It is contended by
Mr. S.J. Shah, learned counsel for the petitioners, that the petitioners were
not bound by the valuation of these shares made by the auditors because the
valuation was not fair. Under article 61 of the articles of association the
auditors are required to certify in writing what, in their opinion, is the fair
value of the shares in case there is any difference between the transferor and
the purchaser as to the fair value of a share. The article further provides
that in fixing this fair value the auditors shall be considered as acting as an
expert. As observed in Pennington's Company Law, fifth edition, at page 817 :
"If the
pre-emption clause requires the shares to be offered to the other members at a
fair value certified by the directors of the company's auditor, the court
cannot enquire into the correctness of the valuation, unless there is evidence
that it was not honestly made, or unless the person who made it set out the
reasons for his valuation, and those reasons show that he did not apply the
proper principles ......... and in that situation the transferor's only remedy
is to sue the person who made the valuation for the difference between the
valuation and the real value of the shares as damages in an action for
negligence."
In the case of Baber
v. Kenwood Manufacturing Co. Ltd. and Whinney Murray and Co. [1978] 1 Lloyd's
Law Reports 175 (CA), at page 179, it is held :
"If two persons
agree that the price of property should be fixed by a valuer on whom they
agree, and he gives that valuation honestly and in good faith, they are bound
by it. If there were fraud or collusion, of course, it would be very different.
Fraud or collusion unravels everything."
The petitioners were,
therefore, bound by the valuation made by the auditors unless they can
establish fraud or collusion. Otherwise, the auditor's certificate is final and
one cannot go into the question whether the valuation is fair or proper or not.
In the first place,
there is no material before us which would indicate that the valuation made by
the auditors was not fair. On the contrary, while the auditors valued the
shares at Rs. 2,160 each, at the actual sale to the fifth respondent and the
companies controlled by him, the shares fetched a higher price of Rs. 2,300 per
share. We have also to bear in mind that the 3,417 shares held by the trustees
as also the 93 shares held personally by some of the trustees, were sold as a
controlling block of shares in the first respondent company. They would,
therefore, fetch a higher price. The trustees were also duty-bound to obtain
the best possible price for the shares because the sale proceeds were impressed
with the public trust created by the settlor. They were, therefore, entitled to
sell these shares as a controlling block of shares in the first respondent
company. As a consequence they seem to have fetched a good price of Rs. 2,300.
The valuation made by the auditors, therefore, in this context cannot be
considered as unfair.
The petitioners have
not relied upon the balance-sheets of the company or any other financial data
of the company to establish that the valuation made by the auditors was unfair.
The petitioners, however, contend that at a subsequent date, after having
obtained control of the first respondent company, the board of directors issued
an additional 17,666 shares at par. This, according to the petitioners, would
indicate that the valuation made by the auditors of the company was unfair. We
do not see how a fresh issue of shares at a subsequent date at par can, in any
manner, affect the valuation, earlier made by the auditors of the company, of
shares which were then available for sale. The board of directors are within
their rights in issuing fresh shares at par. They could have even issued bonus
shares. This does not mean that the earlier share valuation which was made by
the auditors in respect of the shares which were sold by one group of
shareholders to another was unfair. In fact we have not been shown even the balance-sheets
of the company for the relevant dates in order to establish the petitioner's
claim that the valuation made by the company's auditors was unfair. The
petitioners rely upon the, fact that they have made a complaint to the
institution of auditors in respect of the conduct of the auditors of this
company. That by itself cannot establish that the valuation was unfair.
Collusion :
The auditors,
according to the petitioners, have acted in collusion with the other executors
and the intending purchasers in order to deprive the petitioners of their right
to purchase these shares. No particulars of such collusion and/or fraud are set
out in the petition. In the absence of any particulars, this plea cannot be
accepted. The petitioners seem to suggest that by valuing the shares at higher
figures, the petitioners were deprived of their right to purchase these shares.
Presumably, therefore, the petitioners did not exercise their right under
article 57A because they did not have enough funds to purchase these shares at
Rs. 2,160 per share. We do not have any necessary material to indicate what
were the funds available with the petitioners, what, according to the
petitioners, was the fair value of the shares and whether the funds with the
petitioners were adequate for the purchase of these shares at the "fair
value" as claimed by the petitioners. The entire argument is, therefore,
purely hypothetical. In fact, in this situation, there appears to be a clear
conflict of interests and duties as far as the petitioners are concerned. The
first petitioner, as an executor/trustee under the will of her husband was
duty-bound to realise the maximum possible price for the shares held by her
along with the other executors so that maximum possible amount can be made
available for purposes of the trust created by her deceased husband. On the
other hand, as a person who was entitled to purchase these shares in exercise
of her right of pre-emption under article 57A of the articles of association,
she was interested in obtaining these shares at as low a price as possible. The
second petitioner was only her nominee for the purpose of purchase of these
shares. Both were, therefore, equally interested in purchasing these shares at
as low a price as possible. The entire challenge to the valuation made by the
auditors of the company indicates the interest of the petitioners in obtaining
these shares at as low a price as possible. Looking at this clear conflict of
interests and duties, it is doubtful, whether the petitioners, so long as the first
petitioner remained an executor/trustee, could have at all purchased these
shares in exercise of their rights under article 57A. In any case we have no
material to arrive at any finding of fraud or collusion on the part of the
auditors, or even any deliberate overvaluation.
The petitioners next
contend that the other executors, namely, respondents Nos. 3 and 4, were also
interested in selling their personal holding of 93 shares at a high price;
Hence, they were interested in getting the auditors to make a high valuation.
As earlier stated, there is no material which would indicate that the executors
asked the auditors to overvalue the shares. In fact, the shares when sold
fetched a higher price than that fixed by the auditors. Moreover, in the case
of respondents Nos. 3 and 4, their personal interest does not conflict with
their interest as trustees and executors. Both were equally interested in
getting as good a price as possible for the shares. They are, therefore, not in
the same position as the petitioners.
Natural justice :
The petitioners have
also challenged the valuation made by the auditors on the ground that there was
a denial of natural justice in determining this valuation. According to the
petitioners, the auditors should have first prepared a draft valuation giving
their reasons and submitted a copy of it to the petitioners for their comment.
After the petitioners were heard on this draft valuation the auditors should
have finalised their valuation. In not doing so they have violated the principles
of natural justice.
The entire argument
is misconceived. The auditors were acting as experts, relying on their own
skill and judgment in giving their valuation of shares. The question of
applying the principles of natural justice in such a case does not arise. In
any case they were not bound to follow the procedure as suggested by the
petitioners. Moreover, before giving their valuation certificate, the auditors
did ask the petitioners whether they would like to make any submissions or
produce any material regarding the valuation of shares. They extended the time
for this purpose at the request of the petitioners. The petitioners, however,
did not avail of this opportunity and on the last day of the extended time,
claimed that natural justice was denied to them because the draft valuation,
etc., were not sent to them for comment. Hence, this contention of the
petitioners has no merit.
Readiness and
willingness of the petitioners to purchase :
It was next contended
by the petitioners that the respondents have acted illegally in selling these
shares to a third party when the petitioners were ready and willing to exercise
their right of pre-emption under article 57A. Undoubtedly, the petitioners
accepted the offer made to them under article 57A to purchase these shares. The
offer was to sell these shares at a price of Rs. 2,250 per share which was the
offer then received by the executors from a third party, or at a price to be
determined by the auditors under article 57A. The petitioners agreed to purchase
these shares at a price to be determined by the auditors. The price so fixed by
the auditors was binding on the petitioners. Nevertheless, when the auditors
determined the price, the petitioners challenged the price and did not agree to
purchase these shares at the price fixed by the auditors. In these
circumstances, the executors were free to offer the shares for sale elsewhere
in accordance with the articles of the company. There is no breach of any
contract on the part of the executors.
After these shares
were sold by the executors to the fifth respondent and the companies controlled
by him to the knowledge of the petitioners, the petitioners wrote a letter
accepting the valuation made by the auditors and offered to purchase the shares
at the valuation made by the auditors. This belated acceptance at a time when
the petitioners were fully aware that the shares were already sold, does not
appear to be genuine.
Validity of the board
meeting of November 21, 1985 :
It was next contended
by the petitioners that the agenda of the meeting of the board of directors at
which the transfer of these shares was accepted by the board, did not contain
this item relating to the transfer of these shares. Hence, according to the
petitioners, the board meeting was invalid. The petitioners, after objecting to
the manner of convening the board meeting, had left the meeting. The
subject-matter of transfer of shares was taken up, after the petitioners had
left, under the heading "to consider any other matter with the permission
of the chairman". In this connection, our attention was drawn to section
286 of the Companies Act which deals with the meetings of the board of
directors. This section does not say that every item which is discussed at the
board meeting must be specified on the agenda of the board meeting. In fact,
the section does not refer to any agenda. The Punjab and Haryana High Court in
the case of Suresh Chandra Marwaha v. hauls Pvt. Ltd. [1978] 48 Comp Cas 110
dealing with a similar situation where, at the meeting of the board of
directors, some shares were transferred about which there was no mention in the
agenda of the meeting, said (at page 119) : "No provision of law or the
articles of association of the company has been brought to our notice obliging
the board of directors to only transact that business for which agenda is
issued. It is well-known that every agenda of a meeting has a residuary clause
'to consider any other matter with the permission of the chairman'. The matter
with regard to the transfer of shares was considered in the meeting of the
board of directors ........ with the permission of the chairman. No illegality
was committed thereby." Similar observations are made by the Delhi High
Court in the case of Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974]
44 Comp Cas 390. The Delhi High Court also said that the law does not require
an agenda for a meeting of the board of directors and any business whatsoever
can be transacted at the board meeting. In any case, this is, at the highest,
only an irregularity and it would not vitiate the transfer or shares.
The petitioners have
alleged that at the very same meeting of the board of directors, respondent No.
5 was brought on the board of directors as an additional director. There was,
therefore, a conspiracy between the other directors of the first respondent
company and the purchasers of the transferred shares to oust the petitioners.
In this context, it is necessary to bear in mind that respondent No. 5 and the
companies controlled by him had, by paying the price of Rs. 2,300 per share,
acquired the controlling block of shares in the first respondent company. All
the directors of the first respondent company were aware of this fact. In these
circumstances, if respondent No. 5 desired to be on the board of directors of
the first respondent company, there was nothing underhand about it. This cannot
be considered as a conspiracy against the petitioners. The petitioners had the
first option to purchase this group of shares. The challenge, therefore, to the
transfer of 3,417 plus 93 shares of the first respondent company fails. The
question of rectification of the register of members in this connection does
not arise.
Fresh issue of 17,666
shares :
The next ground of challenge
is to the fresh issue of 17,666 shares to respondent No. 5 and his group of
companies at par. This was done at the annual general meeting of the company
held on November 16, 1985. At the relevant date the authorised capital of the
first respondent company was Rs. 25 lakhs divided into 25,000 shares of Rs. 100
each. The issued capital was Rs. 7,33,400 (7,334 shares). At this annual
general meeting, it was decided to issue the balance authorised shares, that is
to say, 17,666 shares of Rs. 100 each so as to increase the issued share
capital to Rs. 25 lakhs. The agenda of the annual general meeting did not show
this item of fresh issue of 17,666 shares at par. The respondents claim that
there was urgent financial necessity to obtain additional share capital for the
purposes of this company. They rely upon the need to purchase certain machinery
and so on. We are not very impressed with this so-called financial necessity.
The board meeting
which immediately followed the annual general meeting decided to allot these
shares at par to respondent No. 5 and certain other companies under his
control. This clearly indicates that respondent No. 5 and his group of
shareholders, who were in control of the respondent company, had decided to
make a fresh issue of share capital to themselves at par so as to strengthen
their control over the company. For this purpose they brought in certain
additional funds, being the price of these shares which they purchased at par.
Can this action be
challenged ? Let us first examine the legal effect of the agenda of the annual
general meeting not showing this item on the agenda. Section 172 of the
Companies Act, which deals with the meetings of the company, requires that the
notice of the meeting shall specify the place, the day, and the hour of the
meeting and shall contain a statement of the business to be transacted at the
meeting. Section 172 also requires an explanatory statement to be annexed to
such notice as set out in that section. The respondents certainly committed an
irregularity in not mentioning this item on the agenda of the annual general
meeting. But this irregularity does not, in our view, vitiate the decision
which was taken. As set out earlier, the court will not interfere in the case
of irregularities which can be cured. In the present case, even without these
additional shares which were issued, respondent No. 5 and his group of
shareholders had a majority control over the company. This is clear from the
votes which were cast at the annual general meeting in favour of and against
this fresh issue of shares. 4,260 votes were cast in favour of this resolution
while 3,049 votes were cast against the resolution. Hence, they were and are in
a position to get the fresh issue sanctioned at the meeting of the company after
notice. Moreover, at the same annual general meeting, it was decided that an
extraordinary general meeting of the company would be called after proper
notice to ratify this fresh issue of 17,666 shares at par. Such an
extraordinary general meeting was held after notice on January 31, 1986, when
the issue of these shares at par was ratified. According to the petitioners,
this ratification is invalid as the shareholders of the newly issued 17,666
shares also voted at this extraordinary general meeting in favour of the
resolution. But quite clearly, even if we ignore the 17,666 additional votes
which were cast in favour of the resolution, the remaining votes in favour,
which are 4,260, far exceed 3,049 votes cast against the resolution. The
ratification is valid. We do not see any reason to invalidate this issue.
As observed by
Mellish L.J. in the ease of MacDougall v. Gardiner [1875] 1 Ch 13, at page 25,
"If the thing complained of is a thing which in substance the majority of
the company are entitled to do or if something has been done irregularly which
the majority of the company are entitled to do regularly, or if. something has
been done illegally which the majority of the company are entitled to do
legally, there can be no use in having litigation about it, the ultimate end of
which is only that a meeting has to be called, and then ultimately the majority
gets its wishes". (see also in this connection Parmeshwari Prasad Gupta v.
Union of India, AIR. 1973 SC 2389 ; [1974] 44
Comp Cas 1).
Pro-rata distribution
of the fresh issue :
Under section 81(1)
of the Companies Act where there is a further issue of capital such further
shares shall be offered to the persons who, at the date of the offer, are
holders of the equity shares of the company in proportion, as far as possible,
to the capital paid up on the shares at that date. Section 81(3), however,
provides that section 81 does not apply to a private limited company. A private
limited company, therefore, is entitled to offer such further issue of shares
in such manner as it may determine, subject of course to its articles of
association. The articles of association of the first respondent company do not
require such further issue of shares to be allotted in any particular manner to
the existing shareholders. The allocation of further issue of shares,
therefore, to respondent No. 5 and his group of companies, is not illegal or
contrary to law. Moreover, the respondents have, at the hearing of the
petition, made a "with prejudice" offer to distribute these 17,666 shares
at par pro rata to the petitioners so that the petitioners may continue to have
their 41 per cent. holding of shares in the first respondent company. This
"with prejudice" offer has been made again at the hearing of these
appeals before us also. But this offer has not been accepted by the
petitioners. We do not see how this issue of 17,666 shares at par can be
invalidated, although undoubtedly, it has caused prejudice to the petitioners
by strengthening the control of respondent No. 5 and his group over the first
respondent company. If any other remedy at law is available to the petitioners
in this connection, they are free to avail of it. But we fail to see how the
register of members can be rectified under section 155 of the Companies Act in
respect of these shares when the respondents were within their rights in
issuing these shares at par.
Subsequent events :
We would also like to
refer to some subsequent events which also make it difficult to set the clock
back, so to speak. In the first place, by selling the 3,417 shares the
executors received a sum of about Rs. 80 lakhs. After discharging the
liabilities under the will of the deceased, Dr. Parulekar, the net sale
proceeds amounting to about Rs. 60 lakhs have been used to create a public
charitable trust for the purposes set out by the settlor in his will. The fund
is now impressed with a public charitable trust. Secondly, the fund which was
brought into the company by respondent No. 5 and his controlling group of
companies by purchasing the fresh issue of 17,666 shares, has also been
utilised by the company for its expansion, for investments and for the purchase
of machinery. This fund also is not now available for being released to the
original buyers.
In these
circumstances, the learned single judge, while allowing the petition, had
directed the petitioners to bring in a sum of Rs. 80,73,000 within the time
stipulated by him under his order. The petitioners, however, failed to deposit
this amount or any part thereof in the court within the stipulated period.
Their application for extension of time was also rejected by the learned single
judge for reasons which are set out by him in his order of March 30, 1988. In
these circumstances and looking to the fact that the petitioners have not been
able to raise the funds within the period given to them by the learned single
judge for acquiring a controlling interest in the first respondent company, we
do not see how any relief can be granted to the petitioners. The direction of
the learned single judge relating to the retention of 17,666 shares with the
company until they are reallotted by the directors also, in our view, is a
relief which is not within the ambit of section 155 of the Companies Act. Be
that as it may, looking to these circumstances, it is difficult to grant any
relief to the petitioners under section 155. They have been unable to avail of
their rights under article 57A to acquire a controlling interest in the first
respondent company. For various reasons, with which we are not concerned, either
they do not have the requisite funds, or for reasons best known to them, they
have not availed of their rights as required by law. We may also mention in
this connection the fact that even initially, the suit which they filed in the
Poona court was not a suit for specific performance of their rights under
article 57A, but only a suit to restrain the executors from selling the shares
to anyone other than the petitioners. Only in August, 1986, they filed the
present company petition which again is for a limited relief under section, 155
of the Companies Act and not a petition under section 397 or 398 of the
Companies Act. It was only after the judgment was delivered by the learned
single judge in this company petition that they have now filed two suits in March,
1988, for specific performance. Section 155 is a discretionary remedy which is
not normally resorted to when there are allegations of fraud. We need not,
however, go into this aspect of the matter because, in any event, for reasons
which are set out by us in our order, the petitioners are not entitled to any
relief as prayed for by them in the petition.
The judgment of March
30, 1988 :
The appeals before us
from the judgment of the learned judge dated March 31, 1988, declining to grant
any extension of time, are all filed by either the trustees, the purchasers
from the trustees or by the company in respect of certain observations made in
that judgment and order. The petitioners have not filed any appeal before us
challenging the order refusing to extend the time for the deposit of Rs.
80,73,000. The impugned observations are in respect of the readiness and
willingness of the petitioners to purchase the shares in question. The learned
judge has observed that on account of the failure of the petitioners to deposit
Rs. 80,73,000 within the stipulated period the petition stands dismissed. But
the observations made in his judgment would continue to bind the parties. In
view of the fact that the appeals from the main judgment are now allowed, the
appellants, from this part of the order, can have no grievance now.
In his judgment of
March 30, 1988, the learned single judge has also observed that in the suit for
specific performance it would be open to the petitioners to show their capacity
and to convince the court that they are in a position to really purchase these
shares and to enforce specific performance of the contract. These observations
should not be interpreted to mean that the readiness and 'willingness of the
petitioners will have to be judged only at the point of time when the suits for
specific performance are decided. The learned judge has merely referred to the
fact that the question of readiness and willingness of the petitioners,
throughout the material period, to purchase these shares will have to be
decided by the court which tries those suits on the basis of the evidence which
is available before the court. These observations cannot be read to mean that,
if the law requires the petitioners to prove their readiness and willingness
throughout the material period, the requirements of law have, in any manner,
been modified by the learned single judge or by us.
In the premises,
Appeal No. 711 of 1988 and Appeal No. 1214 of 1988 are allowed. Appeal No. 742
of 1988 which is the petitioners' appeal against the conditional order is
dismissed. Appeals Nos. 655 of 1988, 710 of 1988 and 1032 of 1988 are dismissed
with the clarifications we have already made in respect of the order of the
learned single judge dated March 30, 1988.
Appeals are disposed
of accordingly. Looking to the circumstances of the present case there will be
no order as to costs.
Mr. S.M. Shah,
learned counsel for the petitioners, applies for the continuation of order
dated December 21, 1989, in Notice of Motion No. 3109 of 1989, taken out in
Appeal No. 742 of 1988. This notice of motion was, inter alia, to restrain the
respondents from amending the articles of association of the respondent company
as set out therein. In that motion an order was passed whereby, pending
disposal of the appeal, the appellants' right of pre-emption under article 57A
was not to be disturbed and respondent No. 1 company was directed not to issue
or invite any fresh capital till the disposal of the appeal. Certain other
directions were also given as set out therein. This order shall remain in force
for a period of eight weeks from today and no further.
The petitioners apply
for leave to appeal to the Supreme Court. No substantial question of law of
public importance arises in this appeal, and hence the leave is refused.
Certified copy
expedited.
[1995] 6 SCL 201 (
HIGH COURT OF
v.
Incab Industries Ltd.
SHYAMAL KUMAR SEN, J.
MAY 8, 1995
Section 291 of the Companies Act, 1956 - Board of
directors - Powers of -Plaintiff was a nominee director and chairman of
defendant company - He was nominated as chairman by company's consulting
engineer in terms of power granted to consulting engineer in articles of
association of company -Subsequently, however, board of directors removed
chairman by passing resolution to that effect - Plaintiffs case was that board
had no power to remove him as in terms of articles of association he could be
removed only by consulting engineer who had nominated him - Whether simply
because there was an agreement at one point of time with consulting engineer
with power of nomination of chairman it could be said that board lacked power
to remove chairman, especially when consulting engineer did not come forward to
enforce that right - Held, no
Section 286 of the Companies Act, 1956 - Meetings
of Board - Notice of meetings - Whether even if there is no specific agenda,
under miscellaneous items 'with permission of chairman' any other business may
be transacted -Held, yes - Whether, therefore, simply because removal of
chairman is not mentioned in agenda of meeting, resolution for removal of
chairman passed by majority directors, can be said to be invalid particularly
when chairman himself has raised such issue in meeting - Held, no
FACTS
The plaintiff was a nominee director and chairman of
the defendant-company (defendant No. 1) and the defendant Nos. 2 and 6 were the
other directors of the company. The plaintiff was nominated by Consulting
Engineer (defendant No. 7) of defendant company in terms of power granted in
the articles of association of the company. By a board meeting dated 5-10-1994
the plaintiff was removed from the chairmanship by the defendant Nos. 2 to 6
who were the nominee-directors appointed by different financial institutions.
The plaintiff filed the suit for a declaration that he continued to be the chairman of the company and that the
alleged board meeting was null and void and for a perpetual injunction restraining
the defendants 1 to 5 from giving effect to the decision of the alleged board
meeting. The plaintiff's contention was that it was under the powers granted to
the 7th defendant that the 7th defendant appointed the plaintiff as the
chairman and as such the board of directors had no power to remove him from the
chairmanship as long as 7th defendant did not choose to remove him. The
plaintiff further contended that the removal of chairman from the board was not
one of the items of agenda of the notice for the board meeting which was
scheduled to be held originally on 10-9-1994 nor in the agenda of the adjourned
meeting and, therefore, such an item could not have been considered and no
decision could have been taken on such an issue.
HELD
Notice of
every meeting of the board of directors of a company is required to be given in
writing to every director for the time being in
It cannot be
disputed that even if there is no specific agenda under the miscellaneous items
'with the permission of the chairman' any other business may be transacted. In
the instant case, it appeared from record that the chairman himself raised the
question of revival package and the question of bringing in funds by the
chairman was considered at several meetings. It appeared from the records that
the question of bringing in funds by the plaintiff and his stepping down as
chairman was discussed in the earlier meeting held on 31-3-1994 and also on
10-9-1994 and subsequently the meeting was adjourned to 5-10-1994 for further
discussion.
In fact the
plaintiff-petitioner contended that he could not be removed at the Board
meeting since he was appointed by the Consulting Engineers in terms of the
agreement with the said Consulting Engineer and also by virtue of article 90 he
would continue to remain as chairman until removed by the consulting engineers
and it was not open for the board to remove him. He did not, however, raise any
objection to the discussion on the issue at any of the meeting in view of the
absence of agenda. Even if the business is not one of the items in the agenda
still the matter may be considered at the Board meeting and appropriate
resolution may be passed.
The matter in
issue was discussed at the meeting. The petitioner did not raise any objection
to such issue being discussed nor did he pray for any adjournment of the
meeting on the ground that the matter was not in the agenda. At the worst the
transaction of such a business might only be an irregularity and not an
illegality. It is well settled that the Court does not interfere with the
internal management of a company if the acts complained of can be set right by
the members or directors.
On
consideration of the relevant articles of the company, namely, articles 2, 90
and 129 to 131 the petitioner could not claim that he had right to continue on
the basis of the said articles for the indefinite period.
It was also
on record that the petitioner was also elected as a chairman by the board of
directors as would appear from the minutes of the board meeting dated
31-1-1984. If the petitioner was elected by the board, the board might also
express its no confidence and remove the petitioner as chairman. The fact that
he was nominated by the Consulting Engineers did not mean that he would
continue for ever. There cannot be an agreement in perpetuity; it was obvious
from the conduct of the parties that they had treated the contract as having
been abandoned and no longer in force nor enforceable.
In that view
of the matter the petitioner could not claim to continue to be chairman for
ever, by virtue of the fact that he was a nominee of Consulting Engineer. It
also appeared that all directors except one who was out of
Article 117
provides that in the absence of the chairman board might appoint any other
director to be chairman of the meeting. The board, therefore, under the article
was expressly authorised to appoint any chairman. Simply because there was an
agreement at one point of time with the consulting engineers with power of nomination
of chairman and although consulting engineers did not come forward to enforce
the same, it could not be said that the action of the board was unjustified. It
appeared that a deadlock had been created in the management of the company. The
action of the chairman had been criticised by the majority of the directors. As
already noted they expressed lack of confidence in the chairman. Under such
circumstances, the court should not interfere in the internal affairs relating
to the management of the company.
It would not
be proper to interfere with the internal management of the company. Passing of
interlocutory relief at this stage would really amount to such interference in
the internal management of the company. Accordingly, the petitioner was not
entitled to any interlocutory relief of injunction as prayed in the
application.
CASES REFERRED TO
Punjab National Bank v. Sanchaita Investment 89 CWN
509, Krishna Lal Sadhu v. Mt. Promila Bala Dasi AIR 1928 Cal. 518, M.C. Chacko v. State Bank of Travancore AIR 1970 SC 504, La Compagnie De
Mayville v. Whitley [1896] 1 Ch.D. 788, Ferrucciosias v. Jai Manga Ram Mukhi
[1994] 1 CLJ 345, Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44
Comp. Cas. 390 (
JUDGMENT
1. On 17-10-1994, the petitioner filed the above
suit for the following reliefs :
(a) A declaration that
the plaintiff has been, still is and continues to be the Chairman of the Board
of Directors of the defendant No. 1;
(b) A declaration that
the meeting of the Board of Directors of the defendant No. 1 scheduled on
5-10-1994 was adjourned without transacting any business and no matter was
discussed and no resolution was passed for the removal of the plaintiff as
Chairman of the Board of Directors of the defendant No. 1;
(c) A declaration that
the alleged minutes of the alleged Board meeting dated 5-10-1994 of the
defendant No. 1 pertaining to the purported removal of the plaintiff from the
chairmanship of the Board of Directors of the defendant No. 1 is bad, null and
void, cannot be given effect to and is not binding on the plaintiff and the
defendant No. 1;
(d) Perpetual
injunction restraining the defendant Nos. 1 to 5 their servants, agents and
assigns from giving any effect or further effect to or acting or further acting
in furtherance of the purported resolution dated 5-10-1994 of the defendant No.
1, being annexures 'M' and 'N' respectively hereto in any manner whatsoever;
(e) Perpetual
injunction restraining the defendant Nos. 1 to 5, their servants, agents and
assigns from asserting in any manner whatso ever that the plaintiff has ceased
to be the Chairman and/or removed from the chairmanship of the Board of
Directors of the defendant No. 1;
(f) The alleged minutes
of the alleged Board meeting of the defendant No. 1 held on 5-10-1994 and the
purported letter dated 6-10-1994 being annexures 'M' and 'N' respectively
hereto be delivered and cancelled;
(g) Temporary
injunction;
(h) Receiver;
(i) Attachment;
(j) Costs;
(k) Further
and/or other reliefs.
2. In the plaint it has been alleged inter
alia as follows :
The defendant No. 1 was originally incorporated under
the provisions of the Indian Companies Act, 1913, under the name 'Indian Cable
Co. Ltd.' and is now an existing company within the meaning of the provisions
of the Companies Act, 1956 ('the Act'). In or about January 1987 the name of
the defendant No. 1 was changed from Indian Cable Co. Ltd., to its present name
and a fresh Certificate of Incorporation consequent upon change of name was
issued on 30-1-1987.
3. The defendant Nos.
2, 3, 4 and 5 are the Directors of the defendant No. 1 as nominees of the
financial institutions, i.e., Industrial Credit and Investments Corporation of
India Ltd. (ICICI), LIC Housing Finance Ltd., Unit Trust of India and National
Insurance Co. Ltd., respectively. The defendant No. 6 is a nominee Director of
the defendant No. 7.
4. The plaintiff
together with his associates holds 35 per cent shares of defendant No. 1. The plaintiff
became and still continues to be one of the Directors and Chairman of the Board
of Directors of the defendant No. 1 as nominee of the defendant No. 7 by reason
of the following.
5. The petitioner has
referred to the relevant articles of association of the defendant No. 1 -
Company which inter alia provides as follows :-
"90. The Consulting Engineers shall be entitled,
so long as their agreement with the company as referred to in Article 131
hereof, remains in force, to appoint up to two Directors and to remove any
Director so appointed and appoint another in his place or in the place of a
Director so appointed who resigns or otherwise vacates his office. Such
Directors shall be ex officio Directors within the meaning of these articles
and such one of them as from time to time shall be named by the Consulting
Engineers shall be Chairman of the Board. The ex officio Directors named in the
next following article shall be deemed to have been appointed as such under
this Article.
135. The Consulting Engineers being an incorporated
company its Directors for the time being may regulate and conduct their
proceedings and exercise all or any of the powers, authorities and discretions
of that company as the Consulting Engineers of this company in such manner as
the articles of association of that company may permit or direct and may
delegate all or any of such powers, authorities and discretions to such of the
managers or other officers of that company and on such terms and conditions as
the Directors of that company may see fit, and accordingly all deeds and documents required to be signed
by the consulting engineers of this company shall be deemed to be sufficiently
so signed if signed by any director of the consulting engineers' company or by
any other officer of that company to whom its Directors may have delegated
their powers in that behalf."
6. A copy of
the extract of the relevant articles of association of the defendant No. 1 has
been annexed to the plaint.
7. By
an agreement dated 28-1-1947, between the defendant No. 1 and the defendant No.
7, the defendant No. 7 was appointed as a Consulting Engineer of the defendant
No. 1, a xerox copy whereof has been annexed to the plaint.
8. Some
of the relevant clauses of the aforesaid agreement dated 28-1-1947 are
reproduced below :
"(i) So long
as the consulting engineers remain consulting engineers to the Indian company
and so long as they hold not less than 10,000 shares of any class, in the
Indian company of nominal value Rupees ten or their equivalent the consulting
engineers shall be at liberty at all times and from time to time to appoint two
directors of the Indian company to cancel their appointments or the appointment
of either of them and upon such cancellation or the retirement or resignation
of them or either of them to appoint other directors or another director so
long as not more than two directors so appointed hold office as such at the
same time. Any director or directors so appointed by the consulting engineers
shall be ex officio directors and shall not be subject to retirement by
rotation nor shall they be under obligation to take up or acquire any share
qualification. So soon as this agreement shall come into force the consulting
engineers shall be entitled to nominate one of such ex officio directors to act
as Chairman of the Board of the Indian company and the other of such ex officio
Directors to be general manager of the Indian company or may nominate one of
such ex officio Directors to hold both the said offices, subject as aforesaid.
Such rights of nomination as aforesaid shall subsist during the continuance of
this agreement and may be exercised if and when an ex officio Director as
aforesaid shall die or otherwise cease to hold the office or offices to which
he has been nominated in pursuance of the provisions hereof. Upon the
consulting engineers exercising their right to nominate an ex officio Director
to act as general manager of the Indian company the Indian company shall enter
into a service agreement with such person appointing him as general manager on
terms to be agreed between him and the Indian company and unless otherwise
mutually agreed between the parties hereto the terms of service of any ex
officio director subsequently nominated by the consulting engineers to act as
general manager of the Indian company shall mutatis mutandis and so far as
circumstances permit be the same as those contained in such service agreement
as aforesaid.
(ii) The consulting
engineers shall continue to be the sole consulting engineers of the Indian company
under the terms of this agreement (unless the consulting engineers shall give
notice to determine this agreement in accordance with the provisions
hereinafter contained) for the period of twenty one years certain from first
day of April, one thousand nine hundred and fort}' seven and thereafter until
they shall be removed there from by an Extraordinary Resolution of the Indian
company passed at an extraordinary general meeting specially convened for that
purpose and for which not less than twelve calendar months' notice shall be
given (but which shall in no case be given on a date earlier than first day of
April one thousand nine hundred and sixty seven) and at which persons holding
or representing by proxy or power of attorney not less than three-fourths of
the issued share capital of the Indian company for the time being and having
voting rights shall be present and shall vote for such resolution."
9. The
consulting engineers shall be entitled to determine this agreement by giving
twelve months' notice in writing to the Indian company expiring at any time and
upon the expiry of such notice this agreement shall cease and determine but
without prejudice to the performance and satisfaction of all obligations,
duties, rights and claims which shall have become binding on either party
thereto or shall have accrued prior to the expiration of such notice.
10. Subsequent
thereto a supplemental agreement was executed on 30-10-1951 between the
defendant No. 1 and the defendant No. 7. A xerox copy of the said supplemental
agreement has been annexed to the plaint.
11. In
terms of the agreement between the defendant No. 1 and the defendant No. 7 and
in tune with article 90 of the articles of association of the defendant No. 1
the defendant No. 7 nominates two directors on the Board of the defendant No. 1
since 1947 one of whom was also the Chairman of the Board of Directors of the
defendant No. 1.
12. Till
31-1-1984 Mr. D.P.N. Kanga, Mr. R.G. Hall and Mr. L.A. Farren, the defendant
No. 6 were the Directors of the defendant No. 1 nominated by the Defendant No.
7 on the Board of Directors of the defendant No. 1, Mr. D.P.M. Kanga was
further nominated by the defendant No. 7 as the Chairman of the Board of
Directors of the defendant No. 1. On 31-1-1984 in the Board meeting of the
defendant No. 1 the resignation of Mr. R.G. Hall as a Director of the defendant
No. 1 was accepted and the vacancy caused by such resignation was filled up by
appointing the plaintiff as a Director of the defendant No. 1. A copy of the
minutes of the Board meeting held on 31-1-1984 has been annexed to the plaint.
13. As
Mr. D.P.M. Kanga expressed his desire to retire by a letter dated 15-11-1984
addressed by the defendant No. 7 to the defendant No. 1, the plaintiff was also
nominated by the defendant No. 7 as the Chairman of the Board of Directors of
the defendant No. 1. A xerox copy of the said letter dated 15-11-1984 has been
annexed to the plaint. Thus, the plaintiff and Mr. L.A. Ferren, the defendant
No. 6 continued and still continues to remain as Chairman and Director
respectively of the defendant No. 1 as nominees of the defendant No. 7.
14. In
terms of the said letter dated 15-11-1984 a Board meeting of the defendant No.
1 was held on 17-12-1984 whereas the resignation of Mr. D.P.M. Kanga was duly
considered and accepted and simultaneously the plaintiff was appointed as the
Chairman of the Board of Directors. A copy of the minutes of the said Board
meeting of the defendant No. 1 so held on 17-12-1984 has been annexed to the
plaint.
15. It
has further been alleged that the consulting engineers agreement between the
defendant No. 1 and the defendant No. 7 remains in force till date, and, the
defendant No. 7 has not removed the plaintiff either from the chairmanship or
from the directorship of the defendant No. 1.
16. It has
been further alleged that the plaintiff has not resigned or vacated his office
as Director of the defendant No. 1 nor has resigned or vacated the post of
Chairman of the Board of Directors of the defendant No. 1.
17. In or
about the first week of September 1994 the plaintiff received from the
defendant No. 1 a notice of the Board meeting of the defendant No. 1 scheduled
to be held on 10-9-1994. A xerox copy of the said notice has been annexed and
forms part of the plaint without the enclosures.
18. It
has been alleged that the said Board meeting scheduled to be held on 10-9-1994,
though was held, but after some discussions remained inconclusive and was
adjourned till 21-9-1994.
19. It
has been alleged that the agenda of the Board meeting scheduled to be held on
10-9-1994 had no item regarding removal or resignation or cessation of the
plaintiiff as Chairman of the Board of Directors of the defendant No. 1 for
discussion by the Board. No leave was sought for from the plaintiff, nor any
permission was given by the plaintiff to discuss any matter regarding
resignation of the plaintiff as Chairman from the Board of Directors of the
defendant No. 1. The defendant No. 2 as a Director of the defendant No. 1
wanted to be informed about the Consulting Engineers agreement vis-a-vis
information about the appointment of the plaintiff as Director and Chairman of
the plaintiff.
20. On
or about 15-9-1994, by a letter addressed to the defendant No. 1, the defendant
No. 2 as Assistant General Manager of ICICI sought for certain information and
documents regarding, inter alia , appointment of the plaintiff as Director and
Chairman of the defendant No. 1. A xerox copy of the said letter dated
15-9-1994 has been annexed and forms part of the plaint.
21. The said
letter dated 15-9-1994 was duly replied to on behalf of the defendant No. 1 by
the plaintiff by his letter dated 19-9-1994, a copy whereof has been annexed
and the same forms part of the plaint.
22. By
a letter dated 19-9-1994 the plaintiff also intimated the Chairman of the ICICI
Ltd., who had nominated the defendant No. 2 as a nominee to the Board of
Directors of the defendant No. 1, inter alia, the true position of the
plaintiff as nominee Chairman of the defendant No. 7. A xerox copy of the said
letter dated 19-9-1994 has been annexed and the same forms part of the plaint.
23. The
adjourned Board meeting of the defendant No. 1 held on 21-9-1994 was again
adjourned till 5-10-1994 without transacting any business.
24. By
a letter dated 3-10-1994 as also by fax addressed to the Deputy Managing
Director, ICICI the plaintiff made his position, stand and explanation clear as
would be evident from a copy of the said letter which has been annexed to the
plaint. In the said message it was reiterated that the issues raised in the
communication dated September 15, 1994 and in ICICI's further letter dated
September 21, 1994 stood fully responded to by the plaintiff.
25. On
or about 3-10-1994 the plaintiff was informed by the Company Secretary of the
defendant No. 1 that the adjourned Board meeting of the defendant No. 1
scheduled to be held on 5-10-1994 had been further postponed till 10-10-1994.
The plaintiff further came to learn from the Company Secretary of the defendant
No. 1 that the other members of the Board of Directors of the defendant No. 1
had also been intimated of the same. In this context, a specimen copy of the
fax message dated 3-10-1994 issued by the said Company Secretary of the
defendant No. 1 to the members of the Board of Directors of the defendant No. 1
has been annexed to the plaint.
26. It
has been alleged that on 4-10-1994 the plaintiff came to know that the
defendant No. 2 objected to the postponement of the Board meeting of the
defendant No. 1 scheduled to be held on 5-10-1994 and that he contended that
the issue regarding the continuance of the plaintiff as Chairman of the Board
of Directors of the defendant No. 1 was under discussion at the Board level
since 31-3-1994. It has also been contended on behalf of the plaintiff that the
question of discontinuation of the plaintiff as Chairman of the board of
Directors of the defendant No. 1 did not and could not arise. At the Board
Meeting of the defendant No. 1 held on 31-3-1994 an issue cropped up as to
whether the plaintiff would be bringing in fresh funds as a booster to the
revival package of the defendant No. 1. The plaintiff also at the said meeting
and also at the meeting held on 21-9-1994 assured full co-operation with the
Board for the purpose of revival of the defendant No. 1. Moreover, the
plaintiff out of his own resources paid a substantial sum to the statutory and
other creditors of the defendant No. 1 including the provident fund to show his
bona fide in the matter of assurance of such co-operation. The question of
removal or resignation or cessation of the plaintiff from the chairmanship of
the defendant No. 1 did not and could not arise.
27. It has been
alleged that though the plaintiff attended the Board meeting of the defendant
No. 1 on 5-10-1994 but as the statutory books for holding the meeting were not
there because of the absence of the Company Secretary, the meeting had again to
be adjourned without transacting any business till a date convenient to the
members of the Board of the defendant No. 1 at a later date. Since the members
of the Board of the defendant No. 1 were present, some time was utilised for
discussing the financial aspects of the defendant No. 1.
28. It
has further been contended on behalf of the defendant Nos. 2, 3 and 4 that such
a meeting was held on 5-10-1994 at Bombay and a resolution was passed at such
an alleged meeting removing the plaintiff from the chairmanship of the Board of
Directors of the defendant No. 1.
29. The
defendant Nos. 2, 3 and 4 by a letter dated 6-10-1994 addressed to the
defendant No. 1 tried to explain the circumstances under which the plaintiff
was allegedly removed from the Chairmanship of the Board of Directors of the
defendant No. 1 enclosing therein the minutes of the meeting to be held on
5-10-1994. By the said letter, the defendant No. 1 was directed to take
necessary action.
30. It
has been submitted on behalf of the plaintiff that the Board meeting of the
defendant No. 1 held on 5-10-1994 and the business transacted there as
reflected in the alleged minutes and the intimation by the defendant Nos. 2, 3
and 4 to give effect thereto by the letter dated 6-10- 1994 being annexures 'M'
and 'N' are illegal, bad and not enforceable, of no effect and not binding on
the plaintiff or the defendant No. 1 for, inter alia, the following reasons :
(a) The action of the
defendant Nos. 2, 3 and 4 and attempt to remove the plaintiff as Chairman of
the defendant No. 1 is ultra vires its articles of association.
(b) The whole basis of the
Board meeting dated 5-10-1994 as reflected in the minutes is with regard to
earlier discussions allegedly held is not reflected in the Minute Book of the
Board of Directors.
(c) There was no, nor could
there be any agenda for removal of the plaintiff from the chairmanship of the
defendant No. 1 or the plaintiff ever consented to include any such agenda for
discussion either on 10-9-1994 or at any adjourned meeting thereof. There was
also no fresh agenda either on 10-9-1994 or on 21-9-1994.
(d) When the plaintiff has
been appointed at the behest of the defendant No. 7 in terms of article 90 of
the articles of association of the defendant No. 1 removal can only be made in
terms of the said article and not otherwise and the defendant No. 7 has not
taken any step for removal of the plaintiff.
(e) The defendant Nos. 2, 3
and 4 even if they had constituted a quorum for a meeting of the Board of
Directors of the defendant No. 1 had no authority and/or jurisdiction under the
articles of association to appoint and/or remove any person as Chairman of the
defendant No. 1.
(f) The Board of Directors
of the defendant No. 1 are not entitled to act contrary to the said agreement
between the defendant No. 1 and the defendant No. 7 and article 90 of the
articles of association of the defendant No. 1.
(g) Ability or inability to
bring in fresh or further funds does not and cannot have any relation
whatsoever in the matter of operation of the terms of the agreement between the
defendant No. 1 and the defendant No. 7 as also in the matter of operation of
the provisions of article 90 of the articles of association of the defendant
No. 1.
(h) Article 2 of the
articles of association expressly provides that save as reproduced in the said
articles of association, the regulations contained in Table A of the First
Schedule to the Act would not apply to the defendant No. 1. It has also been
contended that the purported removal of the plaintiff is also contrary to the
provisions of article 98 of the articles of association of the defendant No. 1
in any event. It is wholly untrue as allegedly recorded in the said minutes of
the Board meeting allegedly held on 5-10-1994 to the effect that the enquiries
with the defendant No. 7 revealed that the defendant No. 7 did not consider the
plaintiff as their nominee on the Board of Directors of the defendant No. 1.
The alleged minutes of the alleged Board Meeting dated 5-10-1994 does not in
any event consider the contents of the plaintiff's letter dated 19-9-1994 and
3-10-1994.
(i) Notice of the alleged
Board Meeting dated 5-10-1994 had not been given to all the Directors of the
defendant No. 1 and in particular the defendant No. 6 and as such, no legal and
valid Board Meeting could be held on 5-10-1994 in any event.
31. The
plaintiff by his letter dated 15-10-1994 has intimated the defendant No. 1 not
to take any action or further action pursuant to the alleged minutes of the
alleged Board Meeting dated 5-10-1994 as forwarded by the defendant Nos. 2, 3
and 4. A copy of the said letter has been annexed to the plaint.
32. In the premises, the plaintiff moved this
instant interlocutory application and on 17-10-1994 obtained ad interim order
from the Vacation Bench to the following effect :-
"THE COURT
: Leave is given to the petitioner to have the petition stamped and punched
within one week after the re-opening of the Long Vacation.
In the
meantime no further effect to the Annexures "M" and "N" to
the petition will be given, and status quo be maintained.
Let the matter appear on 21 st October, 1994.
All parties
are to act on a signed copy of the minutes of this order on the usual
undertaking."
33. Mr.
P.K. Roy, the learned Advocate for the plaintiff has submitted at the outset that
article 2 of the articles of association of the defendant No. 1 company
expressly excludes the operation/applicability of Table A of the Companies Act.
34. He
has also submitted that the plaintiff's claim is based on Article 90 read with
Articles 129, 130, 131, 132, 133, 134 and 135 of the company.
35. Referring
to the said articles it has been submitted that the purported attempt to remove
the petitioner from the post of Chairman is clearly contrary to the said
articles, and as such, should not be allowed to be given effect to Mr. Roy has
also submitted that purported resolution for removal of the plaintiff from
chairmanship of defendant No. 1 company is ultra vires, the article of the
company and directly affects the plaintiff, and as such the objection raised by
the contesting defendants regarding locus standi of the plaintiff to maintain
the application cannot be sustained.
36. It
has also been submitted that the letter dated 15-11-1994 signed by L.A. Farran,
Executive Director of BICC (Consulting Engineers), expressly provides that the
plaintiff was nominated by BICC as Chairman of Incab the said letter is not
under challenge.
37. It
has been contended that in the Affidavit in opposition filed on behalf of the
defendant Nos. 2 to 5 a copy of a letter dated 4-10-1994 has been annexed to
show as if the plaintiff is not holding the position of Chairman/Director of
Incab as BICC's nominee.
38. The
learned Advocate has further contended that the said document does not merit
any credence, for the following reasons :-
(i) It is not a
communication to Incab. The identity of the signatory to the letter is unknown.
(ii) The letter does not
indicate that it was written under the authority of the Board of Directors of
BICC or of its shareholders in general meeting.
(iii) The provision as to the termination of the agreements of 1947
and 1951 have not been adverted to.
(iv) The alleged faxes of 30-9-1994 and 4-10-1994 emanating from
P.K. Mukherji of ICICI have not been disclosed - it is thus not appreciated, in
what context the said letter was written.
(v) Finally, in the concluding paragraph, the author of the
letter expressed inability to influence 'those affairs'.
39. It has been
contended that the said letter cannot and does not have the effect of
overriding the earlier undisputed letter of 15-11-1984.
40. It has further been submitted that no question of any perpetual agreement arises in the present case. The agreements between BICC and Incab contains the provisions for termination thereof. However, nothing has been produced by the contesting defendants to show that such agreements have been terminated excepting the disputed letter of 4-10- 1994 on which no reliance can be placed for the reasons stated hereinabove.
41. Mr. Roy has further submitted that by getting himself elected, a director does not necessarily cease to be a nominee director of the company. By virtue of nomination as permissible under the articles of association and also by getting himself elected, the plaintiff in effect stands on two legs with the consequence that in the event of removal/loss of one leg, he can still continue to stand on the other. There is no bar in law to such a position and none has been cited before this Court. Nomination does not get supplemented by election as suggested in the disputed letter dated 4-10-1994. On the contrary, nomination gets supplemented by election.
42. It has been contended by Mr. Roy, learned Advocate for the plaintiff that notwithstanding whether the law does or does not require circulation of a formal agenda, in practice it is done almost invariably in all cases. Even a cursory glance through minute books of Board Meetings of Incab kept in the custody of this Court would show that it has been always the practice of Incab to circulate agenda of such meetings. There is no warrant for departure from such a statutory practice and more so while discussing a highly crucial issue like the Chairman's removal. This issue is of such a high magnitude and it is so projected by the defendant Nos. 2 to 5 as if the very survival of Incab is dependant on that issue. It is, therefore, obvious that there should have been at least an indication of such an important issue in the agenda and more so when very minor issues, i.e., fixed deposit holders - repayment of principal, interest, recovery of intercorporate loans, Flat at M-11, Greater Kailash and date of next Board meeting have been detailed in the agenda.
43. It is the contention
of Mr. Roy that some indication even if not in the shape of a formal agenda,
should be given in advance of a Board meeting stands to reason, as importance
of such an issue, may be the deciding factor for a Director to opt to attend
the meeting or to attend to some other more important business, may be of the
company itself.
44. It has also been contended that it is one case of not
having an agenda at all and completely another, when there are as many as 29
items on the agenda and the very vital one and in fact the only one claimed to
have been discussed at the relevant meeting dated 5-10-1994 was not included in
the agenda.
45. Mr. Roy has also
submitted that in any event, the rudimentary principles of natural justice
require that before an act is done affecting the substantive rights of a
person, that person be given notice of such proposed act so that he has a
chance of persuading the concerned persons as to why such act should not be
done. In the present case the contesting defendants acted in complete breach of
the principles of natural justice.
46. He has submitted that it is not necessary to give reasons for removal of the plaintiff from chairmanship, even then, where reason has in fact been given but is unsustainable, no decision should be allowed to rest thereon. Mr. Roy has further submitted that an analogy may be drawn from a speaking and non-speaking award. At law, an arbitrator is not obliged to give reasons for the Award. But where he chooses to give reasons, the same may come under judicial scrutiny and may be set aside.
47. Mr. Roy has relied upon the judgment and decision in the case of Punjab National Bank v. Sanchaita Investment 89 CWN 509 and in the case of Krishna Lal Sadhu v. Mt. Promila Bala Dasi AIR 1928 Cal. 518 and also in the case of M.C. Chacko v. State Bank of Travancore AIR 1970 SC 504.
48. Mr. Roy has further submitted that a beneficiary under an agreement can insist on specific performance thereof and can maintain legal proceedings for that purpose. However, the plaintiff has not instituted the present suit as a nominee of BICC. The plaintiff was appointed as Chairman of the Board of Directors and has a right to continue as such until he is removed in accordance with the procedure prescribed, expressly or impliedly, in the constitution of the company. The said right of the plaintiff has been infringed by the contesting defendants who have purported to remove the plaintiff from chairmanship illegally and in exercise of a power which they do not have. It is to redress such wrong done to the plaintiff that the present proceedings have been instituted.
49. It is the contention of Mr. Roy that there is no question of specific performance of any agreement in the instant case. The plaintiff's suit is for redressal of a wrong done to the plaintiff and, hence, an order of injunction could be and should be passed to restrain the concerned defendants from doing and/or further doing such wrong to the plaintiff.
50. It has been strongly
urged by Mr. Roy that by purporting to remove the plaintiff from chairmanship,
the defendant Nos. 2 to 5 have to arrogate to themselves and exercise a power
which they do not have in view of the concerned articles as aforestated. In the
premises such act of the said defendants is null and void and invalid since the
Directors and members of a company are bound to comply and act in accordance
with the memorandum and articles of a company (section 36 of the Companies
Act).
51. Accordingly, Mr. Roy
had submitted that the present application should be allowed and the plaintiff
should be granted redress by way of passing an order in terms of the prayers in
the said petition.
52. The following
grounds have been mainly urged on behalf of the plaintiff in support of his
case :
(a) The item regarding the removal of the plaintiff as Chairman
of the Board of Directors of the company was not mentioned in the agenda of the
Board meeting convened to be held on 31-3-1994.
(b) The grounds for removal being alleged inability to bring in
Rs. 20 crores by Tapuriah is not correct and the minutes have not been properly
written.
(c) The removal of the Chairman by the Directors is ultra vires
the powers of the Directors.
53. On the question there was no agenda for
removal of the plaintiff as Chairman.
54. The plaintiff has referred to
penultimate items in the agenda to the effect following :
Any other points with the
permission of the Chairman'.
55. In this connection this ground has been
taken in the plaint, paragraph 22(c), page 24.
56. The
plaintiff/petitioner has relied upon articles 2, 90 and 129 to 131 of the
articles of association of the company. These articles have been referred to
for the purpose of showing that BICC were entitled to nominate two Directors
one of whom would be nominated as Chairman and the agreement of 1947 was for 21
years and thereafter it would continue until terminated as provided in the said
agreement.
57. Reference was made
to annexure 'E' to the petition a letter dated 15-11-1984 written by L.A.
Farren to the Board of Directors of the Company to the effect that Mr. D.P.M.
Kanga who was nominated by BICC as Chairman was desirous of retiring and BICC
wanted to nominate Mr. Kashinath Tapuriah who was already a Director as
Chairman in place of Mr. Kanga.
58. Mr.
A.K. Mitra - the learned Advocate for the defendant No. 1 company represented by
the Secretary has submitted that initial appointment of the plaintiff as
Chairman has not been disputed. According to him, the provisions of the Act and
the articles of the company do not contemplate appointment of a permanent
Chairman.
59. He
has also referred to the relevant articles in this connection and submitted
that in terms of the article as well as the agreement the BICC has under the
authority vested in it has nominated the petitioner as Chairman and the
petitioner continues to be Chairman until it is revoked by the Consulting
Engineer.
60. Mr. Mitra has referred to
sections 194, 195 and 286 of the Companies Act.
61. Section 286 provides as
follows :
"Under
section 286 of the Companies Act notice of every meeting of the Board of Directors
of a company is required to be given in writing to every director for the time
being in India. There is no other provision in the Act requiring the notice of
the Board meeting to specify any agenda. In this connection, reference may be
made to section 172 of the Companies Act. Under sub-section (1) every notice of
a meeting of a company shall specify the place and the day and hour of the
meeting and shall contain a statement of the business to be transacted thereat.
Under section 173 in respect of every special business in the Explanatory
Statement is also required to be given relating to each item of special
business. Therefore, the distinction is quite clear regarding the notices of
Board meetings and General meetings."
62. Mr.
Mitra has further submitted that the plaintiff has been duly nominated by the
Consulting Engineers by subsequent election at the said meeting in terms of the
article 90 of the company and else in terms of the agreement and his authority
to act as Chairman has not been revoked by BICC. The said nomination has been
duly adopted.
63. He
has further submitted only because of his subsequent re-election it cannot be
said that there is no question of nomination by Consulting Engineers of BICC.
In fact the subsequent election is a mode of ratification of the nomination
originally made and it cannot be contended that the question of nomination does
not arise.
64. Mr.
S.B. Mukherjee learned advocate for respondent Nos. 2 to 5 has submitted that
even if there is no specific agenda under the miscellaneous items with the
permission of the Chairman any other business may be transacted. In the instant
case, the respondents' contention is that the Chairman himself raised the
question of his stepping down from the chairmanship of the company. This is
evident from the letter dated 6-10-1994 petition, written by three of the
directors who attended the meeting. In the second para of this letter it has
been stated that Mr. Tapuriah assured that he would bring in necessary
funds for revival of the company, failing which he suggested that he is
stepping down as Chairman be considered at the meeting scheduled to be held on
18-4-1994. Therefore, Mr. Tapuriah is estopped from contending otherwise.
65. He has further
submitted that even if the business is not one of the items in the agenda still
the matter may be considered at the Board meeting and appropriate resolution
may be passed in connection therewith.
66. In support of the contention he has
referred to the following decisions :
1. La Compagnie De Mayville v. Whitley
(1896) 1 Ch. D. 788
2. Ferrucciosias v. Jai Manga Ram Mukhi (1994) 1 CLJ 345.
3. Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp. Cas. 390 (Delhi)
67. He has also referred
to Palmer's Company Law, 24th Edn. articles 61-63, pp. 910-911 and Buckley on
the Companies Act, 14th Edn., Vol. I, p. 1019.
68. It is the contention
of Mr. Mukherjee that the transaction of such a business might only be an
irregularity and not an illegality.
69. Mr. Mukherjee has
further submitted that the Court does not interfere with the internal
management of a company if the acts complained of can be set right by the
members or directors.
70. In support of his contention, the learned
Advocate has relied upon the following decisions :
1. Burland
v. Earle 1902 AC.
2. Bentley
Stevens v. Jones (1974) 2 All ER 653
3. Life
Insurance Corpn. of India v. Escorts Ltd. AIR 1986 SC 1370
71. Mr. Mukherjee has
referred to articles 2, 90 and 129 to 131 of the company's articles. He has
submitted that Tapuriah cannot assert any right on the basis of the said
articles.
72. Mr. Mukherjee has
further submitted that article 90 merely confers the rights on the consulting
engineers to nominate a Chairman of the Board of Directors. A mere nomination
would not automatically amount to such director being appointed Chairman and
this is obvious from the minutes of the Board meeting dated 31-1-1984, on which
reliance has been placed by the petitioner. At this meeting consequent upon the
nomination by BICC plaintiff was appointed a Chairman by the Board of
Directors. Therefore, the appointing authority being the Board of Directors
they have also the right to remove the Chairman. No such power of appointment
of Chairman or removal of Chairman is vested in the Consulting Engineers.
73. The learned Advocate
referred to section 255 of the Companies Act and section 25 of the Industrial
Finance Corpn. Act, 1948.
He has also submitted that articles 129 to 131 referred
to the agreement between the company and the consulting engineers. Plaintiff is
not a party to the agreement nor is any personal right or benefit conferred on
him under the said agreement. In fact, he was nowhere in the picture when the
agreement was entered into in 1947 and modified in 1951. Therefore, he cannot
enforce any rights or obligations under the said agreement.
74. In support of the
aforesaid contention Mr. Mukherjee has relied upon the following decisions :
1. M.C. Chackos case (supra)
2. Krishna Lal Sadhu's case (supra)
3. Punjab National Bank (supra)
75. The learned Advocate for the defendant Nos. 2 to 5 has also referred to Chapter VIII section 38 of the Specific Relief Act. He has submitted that no perpetual injunction could be claimed as under section 38(2) the provisions of Chapter II would be attracted. Under sections 14 and 15 of Chapter II no specific performance can be claimed inasmuch as monetary compensation would be an adequate relief and it is only a party to the contract who can enforce the agreement.
76. He has further submitted that in any event, the instant suit is not a suit for specific performance nor are the essential pleadings required in a suit for specific performance made therein. Therefore, no temporary injunction can also be granted.
77. It is the contention of the learned Advocate that there cannot be an agreement in perpetuity; it is obvious that from the conduct of the parties and in particular BICC they have treated the contract as having been abandoned and no longer in force nor enforceable.
78. Mr. Mitra has
strongly relied upon the letter of the BICC and submitted that they do not
consider the plaintiff to be their nominee.
He has further submitted that the agreement with the
consulting engineers made in 1947 and 1951 are not in force.
79. It is also the
contention of the learned Advocate that after such a long lapse of time and in
view of the changed circumstances the agreements are not enforceable.
He has further submitted that they are entirely
neutral on the issue of dismissal or appointment of Chairman or any director.
80. Accordingly, he has
submitted that the petitioner cannot claim to continue on the basis of
nomination originally made by BICC.
81. The learned Advocate for the defendant Nos. 2 to 5 has referred to article 117 which provides that in the absence of the Chairman Board may appoint any other Director to be Chairman of the meeting.
82. It has been contended by the learned Advocate that no grounds are necessary for removal.
He has further submitted that four directors attended
the disputed meetings. Three out of the said four directors are of the view
that a certain thing transpired at the meeting. They are disinterested
Directors who have nothing to gain personally. There is no reason why their
version should not be accepted.
83. It has also been contended that the question raised in this proceeding cannot be finally decided at this stage on affidavit evidence.
84. It has also been submitted that the minutes have not been recorded in the minute book does not mean that no meeting was held. Admittedly, meeting was held. The original minute book was being retained by the Secretary who is openly siding with the plaintiff. The minute books have since been produced in Court.
85. It has also been contended that apart from the fact that the plaintiff has failed to bring funds of Rs. 20 crores there is lack of confidence in plaintiff by the financial institution as shareholders, and also the workers and the Bankers.
86. The learned Advocate has also submitted that in the interest of the company, the Court should not intervene in the internal management as no illegality has been committed by removal of the plaintiff.
87. In this connection he has relied upon the following decisions :
(i) Bentley
Steven's case (supra)
(ii) Life
Insurance Corpn. of India's case (supra)
88. He has also contended that the appointment of the plaintiff was made by the Board and, as such, the removal can be also made by the Board. The plaintiff has been appointed Director by the shareholders so also L.A. Farren.
89. Apart from their question of nomination under article 90 by the consulting engineers they are not nominee directors of BICC but share holders directors duly elected at the general meeting.
90. According to Mr. Mukherjee, article 117 clearly shows that if the Chairman is not present the Directors present shall approach a Chair man. So this is not a permanent appointment. He has referred to section 175 of the Act, which provides for power of Chairman.
91. He has also
submitted that Table 'A' does not apply in terms of article 2 of the company.
He has further submitted that chairmanship is not a legal status. By his
removal no legal right or contractual right has been infringed.
92. He has referred to
section 9 which provides that anything in the memorandum or articles or
agreement or resolution contrary to the Act will be void.
93. I have considered the submissions of the
parties and the decisions cited from the bar.
94. The question in
issue is if the removal of the plaintiff as Chairman of the company at the
Board Meeting is valid.
95. The first contention
of the plaintiff is that there was specific agenda at the meeting on the
question of removal of the Chairman. In this connection, it may be noted that
section 286 is that notice of every meeting of the Board of Directors of a
company is required to be given in writing to every director for the time being
in India. Section 172(1) provides that every notice of a meeting of a company
shall specify the place and the day and hour of the meeting and shall contain a
statement of the business to be transacted thereat. Section 173 provides that
in respect of every special business in the explanatory statement is also
required to be given relating to each item of special business. Therefore, the
distinction is quite clear regarding the notices of Board meetings and general
meetings.
96. It cannot be
disputed that even if there is no specific agenda under the miscellaneous items
with the permission of the Chairman any other business may be transacted. In
the instant case, it appears from record that the Chairman himself raised the
question of revival package and the question of bringing in funds by the
Chairman was considered at several meetings. It is also not in dispute that the
company was passing through financial crisis.
97. The plaintiff
himself wrote to the Chairman, The Industrial Credit & Investment
Corporation of India Ltd. by letter dated 19-9-1991 that he had made the
commitment to bring in Rs. 20 crores, whereas in the draft minutes of the
meeting held on 31-3-1994, the defendant No. 2 had changed the figure to Rs. 30
crores. The plaintiff has also admitted in the said letter that the company
might require somewhere around Rs. 30 crores, as against Rs. 20 crores
originally envisaged. He also recorded in the said letter that draft minutes of
the meeting dated 31-3-1994 does not contain correct statement regarding his
commitment to step down from the post of chairmanship of the company.
98. It has, however,
been noted in the said letter that the funds required for the revival package
as committed by the plaintiff are now ready. The relevant portion of the said
letter is as follows :
"In the meantime, I wish to inform you that the
funds required for the revival package as committed by me are now ready and I
would be pleased to produce before you proof of the same.
May I also point out for your kind information that
during the last Board meeting of the company held on 10th September, 1994, when
Mr. P.K. Mukherjee asked me to step down as Chairman I had made a specific
enquiry whether the financial institutions had an alternate promoter who was
willing to be associated in the revival of the company. To this, the answer
from the institutional nominees was evasive. You will kindly appreciate that
while the Institutions, no doubt, have a substantial stake in the company, I,
too, have a considerable interest and, therefore, any alternative proposal
should, in all fairness, be disclosed to me rather than pressurising me in this
manner.
I am writing all this to you because I know that you
are a fair and dispassionate person who can be relied upon to take an objective
view of the entire situation.
Our next Board meeting is fixed for Wednesday 21st
Sept. 1994, and I would seek your intervention so that matters can be resolved
amicably and with grace and dignity.
With kind regards"
99. It appears to me
that the question of bringing in funds by the plaintiff and his stepping down as
Chairman was discussed in the earlier meeting held on 31-3-1994 and also on
10-9-1994 and subsequently the meeting was adjourned to 5-10-1994 for further
discussion.
100. In fact the
plaintiff-petitioner contended that he could not be removed at the Board
meeting since he was appointed by the consulting engineers in terms of the
agreement with the said consulting engineers dated and also by virtue of
article 90 he would continue to remain as Chairman until removed by the
consulting engineers and it is not open for the Board to remove him. He did
not, however, raise any objection to the discussion on the issue at any of the
meeting in view of the absence of agenda.
101. It may be noted that
even if the business is not one of the items in the agenda still the matter may
be considered at the Board meeting and appropriate resolution may be passed.
102. In this connection
reference may be made to Palmer's Company Law, 24th Edn., Arts. 61-63 which
deals with the notice of board meeting at page 911. It has been noted that
'Notice of a board meeting need not, unless the articles otherwise provide,
specify the nature of the business to be transacted'.
103. In this connection,
the judgment and decision in the case of La Compagnie De Mayville (supra) it
may be noted that the relevant portion of Lindley L.J. appears to be very
important. The relevant portion of the judgment
of Lindley L.J. as appears at pages 796-797 of the said report is set out
herein below :
"This
case involves one question which is of great importance to companies. The rest
of the points are comparatively trifling. The great point is whether, when a
directors' meeting is to be held, it is necessary to give a notice not only of
the meeting, but of the business to be transacted at the meeting. I am not
prepared to say as a matter of law that it is necessary. As a matter of
prudence it is very often done, and it is a very wise thing to do it: but it
strikes me, as it struck Lord Tenterden in Rex v. Pulsford (1), that there is
an immense difference between meetings of shareholders or corporators and
meetings of those whose business it is to attend to the transaction of the
affairs of the company or corporation. It is not uncommon for directors
conducting a company's business to meet on stated days without any previous
notice being given either of the day or of what they are going to do. Being
paid for their services as they generally are, and as is the case in this
company it is their duty to go when there is any business to be done, and to
attend to that business whatever it is; and I cannot now say for the first time
that as a matter of law the business conducted at a directors' meeting is
invalid if the directors have had no notice of the kind of business which is to
come before them. Such a rule would be extremely embarrassing in the
transaction of the business of companies."
104. In this
connection it will be appropriate to note the observations of Buckley in his
Companies Acts, 14th Edition, Vol. 1, page 1019 wherein it has been observed by
the learned Author as follows :
"But
notice of the business as distinguished from notice of the meeting is not
necessary. In the case of special business it may be prudent and right to give
notice of it, but it is not legally necessary to do so."
105. The judgment
and decision in the case of Ferrucciosias relied upon by Mr. S.B. Mukherjee,
the learned advocate for the petitioner may also be taken note of. In the
aforesaid decision learned Judge of the Delhi High Court held that if no agenda
is circulated the directors could object at the meeting and the meeting has to
be adjourned.
106. In
the instant case as already noted the matter in issue was discussed at the
meeting. The petitioner did not raise any objection to such issue being
discussed nor did he pray for any adjournment of the meeting on the ground that
the matter was not in the agenda.
107. In
my view at the worst the transaction of such a business might only be an
irregularity and not an illegality. It is well settled that the Court does not
interfere with the internal management of a company if the Acts complained of
can be set right by the members or directors.
108. In
this connection, the following decisions relied upon by the learned advocate
for the respondent Nos. 2 to 5 may be taken note of :
1. Burland's
case (supra)
2. Bentley
Steven's case (supra)
3. Life
Insurance Corpn. of India's case (supra)
109. In the case of
Burland (supra) it was inter alia held that 'it is an elementary principle of the
law relating to joint stock companies that the Court will not interfere with
the internal management of companies acting within their powers, and in fact
has no jurisdiction to do so.'
110. In the case of
Bentley Stevens (supra) it was held that a shareholder had a statutory right to
move a resolution to remove a director and that the Court was not entitled to
grant an injunction restraining him from calling a meeting to consider such a
resolution. A proper remedy of the Director was to apply for a winding-up order
on the ground that it was 'just and equitable' for the Court to make such an
order.
In the case of Ebrahimi v. West Bourne Galleries Ltd.
[1972] 2 All ER 492 the absolute right of the general meeting to remove the
directors was recognised and it was pointed out that it would be open to the
Director sought to be removed to ask the Company Court for an order for
winding-up on the ground that it would be 'just and equitable' to do so. The
House of Lords said :
"My Lords, this is an expulsion case, and I must
briefly justify the application in such case of the just and equitable
clause…………..The law of companies recognises the right in many ways, to remove a
director from the board. Section 184 of the Companies Act, 1948 confers this
right on the company in general meeting whatever the articles may say. Some
articles may prescribe other methods, for example a governing director may have
the power to remove (of Re Wondo-flex Textiles Pty Ltd.) (1951) VLR 758. And
quite apart from removal powers, there are normally provisions for retirement
of directors by rotation so that their re-election can be opposed and defeated
by a majority, or even by a casting vote. In all these ways a particular director-member may find himself no
longer a director, through removal, or non re-election; this situation he must
normally accept, unless he undertakes the burden of proving fraud or mala
fides. The just and equitable provision nevertheless comes to his assistance if
he can point to, and prove some special underlying obligation of his fellow
member(s) in good faith, or confidence, that so long as the business continues
he shall be entitled to management participation an obligation so basic that if
broken, the conclusion must be that the association must be dissolved."
111. The Supreme Court in the case of Life Insurance Corpn. of
India (supra) at page 1423 in paragraph 100 held and observed as follows :-
"100. Thus, we see that every shareholder of a company
has the right, subject to statutorily prescribed procedural and numerical
requirements, to call an extraordinary general meeting in accordance with the
provisions of the Companies Act. He
cannot be restrained from calling a meeting and he is not bound to disclose the
reasons for the resolutions proposed to be moved at the meeting. Nor are the
reasons for the resolutions subject to judicial review. It is true that under
section 173(2) of the Companies Act, there shall be annexed to the notice of the
meeting a statement setting out all material facts concerning each item of
business to be transacted at the meeting including, in particular, the nature
of the concern or the interest, if any, therein, of every director, the
managing agent if any, the secretaries and treasurers if any, and the manager,
if any. This is a duty cast on the management to disclose, in an explanatory
note, al1 material facts relating to the resolution coming up before the
general meeting to enable the shareholders to form a judgment on the business
before them. It does not require the shareholders calling a meeting to disclose
the reasons for the resolutions which they propose to move at the meeting. The
Life Insurance Corpn. of India, as a shareholder of Escorts Limited, has the same
right as every shareholder to call an extraordinary general meeting of the
company for the purpose of moving a resolution to remove some Directors and
appoint others in their place. The Life Insurance Corpn. of India cannot be
restrained from doing so nor is it bound to disclose its reasons for moving the
resolutions." (p. 1423)
112. It
appears on consideration of the relevant articles of the company, namely,
articles 2, 90 and 129 to 131 the petitioner cannot claim that he has right to
continue on the basis of the said articles for the indefinite period.
113. It
is also on record that the petitioner was also elected as a Chairman by the
Board of Directors as will appear from the minutes of the Board meeting dated
31-1-1984, if the petitioner was elected by the Board, the Board may also
express its no confidence and remove the petitioner as Chairman. The fact, he
was nominated by the consulting engineers that does not mean that he will
continue for ever.
114. In
my view there cannot be an agreement in perpetuity; it is obvious that from the
conduct of the parties and in particular BICC that they have treated the
contract as having been abandoned and no longer in force nor enforceable.
115. It
appears from the correspondence exchanged with BICC that BICC does not
specifically express any view in the matter. It is also on record that the
consulting engineers in terms of the agreement are not receiving any
remuneration for long years. There is another on record to show that consulting
engineers are still acting as consulting engineers. It appears from the letter
written by BICC as disclosed in the proceeding that they are entirely neutral
on the issue of dismissal or appointment of Chairman or any Director. There is
great doubt if the said agreement can have any force still now. Moreover, they
have specifically mentioned in the letter that they are not taking any side in
the dispute between other directors and the Chairman.
116. In
that view of the matter the petitioner cannot claim to continue to be Chairman
for ever, by virtue of the fact that he is a nominee of BICC. It also appears
that all Directors except L.A. Farren is out of India and express lack of
confidence in the petitioner and against his continuance as Chairman.
117. Article
117 provides that in the absence of the Chairman Board may appoint any other
Director to be Chairman of the meeting. The Board, therefore, under the article
is expressly authorised to appoint any Chairman. Simply because there was an
agreement at one point of time with the consulting engineers with power of
nomination of Chairman and although consulting engineers do not come forward to
enforce the same, it cannot be said that the action of the Board is
unjustified. It appears dead lock has been created in the management of the
company. The action of the Chairman has been criticised by the majority of the
directors. As already noted they expressed lack of confidence in the Chairman.
118. Under
such circumstances already noted, Court should not interfere in the internal
affairs relating to the management of the company and, as such, in my view, it
will not be proper for me to interfere in the decision taken by the Board and
by the majority of the directors.
119. It
may be noted that four directors attended the meeting wherein lack of
confidence was expressed by three out of the said four directors. The said
directors represent financial institution holding major shares in the company.
120. Article
117 clearly shows that if the Chairman is not present then the Directors present
shall appoint a Chairman. It, therefore, appears that appointment of the
Chairman is not a permanent one.
121. Section 175 also shows that
there is provision for Chairman for any particular meeting.
122. It is not in dispute Table
'A' does not apply in view of the article 2 of the company.
123. The
relief if granted will be in the nature of specific performance which is not
permissible in view of section 38(2). Under sections 14 and 15 of the Specific
Relief Act no specific performance can be claimed inasmuch as monetary
compensation would be an adequate relief.
124. In
the instant case, it would not be proper to pass the order of injunction. In
this connection the judgment and decision in the case of Plantations Trust Ltd.
v. Bila (Sumatra) Rubber Lands Ltd. 144 Law Time.-, 676 relied upon by Mr.
Mukherjee, the learned Advocate for the petitioner may be taken note of.
125. In the aforesaid decision there was an
agreement to appoint nominee of the guarantee company as directors. Clause 6 of
the agreement provides as follows :
"The
company will appoint two persons, to be nominated by the trust, to be directors
of the company and by Clause 7 the Bila Company's manager was to be replaced by
another manager to be approved by the Trust Company."
126. It
was held that although upon the true construction of the contract there was a
right in the T. Company to nominate two directors, the nomination had not the
effect of appointing the nominee directors of the B. Company and on the merits
the injunction, being asked for not with the view of protecting the T.
Company's security ought not to be granted.
127. In the aforesaid decision on
similar facts the prayer for injunction was refused.
128. Considering the facts and circumstances of
the case and the principles of law as settled by different decisions it appears
to me that it will not be proper for me to interfere with the internal
management of the company. Passing of interlocutory relief at this stage will
really amount to such interference in the internal management of the company.
Accordingly, in my view the petitioner is not entitled to any interlocutory
relief of injunction as prayed in the application.
129. Application
for injunction accordingly fails and dismissed. The ad interim order passed by
the Vacation Bench of this Court on 17-10-1994 stands vacated.
130. In
view of the order made in the main interlocutory application no order is
required to be passed in the application for revocation and the cancellation of
the Vakalatnama filed by Jalan & Co. which was made during the pendency of
this application.
131. Mr.
Banerji, the learned Advocate prays for stay of operation of the judgment and
order passed today and submits that since the ad interim order has continued
from 17-10-1994 it should be allowed to continue for one week more and the
judgment and order should remain stayed for one week.
132. Mr.
S. Sarkar, the learned Advocate for the respondent Nos. 2 to 5 opposes this
prayer. Mr. Banerjee, however, submits that the resolution passed on 5-10-1994
should not be given effect to by the company for at least one week. Mr. Sarkar
does not really oppose the same. Accordingly, the resolution passed on
5-10-1994 at the company's meeting will not be given effect to for one week
from date. In that view of the matter no order is required to be passed staying
the operation of my judgment and order passed to-day.
133. All
parties concerned are to act on a signed copy of the operative part of this
judgment and order on the usual undertaking.
[1988] 64 COMP. CAS. 19 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Paragaon Utility Financiers P.
Ltd.
MAY 15, 1986
Arun Jain for the Petitioners.
N.K. Sodhi, H.S.
Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the
Companies Act, 1956.
Briefly, the facts are that
the respondent is a private limited company having authorised capital of Rs.
10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up
capital is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in
arrears amount to Rs. 59,000. It was incorporated on August 21, 1961, under the
provisions of the Companies Act (hereinafter referred to as "the
Act"). The petitioners hold 150 shares as detailed below:
|
|
No.
1 |
20 |
|
Hardev Singh
Minhas," |
No. 2 |
30 |
|
Maj. K. Gurdev
Singh," |
No. 3 |
20 |
|
Smt. Nasib
Kaur," |
No. 4 |
20 |
|
Iqbaljit
Singh," |
No. 5 |
20 |
|
Smt. Kirpal
Kaur," |
No. 6 |
20 |
|
Smt. Chanan
Kaur," |
No. 7 |
20 |
It is alleged that the affairs of the company are
being conducted prejudicially to public interest and in a manner oppressive to
the petitioners, who are in minority, as detailed below:
(i) The company had been allotted 490 equity shares of
Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as
"PISCO"). The paid-up amount in respect of the above shares was Rs.
3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife,
Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife (124
shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran
Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares).
These were transferred in a clandestine manner and without having been offered
to any other shareholder including the petitioners, for a consideration of Rs.
3.90 lakhs in a meeting of the board of directors of the company held on
December 30, 1978. No money in cash was paid by the purchasers to the company
as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited
with the company was adjusted towards the purchase price and the balance amount
of Rs. 1,90,000 was given by the company as loan to the purchasers with
interest at the rate of 15 per cent, per annum. The meeting in which the shares
were transferred was illegal and void for want of quorum. Some other
irregularities were also committed by the board of directors in calling and
holding the meeting. Thus, the transfer of shares is not binding on the
company.
(ii) Shri Ramesh Inder Singh was the managing director of the
company in the year 1976 and he had been operating the bank account of the
company maintained in the Central Bank of
(iii) Mohinder Singh had been appointed as
manager-cum-cashier of the company during the regime of Pavittar Singh, father
of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh.
As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by
him in the year 1976. The board of directors decided to take action against
him. The matter was taken in various meetings of the board of directors but no
action was taken against him. Thus, the interest of the shareholders was not
protected by the management.
(iv) The minutes book of the company relating to the meetings
of the board of directors and shareholders was not kept properly from November,
1978, to September, 1979. Some of the proceedings have not been signed by the
chairman. There are various violations of the provisions of section 193 of the
Act. Therefore, the business transacted in the meetings during that period is
illegal and void ab initio.
(v) The company had been advancing loans to some persons
without any documents. It is alleged that it advanced loan without interest and
without getting executed any document to PISCO. An amount of Rs. 14,309.57
stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder
Singh as on December 31, 1978, but no action has been taken to recover the
amounts from them.
The aforesaid allegations,
it is pleaded, go to prove the mismanagement on the part of the management
which is prejudicial to public interest and oppressive to the minority members
of the compauy. Thus, the circumstances are such in which it would be just and
equitable that the company can be ordered to be wound up. Consequently, it is
prayed that action be taken under the aforesaid section. The respondents in the
petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar
Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder
Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No.
2, late Pavittar Singh, was ordered to be deleted.
The petition has been
contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two
written statements have been filed, one on behalf of respondent No. 1 and the
other on behalf of the latter respondents. Respondent No. 1 alleged that the
affairs of the company were meticulously looked after during the period when
Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application
for rectification of the register of shareholders of PISCO under section 155.
The application was decided against him but an appeal is pending in this court
against that order.
In the written statement on
behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the
allegations in the petition do not make out a case of oppression and
mismanagement of the affairs of the company and its winding up on just and
equitable grounds. The petition is mala fide and had been filed at the behest
of Col. P. S. Dhillon who had been the managing director till April 20, 1982,
when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of
Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in
the petition, it is stated, related to the transfer of 490 shares held by the company
in PISCO. The matter had been decided in company petition filed by Col. P. S.
Dhillon which had since been dismissed. It is further pleaded that
rectification of the transfer of shares cannot be the subject-matter of a
petition under sections 397 and 398. The allotment cannot also be declared
invalid in the absence of PISCO. The other allegations in the petition have
been controverted by the said respondents.
On the pleadings of the
parties, the following issues were framed:
1. Whether the petition is maintainable in view of the preliminary
objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and
paragraph No. 6 of the written statement of respondent No. 1? [Opp].
2. Whether the affairs of the company are being conducted in a manner
prejudicial to the interest of the company and public? [Opp].
3. Whether the acts of
the majority are oppressive to the interest of the minority? [Opp].
A. Relief.
Issue No. 1: The first preliminary
objection raised by Mr. Sodhi is that the petitioners have no right to maintain
the present petition as they did not own 10 per cent, shareholding on the date
of filing the petition. On the other hand, Mr. Jain, counsel for the
petitioners, has argued that the petitioners had 150 shares out of 1,000 shares
on the date of filing the petition as given in the petition. Thus, they had the
right to file the petition.
I have duly considered the
arguments of learned counsel and find force in the contention of Mr. Jain. The
petitioners, as given in the list of members, exhibit P-88, filed with the
Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June
30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the time
of filing the petition, the petitioners were shareholders of the company. From
the list, exhibit P-88, and statement of Col. Dhillon, it is evident that the
petitioners had more than 10 per cent, shareholding in the company.
At this, Mr. Sodhi sought
to urge that the position reflected in exhibit P-88 relates to the month of
June, 1982, whereas the petition was filed in October, 1982. He argues that it
was incumbent on the petitioners to show the total number of shareholding held
by them on the date of filing the petition which they failed to do. He made
reference to Rajahmundry
Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of
the board of directors dated October 29,1978, wherein 20 shares held by
Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh
and Amarjit Singh Bajwa, son of Rattan Singh.
I do not find any substance
in this submission of learned counsel as well. The petitioners have shown that
according to the latest list of members filed with the Registrar of Companies,
they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement
that all the petitioners were shareholders of the company on the date of filing
the petition. The proceedings of the board of directors dated October 29, 1978,
however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner.
It cannot be ruled out that 20 shares might have been again transferred in the
name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of
shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not
been transferred to her subsequently, the remaining petitioners still had more
than 10% shareholding on the date of petition and thus they were entitled to
file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case.
[1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant
after obtaining the consent of more than one-tenth in number of the members
presented the petition under section 153C of the Indian Companies Act, 1913
(section 397 of the Companies Act, 1956). Subsequent to the presentation of the
petition, some of the members withdrew their consent. It was held that
subsequent withdrawal of the consent could not affect the right of the
petitioner to proceed with the petition or the jurisdiction of the court to
dispose of it on merits. In my view, the observations in the above case are of
no assistance to Mr. Sodhi. Consequently, I overrule this preliminary objection.
The second objection of Mr.
Sodhi is that the allegations made in the petition should be such that a prima
facie case for winding up of the company has been made out under section
433(f), but from the allegations in the petition, no such case stands established.
In support of his contention, he places reliance on Shanti Prasad Jain v.
Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth Mohan
Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas P.
Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976 SC
565.
There is no dispute about
the proposition that an action under section 397 can be taken only if a prima
facie case for winding up has been made out on the allegations in the petition.
In the above observations, I find support from Rajahmundry Electric Supply
Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows
(at page 95):
".before taking action
under section 153C, the court must be satisfied that circumstances exist on
which an order for winding up could be made under section 162".
Sections 153C and 162 of
the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956
Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 (SC). It was further observed therein that the conduct of the majority
shareholders must be burdensome, harsh and wrongful and mere lack of confidence
between the majority shareholders and the minority shareholders would not be
enough unless the lack of confidence springs from oppression by the majority in
the management of the company's affairs and such oppression must involve at
least an element of lack of probity or fair dealing to a member in the matter
of his proprietary rights as a shareholder.
It is now to be determined
whether the allegations in the petition make out a prima facie case for the
winding up of the company under section 433(f). The section says that a company
may be wound up by the court if it is of opinion that it is just and equitable
to do so. The question arises what the words "just and equitable"
mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that
the principle of "just and equitable" baffles a precise definition.
It must rest with the judicial discretion of the court depending upon the facts
and circumstances of each case. These are necessarily equitable considerations
and may, in a given case, be superimposed on law. Whether it would be so done
in a particular case cannot be put in the strait-jacket of an inflexible
formula. Clause (f) is not to be read as being ejusdem generis with the
preceding five clauses. Whether the five earlier clauses prescribe definite
conditions to be fulfilled for the one or the other to be attracted in a given
case, the just and equitable clause leaves the entire matter to the wide and
wise judicial discretion of the court. The only limitations are the force and
content of the words "just and equitable" themselves. In view of
sections 397, 398 and 443(2), relief under section 433(f) based on the just and
equitable clause is in the nature of a last resort, when other remedies are not
efficacious enough to protect the general interest of the company. There must
be materials to show when the just and equitable clause is invoked that it is just
and equitable not only to the persons applying for winding up but also to the
company and to all its shareholders. It is further observed that the court will
have to keep in mind the position of the company as a whole and the interest of
the shareholders and to see that they do not suffer in a fight for power that
may ensue between the two groups. Similar observations were made in Seth Mohan
Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in making an
order for winding up on the ground that it is just and equitable that a company
should be wound up, the court shall consider the interest of the shareholders
as well as of the creditors. It is not necessary to dilate further on this
matter. It is sufficient to observe that if the allegations in the petition are
taken to be established, the petitioners are entitled to obtain an order of
winding up under section 433(f).
The third preliminary
objection of Mr. Sodhi is that the oppression should continue up to the date of
the petition. He contends that the petition in this case does not show that the
oppression is continuous and, therefore, it is liable to be dismissed. To
fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35
Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and
Jute Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand,
Mr. Jain has argued that if the effect of a single act is continuously
oppressive, the court is entitled to pass an order under sections 397 and 398.
He refers to In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal).
I have duly considered the
argument. The matter does not require any elaborate discussion as it has been
settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 that in order to file an application under section 397, if must be shown
that the conduct of the majority shareholders was oppressive to the minority
members and this requires that events have to be considered not in isolation
but as part of a consecutive story. There must be continuous acts on the part
of the majority shareholders, continuing up to the date of the petition,
showing that the affairs of the company were being conducted in a manner
oppressive to some part of the members. Same view was expressed by P. N.
Bhagwati, J. as he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777
(Guj). It was observed therein that sections 397 and 398 postulate that there
must be at the date of the application a continuing course of conduct of the
affairs of the company which is oppressive to any shareholder or shareholders
or prejudicial to the interests of the company. I am in respectful agreement
with the above observations. It is true that in Sindhri Iron Foundry's case
[1964] 34 Comp Cas 510, it was held by a learned single judge of the Calcutta
High Court that if the court is satisfied that a single wrongful act is such
that its effect will be a continuous course of oppression and there is no
prospect of remedying the situation by the voluntary act of the party
responsible for the wrongful act, the court is entitled to interfere by an
appropriate order under section 397 of the Act. However, the above observations
are not in consonance with those of the Supreme Court in Shanti Prasad Jain's [1965]
35 Comp Cas 351. Consequently, it is not possible for me to rely upon the view
expressed by the Calcutta High Court.
It is clear from the facts
that the petitioners have alleged oppression relating to the year 1978-79.
Thereafter, Col. P. S. Dhillon was appointed as the managing director who
remained as such for many years, but during that period, the petitioners
remained quiet and took no action. Thus, it cannot be said that there are
continuous acts of the majority shareholders which have been oppressive to the
petitioners. Consequently, the petition is liable to be dismissed on this short
ground.
Issues Nos. 2 and
3.—Though, in view of the above finding, it is not necessary to deal with the
arguments of Mr. Jain on these issues, in order to avoid the possibility of
remand in appeal, I consider it proper to deal with them.
In the first instance,
counsel for the petitioners has challenged the resolutions passed in the
meetings of the company held on November 30, 1978, December 30, 1978, January
15, 1979, and February 28, 1970. It was highlighted by him that several
directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt.
Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder
Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt.
Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder
Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri
Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh.
Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh
Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother
of Smt. Nasib Kaur. He submits that the matter is to be examined in this
background. He has challenged the legality of the resolution dated November 30,
1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in
which the resolution was passed was incomplete; secondly, no notice of the
meeting was given to the directors and, thirdly, that, in fact, no meeting was
held on that date.
The first question that
arises for determination is as to whether the quorum for the meeting in which
resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that
there were 32 directors of the company on November 30, 1978, and, therefore,
the quorum for the meeting was 11. However, only 8 directors were present. Out
of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on
September 27, 1977, and January 30, 1978, respectively, as they failed to
attend three consecutive meetings and thus they would be deemed to be not
present in the meeting. In this way, only six directors would be deemed to be
present.
On the other hand, Mr.
Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej
Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib
Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh
and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of
directors on that date was 24. The number for determining the quorum will be
deemed to be 24 and not 32. Therefore, the quorum would have been complete if
eight directors were present. He further contends that Shri Pavittar Singh had
been re-elected as director on June 30, 1978, and, therefore, he did not suffer
from any disability on November 30, 1978.
I have duly considered the
arguments of learned counsel. It has been admitted by Mr. Jain that out of the
32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh,
Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar
Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh
had ceased to be directors prior to November 30, 1978. Subsection (2) of
section 287 provides that the quorum for a meeting of the board of directors of
the company shall be one-third of its total strength or two directors,
whichever is higher. In clause (a) of sub-section (2) of section 287, the total
strength of the board of directors of a company has been denned as the total
strength of the board of directors as determined in pursuance of the Act, after
deducting there from the number of directors, if any, whose places may be
vacant at the time. It is thus evident that for constituting quorum, l/3rd of
the total number of directors who do not suffer from any disability are to be
taken into consideration. The effective number of directors who admittedly
ceased to be so is 8. Thus, the number of effective directors was 24 and out of
them 8 directors could constitute the quorum. The directors present in the
meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt.
Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar
Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt.
Inderjit Kaur and Shri Ravinder Singh ceased to be directors. There is a
dispute as to whether Shri Pavittar Singh was re-elected as a director or not.
Even if it may be assumed that Shri Pavittar Singh had been re-elected as
director, the quorum was incomplete as only six directors were present.
The second question to be
determined is whether notice of the meeting was given to the directors and if
not with what effect. Mr. Jain has argued that the copy of the despatch
register of the company from October 16, 1978, to February 19, 1979, exhibit
P-74, does not show that any notice was issued for the said meeting. On the
other hand, Mr. Sodhi, has argued that the only requirement under section 286
is that the notice of the meeting should be in writing. It does not prescribe
the manner in which it is to be served on the directors. The notice under
article 82 of the articles of association can be served personally. He submits
that notices were not sent by post but through a messenger.
It is not disputed by Mr.
Sodhi that the notices were not entered in the despatch register. There is no
reliable evidence on record to prove that notices were sent through messenger
and, therefore, it cannot be held that notices were given to the directors. It
is essential that the notices of the meetings have to be sent to all the
directors, otherwise, the resolutions passed in such meetings are invalid. In
this view, I am fortified by the observations of the Supreme Court in
Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC
2389, wherein it was observed that notice to all the directors of a meeting of
the board of directors is essential for the validity of any resolution passed
at the meeting and where no notice was even given to one of the directors, the
resolution passed at the meeting of the board of directors is invalid.
Consequently, I am of the opinion that the resolution dated November 30, 1978,
is invalid on this ground.
The third question to be
determined is whether the meeting was held on November 30, 1978, or the minutes
were recorded without holding the meeting. Mr. Jain has argued that no meeting
was held but the minutes were recorded subsequently by the eight directors in
collusion with each other. In support of his contention, he brought to my
notice the fact that the signatures of the chairman at the end of the minutes
bear the date November 30, 1979, instead of November 30, 1978. The arguments
have been considered by me but I do not agree with them. The proceedings book
is page-marked and consists of several resolutions even after this resolution.
This resolution cannot be said to have been incorporated therein subsequently
merely because under the resolution, Shri Pavittar Singh purported to have
signed on November 30, 1979. The year and the date might have been mentioned
through an oversight.
Now, I advert to the
resolution, exhibit P-2, passed in the meeting held on December 30, 1978. Mr.
Jain has challenged the said resolution on four grounds, out of which three
grounds are the same on which resolution, exhibit P-1, was challenged. The
fourth ground is that 5 transferees of the shares of PISCO, namely, Smt. Nasib
Kaur, Shri Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri
Swaran Singh, took part in the meeting without disclosing their interest in the
proposed transaction and, therefore, they ceassed to be directors on that date.
The first question to be seen is whether the quorum for the meeting was
complete or not. This meeting was attended by the following ten directors:
|
1. |
Smt.
Nasib Kaur. |
|
2. |
Smt.
Mohinder Kaur, |
|
3. |
Smt.
Rajinder Singh Johal, |
|
4. |
Smt.
Gurbax Kaur, |
|
5. |
Shri
Pavittar Singh, |
|
6. |
Shri
Ravinder Singh, |
|
7. |
Shri
Swaran Singh, |
|
8. |
Smt.
Inderjit Kaur, |
|
9. |
Shri
Rameshinder Singh, and |
|
10. |
Shri
Amar Singh. |
The resolution was passed
for transferring 490 shares of PISCO held by the company in favour of the following
persons for full consideration:
|
|
Shares |
|
1. Shri
Pavittar Singh and his wife, Smt. Nasib Kaur |
122 |
|
2. Shri
Ravinder Singh and his wife, Smt. Santosh |
124 |
|
3. Shri
Rameshinder Singh |
122 |
|
4. Shri
Swaran Singh |
122 |
|
|
490 |
N.B. Out of 6
transferees, all except Smt. Santosh were directors of the company.
Mr. Jain has contended that
out of the ten directors present in the meeting, five directors were transferees.
Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder Singh had also
ceased to be directors. Smt. Inderjit Kaur had further ceased to be a director.
If the presence of the five transferee-directors and that of Smt. Inderjit Kaur
is not taken into consideration, then the quorum is incomplete. On the other
hand, Mr. Sodhi has argued that Shri Pavittar Singh, after he had ceased to be
a director, was re-elected on June 30, 1978. However, he admits that Smt.
Inderjit Kaur ceased to be a director. He further submits that the transferees
did not cease to be directors at the time of passing the resolution and at the
most they ceased to be so after the resolution had been passed.
First, it is to be seen
whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as
argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the
shareholders dated June 30, 1978, from which it is clear that he was re-elected
as director on June 30, 1978. Thereafter, it is not shown that he ceased to be
so. Consequently, I am of the opinon that he was a director on December 30,
1978.
It is next to be seen
whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder,Singh
and Shri Rameshinder Singh had ceased to be directors on that date because they
took part in the meeting at the time of passing the resolution, exhibit P-2.
Relevant parts of sections 283(1)(i) and 299 read as follows:
"Section 283. Vacation
of office by directors.—(1) The office of a director shall become vacant if—.
(i) he acts in
contravention of section 299.
Section 299. Disclosure of interests by
director.—(1) Every director of a company who is in any way, whether directly
or indirectly, concerned or interested in a contract or arrangement, or
proposed contract or arrangement, entered into or to be entered into, by or on
behalf of the company, shall disclose the nature of his concern or interest at
a meeting of the board of directors.".
From a reading of section
283, it is clear that the office of the director becomes vacant when a director
acts in contravention of section 299. It is enjoined by section 299 that a
director, who is interested in a contract entered into by or on behalf of the
company, should disclose the nature of his interest at a meeting of the board
of directors. If he fails to do so, he ceases to be a director. In view of the
aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran
Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of
the company.
Now, the question arises,
whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1)
of section 300 provides that no director of a company shall, as a director, take
any part in the discussion or vote on any contract by or on behalf of the
company, if he is in any way, whether directly or indirectly interested in the
contract, nor shall his presence count for the purpose of forming a quorum at
the time of any such discussion or vote; and if he does vote, his vote shall be
void. Sub-section (2)(a), which is in the nature of a proviso to sub-section
(1), says that sub-section (1) shall not apply to a private company which is
neither a subsidiary nor a holding company of a public company. A reading of
the above provisions makes it clear that sub-section (1) applies to a public
limited company and not to a private company which is not a subsidiary or a
holding company of a public company. Therefore, it is in the case of a public
company and a private company which is a subsidiary or a holding company of a
public company, that if a director takes part in the proceedings of the board
of directors and votes regarding any contract in which he is interested, his
presence for the purposes of forming a quorum shall not be counted and his vote
shall be void. However, it will not be so if the company is a private company.
In the present case, the company is a private company. Therefore, the presence
of the aforesaid five directors for the purposes of quorum and their vote for
the purpose of passing the resolution cannot be excluded. They shall, however,
cease to be directors after the passing of the said resolution. Consequently,
the resolution, exhibit P-2, cannot be held to be invalid on this ground.
However, it may be reiterated that the shares were transferred in the names of
some of the directors. Thus, the action of the directors in passing the
resolution amounts to oppression of the minority shareholders in spite of the
fact that it is not an invalid resolution. In the above observation, I find
support from Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it
was held that a resolution may be passed by the directors which is perfectly
legal in the sense that it did not contravene any provision of law, and yet it
may be oppressive to the minority shareholders or prejudicial to the interest
of the company. Such a resolution can certainly be struck down by the court
under section 397 or 398.
Now, it is to be seen whether
Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt. Surjit
Kaur were directors on the date of the meeting, i.e., December 30, 1978, and if
not, with what effect. Smt. Nasib Kaur was re-elected as a director on June 30,
1978, vide resolution, exhibit R-2/5. It is not shown that thereafter she
ceased to be so. Consequently, she was a director on the date of the meeting.
Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be directors. If
the presence of two directors, namely, Ravinder Singh and Smt. Inderjit Kaur,
is not taken into consideration, eight directors were still present in the
meeting. The total number of directors, as already mentioned, was 24. Thus, the
quorum was complete.
Mr. Jain next submits that
no notice of the meeting was sent to the directors and, consequently, the
meeting was illegal. There is force in this submission. The copies of the
despatch register from October 16, 1978, to February 19, 1979, exhibit P-74,
show that no notice was sent regarding the meeting. A similar argument was
raised earlier and was dealt with while determining the validity of the
resolution dated November 30, 1978. For similar reasons, the resolution dated
December 30, 1978, is also invalid.
Mr. Jain has then argued
that in the resolution dated November 30, 1978, it was decided that the shares
be offered to the existing shareholders. Shri R. S. Johal was authorised to do
so. However, he did not offer the shares to the other shareholders and,
therefore, the transfer of shares to Pavittar Singh, etc., amounts to
oppression on the minority shareholders.
I find substance in this
submission. Before deciding to whom the shares should be sold, it was the duty
of Shri Johal to make an offer of sale to all the shareholders. Those should have
been transferred to one who made the highest offer. However, it was not done.
It is true that Shri Johal says that he told orally all the shareholders in
this regard. This part of the statement, however, cannot be accepted.
Consequently, transfer of the shares to the transferees without offering the
shares to the other shareholders in terms of the resolution dated November 30,
1978, exhibit P-1, is oppressive to the other shareholders.
Mr. Jain has further argued
that the consideration for the 490 shares purchased by Shri Pavittar Singh,
etc., was not paid in cash by them. The purchase price of the shares was Rs.
4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them
towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them
from the company for interest at the rate of 15% per annum and that amount has
not been repaid till today.
I have duly considered the
argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some
amount was shown payable to the transferees in the account books of the
company. In case that amount was got adjusted by them towards the payment of
consideration of the shares, no fault can be found therein. However, the act of
advancing a loan by the company to the transferee-directors at the juncture
when the company was not in sound financial condition was an oppressive act on
the minority shareholders. It is also relevant to point out that they have not
repaid the amount of loan or interest thereon up-to-date.
The third resolution of the
company, which has been challenged by the petitioners, is dated January 15,
1979, exhibit P-17. By this resolution, the minutes of the meeting dated
December 30, 1978, were confirmed and the loans given to the directors for
purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that
there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri
Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took
part in the meeting dated December 30, 1978, without disclosing their interest
in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and
Shri Avtar Singh admittedly ceased to be directors. The total number of
directors present was eleven and in case the aforementioned seven directors are
excluded, the number of directors present remained four. The quorum of the
meeting should have been eight and thus the resolution is invalid. I agree with
the submission of learned counsel. It is not necessary to dilate (further) on
the paint as the matter has already been discussed above.
Mr. Jain has further
challenged the validity of the resolution on the ground that the notices of the
meeting were not despatched to the directors. He, in support of his contention,
referred to the despatch register, exhibit P-74. I agree with this submission
as well. The matter has already been discussed above. For similar reasons, this
resolution is also invalid.
Mr. Jain has next
challenged on similar grounds the resolution passed in the meeting held on
February 28, 1979, exhibit P-18, by which the sale of 490 shares in favour of
Shri Pavittar Singh, etc., was approved. The first thing to be seen is as to
whether the quorum of the meeting was complete. Eleven directors were present
in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder
Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As
already held, they ceased to be directors on December 30, 1978. Out of the
remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt.
Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six
directors are to be excluded for the purposes of quorum. Consequently, five
directors would be deemed to be present in the meeting. The quorum for the
meeting was eight. I am, therefore, of the opinion that the resolution dated
February 28, 1979, is also invalid.
The second question is
whether the resolution is invalid as the notices of the meeting were not sent
to all the directors. In the despatch register, exhibit P-74, admittedly, the
despatch of the notices of the meeting to the directors is entered. Therefore,
I am of the view that this formality had been fulfilled by the company and the
resolution cannot be held to be invalid on this ground.
Mr. Jain has further argued
that the resolution was invalid as Shri R. S. Johal and ten other directors
protested against the resolution and walked out of the meeting. He made
reference to the letter dated February 28, 1969, exhibit P-76. There is force
in this submission also. It is stated in the letter, exhibit P-76, that in the
meeting of the board of directors held on February 28, 1979, the directors who
signed the letter did not agree to the proposal for transfer of the 490 shares
held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh,
Ravinder Singh and Swaran Singh and voted against the resolution. The
resolution, therefore, stood defeated. The directors who signed the letter
walked out of the meeting in protest against the overbearing, arbitrary, unconstitutional
and illegal action, arrogant attitude and threatening behaviour of the
directors interested in the transferees. The latter prevailed upon the managing
director and, therefore, he refused to record their disapproval and vote of
dissent. It was requested by them that the minutes be not recorded, contrary to
the will and verdict of the majority of the directors. The letter is signed by
11 directors and addressed to the managing director. From the above letter, it
is evident that eleven other directors were present in the meeting but neither
their presence nor their vote of dissent against the resolution was recorded.
Shri R. S. Johal appeared in the witness-box as P.W.-4 and affirmed the stand
taken in the letter, exhibit P-76. He stated that in the meeting held on
February 28, 1979, there was a dispute regarding the sale of shares in favour
of Rameshinder Singh and his partymen and that some of the directors, namely,
Shri N. S. Domeli, Shri Puran Chand, Smt. Beant Kaur, Shri Didar Singh, Smt.
Ravinder Kaur, Smt. Rattan Kaur, Shri Puran Singh, Shri Hardev Singh, Smt.
Nasib Kaur and Mrs. Vaneet, walked out of the meeting. There is no mention
about the dispute in the minutes. Shri Domeli also admits his signature on the
letter. I am, therefore, of the opinion that the resolution dated February 28,
1979, exhibit P-18, is invalid.
The petitioners have also
challenged the resolutions passed in the annual general meeting held on June
30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and
loss account for the year ending December 31, 1978, were passed. It is
contended by Mr. Jain that 21 days' clear notice for holding the meeting was
required to be iven to the shareholders under section 171, but that was not
done. The notices were despatched on June 13, 1979, and thus 21 days' clear
notice was not given to them. He also contends that the copies of the
balance-sheet should have been sent with the notices but the same were not
sent.
Mr. Sodhi has not disputed
that the notices given to the shareholders were of less than 21 days. Section
171 reads as follows:
"171. Length of notice
for calling meeting.—(1) A general meeting of a company may be called by giving
not less than twenty-one days' notice in writing.
(2)A general meeting may be
called after giving shorter notice than that specified in sub-section (1), if
consent is accorded thereto—
(i) in the case of an annual general meeting, by all the members
entitled to vote thereat; and
(ii) in the case of any other meeting, by members of the company
(a) holding, if the company has a share capital, not less than 95 per cent, of
such part of the paid-up share capital of the company as gives a right to vote
at the meeting, or (b) having, if the company has no share capital, not less
than 95 per cent, of the total voting power exercisable at that meeting:
Provided that where any
members of a company are entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall
be taken into account for the purposes of this sub-section in respect of the
former resolution or resolutions and not in respect of the latter".
A reading of the section
shows that 21 days' notice is necessary for convening the annual general
meeting. However, a shorter notice for such a meeting can be given, if all the
members who are entitled to vote in the meeting accord their consent for doing
so. Previously, fourteen days' notice was provided but later the period of
notice was extended to 21 days on the report of the Company Law Committee. The
reasons for extension of period have been given in the report, the relevant
portion of which reads as follows:
"We further recommend
that twenty-one day's notice should be given of all resolutions to be passed at
a general meeting—ordinary or special. The extension of the period of notice
from fourteen to twenty-one days is necessary to enable shareholders to combine
and canvass for proxies if they so desire. The present period of fourteen days
is too short for all the processes that are involved before the shareholders
canvass their opinion in favour of or against a particular resolution proposed
to be considered at any meeting of the company".
After taking into
consideration the provisions of the section and the reasons for incorporating
the same, I am of the view that the period of notice cannot be curtailed except
on the ground mentioned in the section itself. The provisions of the section
are mandatory and if they are not complied with, the resolutions passed in such
a meeting cannot be held to be valid. The members in this case admittedly did
not agree for curtailing the period of notice. Therefore, the resolutions
passed in the meeting dated June 30, 1979, are invalid.
The petitioners have
further challenged the validity of the resolution of the board of directors
dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and
loss account for the year ending December 31, 1978. Mr. Jain submits that the
quorum in the meeting was not complete and, therefore, the resolution was
invalid. I do not find any substance in the argument. In the meeting, eight
directors were present. As already mentioned, there were only twenty-four
directors of the company. Consequently, eight directors constituted the quorum.
I am, therefore, of the view that the resolution cannot be said to be invalid.
The next contention of Mr.
Jain is that the shares which were transferred to Shri Pavittar Singh, etc.,
had more value than that for which they were sold. In support of his
contention, he places reliance on the balance-sheet ending December 31, 1976,
exhibit R. 2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and
the balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find
substance in this submission. The shares were not quoted on the stock exchange.
No reliable data has been provided by the petitioners showing that the value of
the shares was more. In the first two balance-sheets, the company is shown to
have suffered losses to the tune of several lakhs of rupees. In the balance-sheet
ending December 31, 1978, some profit is shown to have been earned. After
adjustment of the profit, the loss carried forward is Rs. 5 lakhs odd. The
aforesaid figure shows that PISCO was not faring well.
The respondents produced Arun
Joshi, R-2/3. He deposed that no dividend was declared or paid to the
shareholders during the aforesaid period. The face value of each share was Rs.
1,000. He further deposed that, according to the assets of the company, the
value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs.
625 in the year 1978.
After taking into
consideration the circumstances, it cannot be accepted that the value of the
shares was more than Rs. 1,000 per share when they were transferred to the
respondents.
Mr. Jain then contends that
the accounts of the company were not even operated by duly authorised persons.
To fortify his argument, he made reference to the copy of the resolution of the board of
directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India
and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of
directors.
I
have duly considered the matter. In the copy of the resolution, exhibit P-3, it
is stated that Shri Pavittar Singh, managing director, would remain out of
station for two months with effect from April 10, 1976. The accounts of the
company with the Central Bank of India, Civil Lines, Jullundur, and Indian
Overseas Bank, Jullundur, would be jointly operated by Shri Naranjan Singh
Domeli, chairman of the company, and Shri Rameshinder Singh, director of the
company in place of Shri Pavittar Singh, managing director. It was further
stated that in future any two of the three persons, namely, Shri Naranjan Singh
Domeli, Shri Pavittar Singh and Shri Rameshinder Singh, would jointly operate
the accounts. It has been certified to be a true copy by Shri Mohinder Singh as
the managing director. The original resolution purports to bear the signatures
of Shri Bir Singh Johal, chairman. However, Mohinder Singh was not the managing
director of the company nor was Bir Singh Johal its chairman. The resolution
does not find a place in the original minutes book of the board of directors.
Some resolutions dated April 11, 1976, are entered in the minutes book (copy exhibit
P. 3-A). These resolutions are different from the resolution, exhibit P-3. Mr.
Sodhi has not been able to show any other resolution in the minutes book, copy
of which is exhibit P-3. In the circumstances, it is evident that the affairs
of the company were mismanaged by the respondents.
Mr.
Jain has further argued that Shri Rameshinder Singh operated the accounts on
the basis of that resolution and advanced loans to the persons in the names of
some fictitious persons and thus misappropriated the amounts. He submits that
the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there
was no such person. On the other hand, Mr. Sodhi has placed reliance on the
statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew
Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also
referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a
payee's account cheque and the payment of the cheque was made to the Punjab and
Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it
cannot be held that Jagtar Singh was a fictitious person.
The
next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a
manager by the respondent had embezzled a huge amount of the company but no
effective step was taken to recover the amount from him. In order to prove the
aforesaid facts, Mr. Jain placed reliance on
the resolutions of the board of directors, exhibit P-87, dated December 30,
1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977,
exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit
P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the
resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due
on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda.
However, Shri Mohinder Singh reconstructed the record and showed an amount of
Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was
given to the company. It is further stated that Shri Mohinder Singh had
introduced false credits in the account books in favour of Sarabha Land and
Motor Finance (P.) Ltd. in connivance with Shri Raghbir Singh of the said
company. These entries were got fictitiously made by him. In the resolution,
exhibit P-67, it was said that certain irregularities were committed by Shri
Mohinder Singh and, therefore, his services had been terminated. It was
resolved that a sub-committee consisting of the chairman and the managing director
be appointed to go into the accounts and submit a report for taking appropriate
action against him.
In the resolutions,
exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the
report of the sub-committee had not been received. In exhibit P-71, it was said
that Mohinder Singh had not rendered accounts and had handed over the cash.
Consequently, it was decided to approach him for that purpose. In the
resolution, exhibit P-72, dated December 13, 1977, the matter again came up
before the board of directors and it was resolved that action against Shri
Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that
taking of appropriate action against Shri Mohinder Singh was being deferred
without any reason even though it stood established that he had misappropriated
the funds of the company. It is true that Shri Naranjan Singh Domeli made a
statement that a FIR was lodged against Shri Mohinder Singh but the particulars
of the FIR have not been brought on the record. It has not been shown that any
further action was taken by the directors to recover the amount. It appears
that the FIR was lodged to complete the formalities and the directors were not
serious in taking any action against him. Thus, the allegation of the petitioners
that the company was mismanaged stands established.
Mr. Jain has also argued
that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri
Paramjit Singh. Even no document was got executed from them in token of having
received the amounts. The act amounts to mismanagement. I find substance in
this submission. The argument regarding the payment of loans to the aforesaid
persons and PISCO stands established from the copies of the ledger of the
respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several
amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is
shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various
amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an
amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30,
1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri
Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on
January 1, 1977. No amount of interest was debited to their account. No
document was got executed from the said debtors. The aforesaid amounts have not
been repaid by the said persons. Col. K. S. Dhillon, petitioner, deposed that
Shri Pavittar Singh was the managing director of PISCO and Shri Swaran Singh,
Shri Ravindar Singh, Shri Rameshin-der Singh and Amar Singh were its directors.
It appears that the amounts were advanced to PISCO without interest because the
said directors wanted to help their concern. After taking into consideration
all the circumstances, I am of the view that the affairs of the company were
conducted by the respondents in a manner oppressive to the petitioners.
Before parting with the
judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the
resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the
directors, they could not be challenged in view of section 290 of the Act. In
support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills
P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).
I do not agree with the
argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner,
five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits
P-l, P-17 and P-18 have been declared invalid on the ground that the quorum at
the meetings was incomplete and no proper notice of the meeting was given to
the directors, exhibit P-2 on the ground that no proper notice was given to the
directors and exhibit R. 2/6 on the ground that no notice of requisite period
was given. Exhibit P-18 was declared invalid also on the ground that the
resolution was opposed by the majority of the directors and, therefore, it
could not be deemed to have been passed. Section 290 of the Companies Act provides
that the acts done by a person as a director shall be valid notwithstanding
that it may afterwards be discovered that his appointment was invalid by reason
of any defect or disqualification or had terminated by virtue of any provision
contained in the Act or in the articles. It is evident from the language of the
section that it gives protection to the acts of the directors if their
appointments were invalid on account of any defect or disqualification or the
same had come to an end. It does not give protection to their acts which are
otherwise illegal. Thus, the resolutions passed in a meeting which had not been
properly convened are not valid resolutions. Consequently the resolutions,
exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot be held valid under the said
section.
It is true that the
resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground
that the quorum for the meeting was incomplete as some of the directors present
there ceased to be so. But, in the facts and circumstances of this case, the
section does not give protection to the resolutions passed in such meetings.
The reason is that the resolutions in the present case have not been passed
bona fide by the directors, as out of the six beneficiaries, five were directors
of the company and the sixth was the wife of one of them. The sole object of
the directors in passing the resolution was to promote their self-interest.
Moreover, the benefit of the said section can normally be taken by a third
person and not by the directors or their close relations. It is further
noteworthy that some of the resolutions were oppressive to the minority
shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it
was observed by me that even if a director ceased to be so in view of section
283, the resolution of the board of directors could not be held illegal in view
of section 290 which provided that the acts done by a person would be valid
notwithstanding that it might afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. The facts of that
case were that a boiler was sold by the company after a decision had been taken
in a meeting of the board of directors. The purchaser had no concern with the
company. He took a plea that he was a bona fide purchaser for valuable
consideration. The case is clearly distinguishable and, therefore, the
observations therein are of no help in deciding the petition.
Consequently, in view of
the finding that there were no continuous acts of the majority shareholders
which had been oppressive to the petitioners, I dismiss the petition. However,
the parties are left to bear their own costs.
COMPANIES ACT
[1995] 6 SCL 201 (
HIGH COURT OF
v.
Incab Industries Ltd.
SHYAMAL KUMAR SEN, J.
MAY 8, 1995
Section 291 of the Companies Act, 1956 - Board
of directors - Powers of -Plaintiff was a nominee director and chairman of
defendant company - He was nominated as chairman by company's consulting
engineer in terms of power granted to consulting engineer in articles of
association of company -Subsequently, however, board of directors removed
chairman by passing resolution to that effect - Plaintiffs case was that board
had no power to remove him as in terms of articles of association he could be
removed only by consulting engineer who had nominated him - Whether simply
because there was an agreement at one point of time with consulting engineer
with power of nomination of chairman it could be said that board lacked power
to remove chairman, especially when consulting engineer did not come forward to
enforce that right - Held, no
Section 286 of the Companies Act, 1956 - Meetings
of Board - Notice of meetings - Whether even if there is no specific agenda,
under miscellaneous items 'with permission of chairman' any other business may
be transacted -Held, yes - Whether, therefore, simply because removal of
chairman is not mentioned in agenda of meeting, resolution for removal of
chairman passed by majority directors, can be said to be invalid particularly
when chairman himself has raised such issue in meeting - Held, no
FACTS
The plaintiff was a nominee director and chairman of
the defendant-company (defendant No. 1) and the defendant Nos. 2 and 6 were the
other directors of the company. The plaintiff was nominated by Consulting
Engineer (defendant No. 7) of defendant company in terms of power granted in
the articles of association of the company. By a board meeting dated 5-10-1994
the plaintiff was removed from the chairmanship by the defendant Nos. 2 to 6
who were the nominee-directors appointed by different financial institutions.
The plaintiff filed the suit for a declaration that he continued to be the chairman of the company and that the
alleged board meeting was null and void and for a perpetual injunction
restraining the defendants 1 to 5 from giving effect to the decision of the
alleged board meeting. The plaintiff's contention was that it was under the
powers granted to the 7th defendant that the 7th defendant appointed the
plaintiff as the chairman and as such the board of directors had no power to remove
him from the chairmanship as long as 7th defendant did not choose to remove
him. The plaintiff further contended that the removal of chairman from the
board was not one of the items of agenda of the notice for the board meeting
which was scheduled to be held originally on 10-9-1994 nor in the agenda of the
adjourned meeting and, therefore, such an item could not have been considered
and no decision could have been taken on such an issue.
HELD
Notice of
every meeting of the board of directors of a company is required to be given in
writing to every director for the time being in
It cannot be
disputed that even if there is no specific agenda under the miscellaneous items
'with the permission of the chairman' any other business may be transacted. In
the instant case, it appeared from record that the chairman himself raised the
question of revival package and the question of bringing in funds by the
chairman was considered at several meetings. It appeared from the records that
the question of bringing in funds by the plaintiff and his stepping down as
chairman was discussed in the earlier meeting held on 31-3-1994 and also on
10-9-1994 and subsequently the meeting was adjourned to 5-10-1994 for further
discussion.
In fact the
plaintiff-petitioner contended that he could not be removed at the Board
meeting since he was appointed by the Consulting Engineers in terms of the
agreement with the said Consulting Engineer and also by virtue of article 90 he
would continue to remain as chairman until removed by the consulting engineers
and it was not open for the board to remove him. He did not, however, raise any
objection to the discussion on the issue at any of the meeting in view of the
absence of agenda. Even if the business is not one of the items in the agenda
still the matter may be considered at the Board meeting and appropriate
resolution may be passed.
The matter in
issue was discussed at the meeting. The petitioner did not raise any objection
to such issue being discussed nor did he pray for any adjournment of the
meeting on the ground that the matter was not in the agenda. At the worst the
transaction of such a business might only be an irregularity and not an
illegality. It is well settled that the Court does not interfere with the
internal management of a company if the acts complained of can be set right by
the members or directors.
On
consideration of the relevant articles of the company, namely, articles 2, 90
and 129 to 131 the petitioner could not claim that he had right to continue on
the basis of the said articles for the indefinite period.
It was also
on record that the petitioner was also elected as a chairman by the board of
directors as would appear from the minutes of the board meeting dated
31-1-1984. If the petitioner was elected by the board, the board might also
express its no confidence and remove the petitioner as chairman. The fact that
he was nominated by the Consulting Engineers did not mean that he would
continue for ever. There cannot be an agreement in perpetuity; it was obvious
from the conduct of the parties that they had treated the contract as having
been abandoned and no longer in force nor enforceable.
In that view
of the matter the petitioner could not claim to continue to be chairman for
ever, by virtue of the fact that he was a nominee of Consulting Engineer. It
also appeared that all directors except one who was out of
Article 117
provides that in the absence of the chairman board might appoint any other
director to be chairman of the meeting. The board, therefore, under the article
was expressly authorised to appoint any chairman. Simply because there was an
agreement at one point of time with the consulting engineers with power of
nomination of chairman and although consulting engineers did not come forward
to enforce the same, it could not be said that the action of the board was
unjustified. It appeared that a deadlock had been created in the management of
the company. The action of the chairman had been criticised by the majority of
the directors. As already noted they expressed lack of confidence in the
chairman. Under such circumstances, the court should not interfere in the
internal affairs relating to the management of the company.
It would not
be proper to interfere with the internal management of the company. Passing of
interlocutory relief at this stage would really amount to such interference in
the internal management of the company. Accordingly, the petitioner was not
entitled to any interlocutory relief of injunction as prayed in the
application.
CASES REFERRED TO
Punjab National Bank v. Sanchaita Investment 89 CWN
509, Krishna Lal Sadhu v. Mt. Promila Bala Dasi AIR 1928 Cal. 518, M.C. Chacko v. State Bank of Travancore AIR 1970 SC 504, La Compagnie De
Mayville v. Whitley [1896] 1 Ch.D. 788, Ferrucciosias v. Jai Manga Ram Mukhi
[1994] 1 CLJ 345, Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44
Comp. Cas. 390 (
JUDGMENT
1. On 17-10-1994, the petitioner filed the above suit for the following
reliefs :
(a) A declaration that the
plaintiff has been, still is and continues to be the Chairman of the Board of
Directors of the defendant No. 1;
(b) A declaration that the
meeting of the Board of Directors of the defendant No. 1 scheduled on 5-10-1994
was adjourned without transacting any business and no matter was discussed and
no resolution was passed for the removal of the plaintiff as Chairman of the
Board of Directors of the defendant No. 1;
(c) A declaration that the
alleged minutes of the alleged Board meeting dated 5-10-1994 of the defendant
No. 1 pertaining to the purported removal of the plaintiff from the
chairmanship of the Board of Directors of the defendant No. 1 is bad, null and
void, cannot be given effect to and is not binding on the plaintiff and the
defendant No. 1;
(d) Perpetual injunction
restraining the defendant Nos. 1 to 5 their servants, agents and assigns from
giving any effect or further effect to or acting or further acting in
furtherance of the purported resolution dated 5-10-1994 of the defendant No. 1,
being annexures 'M' and 'N' respectively hereto in any manner whatsoever;
(e) Perpetual injunction
restraining the defendant Nos. 1 to 5, their servants, agents and assigns from
asserting in any manner whatso ever that the plaintiff has ceased to be the
Chairman and/or removed from the chairmanship of the Board of Directors of the
defendant No. 1;
(f) The alleged minutes of
the alleged Board meeting of the defendant No. 1 held on 5-10-1994 and the purported
letter dated 6-10-1994 being annexures 'M' and 'N' respectively hereto be
delivered and cancelled;
(g) Temporary
injunction;
(h) Receiver;
(i) Attachment;
(j) Costs;
(k) Further
and/or other reliefs.
2. In the plaint it has been alleged inter
alia as follows :
The defendant No. 1 was originally incorporated under
the provisions of the Indian Companies Act, 1913, under the name 'Indian Cable
Co. Ltd.' and is now an existing company within the meaning of the provisions
of the Companies Act, 1956 ('the Act'). In or about January 1987 the name of
the defendant No. 1 was changed from Indian Cable Co. Ltd., to its present name
and a fresh Certificate of Incorporation consequent upon change of name was
issued on 30-1-1987.
3. The defendant Nos.
2, 3, 4 and 5 are the Directors of the defendant No. 1 as nominees of the
financial institutions, i.e., Industrial Credit and Investments Corporation of
India Ltd. (ICICI), LIC Housing Finance Ltd., Unit Trust of India and National
Insurance Co. Ltd., respectively. The defendant No. 6 is a nominee Director of
the defendant No. 7.
4. The plaintiff
together with his associates holds 35 per cent shares of defendant No. 1. The
plaintiff became and still continues to be one of the Directors and Chairman of
the Board of Directors of the defendant No. 1 as nominee of the defendant No. 7
by reason of the following.
5. The petitioner has referred to the
relevant articles of association of the defendant No. 1 - Company which inter alia provides as
follows :-
"90. The Consulting Engineers shall be entitled,
so long as their agreement with the company as referred to in Article 131
hereof, remains in force, to appoint up to two Directors and to remove any
Director so appointed and appoint another in his place or in the place of a
Director so appointed who resigns or otherwise vacates his office. Such
Directors shall be ex officio Directors within the meaning of these articles
and such one of them as from time to time shall be named by the Consulting
Engineers shall be Chairman of the Board. The ex officio Directors named in the
next following article shall be deemed to have been appointed as such under
this Article.
135. The Consulting Engineers being an incorporated
company its Directors for the time being may regulate and conduct their
proceedings and exercise all or any of the powers, authorities and discretions
of that company as the Consulting Engineers of this company in such manner as
the articles of association of that company may permit or direct and may
delegate all or any of such powers, authorities and discretions to such of the
managers or other officers of that company and on such terms and conditions as
the Directors of that company may see fit, and accordingly all deeds and documents required to be signed
by the consulting engineers of this company shall be deemed to be sufficiently
so signed if signed by any director of the consulting engineers' company or by
any other officer of that company to whom its Directors may have delegated
their powers in that behalf."
6. A copy of
the extract of the relevant articles of association of the defendant No. 1 has
been annexed to the plaint.
7. By
an agreement dated 28-1-1947, between the defendant No. 1 and the defendant No.
7, the defendant No. 7 was appointed as a Consulting Engineer of the defendant
No. 1, a xerox copy whereof has been annexed to the plaint.
8. Some
of the relevant clauses of the aforesaid agreement dated 28-1-1947 are
reproduced below :
"(i) So long as the consulting
engineers remain consulting engineers to the Indian company and so long as they
hold not less than 10,000 shares of any class, in the Indian company of nominal
value Rupees ten or their equivalent the consulting engineers shall be at
liberty at all times and from time to time to appoint two directors of the
Indian company to cancel their appointments or the appointment of either of
them and upon such cancellation or the retirement or resignation of them or
either of them to appoint other directors or another director so long as not
more than two directors so appointed hold office as such at the same time. Any
director or directors so appointed by the consulting engineers shall be ex
officio directors and shall not be subject to retirement by rotation nor shall
they be under obligation to take up or acquire any share qualification. So soon
as this agreement shall come into force the consulting engineers shall be
entitled to nominate one of such ex officio directors to act as Chairman of the
Board of the Indian company and the other of such ex officio Directors to be
general manager of the Indian company or may nominate one of such ex officio
Directors to hold both the said offices, subject as aforesaid. Such rights of
nomination as aforesaid shall subsist during the continuance of this agreement
and may be exercised if and when an ex officio Director as aforesaid shall die
or otherwise cease to hold the office or offices to which he has been nominated
in pursuance of the provisions hereof. Upon the consulting engineers exercising
their right to nominate an ex officio Director to act as general manager of the
Indian company the Indian company shall enter into a service agreement with
such person appointing him as general manager on terms to be agreed between him
and the Indian company and unless otherwise mutually agreed between the parties
hereto the terms of service of any ex officio director subsequently nominated
by the consulting engineers to act as general manager of the Indian company
shall mutatis mutandis and so far as circumstances permit be the same as those
contained in such service agreement as aforesaid.
(ii) The consulting engineers
shall continue to be the sole consulting engineers of the Indian company under the
terms of this agreement (unless the consulting engineers shall give notice to
determine this agreement in accordance with the provisions hereinafter
contained) for the period of twenty one years certain from first day of April,
one thousand nine hundred and fort}' seven and thereafter until they shall be
removed there from by an Extraordinary Resolution of the Indian company passed
at an extraordinary general meeting specially convened for that purpose and for
which not less than twelve calendar months' notice shall be given (but which
shall in no case be given on a date earlier than first day of April one
thousand nine hundred and sixty seven) and at which persons holding or
representing by proxy or power of attorney not less than three-fourths of the issued
share capital of the Indian company for the time being and having voting rights
shall be present and shall vote for such resolution."
9. The
consulting engineers shall be entitled to determine this agreement by giving
twelve months' notice in writing to the Indian company expiring at any time and
upon the expiry of such notice this agreement shall cease and determine but
without prejudice to the performance and satisfaction of all obligations,
duties, rights and claims which shall have become binding on either party
thereto or shall have accrued prior to the expiration of such notice.
10. Subsequent
thereto a supplemental agreement was executed on 30-10-1951 between the
defendant No. 1 and the defendant No. 7. A xerox copy of the said supplemental
agreement has been annexed to the plaint.
11. In terms
of the agreement between the defendant No. 1 and the defendant No. 7 and in
tune with article 90 of the articles of association of the defendant No. 1 the
defendant No. 7 nominates two directors on the Board of the defendant No. 1
since 1947 one of whom was also the Chairman of the Board of Directors of the
defendant No. 1.
12. Till
31-1-1984 Mr. D.P.N. Kanga, Mr. R.G. Hall and Mr. L.A. Farren, the defendant
No. 6 were the Directors of the defendant No. 1 nominated by the Defendant No.
7 on the Board of Directors of the defendant No. 1, Mr. D.P.M. Kanga was
further nominated by the defendant No. 7 as the Chairman of the Board of
Directors of the defendant No. 1. On 31-1-1984 in the Board meeting of the defendant
No. 1 the resignation of Mr. R.G. Hall as a Director of the defendant No. 1 was
accepted and the vacancy caused by such resignation was filled up by appointing
the plaintiff as a Director of the defendant No. 1. A copy of the minutes of
the Board meeting held on 31-1-1984 has been annexed to the plaint.
13. As
Mr. D.P.M. Kanga expressed his desire to retire by a letter dated 15-11-1984
addressed by the defendant No. 7 to the defendant No. 1, the plaintiff was also
nominated by the defendant No. 7 as the Chairman of the Board of Directors of
the defendant No. 1. A xerox copy of the said letter dated 15-11-1984 has been
annexed to the plaint. Thus, the plaintiff and Mr. L.A. Ferren, the defendant
No. 6 continued and still continues to remain as Chairman and Director
respectively of the defendant No. 1 as nominees of the defendant No. 7.
14. In
terms of the said letter dated 15-11-1984 a Board meeting of the defendant No.
1 was held on 17-12-1984 whereas the resignation of Mr. D.P.M. Kanga was duly
considered and accepted and simultaneously the plaintiff was appointed as the
Chairman of the Board of Directors. A copy of the minutes of the said Board
meeting of the defendant No. 1 so held on 17-12-1984 has been annexed to the
plaint.
15. It
has further been alleged that the consulting engineers agreement between the
defendant No. 1 and the defendant No. 7 remains in force till date, and, the
defendant No. 7 has not removed the plaintiff either from the chairmanship or
from the directorship of the defendant No. 1.
16. It
has been further alleged that the plaintiff has not resigned or vacated his
office as Director of the defendant No. 1 nor has resigned or vacated the post
of Chairman of the Board of Directors of the defendant No. 1.
17. In
or about the first week of September 1994 the plaintiff received from the
defendant No. 1 a notice of the Board meeting of the defendant No. 1 scheduled
to be held on 10-9-1994. A xerox copy of the said notice has been annexed and
forms part of the plaint without the enclosures.
18. It
has been alleged that the said Board meeting scheduled to be held on 10-9-1994,
though was held, but after some discussions remained inconclusive and was
adjourned till 21-9-1994.
19. It
has been alleged that the agenda of the Board meeting scheduled to be held on
10-9-1994 had no item regarding removal or resignation or cessation of the
plaintiiff as Chairman of the Board of Directors of the defendant No. 1 for
discussion by the Board. No leave was sought for from the plaintiff, nor any
permission was given by the plaintiff to discuss any matter regarding
resignation of the plaintiff as Chairman from the Board of Directors of the
defendant No. 1. The defendant No. 2 as a Director of the defendant No. 1
wanted to be informed about the Consulting Engineers agreement vis-a-vis
information about the appointment of the plaintiff as Director and Chairman of
the plaintiff.
20. On
or about 15-9-1994, by a letter addressed to the defendant No. 1, the defendant
No. 2 as Assistant General Manager of ICICI sought for certain information and
documents regarding, inter alia , appointment of the plaintiff as Director and
Chairman of the defendant No. 1. A xerox copy of the said letter dated
15-9-1994 has been annexed and forms part of the plaint.
21. The said
letter dated 15-9-1994 was duly replied to on behalf of the defendant No. 1 by
the plaintiff by his letter dated 19-9-1994, a copy whereof has been annexed
and the same forms part of the plaint.
22. By
a letter dated 19-9-1994 the plaintiff also intimated the Chairman of the ICICI
Ltd., who had nominated the defendant No. 2 as a nominee to the Board of
Directors of the defendant No. 1, inter alia, the true position of the
plaintiff as nominee Chairman of the defendant No. 7. A xerox copy of the said
letter dated 19-9-1994 has been annexed and the same forms part of the plaint.
23. The
adjourned Board meeting of the defendant No. 1 held on 21-9-1994 was again
adjourned till 5-10-1994 without transacting any business.
24. By
a letter dated 3-10-1994 as also by fax addressed to the Deputy Managing
Director, ICICI the plaintiff made his position, stand and explanation clear as
would be evident from a copy of the said letter which has been annexed to the
plaint. In the said message it was reiterated that the issues raised in the
communication dated September 15, 1994 and in ICICI's further letter dated
September 21, 1994 stood fully responded to by the plaintiff.
25. On
or about 3-10-1994 the plaintiff was informed by the Company Secretary of the
defendant No. 1 that the adjourned Board meeting of the defendant No. 1
scheduled to be held on 5-10-1994 had been further postponed till 10-10-1994.
The plaintiff further came to learn from the Company Secretary of the defendant
No. 1 that the other members of the Board of Directors of the defendant No. 1
had also been intimated of the same. In this context, a specimen copy of the
fax message dated 3-10-1994 issued by the said Company Secretary of the
defendant No. 1 to the members of the Board of Directors of the defendant No. 1
has been annexed to the plaint.
26. It
has been alleged that on 4-10-1994 the plaintiff came to know that the
defendant No. 2 objected to the postponement of the Board meeting of the
defendant No. 1 scheduled to be held on 5-10-1994 and that he contended that
the issue regarding the continuance of the plaintiff as Chairman of the Board
of Directors of the defendant No. 1 was under discussion at the Board level
since 31-3-1994. It has also been contended on behalf of the plaintiff that the
question of discontinuation of the plaintiff as Chairman of the board of
Directors of the defendant No. 1 did not and could not arise. At the Board
Meeting of the defendant No. 1 held on 31-3-1994 an issue cropped up as to
whether the plaintiff would be bringing in fresh funds as a booster to the
revival package of the defendant No. 1. The plaintiff also at the said meeting
and also at the meeting held on 21-9-1994 assured full co-operation with the
Board for the purpose of revival of the defendant No. 1. Moreover, the
plaintiff out of his own resources paid a substantial sum to the statutory and
other creditors of the defendant No. 1 including the provident fund to show his
bona fide in the matter of assurance of such co-operation. The question of removal
or resignation or cessation of the plaintiff from the chairmanship of the
defendant No. 1 did not and could not arise.
27. It has been
alleged that though the plaintiff attended the Board meeting of the defendant
No. 1 on 5-10-1994 but as the statutory books for holding the meeting were not
there because of the absence of the Company Secretary, the meeting had again to
be adjourned without transacting any business till a date convenient to the
members of the Board of the defendant No. 1 at a later date. Since the members
of the Board of the defendant No. 1 were present, some time was utilised for
discussing the financial aspects of the defendant No. 1.
28. It
has further been contended on behalf of the defendant Nos. 2, 3 and 4 that such
a meeting was held on 5-10-1994 at Bombay and a resolution was passed at such
an alleged meeting removing the plaintiff from the chairmanship of the Board of
Directors of the defendant No. 1.
29. The
defendant Nos. 2, 3 and 4 by a letter dated 6-10-1994 addressed to the defendant
No. 1 tried to explain the circumstances under which the plaintiff was
allegedly removed from the Chairmanship of the Board of Directors of the
defendant No. 1 enclosing therein the minutes of the meeting to be held on
5-10-1994. By the said letter, the defendant No. 1 was directed to take
necessary action.
30. It
has been submitted on behalf of the plaintiff that the Board meeting of the
defendant No. 1 held on 5-10-1994 and the business transacted there as
reflected in the alleged minutes and the intimation by the defendant Nos. 2, 3
and 4 to give effect thereto by the letter dated 6-10- 1994 being annexures 'M'
and 'N' are illegal, bad and not enforceable, of no effect and not binding on
the plaintiff or the defendant No. 1 for, inter alia, the following reasons :
(a) The action of the
defendant Nos. 2, 3 and 4 and attempt to remove the plaintiff as Chairman of
the defendant No. 1 is ultra vires its articles of association.
(b) The whole basis of the Board
meeting dated 5-10-1994 as reflected in the minutes is with regard to earlier
discussions allegedly held is not reflected in the Minute Book of the Board of
Directors.
(c) There was no, nor could
there be any agenda for removal of the plaintiff from the chairmanship of the
defendant No. 1 or the plaintiff ever consented to include any such agenda for
discussion either on 10-9-1994 or at any adjourned meeting thereof. There was
also no fresh agenda either on 10-9-1994 or on 21-9-1994.
(d) When the plaintiff has
been appointed at the behest of the defendant No. 7 in terms of article 90 of
the articles of association of the defendant No. 1 removal can only be made in
terms of the said article and not otherwise and the defendant No. 7 has not
taken any step for removal of the plaintiff.
(e) The defendant Nos. 2, 3
and 4 even if they had constituted a quorum for a meeting of the Board of
Directors of the defendant No. 1 had no authority and/or jurisdiction under the
articles of association to appoint and/or remove any person as Chairman of the
defendant No. 1.
(f) The Board of Directors
of the defendant No. 1 are not entitled to act contrary to the said agreement
between the defendant No. 1 and the defendant No. 7 and article 90 of the
articles of association of the defendant No. 1.
(g) Ability or inability to
bring in fresh or further funds does not and cannot have any relation
whatsoever in the matter of operation of the terms of the agreement between the
defendant No. 1 and the defendant No. 7 as also in the matter of operation of
the provisions of article 90 of the articles of association of the defendant
No. 1.
(h) Article 2 of the
articles of association expressly provides that save as reproduced in the said
articles of association, the regulations contained in Table A of the First
Schedule to the Act would not apply to the defendant No. 1. It has also been
contended that the purported removal of the plaintiff is also contrary to the
provisions of article 98 of the articles of association of the defendant No. 1
in any event. It is wholly untrue as allegedly recorded in the said minutes of
the Board meeting allegedly held on 5-10-1994 to the effect that the enquiries
with the defendant No. 7 revealed that the defendant No. 7 did not consider the
plaintiff as their nominee on the Board of Directors of the defendant No. 1.
The alleged minutes of the alleged Board Meeting dated 5-10-1994 does not in
any event consider the contents of the plaintiff's letter dated 19-9-1994 and
3-10-1994.
(i) Notice of the alleged
Board Meeting dated 5-10-1994 had not been given to all the Directors of the
defendant No. 1 and in particular the defendant No. 6 and as such, no legal and
valid Board Meeting could be held on 5-10-1994 in any event.
31. The
plaintiff by his letter dated 15-10-1994 has intimated the defendant No. 1 not
to take any action or further action pursuant to the alleged minutes of the
alleged Board Meeting dated 5-10-1994 as forwarded by the defendant Nos. 2, 3
and 4. A copy of the said letter has been annexed to the plaint.
32. In the premises, the plaintiff moved this
instant interlocutory application and on 17-10-1994 obtained ad interim order
from the Vacation Bench to the following effect :-
"THE COURT
: Leave is given to the petitioner to have the petition stamped and punched
within one week after the re-opening of the Long Vacation.
In the
meantime no further effect to the Annexures "M" and "N" to
the petition will be given, and status quo be maintained.
Let the matter appear on 21 st October, 1994.
All parties
are to act on a signed copy of the minutes of this order on the usual
undertaking."
33. Mr. P.K.
Roy, the learned Advocate for the plaintiff has submitted at the outset that
article 2 of the articles of association of the defendant No. 1 company
expressly excludes the operation/applicability of Table A of the Companies Act.
34. He
has also submitted that the plaintiff's claim is based on Article 90 read with
Articles 129, 130, 131, 132, 133, 134 and 135 of the company.
35. Referring
to the said articles it has been submitted that the purported attempt to remove
the petitioner from the post of Chairman is clearly contrary to the said
articles, and as such, should not be allowed to be given effect to Mr. Roy has
also submitted that purported resolution for removal of the plaintiff from
chairmanship of defendant No. 1 company is ultra vires, the article of the
company and directly affects the plaintiff, and as such the objection raised by
the contesting defendants regarding locus standi of the plaintiff to maintain
the application cannot be sustained.
36. It
has also been submitted that the letter dated 15-11-1994 signed by L.A. Farran,
Executive Director of BICC (Consulting Engineers), expressly provides that the
plaintiff was nominated by BICC as Chairman of Incab the said letter is not
under challenge.
37. It has
been contended that in the Affidavit in opposition filed on behalf of the
defendant Nos. 2 to 5 a copy of a letter dated 4-10-1994 has been annexed to
show as if the plaintiff is not holding the position of Chairman/Director of
Incab as BICC's nominee.
38. The
learned Advocate has further contended that the said document does not merit
any credence, for the following reasons :-
(i) It is not a
communication to Incab. The identity of the signatory to the letter is unknown.
(ii) The letter does not
indicate that it was written under the authority of the Board of Directors of
BICC or of its shareholders in general meeting.
(iii) The provision as to the termination of the agreements of 1947
and 1951 have not been adverted to.
(iv) The alleged faxes of 30-9-1994 and 4-10-1994 emanating from
P.K. Mukherji of ICICI have not been disclosed - it is thus not appreciated, in
what context the said letter was written.
(v) Finally, in the concluding paragraph, the author of the
letter expressed inability to influence 'those affairs'.
39. It has been
contended that the said letter cannot and does not have the effect of
overriding the earlier undisputed letter of 15-11-1984.
40. It has further been submitted that no question of any perpetual agreement arises in the present case. The agreements between BICC and Incab contains the provisions for termination thereof. However, nothing has been produced by the contesting defendants to show that such agreements have been terminated excepting the disputed letter of 4-10- 1994 on which no reliance can be placed for the reasons stated hereinabove.
41. Mr. Roy has further submitted that by getting himself elected, a director does not necessarily cease to be a nominee director of the company. By virtue of nomination as permissible under the articles of association and also by getting himself elected, the plaintiff in effect stands on two legs with the consequence that in the event of removal/loss of one leg, he can still continue to stand on the other. There is no bar in law to such a position and none has been cited before this Court. Nomination does not get supplemented by election as suggested in the disputed letter dated 4-10-1994. On the contrary, nomination gets supplemented by election.
42. It has been contended by Mr. Roy, learned Advocate for the plaintiff that notwithstanding whether the law does or does not require circulation of a formal agenda, in practice it is done almost invariably in all cases. Even a cursory glance through minute books of Board Meetings of Incab kept in the custody of this Court would show that it has been always the practice of Incab to circulate agenda of such meetings. There is no warrant for departure from such a statutory practice and more so while discussing a highly crucial issue like the Chairman's removal. This issue is of such a high magnitude and it is so projected by the defendant Nos. 2 to 5 as if the very survival of Incab is dependant on that issue. It is, therefore, obvious that there should have been at least an indication of such an important issue in the agenda and more so when very minor issues, i.e., fixed deposit holders - repayment of principal, interest, recovery of intercorporate loans, Flat at M-11, Greater Kailash and date of next Board meeting have been detailed in the agenda.
43. It is the contention
of Mr. Roy that some indication even if not in the shape of a formal agenda,
should be given in advance of a Board meeting stands to reason, as importance
of such an issue, may be the deciding factor for a Director to opt to attend
the meeting or to attend to some other more important business, may be of the
company itself.
44. It has also been contended that it is one case of not
having an agenda at all and completely another, when there are as many as 29
items on the agenda and the very vital one and in fact the only one claimed to
have been discussed at the relevant meeting dated 5-10-1994 was not included in
the agenda.
45. Mr. Roy has also
submitted that in any event, the rudimentary principles of natural justice
require that before an act is done affecting the substantive rights of a
person, that person be given notice of such proposed act so that he has a
chance of persuading the concerned persons as to why such act should not be
done. In the present case the contesting defendants acted in complete breach of
the principles of natural justice.
46. He has submitted that it is not necessary to give reasons for removal of the plaintiff from chairmanship, even then, where reason has in fact been given but is unsustainable, no decision should be allowed to rest thereon. Mr. Roy has further submitted that an analogy may be drawn from a speaking and non-speaking award. At law, an arbitrator is not obliged to give reasons for the Award. But where he chooses to give reasons, the same may come under judicial scrutiny and may be set aside.
47. Mr. Roy has relied upon the judgment and decision in the case of Punjab National Bank v. Sanchaita Investment 89 CWN 509 and in the case of Krishna Lal Sadhu v. Mt. Promila Bala Dasi AIR 1928 Cal. 518 and also in the case of M.C. Chacko v. State Bank of Travancore AIR 1970 SC 504.
48. Mr. Roy has further submitted that a beneficiary under an agreement can insist on specific performance thereof and can maintain legal proceedings for that purpose. However, the plaintiff has not instituted the present suit as a nominee of BICC. The plaintiff was appointed as Chairman of the Board of Directors and has a right to continue as such until he is removed in accordance with the procedure prescribed, expressly or impliedly, in the constitution of the company. The said right of the plaintiff has been infringed by the contesting defendants who have purported to remove the plaintiff from chairmanship illegally and in exercise of a power which they do not have. It is to redress such wrong done to the plaintiff that the present proceedings have been instituted.
49. It is the contention of Mr. Roy that there is no question of specific performance of any agreement in the instant case. The plaintiff's suit is for redressal of a wrong done to the plaintiff and, hence, an order of injunction could be and should be passed to restrain the concerned defendants from doing and/or further doing such wrong to the plaintiff.
50. It has been strongly
urged by Mr. Roy that by purporting to remove the plaintiff from chairmanship,
the defendant Nos. 2 to 5 have to arrogate to themselves and exercise a power
which they do not have in view of the concerned articles as aforestated. In the
premises such act of the said defendants is null and void and invalid since the
Directors and members of a company are bound to comply and act in accordance
with the memorandum and articles of a company (section 36 of the Companies
Act).
51. Accordingly, Mr. Roy
had submitted that the present application should be allowed and the plaintiff
should be granted redress by way of passing an order in terms of the prayers in
the said petition.
52. The following
grounds have been mainly urged on behalf of the plaintiff in support of his
case :
(a) The item regarding the removal of the plaintiff as Chairman
of the Board of Directors of the company was not mentioned in the agenda of the
Board meeting convened to be held on 31-3-1994.
(b) The grounds for removal being alleged inability to bring in
Rs. 20 crores by Tapuriah is not correct and the minutes have not been properly
written.
(c) The removal of the Chairman by the Directors is ultra vires
the powers of the Directors.
53. On the question there was no agenda for
removal of the plaintiff as Chairman.
54. The plaintiff has referred to penultimate
items in the agenda to the effect following :
'Any other points with the permission
of the Chairman'.
55. In this connection this ground has been
taken in the plaint, paragraph 22(c), page 24.
56. The
plaintiff/petitioner has relied upon articles 2, 90 and 129 to 131 of the
articles of association of the company. These articles have been referred to
for the purpose of showing that BICC were entitled to nominate two Directors
one of whom would be nominated as Chairman and the agreement of 1947 was for 21
years and thereafter it would continue until terminated as provided in the said
agreement.
57. Reference was made
to annexure 'E' to the petition a letter dated 15-11-1984 written by L.A.
Farren to the Board of Directors of the Company to the effect that Mr. D.P.M.
Kanga who was nominated by BICC as Chairman was desirous of retiring and BICC
wanted to nominate Mr. Kashinath Tapuriah who was already a Director as
Chairman in place of Mr. Kanga.
58. Mr.
A.K. Mitra - the learned Advocate for the defendant No. 1 company represented by
the Secretary has submitted that initial appointment of the plaintiff as
Chairman has not been disputed. According to him, the provisions of the Act and
the articles of the company do not contemplate appointment of a permanent
Chairman.
59. He
has also referred to the relevant articles in this connection and submitted
that in terms of the article as well as the agreement the BICC has under the
authority vested in it has nominated the petitioner as Chairman and the
petitioner continues to be Chairman until it is revoked by the Consulting
Engineer.
60. Mr. Mitra has
referred to sections 194, 195 and 286 of the Companies Act.
61. Section 286 provides as
follows :
"Under
section 286 of the Companies Act notice of every meeting of the Board of
Directors of a company is required to be given in writing to every director for
the time being in India. There is no other provision in the Act requiring the
notice of the Board meeting to specify any agenda. In this connection,
reference may be made to section 172 of the Companies Act. Under sub-section
(1) every notice of a meeting of a company shall specify the place and the day
and hour of the meeting and shall contain a statement of the business to be
transacted thereat. Under section 173 in respect of every special business in
the Explanatory Statement is also required to be given relating to each item of
special business. Therefore, the distinction is quite clear regarding the
notices of Board meetings and General meetings."
62. Mr.
Mitra has further submitted that the plaintiff has been duly nominated by the
Consulting Engineers by subsequent election at the said meeting in terms of the
article 90 of the company and else in terms of the agreement and his authority
to act as Chairman has not been revoked by BICC. The said nomination has been
duly adopted.
63. He
has further submitted only because of his subsequent re-election it cannot be
said that there is no question of nomination by Consulting Engineers of BICC.
In fact the subsequent election is a mode of ratification of the nomination
originally made and it cannot be contended that the question of nomination does
not arise.
64. Mr.
S.B. Mukherjee learned advocate for respondent Nos. 2 to 5 has submitted that
even if there is no specific agenda under the miscellaneous items with the
permission of the Chairman any other business may be transacted. In the instant
case, the respondents' contention is that the Chairman himself raised the
question of his stepping down from the chairmanship of the company. This is evident
from the letter dated 6-10-1994 petition, written by three of the directors who
attended the meeting. In the second para of this letter it has been stated that
Mr. Tapuriah assured that he would bring in necessary funds for revival
of the company, failing which he suggested that he is stepping down as Chairman
be considered at the meeting scheduled to be held on 18-4-1994. Therefore, Mr.
Tapuriah is estopped from contending otherwise.
65. He has further
submitted that even if the business is not one of the items in the agenda still
the matter may be considered at the Board meeting and appropriate resolution
may be passed in connection therewith.
66. In support of the contention he has
referred to the following decisions :
1. La Compagnie De Mayville v. Whitley
(1896) 1 Ch. D. 788
2. Ferrucciosias v. Jai Manga Ram Mukhi (1994) 1 CLJ 345.
3. Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp. Cas. 390 (Delhi)
67. He has also referred
to Palmer's Company Law, 24th Edn. articles 61-63, pp. 910-911 and Buckley on
the Companies Act, 14th Edn., Vol. I, p. 1019.
68. It is the contention
of Mr. Mukherjee that the transaction of such a business might only be an
irregularity and not an illegality.
69. Mr. Mukherjee has
further submitted that the Court does not interfere with the internal
management of a company if the acts complained of can be set right by the
members or directors.
70. In support of his
contention, the learned Advocate has relied upon the following decisions :
1. Burland
v. Earle 1902 AC.
2. Bentley
Stevens v. Jones (1974) 2 All ER 653
3. Life
Insurance Corpn. of India v. Escorts Ltd. AIR 1986 SC 1370
71. Mr. Mukherjee has
referred to articles 2, 90 and 129 to 131 of the company's articles. He has
submitted that Tapuriah cannot assert any right on the basis of the said
articles.
72. Mr. Mukherjee has
further submitted that article 90 merely confers the rights on the consulting
engineers to nominate a Chairman of the Board of Directors. A mere nomination
would not automatically amount to such director being appointed Chairman and
this is obvious from the minutes of the Board meeting dated 31-1-1984, on which
reliance has been placed by the petitioner. At this meeting consequent upon the
nomination by BICC plaintiff was appointed a Chairman by the Board of
Directors. Therefore, the appointing authority being the Board of Directors
they have also the right to remove the Chairman. No such power of appointment
of Chairman or removal of Chairman is vested in the Consulting Engineers.
73. The learned Advocate
referred to section 255 of the Companies Act and section 25 of the Industrial
Finance Corpn. Act, 1948.
He has also submitted that articles 129 to 131
referred to the agreement between the company and the consulting engineers.
Plaintiff is not a party to the agreement nor is any personal right or benefit
conferred on him under the said agreement. In fact, he was nowhere in the
picture when the agreement was entered into in 1947 and modified in 1951.
Therefore, he cannot enforce any rights or obligations under the said
agreement.
74. In support of the
aforesaid contention Mr. Mukherjee has relied upon the following decisions :
1. M.C. Chackos case (supra)
2. Krishna Lal Sadhu's case (supra)
3. Punjab National Bank (supra)
75. The learned Advocate for the defendant Nos. 2 to 5 has also referred to Chapter VIII section 38 of the Specific Relief Act. He has submitted that no perpetual injunction could be claimed as under section 38(2) the provisions of Chapter II would be attracted. Under sections 14 and 15 of Chapter II no specific performance can be claimed inasmuch as monetary compensation would be an adequate relief and it is only a party to the contract who can enforce the agreement.
76. He has further submitted that in any event, the instant suit is not a suit for specific performance nor are the essential pleadings required in a suit for specific performance made therein. Therefore, no temporary injunction can also be granted.
77. It is the contention of the learned Advocate that there cannot be an agreement in perpetuity; it is obvious that from the conduct of the parties and in particular BICC they have treated the contract as having been abandoned and no longer in force nor enforceable.
78. Mr. Mitra has
strongly relied upon the letter of the BICC and submitted that they do not
consider the plaintiff to be their nominee.
He has further submitted that the agreement with the
consulting engineers made in 1947 and 1951 are not in force.
79. It is also the
contention of the learned Advocate that after such a long lapse of time and in
view of the changed circumstances the agreements are not enforceable.
He has further submitted that they are entirely neutral
on the issue of dismissal or appointment of Chairman or any director.
80. Accordingly, he has
submitted that the petitioner cannot claim to continue on the basis of
nomination originally made by BICC.
81. The learned Advocate for the defendant Nos. 2 to 5 has referred to article 117 which provides that in the absence of the Chairman Board may appoint any other Director to be Chairman of the meeting.
82. It has been contended by the learned Advocate that no grounds are necessary for removal.
He has further submitted that four directors attended
the disputed meetings. Three out of the said four directors are of the view
that a certain thing transpired at the meeting. They are disinterested
Directors who have nothing to gain personally. There is no reason why their
version should not be accepted.
83. It has also been contended that the question raised in this proceeding cannot be finally decided at this stage on affidavit evidence.
84. It has also been submitted that the minutes have not been recorded in the minute book does not mean that no meeting was held. Admittedly, meeting was held. The original minute book was being retained by the Secretary who is openly siding with the plaintiff. The minute books have since been produced in Court.
85. It has also been contended that apart from the fact that the plaintiff has failed to bring funds of Rs. 20 crores there is lack of confidence in plaintiff by the financial institution as shareholders, and also the workers and the Bankers.
86. The learned Advocate has also submitted that in the interest of the company, the Court should not intervene in the internal management as no illegality has been committed by removal of the plaintiff.
87. In this connection he has relied upon the following decisions :
(i) Bentley
Steven's case (supra)
(ii) Life
Insurance Corpn. of India's case (supra)
88. He has also contended that the appointment of the plaintiff was made by the Board and, as such, the removal can be also made by the Board. The plaintiff has been appointed Director by the shareholders so also L.A. Farren.
89. Apart from their question of nomination under article 90 by the consulting engineers they are not nominee directors of BICC but share holders directors duly elected at the general meeting.
90. According to Mr. Mukherjee, article 117 clearly shows that if the Chairman is not present the Directors present shall approach a Chair man. So this is not a permanent appointment. He has referred to section 175 of the Act, which provides for power of Chairman.
91. He has also
submitted that Table 'A' does not apply in terms of article 2 of the company.
He has further submitted that chairmanship is not a legal status. By his
removal no legal right or contractual right has been infringed.
92. He has referred to
section 9 which provides that anything in the memorandum or articles or
agreement or resolution contrary to the Act will be void.
93. I have considered the submissions of the
parties and the decisions cited from the bar.
94. The question in
issue is if the removal of the plaintiff as Chairman of the company at the
Board Meeting is valid.
95. The first contention
of the plaintiff is that there was specific agenda at the meeting on the question
of removal of the Chairman. In this connection, it may be noted that section
286 is that notice of every meeting of the Board of Directors of a company is
required to be given in writing to every director for the time being in India.
Section 172(1) provides that every notice of a meeting of a company shall
specify the place and the day and hour of the meeting and shall contain a
statement of the business to be transacted thereat. Section 173 provides that
in respect of every special business in the explanatory statement is also
required to be given relating to each item of special business. Therefore, the
distinction is quite clear regarding the notices of Board meetings and general
meetings.
96. It cannot be
disputed that even if there is no specific agenda under the miscellaneous items
with the permission of the Chairman any other business may be transacted. In
the instant case, it appears from record that the Chairman himself raised the
question of revival package and the question of bringing in funds by the
Chairman was considered at several meetings. It is also not in dispute that the
company was passing through financial crisis.
97. The plaintiff
himself wrote to the Chairman, The Industrial Credit & Investment
Corporation of India Ltd. by letter dated 19-9-1991 that he had made the
commitment to bring in Rs. 20 crores, whereas in the draft minutes of the
meeting held on 31-3-1994, the defendant No. 2 had changed the figure to Rs. 30
crores. The plaintiff has also admitted in the said letter that the company
might require somewhere around Rs. 30 crores, as against Rs. 20 crores
originally envisaged. He also recorded in the said letter that draft minutes of
the meeting dated 31-3-1994 does not contain correct statement regarding his
commitment to step down from the post of chairmanship of the company.
98. It has, however,
been noted in the said letter that the funds required for the revival package
as committed by the plaintiff are now ready. The relevant portion of the said
letter is as follows :
"In the meantime, I wish to inform you that the
funds required for the revival package as committed by me are now ready and I
would be pleased to produce before you proof of the same.
May I also point out for your kind information that
during the last Board meeting of the company held on 10th September, 1994, when
Mr. P.K. Mukherjee asked me to step down as Chairman I had made a specific
enquiry whether the financial institutions had an alternate promoter who was
willing to be associated in the revival of the company. To this, the answer
from the institutional nominees was evasive. You will kindly appreciate that
while the Institutions, no doubt, have a substantial stake in the company, I,
too, have a considerable interest and, therefore, any alternative proposal
should, in all fairness, be disclosed to me rather than pressurising me in this
manner.
I am writing all this to you because I know that you
are a fair and dispassionate person who can be relied upon to take an objective
view of the entire situation.
Our next Board meeting is fixed for Wednesday 21st
Sept. 1994, and I would seek your intervention so that matters can be resolved
amicably and with grace and dignity.
With kind regards"
99. It appears to me
that the question of bringing in funds by the plaintiff and his stepping down
as Chairman was discussed in the earlier meeting held on 31-3-1994 and also on
10-9-1994 and subsequently the meeting was adjourned to 5-10-1994 for further
discussion.
100. In fact the
plaintiff-petitioner contended that he could not be removed at the Board
meeting since he was appointed by the consulting engineers in terms of the
agreement with the said consulting engineers dated and also by virtue of
article 90 he would continue to remain as Chairman until removed by the
consulting engineers and it is not open for the Board to remove him. He did
not, however, raise any objection to the discussion on the issue at any of the
meeting in view of the absence of agenda.
101. It may be noted that
even if the business is not one of the items in the agenda still the matter may
be considered at the Board meeting and appropriate resolution may be passed.
102. In this connection
reference may be made to Palmer's Company Law, 24th Edn., Arts. 61-63 which
deals with the notice of board meeting at page 911. It has been noted that
'Notice of a board meeting need not, unless the articles otherwise provide,
specify the nature of the business to be transacted'.
103. In this connection,
the judgment and decision in the case of La Compagnie De Mayville (supra) it
may be noted that the relevant portion of Lindley L.J. appears to be very
important. The relevant portion of the judgment
of Lindley L.J. as appears at pages 796-797 of the said report is set out
herein below :
"This
case involves one question which is of great importance to companies. The rest
of the points are comparatively trifling. The great point is whether, when a
directors' meeting is to be held, it is necessary to give a notice not only of
the meeting, but of the business to be transacted at the meeting. I am not
prepared to say as a matter of law that it is necessary. As a matter of
prudence it is very often done, and it is a very wise thing to do it: but it
strikes me, as it struck Lord Tenterden in Rex v. Pulsford (1), that there is
an immense difference between meetings of shareholders or corporators and
meetings of those whose business it is to attend to the transaction of the
affairs of the company or corporation. It is not uncommon for directors
conducting a company's business to meet on stated days without any previous
notice being given either of the day or of what they are going to do. Being
paid for their services as they generally are, and as is the case in this
company it is their duty to go when there is any business to be done, and to
attend to that business whatever it is; and I cannot now say for the first time
that as a matter of law the business conducted at a directors' meeting is
invalid if the directors have had no notice of the kind of business which is to
come before them. Such a rule would be extremely embarrassing in the
transaction of the business of companies."
104. In this
connection it will be appropriate to note the observations of Buckley in his
Companies Acts, 14th Edition, Vol. 1, page 1019 wherein it has been observed by
the learned Author as follows :
"But
notice of the business as distinguished from notice of the meeting is not
necessary. In the case of special business it may be prudent and right to give
notice of it, but it is not legally necessary to do so."
105. The
judgment and decision in the case of Ferrucciosias relied upon by Mr. S.B.
Mukherjee, the learned advocate for the petitioner may also be taken note of.
In the aforesaid decision learned Judge of the Delhi High Court held that if no
agenda is circulated the directors could object at the meeting and the meeting
has to be adjourned.
106. In
the instant case as already noted the matter in issue was discussed at the
meeting. The petitioner did not raise any objection to such issue being
discussed nor did he pray for any adjournment of the meeting on the ground that
the matter was not in the agenda.
107. In
my view at the worst the transaction of such a business might only be an
irregularity and not an illegality. It is well settled that the Court does not
interfere with the internal management of a company if the Acts complained of
can be set right by the members or directors.
108. In
this connection, the following decisions relied upon by the learned advocate
for the respondent Nos. 2 to 5 may be taken note of :
1. Burland's
case (supra)
2. Bentley Steven's case (supra)
3. Life
Insurance Corpn. of India's case (supra)
109. In the case of
Burland (supra) it was inter alia held that 'it is an elementary principle of
the law relating to joint stock companies that the Court will not interfere
with the internal management of companies acting within their powers, and in
fact has no jurisdiction to do so.'
110. In the case of
Bentley Stevens (supra) it was held that a shareholder had a statutory right to
move a resolution to remove a director and that the Court was not entitled to
grant an injunction restraining him from calling a meeting to consider such a
resolution. A proper remedy of the Director was to apply for a winding-up order
on the ground that it was 'just and equitable' for the Court to make such an
order.
In the case of Ebrahimi v. West Bourne Galleries Ltd.
[1972] 2 All ER 492 the absolute right of the general meeting to remove the
directors was recognised and it was pointed out that it would be open to the
Director sought to be removed to ask the Company Court for an order for
winding-up on the ground that it would be 'just and equitable' to do so. The
House of Lords said :
"My Lords, this is an expulsion case, and I must
briefly justify the application in such case of the just and equitable
clause…………..The law of companies recognises the right in many ways, to remove a
director from the board. Section 184 of the Companies Act, 1948 confers this
right on the company in general meeting whatever the articles may say. Some
articles may prescribe other methods, for example a governing director may have
the power to remove (of Re Wondo-flex Textiles Pty Ltd.) (1951) VLR 758. And
quite apart from removal powers, there are normally provisions for retirement
of directors by rotation so that their re-election can be opposed and defeated
by a majority, or even by a casting vote. In all these ways a particular director-member may find himself no
longer a director, through removal, or non re-election; this situation he must
normally accept, unless he undertakes the burden of proving fraud or mala
fides. The just and equitable provision nevertheless comes to his assistance if
he can point to, and prove some special underlying obligation of his fellow
member(s) in good faith, or confidence, that so long as the business continues
he shall be entitled to management participation an obligation so basic that if
broken, the conclusion must be that the association must be dissolved."
111. The Supreme Court in the case of Life Insurance Corpn. of
India (supra) at page 1423 in paragraph 100 held and observed as follows :-
"100. Thus, we see that every shareholder of a
company has the right, subject to statutorily prescribed procedural and numerical
requirements, to call an extraordinary general meeting in accordance with the
provisions of the Companies Act. He
cannot be restrained from calling a meeting and he is not bound to disclose the
reasons for the resolutions proposed to be moved at the meeting. Nor are the
reasons for the resolutions subject to judicial review. It is true that under
section 173(2) of the Companies Act, there shall be annexed to the notice of
the meeting a statement setting out all material facts concerning each item of
business to be transacted at the meeting including, in particular, the nature
of the concern or the interest, if any, therein, of every director, the
managing agent if any, the secretaries and treasurers if any, and the manager,
if any. This is a duty cast on the management to disclose, in an explanatory
note, al1 material facts relating to the resolution coming up before the
general meeting to enable the shareholders to form a judgment on the business
before them. It does not require the shareholders calling a meeting to disclose
the reasons for the resolutions which they propose to move at the meeting. The
Life Insurance Corpn. of India, as a shareholder of Escorts Limited, has the
same right as every shareholder to call an extraordinary general meeting of the
company for the purpose of moving a resolution to remove some Directors and
appoint others in their place. The Life Insurance Corpn. of India cannot be
restrained from doing so nor is it bound to disclose its reasons for moving the
resolutions." (p. 1423)
112. It
appears on consideration of the relevant articles of the company, namely,
articles 2, 90 and 129 to 131 the petitioner cannot claim that he has right to
continue on the basis of the said articles for the indefinite period.
113. It
is also on record that the petitioner was also elected as a Chairman by the
Board of Directors as will appear from the minutes of the Board meeting dated
31-1-1984, if the petitioner was elected by the Board, the Board may also
express its no confidence and remove the petitioner as Chairman. The fact, he
was nominated by the consulting engineers that does not mean that he will
continue for ever.
114. In
my view there cannot be an agreement in perpetuity; it is obvious that from the
conduct of the parties and in particular BICC that they have treated the
contract as having been abandoned and no longer in force nor enforceable.
115. It
appears from the correspondence exchanged with BICC that BICC does not
specifically express any view in the matter. It is also on record that the
consulting engineers in terms of the agreement are not receiving any
remuneration for long years. There is another on record to show that consulting
engineers are still acting as consulting engineers. It appears from the letter
written by BICC as disclosed in the proceeding that they are entirely neutral
on the issue of dismissal or appointment of Chairman or any Director. There is
great doubt if the said agreement can have any force still now. Moreover, they
have specifically mentioned in the letter that they are not taking any side in
the dispute between other directors and the Chairman.
116. In
that view of the matter the petitioner cannot claim to continue to be Chairman
for ever, by virtue of the fact that he is a nominee of BICC. It also appears
that all Directors except L.A. Farren is out of India and express lack of
confidence in the petitioner and against his continuance as Chairman.
117. Article
117 provides that in the absence of the Chairman Board may appoint any other
Director to be Chairman of the meeting. The Board, therefore, under the article
is expressly authorised to appoint any Chairman. Simply because there was an
agreement at one point of time with the consulting engineers with power of
nomination of Chairman and although consulting engineers do not come forward to
enforce the same, it cannot be said that the action of the Board is
unjustified. It appears dead lock has been created in the management of the
company. The action of the Chairman has been criticised by the majority of the
directors. As already noted they expressed lack of confidence in the Chairman.
118. Under
such circumstances already noted, Court should not interfere in the internal
affairs relating to the management of the company and, as such, in my view, it
will not be proper for me to interfere in the decision taken by the Board and
by the majority of the directors.
119. It
may be noted that four directors attended the meeting wherein lack of
confidence was expressed by three out of the said four directors. The said
directors represent financial institution holding major shares in the company.
120. Article
117 clearly shows that if the Chairman is not present then the Directors
present shall appoint a Chairman. It, therefore, appears that appointment of the
Chairman is not a permanent one.
121. Section 175 also shows that
there is provision for Chairman for any particular meeting.
122. It is not in dispute Table
'A' does not apply in view of the article 2 of the company.
123. The
relief if granted will be in the nature of specific performance which is not
permissible in view of section 38(2). Under sections 14 and 15 of the Specific
Relief Act no specific performance can be claimed inasmuch as monetary
compensation would be an adequate relief.
124. In
the instant case, it would not be proper to pass the order of injunction. In
this connection the judgment and decision in the case of Plantations Trust Ltd.
v. Bila (Sumatra) Rubber Lands Ltd. 144 Law Time.-, 676 relied upon by Mr. Mukherjee,
the learned Advocate for the petitioner may be taken note of.
125. In the aforesaid decision there was an
agreement to appoint nominee of the guarantee company as directors. Clause 6 of
the agreement provides as follows :
"The
company will appoint two persons, to be nominated by the trust, to be directors
of the company and by Clause 7 the Bila Company's manager was to be replaced by
another manager to be approved by the Trust Company."
126. It
was held that although upon the true construction of the contract there was a
right in the T. Company to nominate two directors, the nomination had not the
effect of appointing the nominee directors of the B. Company and on the merits
the injunction, being asked for not with the view of protecting the T. Company's
security ought not to be granted.
127. In the aforesaid decision on
similar facts the prayer for injunction was refused.
128. Considering the facts and circumstances of
the case and the principles of law as settled by different decisions it appears
to me that it will not be proper for me to interfere with the internal
management of the company. Passing of interlocutory relief at this stage will
really amount to such interference in the internal management of the company.
Accordingly, in my view the petitioner is not entitled to any interlocutory
relief of injunction as prayed in the application.
129. Application
for injunction accordingly fails and dismissed. The ad interim order passed by
the Vacation Bench of this Court on 17-10-1994 stands vacated.
130. In
view of the order made in the main interlocutory application no order is
required to be passed in the application for revocation and the cancellation of
the Vakalatnama filed by Jalan & Co. which was made during the pendency of
this application.
131. Mr.
Banerji, the learned Advocate prays for stay of operation of the judgment and
order passed today and submits that since the ad interim order has continued
from 17-10-1994 it should be allowed to continue for one week more and the
judgment and order should remain stayed for one week.
132. Mr.
S. Sarkar, the learned Advocate for the respondent Nos. 2 to 5 opposes this
prayer. Mr. Banerjee, however, submits that the resolution passed on 5-10-1994
should not be given effect to by the company for at least one week. Mr. Sarkar
does not really oppose the same. Accordingly, the resolution passed on
5-10-1994 at the company's meeting will not be given effect to for one week
from date. In that view of the matter no order is required to be passed staying
the operation of my judgment and order passed to-day.
133. All
parties concerned are to act on a signed copy of the operative part of this
judgment and order on the usual undertaking.